(1)Under the Higher Education Facilities Bond Act of 1986, the Higher Education Facilities Bond Act of 1988, and the Higher Education Facilities Bond Act of June 1992, the issuance, pursuant to the State General Obligation Bond Law, of bonds in an amount not to exceed $400,000,000, $600,000,000, and $900,000,000, respectively, and the expenditure of the revenues therefrom, were authorized for the purpose of aid to the University of California and the California State University for, among other things, the construction and equipping of educational facilities, as specified. Existing law establishes the Higher Education Facilities Finance Committee to administer those acts, and to authorize the issuance and sale of bonds to the extent necessary to fund the education facilities construction apportionments expressly authorized by the Legislature in the annual Budget Act.

More recently, the Class Size Reduction Kindergarten-University Public Education Facilities Bond Act of 1998, the Kindergarten-University Public Education Facilities Bond Act of 2002, the Kindergarten-University Public Education Facilities Bond Act of 2004, and the Kindergarten-University Public Education Facilities Bond Act of 2006 authorized the issuance of bonds and the expenditure of revenues therefrom for the University of California and the California State University, as well as for public elementary and secondary schools.

This bill would enact the Higher Education Facilities Bond Act of 2018, 2020, which, upon approval by the state electorate, would authorize the issuance of state general obligation bonds in an amount not to exceed $4,000,000,000 with one-half of the amount designated for the University of California and the Hastings College of the Law and the other half designated for the California State University, for purposes similar to those specified in the Higher Education Facilities Bond Act of 1986, the Higher Education Facilities Bond Act of 1988, and the Higher Education Facilities Bond Act of June 1992, to be issued and sold in a manner similar to that provided under those acts.

The bill would require that any request for funds from the bonds issued pursuant to the bond act enacted by this bill be accompanied by the 5-year capital outlay plan of the particular university or college and include a schedule that prioritizes the seismic retrofitting needed to significantly reduce seismic hazards in buildings identified as high priority by the university or college, as specified.

(2)This bill would provide for the submission of the Higher Education Facilities Bond Act of 2018 2020 to the voters at the November 6, 2018, 3, 2020, statewide general election, as specified.

(1)Under the Higher Education Facilities Bond Act of 1986, the Higher Education Facilities Bond Act of 1988, and the Higher Education Facilities Bond Act of June 1992, the issuance, pursuant to the State General Obligation Bond Law, of bonds in an amount not to exceed $400,000,000, $600,000,000, and $900,000,000, respectively, and the expenditure of the revenues therefrom, were authorized for the purpose of aid to the University of California and the California State University for, among other things, the construction and equipping of educational facilities, as specified. Existing law establishes the Higher Education Facilities Finance Committee to administer those acts, and to authorize the issuance and sale of bonds to the extent necessary to fund the education facilities construction apportionments expressly authorized by the Legislature in the annual Budget Act.

More recently, the Class Size Reduction Kindergarten-University Public Education Facilities Bond Act of 1998, the Kindergarten-University Public Education Facilities Bond Act of 2002, the Kindergarten-University Public Education Facilities Bond Act of 2004, and the Kindergarten-University Public Education Facilities Bond Act of 2006 authorized the issuance of bonds and the expenditure of revenues therefrom for the University of California and the California State University, as well as for public elementary and secondary schools.

This bill would enact the Higher Education Facilities Bond Act of 2018, which, upon approval by the state electorate, would authorize the issuance of state general obligation bonds in an amount not to exceed $4,000,000,000 with one-half of the amount designated for the University of California and the Hastings College of the Law and the other half designated for the California State University, for purposes similar to those specified in the Higher Education Facilities Bond Act of 1986, the Higher Education Facilities Bond Act of 1988, and the Higher Education Facilities Bond Act of June 1992, to be issued and sold in a manner similar to that provided under those acts.

The bill would require that any request for funds from the bonds issued pursuant to the bond act enacted by this bill be accompanied by the 5-year capital outlay plan of the particular university or college and include a schedule that prioritizes the seismic retrofitting needed to significantly reduce seismic hazards in buildings identified as high priority by the university or college, as specified.

(2)This bill would provide for the submission of the Higher Education Facilities Bond Act of 2018 to the voters at the November 6, 2018, statewide general election, as specified.

(3)This bill would declare that it is to take effect immediately as an urgency statute.

SENATE THIRD READING

STR Bill Id:SB 1225

Author:(Glazer)

As Amended Ver:August 24, 2018

2/3 vote. Urgency

SENATE VOTE: 34-5

SUMMARY: Enacts a $4 billion general obligation bond for higher education facilities, to be considered by the voters at the November 2020 ballot for the construction, reconstruction, and remodeling of existing or new facilities at the University of California (UC), the Hastings College of the Law (Hastings), and the California State University (CSU); and, specifies that of the total amount of bonds authorized, one-half are for UC and Hastings, and one-half are for CSU. Specifically, this bill:

1. Enacts the Higher Education Facilities Bond Act of 2020, which, upon approval at the November 2020 statewide election, authorizes no more than $4 billion of state general obligation bonds for the construction, reconstruction, and remodeling of existing or new facilities at the UC, Hastings, and the CSU.
2. Specifies that allowable uses of the funds include the following:
   1. Construction of buildings and the acquisition of related fixtures;
   2. The equipping of new, renovated, or reconstructed facilities, including preconstruction costs, including, but not necessarily limited to, preliminary plans and working drawings;
   3. Renovation and reconstruction of facilities; and,
   4. The construction or improvement of off-campus facilities of CSU, approved by the CSU Trustees on or before July 1, 2014, including the acquisition of sites upon which these facilities are to be constructed.
3. Authorizes the Higher Education Facilities Finance Committee (Committee), consisting of the Governor, the Controller, the Treasurer (who serves as the Chair), the Director of Finance, the UC President, the CSU Chancellor, or their designees, to create debt or debts, liability or liabilities, of the State of California pursuant to this measure.
4. States that any request forwarded to the Legislature and the Department of Finance for funds from this bond issue for expenditure by the UC or CSU shall be accompanied by the five-year capital outlay plan of the particular university or college, and shall include a schedule that prioritizes the seismic retrofitting needed to significantly reduce, by the 2024–25 fiscal year, in the judgment of the particular university or college, seismic hazards in buildings identified as high priority by the university or college.
5. Specifies that the Treasurer shall sell the bonds authorized by the Committee at times necessary to service expenditures required by the apportionments and bonds authorized by this part shall be prepared, executed, issued, sold, paid, and redeemed as provided in the State General Obligation Bond Law (Chapter 4 (Government Code, Title 2, Division 4, Part 3 (commencing with Section 16720)).
6. Requires the Committee to authorize the issuance of bonds only to the extent necessary to fund the apportionments that are expressly authorized by the Legislature in the annual Budget Act, as specified.

EXISTING LAW:

1. Stipulates that the Legislature shall not, in any manner create any debt or debts, liability or liabilities, which shall, singly or in the aggregate with any previous debts or liabilities, exceed $300,000 unless enactment has been passed by a two-thirds vote of all the members elected to each house of the Legislature and until, at a general election or at a direct primary, it shall have been submitted to the people and shall have received a majority of all the votes cast for and against it at such election (California Constitution, Article XVI, Section 1).
2. Requires the Governor to annually submit to the Legislature, in conjunction with the Governor's Budget, a proposed five-year infrastructure plan, which among other things, shall include the instructional and support facilities needs of UC and CSU (Government Code Section 13102).
3. Authorizes CSU to use up to 12% of its General Fund support budget, less the amount required to fund general obligation bond payments and State Public Works Board rental payments, to fund capital outlay projects, either on a pay-as-you-go approach or to pay principal and interest on university-issued revenue bonds (Education Code (EC) Section 89770, et seq.).
4. Authorizes UC to use up to 15% of its General Fund support budget, less the amount required to fund general obligation bond payments and State Public Works Board rental payments, to fund capital outlay projects, either on a pay-as-you-go approach or to pay principal and interest on university-issued revenue bonds (EC Section 92943, et seq.).
5. Under the State University Revenue Bond Act of 1947, authorizes the CSU Board of Trustees to construct operate and control certain facilities, including student housing and boarding facilities, and to establish charges for use of such facilities (EC Section 90010, et seq.).
6. Under the UC Dormitory Revenue Bond Act of 1947, authorizes the UC Board of Regents to construct operate and control certain facilities, including student housing and boarding facilities, and to establish charges for use of such facilities (EC Section 92400, et seq.).
7. The Kindergarten-University Public Education Facilities Bond Act of 2006, authorized $10.4 billion in general obligation bonds, including $3.1 billion for higher education facilities, of which UC received $890 million and CSU received $690 million (EC Section 101000, et seq.).
8. The Kindergarten Through Community College Public Education Facilities Bond Act of 2016, approved by the voters in November 2016 (Proposition 51), authorized $9 billion state general obligation bonds for K-12 facilities ($7 billion) and California Community College (CCC) facilities ($2 billion) (EC Section 101110, et seq.).

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1. Total principal and interest costs of approximately $6.5 billion to pay off the bonds, ($4 billion in principal and $2.5 billion in interest), with annual debt service payments of $216 million General Fund (GF), when all bonds are sold. (Assumes 30-year maturity and an interest rate of 3.5%.)
2. One-time GF costs in the mid-hundreds-of-thousands of dollars to the Secretary of State for printing and mailing costs to place the measure on the ballot in the November 2018 statewide election.

COMMENTS: Background. Since the late 1980s, the Legislature has placed on the ballot and voters have approved bonds for public higher education every two to four years. The last statewide general obligation bond, Proposition 1D (AB 127, Núñez and Perata, Chapter 35, Statutes of 2006), was approved by voters in November 2006, authorizing the sale of $10.4 billion in general obligation bonds of which $3.087 billion was earmarked for higher education facilities. Of this amount, $1.5 billion was provided for CCC facilities, $890 million was provided for UC, and $690 million was provided for CSU. All Proposition 1D higher education facilities funds have been depleted and K-12 funds have almost been exhausted.

Since 2006, as the state's fiscal condition continued to deteriorate, legislation needed to authorize education bonds was not enacted. Instead, since 2008 the higher education segments have received capital funding from lease-revenue bonds through the annual budget acts; however, these funds have met less than half of the segments' capital needs. Bond funds, whether lease-revenue or general obligation, are allocated through the budget process in accordance with the segments' five-year capital facility plans.

Additionally, in November 2012, California voters approved Proposition 39 to close a corporate tax loophole and increase the state's annual corporate tax revenues by as much as $1.1 billion. Proposition 39 specified that half of the revenue generated from 2013-2018, up to $550 million, should support energy efficiency and alternative energy projects at public schools, colleges, universities and other public buildings, as well as related public-private partnerships and workforce training.

Need for this measure. According to the author, "Higher education facilities are in dire need of improvement, and it is difficult to draw general fund dollars away from other competing needs". The author contends, "A bond is a more economical way to address infrastructure needs, as it spreads the fiscal cost over decades".

Summary of Capital Needs.

1. UC's inventory of capital assets totals approximately 137 million gross square feet in 6,000 buildings. More than half of UC's space is at least 30 years old. UC's capital plan estimates capital needs totaling $27.6 billion through 2022-23. Of this total, UC indicates that $10.9 billion constitute projects eligible for state funding. (Excluded from this amount are capital outlays for UC's medical centers and for auxiliary enterprises, such student housing and parking facilities, which are historically funded with revenue bonds repaid through user fees.) UC indicates that it lacks a fund source for $5.1 billion in state-supportable projects identified in its plan.

While indicating that it is fulfilling a portion of its funding needs, even for state supportable projects, with private donations and the implementation of public-private partnerships (P3s), as well as through its support budget, UC maintains that it cannot sustain its capital program solely with this approach. UC notes that, while state support for capital outlay, through specific capital appropriations, averaged almost $500 million between 1996 and 2012, state support since that time has been only $190 million annually, all of which is a reallocation of operating funds for debt service.

According to UC, "Without an infusion of additional funding, the ability to fully implement the capital program is uncertain and in many cases, unlikely. This funding gap highlights the urgency for new State funding. A new State General Obligation Bond would provide much needed resources to support the University's important mission."

1. CSU's inventory of capital assets totals approximately 86 million gross square feet in 2,100 buildings. More than half of CSU's space is over 40 years old, and its deferred maintenance backlog exceeds $2 billion. CSU's most recent five-year plan identifies a funding need $14.1 billion, consisting of $8.2 billion for academic facilities and $5.9 billion for self-supporting facilities (dormitories, parking, etc.).

CSU indicates that the need for campus academic projects and infrastructure is much greater than the available funds. A request to increase the permanent base operating budget by $15 million was included in the CSU's 2018-19 budget request to the state as a means to finance additional capital outlays. CSU estimates that over $400 million per year is needed to renew existing academic facilities, provide improvements needed to support the academic program, and address life, safety, and seismic deficiencies.

Related legislation. AB 2771 (Eggman) of the current legislation, which is pending action on the Senate Floor, enacts a $7 billion general obligation bond for higher education facilities, to be considered by the voters in 2020.

Prior legislation. Several bond measures have been proposed since 2009 to fund higher education facilities. The most recent of these are:

SB 483 (Glazer and Allen) of 2017, which was held on Suspense in the Senate Appropriations Committee, proposed a $2 billion bond for the November 2018 ballot facilities at UC, CSU, and Hastings.

AB 1433 (Gray) of 2016, which was held on Suspense in the Assembly Appropriations Committee, authorized an unspecified amount of bonds for the UC, CSU, CCC and Hastings.

AB 1088 (O'Donnell) of 2015, which was held on Suspense in the Assembly Appropriations Committee, authorized an unspecified amount of bonds for school districts, county superintendents of schools, county boards of education, charter schools, the CCC, CSU, Hastings, and UC.

Analysis Prepared by: Jeanice Warden / HIGHER ED. / (916) 319-3960 FN: 0004734

SENATE THIRD READING

STR Bill Id:SB 1225

Author:(Glazer and Allen)

As Introduced Ver:February 15, 2018

2/3 vote. Urgency

SENATE VOTE: 34-5

SUMMARY: Enacts a $4 billion general obligation bond for higher education facilities, to be considered by the voters at the November 2018 ballot for the construction, reconstruction, and remodeling of existing or new facilities at the University of California (UC), the Hastings College of the Law (Hastings), and the California State University (CSU); and, specifies that of the total amount of bonds authorized, one-half are for UC and Hastings, and one-half are for CSU. Specifically, this bill:

1. Enacts the Higher Education Facilities Bond Act of 2018, which, upon approval at the November 2018 statewide election, authorizes no more than $4 billion of state general obligation bonds for the construction, reconstruction, and remodeling of existing or new facilities at the UC, Hastings, and the CSU.
2. Specifies that allowable uses of the funds include the following:
   1. Construction of buildings and the acquisition of related fixtures;
   2. The equipping of new, renovated, or reconstructed facilities, including preconstruction costs, including, but not necessarily limited to, preliminary plans and working drawings;
   3. Renovation and reconstruction of facilities; and,
   4. The construction or improvement of off-campus facilities of CSU, approved by the CSU Trustees on or before July 1, 2014, including the acquisition of sites upon which these facilities are to be constructed.
3. Authorizes the Higher Education Facilities Finance Committee (Committee), consisting of the Governor, the Controller, the Treasurer (who serves as the Chair), the Director of Finance, the UC President, the CSU Chancellor, or their designees, to create debt or debts, liability or liabilities, of the State of California pursuant to this measure.
4. States that any request forwarded to the Legislature and the Department of Finance for funds from this bond issue for expenditure by the UC or CSU shall be accompanied by the five-year capital outlay plan of the particular university or college, and shall include a schedule that prioritizes the seismic retrofitting needed to significantly reduce, by the 2024–25 fiscal year, in the judgment of the particular university or college, seismic hazards in buildings identified as high priority by the university or college.
5. Specifies that the Treasurer shall sell the bonds authorized by the Committee at times necessary to service expenditures required by the apportionments and bonds authorized by this part shall be prepared, executed, issued, sold, paid, and redeemed as provided in the State General Obligation Bond Law (Chapter 4 (commencing with Section 16720) of Part 3 of Division 4 of Title 2 of the Government Code).
6. Requires the Committee to authorize the issuance of bonds only to the extent necessary to fund the apportionments that are expressly authorized by the Legislature in the annual Budget Act, as specified.

EXISTING LAW:

1. Stipulates that the Legislature shall not, in any manner create any debt or debts, liability or liabilities, which shall, singly or in the aggregate with any previous debts or liabilities, exceed $300,000 unless enactment has been passed by a two-thirds vote of all the members elected to each house of the Legislature and until, at a general election or at a direct primary, it shall have been submitted to the people and shall have received a majority of all the votes cast for and against it at such election (California Constitution, Article XVI, Section 1).
2. Requires the Governor to annually submit to the Legislature, in conjunction with the Governor's Budget, a proposed five-year infrastructure plan, which among other things, shall include the instructional and support facilities needs of UC and CSU (Government Code Section 13102).
3. Authorizes CSU to use up to 12% of its General Fund support budget, less the amount required to fund general obligation bond payments and State Public Works Board rental payments, to fund capital outlay projects, either on a pay-as-you-go approach or to pay principal and interest on university-issued revenue bonds (Education Code (EC) Section 89770, et seq.).
4. Authorizes UC to use up to 15% of its General Fund support budget, less the amount required to fund general obligation bond payments and State Public Works Board rental payments, to fund capital outlay projects, either on a pay-as-you-go approach or to pay principal and interest on university-issued revenue bonds (EC Section 92943, et seq.).
5. Under the State University Revenue Bond Act of 1947, authorizes the CSU Board of Trustees to construct operate and control certain facilities, including student housing and boarding facilities, and to establish charges for use of such facilities (EC Section 90010, et seq.).
6. Under the UC Dormitory Revenue Bond Act of 1947, authorizes the UC Board of Regents to construct operate and control certain facilities, including student housing and boarding facilities, and to establish charges for use of such facilities (EC Section 92400, et seq.).
7. The Kindergarten-University Public Education Facilities Bond Act of 2006, authorized $10.4 billion in general obligation bonds, including $3.1 billion for higher education facilities, of which UC received $890 million and CSU received $690 million (EC Section 101000, et seq.).
8. The Kindergarten Through Community College Public Education Facilities Bond Act of 2016, approved by the voters in November 2016 (Proposition 51), authorized $9 billion state general obligation bonds for K-12 facilities ($7 billion) and California Community College (CCC) facilities ($2 billion) (EC Sect. 101110, et seq.).

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1. Total principal and interest costs of approximately $6.5 billion to pay off the bonds, ($4 billion in principal and $2.5 billion in interest), with annual debt service payments of $216 million General Fund (GF), when all bonds are sold. (Assumes 30-year maturity and an interest rate of 3.5%.)
2. One-time GF costs in the mid-hundreds-of-thousands of dollars to the Secretary of State for printing and mailing costs to place the measure on the ballot in the November 2018 statewide election.

COMMENTS: Urgency clause. This measure contains an urgency clause.

Background. Since the late 1980s, the Legislature has placed on the ballot and voters have approved bonds for public higher education every two to four years. The last statewide general obligation bond, Proposition 1D (AB 127, Núñez and Perata, Chapter 35, Statutes of 2006), was approved by voters in November 2006, authorizing the sale of $10.4 billion in general obligation bonds of which $3.087 billion was earmarked for higher education facilities. Of this amount, $1.5 billion was provided for CCC facilities, $890 million was provided for UC, and $690 million was provided for CSU. All Proposition 1D higher education facilities funds have been depleted and K-12 funds have almost been exhausted.

Since 2006, as the state's fiscal condition continued to deteriorate, legislation needed to authorize education bonds was not enacted. Instead, since 2008 the higher education segments have received capital funding from lease-revenue bonds through the annual budget acts; however, these funds have met less than half of the segments' capital needs. Bond funds, whether lease-revenue or general obligation, are allocated through the budget process in accordance with the segments' five-year capital facility plans.

Additionally, in November 2012, California voters approved Proposition 39 to close a corporate tax loophole and increase the state’s annual corporate tax revenues by as much as $1.1 billion. Proposition 39 specified that half of the revenue generated from 2013-2018, up to $550 million, should support energy efficiency and alternative energy projects at public schools, colleges, universities and other public buildings, as well as related public-private partnerships and workforce training.

Need for this measure. According to the author, "Higher education facilities are in dire need of improvement, and it is difficult to draw general fund dollars away from other competing needs". The author contends, "A bond is a more economical way to address infrastructure needs, as it spreads the fiscal cost over decades".

Summary of Capital Needs.

1. UC's inventory of capital assets totals approximately 137 million gross square feet in 6,000 buildings. More than half of UC's space is at least 30 years old. UC's capital plan estimates capital needs totaling $27.6 billion through 2022-23. Of this total, UC indicates that $10.9 billion constitute projects eligible for state funding. (Excluded from this amount are capital outlays for UC's medical centers and for auxiliary enterprises, such student housing and parking facilities, which are historically funded with revenue bonds repaid through user fees.) UC indicates that it lacks a fund source for $5.1 billion in state-supportable projects identified in its plan.

While indicating that it is fulfilling a portion of its funding needs, even for state supportable projects, with private donations and the implementation of public-private partnerships (P3s), as well as through its support budget, UC maintains that it cannot sustain its capital program solely with this approach. UC notes that, while state support for capital outlay, through specific capital appropriations, averaged almost $500 million between 1996 and 2012, state support since that time has been only $190 million annually, all of which is a reallocation of operating funds for debt service.

According to UC, "Without an infusion of additional funding, the ability to fully implement the capital program is uncertain and in many cases, unlikely. This funding gap highlights the urgency for new State funding. A new State General Obligation Bond would provide much needed resources to support the University's important mission."

1. CSU's inventory of capital assets totals approximately 86 million gross square feet in 2,100 buildings. More than half of CSU's space is over 40 years old, and its deferred maintenance backlog exceeds $2 billion. CSU's most recent five-year plan identifies a funding need $14.1 billion, consisting of $8.2 billion for academic facilities and $5.9 billion for self-supporting facilities (dormitories, parking, etc.).

CSU indicates that the need for campus academic projects and infrastructure is much greater than the available funds. A request to increase the permanent base operating budget by $15 million was included in the CSU's 2018-19 budget request to the state as a means to finance additional capital outlays. CSU estimates that over $400 million per year is needed to renew existing academic facilities, provide improvements needed to support the academic program, and address life, safety, and seismic deficiencies.

Related legislation. AB 2771 (Eggman, et al.), which is pending action on the Senate Floor, enacts a $7 billion general obligation bond for higher education facilities, to be considered by the voters in 2020.

Prior legislation. Several bond measures have been proposed since 2009 to fund higher education facilities. The most recent of these are:

SB 483 (Glazer and Allen) of 2017, which was held on Suspense in the Senate Appropriations Committee, proposed a $2 billion bond for the November 2018 ballot facilities at UC, CSU, and Hastings.

AB 1433 (Gray) of 2016, which was held on Suspense in the Assembly Appropriations Committee, authorized an unspecified amount of bonds for the UC, CSU, CCC and Hastings.

AB 1088 (O'Donnell) of 2015, which was held on Suspense in the Assembly Appropriations Committee, authorized an unspecified amount of bonds for school districts, county superintendents of schools, county boards of education, charter schools, the CCC, CSU, Hastings, and UC.

Analysis Prepared by: Jeanice Warden / HIGHER ED. / (916) 319-3960 FN: 0004166

Date of Hearing: August 8, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

SBPCA Bill Id:SB 1225

Author:(Glazer) – As Introduced Ver:February 15, 2018

Urgency: Yes State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill enacts a $4 billion general obligation bond for higher education facilities, to be considered by the voters at the November 2018 ballot to fund capital outlay projects for the University of California (UC), the Hastings College of the Law, and the California State University (CSU). The bill specifies that of the total amount of bonds authorized, one-half are for UC and Hastings, and one-half are for CSU. It states the issuance of bonds shall only be for the purpose of funding projects authorized by the Legislature in the annual budget act. It also requires any request to the Legislature and the Department of Finance by UC and CSU for funding from this bond include a five-year capital outlay plan and specifies that the plan must include a schedule prioritizing seismic retrofitting needed to significantly reduce seismic hazards by the 2024-25 fiscal year.

FISCAL EFFECT:

1. Total principal and interest costs of approximately $6.5 billion to pay off the bonds, ($4 billion in principal and $2.5 billion in interest), with annual debt service payments of $216 million GF, when all bonds are sold. (Assumes 30-year maturity and an interest rate of 3.5%.)
2. One-time GF costs in the mid-hundreds-of-thousands of dollars to the Secretary of State for printing and mailing costs to place the measure on the ballot in the November 2018 statewide election.

COMMENTS:

1. Background. From the late 1980s through 2006, the Legislature placed on the ballot and voters approved bonds every two-to-four years that included support for public higher education facilities. In recent years, the state changed how UC and CSU may fund capital outlay projects by allowing each to use their General Fund allocations. The new process requires the segments to each submit an annual capital outlay proposal for Legislative review and Department of Finance approval before using General Fund to support the projects.

UC and CSU both indicate their capital outlay needs will exceed their resources. Specifically, UC's most recent five-year capital outlay plan estimates capital needs totaling $28 billion through 2022-23 and that it lacks a fund source for $5 billion in state-supportable projects identified in the plan. CSU's most recent five-year capital outlay plan estimates capital needs totaling $14 billion through 2022-23 and that it lacks a fund source for $8 million in state-supportable projects identified in the plan.

1. Legislature Currently Considering Two Higher Education Facilities Bond Proposals. This bill and AB 2771 (Eggman) both propose to add to the 2018 statewide ballot a measure to enact a bond for higher education facilities. There are three primary differences between the bills: (a) This bill provides $4 billion and AB 2771 provides $7 billion. (b) This bill prioritizes funds for seismic retrofitting and AB 2771 does not. (c) This bill splits the bond funds equally between the UC and Hastings (50%) and CSU (50%) and AB 2771 does not.
2. Urgency Clause. Regular legislation takes effect January first following a bill’s passage, but urgency bills take effect immediately after passage. This bill includes an urgency clause because it is proposed for the November 2018 statewide ballot. Urgency statutes must be approved by two-thirds vote of each house of the Legislature.
3. Related Legislation. SB 5 (De Leon) places a $4.1 billion general obligation bond measure on the June 2018 statewide ballot to fund parks and water-related projects and habitat conservation.

SB 3 (Beall) places a $4 billion general obligation bond measure on the November 2018 statewide ballot to fund various affordable housing programs ($3 billion) and self-liquidating bonds for veterans' home purchases ($1 billion).

Water Supply and Water Quality Act of 2018. This initiative places an $8.9 billion in general obligation bonds for water-related infrastructure on the November 2018 statewide ballot.

AB 2771 (Eggman) proposes a $7 billion general obligation bond measure for UC, CSU, and Hastings to be placed on the November 2018 statewide ballot. The bill is pending in the Senate Appropriations Committee.

SB 483 (Glazer and Allen) would have placed a $2 billion bond for the November 2018 ballot facilities at UC, CSU, and Hastings, with priority for seismic retrofitting. The bill was held on suspense in Senate Appropriations Committee.

AB 1433 (Gray), of the 2015-16 Legislative Session, would have authorized an unspecified of bonds for the UC, CSU, CCC, and Hastings. The bill was held on suspense in the Assembly Appropriations Committee.

AB 1088 (O'Donnell), of the 2015-16 Legislative Session, authorized an unspecified amount of bonds for school districts, county superintendents of schools, county boards of education, charter schools, the CCC, CSU, Hastings, and UC. The bill was held on suspense in Assembly Appropriations Committee.

Analysis Prepared by: Natasha Collins / APPR. / (916) 319-2081

Date of Hearing: June 26, 2018

ASSEMBLY COMMITTEE ON HIGHER EDUCATION

Jose Medina, Chair

SBPCA Bill Id:SB 1225

Author:(Glazer) – As Introduced Ver:February 15, 2018

SENATE VOTE: 34-5

SUBJECT: Education finance: Higher Education Facilities Bond Act of 2018.

SUMMARY: Enacts a $4 billion general obligation bond for higher education facilities, to be considered by the voters at the November 2018 ballot for the construction, reconstruction, and remodeling of existing or new facilities at the University of California (UC), the Hastings College of the Law (Hastings), and the California State University (CSU); and, specifies that of the total amount of bonds authorized, one-half are for UC and Hastings, and one-half are for CSU. Specifically, this bill:

1. Enacts the Higher Education Facilities Bond Act of 2018, which, upon approval at the November 2018 statewide election, authorizes no more than $4 billion of state general obligation bonds for the construction, reconstruction, and remodeling of existing or new facilities at the UC, Hastings, and the CSU.
2. Specifies that allowable uses of the funds include the following:
   1. Construction of buildings and the acquisition of related fixtures;
   2. The equipping of new, renovated, or reconstructed facilities, including preconstruction costs, including, but not necessarily limited to, preliminary plans and working drawings;
   3. Renovation and reconstruction of facilities; and,
   4. The construction or improvement of off-campus facilities of CSU, approved by the CSU Trustees on or before July 1, 2014, including the acquisition of sites upon which these facilities are to be constructed.
3. Authorizes the Higher Education Facilities Finance Committee (Committee), consisting of the Governor, the Controller, the Treasurer (who serves as the Chair), the Director of Finance, the UC President, the CSU Chancellor, or their designees, to create debt or debts, liability or liabilities, of the State of California pursuant to this measure.
4. States that any request forwarded to the Legislature and the Department of Finance for funds from this bond issue for expenditure by the UC or CSU shall be accompanied by the five-year capital outlay plan of the particular university or college, and shall include a schedule that prioritizes the seismic retrofitting needed to significantly reduce, by the 2024–25 fiscal year, in the judgment of the particular university or college, seismic hazards in buildings identified as high priority by the university or college.
5. Specifies that the Treasurer shall sell the bonds authorized by the Committee at times necessary to service expenditures required by the apportionments and bonds authorized by this part shall be prepared, executed, issued, sold, paid, and redeemed as provided in the State General Obligation Bond Law (Chapter 4 (commencing with Section 16720) of Part 3 of Division 4 of Title 2 of the Government Code).
6. Requires the Committee to authorize the issuance of bonds only to the extent necessary to fund the apportionments that are expressly authorized by the Legislature in the annual Budget Act, as specified.

EXISTING LAW:

1. Stipulates that the Legislature shall not, in any manner create any debt or debts, liability or liabilities, which shall, singly or in the aggregate with any previous debts or liabilities, exceed $300,000 unless enactment has been passed by a two-thirds vote of all the members elected to each house of the Legislature and until, at a general election or at a direct primary, it shall have been submitted to the people and shall have received a majority of all the votes cast for and against it at such election (California Constitution, Article XVI, Section 1).
2. Requires the Governor to annually submit to the Legislature, in conjunction with the Governor's Budget, a proposed five-year infrastructure plan, which among other things, shall include the instructional and support facilities needs of UC and CSU (Government Code Section 13102).
3. Authorizes CSU to use up to 12 percent of its General Fund support budget, less the amount required to fund general obligation bond payments and State Public Works Board rental payments, to fund capital outlay projects, either on a pay-as-you-go approach or to pay principal and interest on university-issued revenue bonds (Education Code (EC) Section 89770, et seq.).
4. Authorizes UC to use up to 15 percent of its General Fund support budget, less the amount required to fund general obligation bond payments and State Public Works Board rental payments, to fund capital outlay projects, either on a pay-as-you-go approach or to pay principal and interest on university-issued revenue bonds (EC Section 92943, et seq.).
5. Under the State University Revenue Bond Act of 1947, authorizes the CSU Board of Trustees to construct operate and control certain facilities, including student housing and boarding facilities, and to establish charges for use of such facilities (EC Section 90010, et seq.).
6. Under the UC Dormitory Revenue Bond Act of 1947, authorizes the UC Board of Regents to construct operate and control certain facilities, including student housing and boarding facilities, and to establish charges for use of such facilities (EC Section 92400, et seq.).
7. The Kindergarten-University Public Education Facilities Bond Act of 2006, authorized $10.4 billion in general obligation bonds, including $3.1 billion for higher education facilities, of which UC received $890 million and CSU received $690 million (EC Section 101000, et seq.).
8. The Kindergarten Through Community College Public Education Facilities Bond Act of 2016, approved by the voters in November 2016 (Proposition 51), authorized $9 billion state general obligation bonds for K-12 facilities ($7 billion) and California Community College (CCC) facilities ($2 billion) (EC Sect. 101110, et seq.).

FISCAL EFFECT: According to the Senate Appropriations Committee, the authorization of $4 billion in general obligation bonds is expected to result in General Fund costs of approximately $7.8 billion to repay, including $3.8 billion in interest, at an annual cost of $220 million.

COMMENTS: Urgency clause. This measure contains an urgency clause.

Background. Since the late 1980s, the Legislature has placed on the ballot and voters have approved bonds for public higher education every two to four years. The last statewide general obligation bond, Proposition 1D (AB 127, Núñez and Perata, Chapter 35, Statutes of 2006), was approved by voters in November 2006, authorizing the sale of $10.4 billion in general obligation bonds of which $3.087 billion was earmarked for higher education facilities. Of this amount, $1.5 billion was provided for CCC facilities, $890 million was provided for UC, and $690 million was provided for CSU. All Proposition 1D higher education facilities funds have been depleted and K-12 funds have almost been exhausted.

Since 2006, as the state's fiscal condition continued to deteriorate, legislation needed to authorize education bonds was not enacted. Instead, since 2008 the higher education segments have received capital funding from lease-revenue bonds through the annual budget acts; however, these funds have met less than half of the segments' capital needs. Bond funds, whether lease-revenue or general obligation, are allocated through the budget process in accordance with the segments' five-year capital facility plans.

Additionally, in November 2012, California voters approved Proposition 39 to close a corporate tax loophole and increase the state’s annual corporate tax revenues by as much as $1.1 billion. Proposition 39 specified that half of the revenue generated from 2013-2018, up to $550 million, should support energy efficiency and alternative energy projects at public schools, colleges, universities and other public buildings, as well as related public-private partnerships and workforce training.

Need for this measure. According to the author, "Higher education facilities are in dire need of improvement, and it is difficult to draw general fund dollars away from other competing needs". The author contends, "A bond is a more economical way to address infrastructure needs, as it spreads the fiscal cost over decades".

Summary of Capital Needs.

• UC's inventory of capital assets totals approximately 137 million gross square feet in 6,000 buildings. More than half of UC's space is at least 30 years old. UC's capital plan estimates capital needs totaling $27.6 billion through 2022-23. Of this total, UC indicates that $10.9 billion constitute projects eligible for state funding. (Excluded from this amount are capital outlays for UC's medical centers and for auxiliary enterprises, such student housing and parking facilities, which are historically funded with revenue bonds repaid through user fees.) UC indicates that it lacks a fund source for $5.1 billion in state-supportable projects identified in its plan.

While indicating that it is fulfilling a portion of its funding needs, even for state supportable projects, with private donations and the implementation of public-private partnerships (P3s), as well as through its support budget, UC maintains that it cannot sustain its capital program solely with this approach. UC notes that, while state support for capital outlay, through specific capital appropriations, averaged almost $500 million between 1996 and 2012, state support since that time has been only $190 million annually, all of which is a reallocation of operating funds for debt service.

According to UC, "Without an infusion of additional funding, the ability to fully implement the capital program is uncertain and in many cases, unlikely. This funding gap highlights the urgency for new State funding. A new State General Obligation Bond would provide much needed resources to support the University's important mission."

• CSU's inventory of capital assets totals approximately 86 million gross square feet in 2,100 buildings. More than half of CSU's space is over 40 years old, and its deferred maintenance backlog exceeds $2 billion. CSU's most recent five-year plan identifies a funding need $14.1 billion, consisting of $8.2 billion for academic facilities and $5.9 billion for self-supporting facilities (dormitories, parking, etc.).

CSU indicates that the need for campus academic projects and infrastructure is much greater than the available funds. A request to increase the permanent base operating budget by $15 million was included in the CSU's 2018-19 budget request to the state as a means to finance additional capital outlays. CSU estimates that over $400 million per year is needed to renew existing academic facilities, provide improvements needed to support the academic program, and address life, safety, and seismic deficiencies.

Related legislation. AB 2771 (Eggman, et al.), which is pending action in the Senate, enacts a $7 billion general obligation bond for higher education facilities, to be considered by the voters at the November 2018 ballot.

Prior legislation. Several bond measures have been proposed since 2009 to fund higher education facilities. The most recent of these are:

SB 483 (Glazer and Allen) of 2017, which was held on Suspense in the Senate Appropriations Committee, proposed a $2 billion bond for the November 2018 ballot facilities at UC, CSU, and Hastings.

AB 1433 (Gray) of 2016, which was held on Suspense in the Assembly Appropriations Committee, authorized an unspecified amount of bonds for the UC, CSU, CCC and Hastings.

AB 1088 (O'Donnell) of 2015, which was held on Suspense in the Assembly Appropriations Committee, authorized an unspecified amount of bonds for school districts, county superintendents of schools, county boards of education, charter schools, the CCC, CSU, Hastings, and UC.

REGISTERED SUPPORT / OPPOSITION:

Support

California State University

California Teamsters

East Bay Leadership Council

State Building and Construction Trades Council, AFL-CIO

University of California

University of California Student Association

Opposition

None on file.

Analysis Prepared by: Jeanice Warden / HIGHER ED. / (916) 319-3960

 THIRD READING  

Bill No: SB 1225

Author:

:

Vote:

SENATE EDUCATION COMMITTEE: 5-0, 3/21/18

AYES: Allen, Wilk, Galgiani, Leyva, Pan

NO VOTE RECORDED: Vidak

SENATE GOVERNANCE & FIN. COMMITTEE: 6-1, 4/25/18

AYES: McGuire, Nguyen, Beall, Hernandez, Hertzberg, Lara

NOES: Moorlach

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/25/18

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SUBJECT:

SOURCE: Author

DIGEST:

This bill, an urgency measure, places a $4 billion general obligation bond on the November 2018 ballot for the construction, reconstruction, and remodeling of existing or new facilities at the University of California (UC), the California State University (CSU), and the Hastings College of the Law.

ANALYSIS:

Existing law:

1. Stipulates that the Legislature shall not, in any manner create any debt or debts, liability or liabilities, which shall, singly or in the aggregate with any previous debts or liabilities, exceed $300,000 unless enactment has been passed by a two-thirds vote of all the members elected to each house of the Legislature and until, at a general election or at a direct primary, it shall have been submitted to the people and shall have received a majority of all the votes cast for and against it at such election (California Constitution Article XVI, Section 1.).
2. Requires the Governor to annually submit to the Legislature, in conjunction with the Governor's Budget, a proposed five-year infrastructure plan, which among other things, shall include the instructional and support facilities needs of UC and CSU (Government Code Section 13102.).

This bill places a $4 billion general obligation bond on the November 2018 ballot for the construction, reconstruction, and remodeling of existing or new facilities at UC, CSU, and the Hastings College of the Law. Of the total amount of bonds authorized, one-half are for UC and the Hastings College of the Law and one-half are for CSU. Specifically, this bill:

1. Enacts the Higher Education Facilities Bond Act of 2018, which, upon approval at the November 2018 statewide election, authorizes no more than $4 billion of state general obligation bonds for the construction, reconstruction, and remodeling of existing or new facilities at the UC, the CSU, and the Hastings College of the Law.
2. Specifies that allowable uses of the funds include the following: (1) construction of buildings and the acquisition of related fixtures, (2) the equipping of new, renovated, or reconstructed facilities, including preconstruction costs, including, but not necessarily limited to, preliminary plans and working drawings, (3) renovation and reconstruction of facilities, and (4) the construction or improvement of off-campus facilities of CSU, approved by the CSU Trustees on or before July 1, 2014, including the acquisition of sites upon which these facilities are to be constructed.
3. Authorizes the Higher Education Facilities Finance Committee, consisting of the Governor, the Controller, the Treasurer, the Director of Finance, the UC President, the CSU Chancellor, and the Chancellor of the California Community Colleges, to create debt or debts, liability or liabilities, of the State of California pursuant to this measure.
4. States that any request forwarded to the Legislature and the Department of Finance for funds from this bond issue for expenditure by the UC or CSU shall be accompanied by the five-year capital outlay plan of the particular university or college, and shall include a schedule that prioritizes the seismic retrofitting needed to significantly reduce, by the 2024–25 fiscal year, in the judgment of the particular university or college, seismic hazards in buildings identified as high priority by the university or college.
5. Specifies that the Treasurer shall sell the bonds authorized by the committee at times necessary to service expenditures required by the apportionments and bonds authorized by this part shall be prepared, executed, issued, sold, paid, and redeemed as provided in the State General Obligation Bond Law (Chapter 4 (commencing with Section 16720) of Part 3 of Division 4 of Title 2 of the Government Code).
6. Requires the Committee to authorize the issuance of bonds only to the extent necessary to fund the apportionments that are expressly authorized by the Legislature in the annual Budget Act, as specified.

Background

From the late 1980s to 2006, the Legislature placed on the ballot and voters approved bonds that have included support for public higher education every two to four years. The last statewide general obligation bond to include support for public higher education was Proposition 1D (AB 127, Núñez and Perata, Chapter 35, Statutes of 2006), authorizing the sale of $10.4 billion in general obligation bonds, of which $3.087 billion was earmarked for higher education facilities. Of this amount, $1.5 billion was provided for the community colleges, $890 million for UC, and $690 million for CSU. All Proposition 1D higher education facilities funds have been depleted.

Since 2006, no general obligation bonds supporting higher education have been enacted. Instead, the higher education segments have received capital funding from lease-revenue bonds through the annual budget acts. Bond funds, whether lease-revenue or general obligation, are allocated through the budget process in accordance with the segments' five-year capital facility plans.

Comments

1. Need for the bill. According to the author, “Since 2006, despite a deteriorated fiscal condition for both the UC and CSU, no higher education-specific bonds have been authorized. Instead, the UC and CSU are able to raise capital funding in limited amounts through their General Revenue Bond Program and Systemwide Revenue Bond Program, respectively. This, however, is an unsustainable way for the segments to meet their capital needs–currently identified to be over $8 billion combined. Further, these bond programs, which must be paid back by the systems themselves, can result in higher costs to students and their families.”

“The last higher education-specific bond passed was Proposition 153 in 1992, which authorized a bond issue of $900 million for the strengthening, upgrading and constructing of public colleges and universities throughout the state.”

“Public support is growing for improving campus infrastructure: In a December 2016 PPIC statewide survey on higher education, two in three Californians (65%) agree with the general idea of a bond measure on the state ballot for higher education construction projects. This is an 11-point increase in support since December 2014 and the highest level of support since PPIC first began asking the question in 2007."

1. What are the facilities needs of the segments? The UC and CSU report the following capital needs:
   1. The UC reported that combining the projects included in its Capital Financial Plan with its current deferred maintenance backlog puts the five- year capital need at nearly $14 billion. However, UC conceded that, of this amount, about $6 billion could be funded with existing resources.
   2. The CSU reported their capital needs for academic programs total about $8.4 billion. However, about $200 million of the need was anticipated to be met with current revenue bonds.

The last statewide general obligation bond supporting the higher education segments, Proposition 1D, provided $890 million for UC and $690 million for CSU. After accounting for the available resources at UC and CSU, the capital needs of the segments appear to be equivalent.

1. How are the segments funded for their facilities needs currently? Over the past few years, the responsibility for capital outlay projects has shifted from the state to the UC and CSU through the state’s annual budget. The segments are now able to use their general fund to support capital outlay projects or to fund revenue bond debt service, with the expectation that they prioritize their capital expenditures within their overall operating budgets. However, UC and CSU maintain that this shift does not preclude them from participating in a state general obligation bond. Further, the segments have expressed that they are not funded adequately for their operations currently, let alone at a level that can also support all of their facilities costs.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, the authorization of $4 billion in general obligation bonds is expected to result in General Fund costs of approximately $7.8 billion to repay, including $3.8 billion in interest, at an annual cost of $220 million.

SUPPORT: (Verified 5/25/18)

California State University

University of California

OPPOSITION: (Verified 5/25/18)

None received

Prepared by:

5/26/18 16:59:38

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 1225 (Glazer) - Education finance: Higher Education Facilities Bond Act of 2018

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

This bill places a $4 billion general obligation bond on the November 2018 ballot for the construction, reconstruction and remodeling of existing or new facilities at the University of California (UC), the California State University (CSU), and the Hastings College of the Law.

Fiscal Impact:

The authorization of $4 billion in general obligation bonds is expected to result in General Fund costs of approximately $7.8 billion to repay, including $3.8 billion in interest, at an annual cost of $220 million.

Background:

From the late 1980s to 2006, the Legislature placed on the ballot and voters approved bonds that have included support for public higher education every two to four years. The last statewide general obligation bond to include support for public higher education was Proposition 1D (AB 127, Núñez and Perata, Chapter 35, Statutes of 2006), authorizing the sale of $10.4 billion in general obligation bonds, of which $3.087 billion was earmarked for higher education facilities. Of this amount, $1.5 billion was provided for the community colleges, $890 million for UC, and $690 million for CSU. All Proposition 1D higher education facilities funds have been depleted.

Since 2006, no general obligation bonds supporting higher education have been enacted. Instead, the higher education segments have received capital funding from lease-revenue bonds through the annual budget acts. Bond funds, whether lease-revenue or general obligation, are allocated through the budget process in accordance with the segments' five-year capital facility plans.

Proposed Law:

This bill places a $4 billion general obligation bond on the November 2018 ballot for the construction, reconstruction, and remodeling of existing or new facilities at UC, CSU, and Hastings College of the Law. Of the total amount of bonds authorized, one-half are for UC and the Hastings College of the Law and one-half are for CSU.

This bill:

1. Specifies that allowable uses of the funds include the following: (1) construction of buildings and the acquisition of related fixtures, (2) the equipping of new, renovated, or reconstructed facilities, including preconstruction costs, including, but not necessarily limited to, preliminary plans and working drawings, (3) renovation and reconstruction of facilities, and (4) the construction or improvement of off-campus facilities of CSU, approved by the CSU Trustees on or before July 1, 2014, including the acquisition of sites upon which these facilities are to be constructed.
2. Authorizes the Higher Education Facilities Bond Act Finance Committee, consisting of the Governor, the Controller, the Treasurer (chair), the Director of Finance, the UC President, and the CSU Chancellor, to create debt or debts, liability or liabilities, of the State of California pursuant to this measure.
3. States that any request forwarded to the Legislature and the Department of Finance for funds from this bond issue for expenditure by the UC or CSU shall be accompanied by the five-year capital outlay plan of the particular university or college, and shall include a schedule that prioritizes the seismic retrofitting needed to significantly reduce, by the 2024–25 fiscal year, in the judgment of the particular university or college, seismic hazards in buildings identified as high priority by the university or college.
4. Specifies that the Treasurer shall sell the bonds authorized by the Committee at times necessary to service expenditures required by the apportionments and bonds authorized by this part shall be prepared, executed, issued, sold, paid, and redeemed as provided in the State General Obligation Bond Law (Chapter 4 (commencing with Section 16720) of Part 3 of Division 4 of Title 2 of the Government Code).
5. Requires the Committee to authorize the issuance of bonds only to the extent necessary to fund the apportionments that are expressly authorized by the Legislature in the annual Budget Act, as specified.

Related Legislation:

SB 483 (Glazer, 2017) would have placed a $2 billion general obligation bond measure on the November 2018 ballot for the construction, reconstruction and remodeling of existing or new facilities at the UC, CSU and the Hastings College of Law. This measure was held in the Senate Appropriations Committee.

AB 1433 (Gray, 2016) would have authorized an unspecified amount of state general obligation bonds for the California Community Colleges, the UC, CSU, and the Hastings College of the Law to construct and modernize education facilities. The measure was held in the Assembly Appropriations Committee.

AB 1088 (O'Donnell, 2015), would have authorized an unspecified amount of state general obligation bonds for school districts, county superintendents of schools, county boards of education, charter schools, the California Community Colleges, the UC, the Hastings College of the Law, and the CSU to construct and modernize education facilities. The measure was held in the Assembly Appropriations Committee.

Staff Comments:

The UC reports that combining the projects included in its Capital Financial Plan with its current deferred maintenance backlog puts the five- year capital need at nearly $10 billion. However, of this amount, about $3.6 billion can be funded with existing resources. The CSU reports that its capital needs for academic programs total about $6.2 billion for which approximately $1 billion is anticipated to be met with current revenue bonds. The last statewide general obligation bond supporting the segments, Proposition 1D, provided $890 million for UC and $690 million for CSU.

Based on the Legislative Analyst Office’s analysis of the costs associated with Proposition 51 of 2016, the $4 billion in bonds authorized by this bill would cost about $7.8 billion to repay, including an estimated $3.8 billion in interest, at an annual cost of about $220 million.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Education finance: Higher Education Facilities Bond Act of 2018

Enacts the Higher Education Facilities Bond Act of 2018, which places a $4 billion bond before voters at the November, 2018, general election ballot.

Background

When public agencies issue bonds, they borrow money from investors, who provide cash in exchange for the agencies’ commitment to repay the principal amount of the bond plus interest. Bonds are usually either revenue bonds, which repay investors out of revenue generated from the project the agency buys with bond proceeds, or general obligation bonds, which the public agency pays out of general revenues and are guaranteed by its full faith and credit.

Section One of Article XVI of the California Constitution and the state’s General Obligation Bond Law guide the issuance of the state’s general obligation debt. The Constitution allows the Legislature to place general obligation bonds on the ballot for specific purposes with a two-thirds vote of the Assembly and Senate. Voters also can place bonds on the ballot by initiative, as they have for parks, water projects, high-speed rail, and stem cell research, among others. Either way, general obligation bonds must be ratified by majority vote of the state’s electorate. Unlike local general obligation bonds, approval by the state’s electorate doesn’t automatically trigger an increased tax to repay the bond. The Constitution commits the state to repay investors from general revenues above all other claims, except payments to public education. California voters approved $38.4 billion of general obligation bonds between 1974 and 1999, which increased significantly to $112 billion between 2000 and 2010, but receded to $17 billion between 2011 and 2018. Additionally, voters will consider the $4 billion California Drought, Water, Parks, Climate, Coastal Protection, and Outdoor Access for All Act of 2018 (SB 5, De Leon, 2017), and the $3 billion Veterans and Affordable Housing Bond Act (SB 3, Beall, 2017), at the June, 2018, primary election and the November, 2018, general election, respectively.

Bond acts have standard provisions that authorize the State Treasurer to sell a specified amount of bonds, and generally include several uniform provisions that:

• Establish the state’s obligation to repay them, and pledge its full faith and credit to repayment,
• Set forth issuance procedures, and link the bond act to the state’s General Obligation Bond Law,
• Create a finance committee with specified membership, chaired by the State Treasurer,
• Charge the committee to determine whether it is “necessary or desirable” to issue the bonds, and
• Add other mechanisms necessary for the State Treasurer and the Department of Finance to implement the bond act, including allowing the board to request a loan from the Pooled Money Investment Board to advance funds for bond-funded programs prior to the bond sale, among others.

In bond acts, the Legislature generally:

• Sets forth categories of projects eligible for bond funds, such as library construction or school facility modernization,
• Chooses an administrative agency to award the funds, such as the State Librarian or the State Allocation Board,
• Details the criteria to guide the administrative agency’s funding in each category,
• Enacts enforcement and audit provisions, and
• Provides for an election to approve the bond act.

Should the voters approve the bond act, the Legislature then appropriates funds to the chosen agencies to fund projects consistent with the criteria, generally as part of the Budget Act. The Department of Finance then surveys agencies to determine the need for bond funds based on a project’s readiness, and then asks the State Treasurer to sell bonds in a specified amount. After the bond sale, the Department of Finance determines which bond acts and agencies receive bond proceeds.

The University of California (UC) offers both undergraduate and graduate education, with its ten campuses enrolling approximately 238,000 students. In the 2016-17 fiscal year, UC awarded approximately 72,322 degrees. Nine of its ten campuses are governed by the Board of Regents; while not governed by the Board of Regents, the UC Hastings College of Law in San Francisco is the state’s oldest law school, with an enrollment of approximately 945 students.

The California State University (CSU) provides undergraduate and graduate instruction generally through the master’s degree, and its 23 campuses enroll approximately 484,000 students. In the 2015-16 fiscal year, CSU awarded approximately 113,000 degrees. CSU is governed by a 25-member Board of Regents.

Both CSU and UC have authority to issue their own revenue bonds, which are bonds repaid and secured by a specified pledge of revenues, such as student housing or parking fees, and not backed by the full faith and credit of the state like general obligation bonds. Additionally, the State Public Works Board (SPWB) can also issue lease revenue bonds where CSU or UC lease facilities from the Board, and the Legislature appropriates funds to pay the leases. These bonds are not general obligations because the Legislature is not obligated to pay the lease rentals if the building is not available for use and occupancy. CSU currently has $154 million in outstanding lease revenue bonds.

Historically, general obligation bonds and SPWB lease revenue bonds have financed many UC and CSU capital improvements. However, the Governor and the Legislature in recent years changed the way the state funds UC and CSU capital outlay; previously, each system would distinguish capital outlay from other costs when requesting funding as part of the Budget Act. Today, UC and CSU include capital outlay with all of its other spending. To implement this change, the Legislature recently provided UC with increased flexibility to pursue capital outlay projects outside of the annual budget process, after approval by the Department of Finance (DOF) and review by the Joint Legislative Budget Committee (AB 94, Committee on Budget, 2013).

AB 94 allowed UC to pledge up to 15% of the state funds provided in its General Fund support budget less general obligation debt payments and lease payments towards capital outlay, lease revenue bond debt, and pay as you go. The Legislature also added almost identical authority for CSU to finance capital projects in 2014 (SB 860, Committee on Budget and Fiscal Review). The Governor’s Five-Year Infrastructure Plan further reflects this change by stating:

“Successful strategies to more efficiently fund infrastructure projects for the University of California (UC) and the California State University (CSU) systems have been implemented. Legislation was enacted in 2014 and 2015 that provided both UC and CSU with the authority to fund capital projects and debt service from their annual support budgets. This provides the universities with the flexibility to prioritize funding sources for their entire operations, including infrastructure development.”

The Plan notes that UC and CSU both submit annual capital outlay proposals for Legislative review and DOF approval to comply with statute. UC submitted 2018-19 capital outlay proposals totaling $266 million, while CSU submitted capital proposals totaling $1.4 billion. The Plan does not assume the proceeds of general obligation bonds will be used for UC or CSU.

UC reports that combining the projects included in its Capital Financial Plan with its current deferred maintenance backlog puts the five-year capital need at nearly $14 billion. However, UC conceded that, of this amount, about $6 billion could be funded with existing resources. CSU reports their capital needs for academic programs total about $8.4 billion. However, about $200 million of the need was anticipated to be met with current revenue bonds.

The last statewide general obligation bond to include support for public higher education was Proposition 1D (AB 127, Núñez and Perata, 2006), which authorized the sale of $10.4 billion in general obligation bonds, of which $3 billion was earmarked for higher education facilities. Of this amount, $1.5 billion was provided for the community colleges, $890 million for UC, and $690 million for CSU. The Governor’s Bond Accountability website (www.bondaccountability.ca.gov) indicates that almost all of these funds have been committed. The author wants the state to issue general obligation bonds to fund additional higher education improvements.

Proposed Law

Senate Bill 1225 enacts the Higher Education Facilities Bond Act of 2018, which places a $4 billion bond before voters at the November, 2018, general election ballot. The measure creates the 2018 Higher Education Capital Outlay Bond Fund, and requires that all bond proceeds be deposited in the Fund. The measure creates a finance committee to administer the bond, consisting of the Treasurer as Chair, the Governor, the Controller, the Director of Finance, the President of the University of California, the Chancellor of the California State University, and the Chancellor of the California Community Colleges, or their designees.

The bill authorizes the Committee to create debts and liabilities on behalf of the state for the purposes of funding aid to UC, CSU, and the Hastings College of the Law for the construction, reconstruction, and remodeling of existing or new facilities authorized in the Budget Act, including:

• Preliminary plans and drawings,
• Acquisition of related fixtures,
• Equipping of new, renovated, or reconstructed facilities,
• Funding for payment of preconstruction costs, or
• Construction of off-campus facilities of CSU, so long as the Trustees approved the construction on or before July 1, 2014, including acquisition of sites upon which the facilities are to be built.

Of the total amount of bonds, one-half must be designated for UC and the Hastings College of the Law, and one-half for CSU.

SB 1225 charges the Committee, pursuant to legislative direction, with the duty to authorize the issuance and sale of its bonds, and incorporates standard provisions in general obligation bond law, either explicitly or by reference, with some modifications.

The measure contains legislative findings and declarations supporting its purposes, and language stating that its provisions clarify authorizations made in the 1986 and 1988 Bond Acts, and is not intended to mark a change.

State Revenue Impact

No estimate.

Comments

1. Purpose of the bill. According to the author, “Since 2006, despite a deteriorated fiscal condition for both the UC and CSU, no higher education-specific bonds have been authorized. Instead, the UC and CSU are able to raise capital funding in limited amounts through their General Revenue Bond Program and Systemwide Revenue Bond Program, respectively. This, however, is an unsustainable way for the segments to meet their capital needs–currently identified to be over $8 billion combined. Further, these bond programs, which must be paid back by the systems themselves, can result in higher costs to students and their families. “The last higher education-specific bond passed was Proposition 153 in 1992, which authorized a bond issue of $900 million for the strengthening, upgrading and constructing of public colleges and universities throughout the state. Public support is growing for improving campus infrastructure: In a December 2016 PPIC statewide survey on higher education, two in three Californians (65%) agree with the general idea of a bond measure on the state ballot for higher education construction projects. This is an 11-point increase in support since December 2014 and the highest level of support since PPIC first began asking the question in 2007”

2. Role reversal? SB 1225 authorizes the sale of $4 billion in general obligation bonds contingent on voter approval to fund capital improvements for UC and CSU authorized in the Budget Act. However, the Legislature recently changed UC and CSU’s capital outlay programs for a future in which no general obligation bond funding would be available; instead, UC and CSU had to integrate capital outlay funding into their general request for resources, and use that funding as security when issuing revenue bonds under its own name. The Legislature increased funding for both systems to compensate. While UC and CSU have significant capital outlay needs, and student fees have escalated significantly in the past decade, should the Legislature again turn to general obligation bonds so soon after making the change? The Committee may wish to consider whether general obligation bonds are the right source to fund UC and CSU capital outlay given its recent shift away from that source.

3. Sixteen tons. Setting the right amount of state general obligation debt is difficult; both the State Treasurer and the Legislative Analyst’s Office state that there’s no correct level. Instead, experts suggest that states should look at three criteria: affordability, comparability, and optimality:^[1]

California currently has $72.7 billion of general obligation and $9.2 billion of lease revenue debt outstanding, which is affordable. The Governor’s 2017 Five-Year Infrastructure Plan states that the Debt Service Ratio, or the ratio between debt service and general fund revenues, as 6.46% in 2016-17 and 5.74% in 2017-18. The State Treasurer calculates a debt service ratio of 6.57% in 2016-17 and 6.4% in 2017-18; the percentages differ because the State Treasurer accounts for offsets of federal government subsidies or transfers from special funds. Annual expenditures on debt service have grown from $2.9 billion in 2000-01 to $7.3 billion in 2017-18, and are estimated to increase to $8.5 billion in 2021-22, assuming voters approve the two proposed bonds pending this year. Additionally, 95% of outstanding debt is paid at a fixed rate of interest. While debt service percentages are reasonable, every dollar spent on debt service reduces the funding that is available for other priorities. The Plan proposes only $848 million in new general obligation bonds.

California’s comparability to other states is less favorable, but improving. The State Treasurer’s 2017 Debt Affordability Report, issued last October, contains the following chart:

Determining optimality or whether government is investing in the quantity and quality of public capital desired by residents, and financing the appropriate share with debt, is more difficult. LAO recommends that the Legislature consider the Five-Year Infrastructure Plan as a starting point to developing a coordinated approach to infrastructure funding, and establish a committee to focus on statewide infrastructure.

4. The good news. Ratings issued from the three major credit rating agencies often inform investors and the public regarding the state’s creditworthiness, and assess any investment risk from investing in California general obligation bonds. Rating agencies Fitch, Standard and Poor’s, and Moody’s praise California’s deep and diverse economy, recent balanced and on-time budgets, reduced budget deficits, and improved reserves and liquidity. However, the agencies also state that California faces challenges: a highly volatile revenue system, constitutionally-imposed governance restrictions, high housing costs that threaten economic growth, minimal prefunding of retiree health care benefits, and a large backlog of maintenance and infrastructure needs, among others. Once considered an outlier, the difference between California bonds and other states as measured by the benchmark 30-year Municipal Market Data Index has tightened from a high of more than 150 basis points at the end of 2009 to around 10 basis points at the end of June 2016, although it increased slightly in 2017. On March 8, 2018, State Treasurer Chiang sold $1.52 billion in bonds for new borrowing, and $663 million to refund outstanding general obligation bonds for debt service savings. Interest rates on the bonds ranged from 2% to 5.25% while yields ranged from 1.3% to 3.72%. The overall true interest cost for the sale was 3.53%, which was almost the same as the interest cost from last March’s bond sale, but higher than the 3.01% from the sale in September, 2017.

5. The bad news. California has a distinct problem: of the $144 billion in general obligation bonds that voters have authorized, more than $30 billion hasn’t been issued yet, with two more bonds totaling $7 billion pending before voters. The state still hasn’t issued more than $8.6 billion in transportation and resources bonds, including around $7 billion to fund high speed rail, plus $7.1 billion from the recent water bond, and $8.1 billion more education bonds (Proposition 51, 2016), among others. While the state has made great progress reducing the amount of authorized, unissued bonds in recent years, many bond-funded projects have not yet received required approvals. While the Treasurer estimates the state will issue a combined $10.5 billion of new money General Fund-supported bonds in 2017-18 and 2018-19, any new bond program may have to wait several years for funding as projects funded by previously authorized bonds get up and running.

6. Do it again. SB 483 (Glazer, 2017) would have placed a $2 billion general obligation bond on the November 2018 ballot for purposes identical to this bill. The measure was held in the Senate Appropriations Committee.

7. Incoming! On March 21^st, the Committee on Education approved SB 1225 by a vote of five to zero. The Committee is hearing the bill as the Committee of second reference.

8. Urgency. As an urgency statute, SB 1225 must be approved by 2/3 vote of each house of the Legislature. Regular legislation takes effect on the January 1 following its passage, but urgency bills take effect as soon as they're passed, signed, and chaptered.

Support and Opposition

(4/6/18)

Support: The California State University, The University of California.

Opposition: Unknown.

-- END --

1. Robert Wassmer and Ronald Fisher “Debt Burdens of California State and Local Governments: Past, Present and Future.” As requested and supported by the California Debt and Investment Advisory Commission. July 2011. ↑

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Education finance: Higher Education Facilities Bond Act of 2018

Enacts the Higher Education Facilities Bond Act of 2018, which places a $4 billion bond before voters at the November, 2018, general election ballot.

Background

When public agencies issue bonds, they borrow money from investors, who provide cash in exchange for the agencies’ commitment to repay the principal amount of the bond plus interest. Bonds are usually either revenue bonds, which repay investors out of revenue generated from the project the agency buys with bond proceeds, or general obligation bonds, which the public agency pays out of general revenues and are guaranteed by its full faith and credit.

Section One of Article XVI of the California Constitution and the state’s General Obligation Bond Law guide the issuance of the state’s general obligation debt. The Constitution allows the Legislature to place general obligation bonds on the ballot for specific purposes with a two-thirds vote of the Assembly and Senate. Voters also can place bonds on the ballot by initiative, as they have for parks, water projects, high-speed rail, and stem cell research, among others. Either way, general obligation bonds must be ratified by majority vote of the state’s electorate. Unlike local general obligation bonds, approval by the state’s electorate doesn’t automatically trigger an increased tax to repay the bond. The Constitution commits the state to repay investors from general revenues above all other claims, except payments to public education. California voters approved $38.4 billion of general obligation bonds between 1974 and 1999, which increased significantly to $112 billion between 2000 and 2010, but receded to $17 billion between 2011 and 2018. Additionally, voters will consider the $4 billion California Drought, Water, Parks, Climate, Coastal Protection, and Outdoor Access for All Act of 2018 (SB 5, De Leon, 2017), and the $3 billion Veterans and Affordable Housing Bond Act (SB 3, Beall, 2017), at the June, 2018, primary election and the November, 2018, general election, respectively.

Bond acts have standard provisions that authorize the State Treasurer to sell a specified amount of bonds, and generally include several uniform provisions that:

• Establish the state’s obligation to repay them, and pledge its full faith and credit to repayment,
• Set forth issuance procedures, and link the bond act to the state’s General Obligation Bond Law,
• Create a finance committee with specified membership, chaired by the State Treasurer,
• Charge the committee to determine whether it is “necessary or desirable” to issue the bonds, and
• Add other mechanisms necessary for the State Treasurer and the Department of Finance to implement the bond act, including allowing the board to request a loan from the Pooled Money Investment Board to advance funds for bond-funded programs prior to the bond sale, among others.

In bond acts, the Legislature generally:

• Sets forth categories of projects eligible for bond funds, such as library construction or school facility modernization,
• Chooses an administrative agency to award the funds, such as the State Librarian or the State Allocation Board,
• Details the criteria to guide the administrative agency’s funding in each category,
• Enacts enforcement and audit provisions, and
• Provides for an election to approve the bond act.

Should the voters approve the bond act, the Legislature then appropriates funds to the chosen agencies to fund projects consistent with the criteria, generally as part of the Budget Act. The Department of Finance then surveys agencies to determine the need for bond funds based on a project’s readiness, and then asks the State Treasurer to sell bonds in a specified amount. After the bond sale, the Department of Finance determines which bond acts and agencies receive bond proceeds.

The University of California (UC) offers both undergraduate and graduate education, with its ten campuses enrolling approximately 238,000 students. In the 2016-17 fiscal year, UC awarded approximately 72,322 degrees. Nine of its ten campuses are governed by the Board of Regents; while not governed by the Board of Regents, the UC Hastings College of Law in San Francisco is the state’s oldest law school, with an enrollment of approximately 945 students.

The California State University (CSU) provides undergraduate and graduate instruction generally through the master’s degree, and its 23 campuses enroll approximately 484,000 students. In the 2015-16 fiscal year, CSU awarded approximately 113,000 degrees. CSU is governed by a 25-member Board of Regents.

Both CSU and UC have authority to issue their own revenue bonds, which are bonds repaid and secured by a specified pledge of revenues, such as student housing or parking fees, and not backed by the full faith and credit of the state like general obligation bonds. Additionally, the State Public Works Board (SPWB) can also issue lease revenue bonds where CSU or UC lease facilities from the Board, and the Legislature appropriates funds to pay the leases. These bonds are not general obligations because the Legislature is not obligated to pay the lease rentals if the building is not available for use and occupancy. CSU currently has $154 million in outstanding lease revenue bonds.

Historically, general obligation bonds and SPWB lease revenue bonds have financed many UC and CSU capital improvements. However, the Governor and the Legislature in recent years changed the way the state funds UC and CSU capital outlay; previously, each system would distinguish capital outlay from other costs when requesting funding as part of the Budget Act. Today, UC and CSU include capital outlay with all of its other spending. To implement this change, the Legislature recently provided UC with increased flexibility to pursue capital outlay projects outside of the annual budget process, after approval by the Department of Finance (DOF) and review by the Joint Legislative Budget Committee (AB 94, Committee on Budget, 2013).

AB 94 allowed UC to pledge up to 15% of the state funds provided in its General Fund support budget less general obligation debt payments and lease payments towards capital outlay, lease revenue bond debt, and pay as you go. The Legislature also added almost identical authority for CSU to finance capital projects in 2014 (SB 860, Committee on Budget and Fiscal Review). The Governor’s Five-Year Infrastructure Plan further reflects this change by stating:

“Successful strategies to more efficiently fund infrastructure projects for the University of California (UC) and the California State University (CSU) systems have been implemented. Legislation was enacted in 2014 and 2015 that provided both UC and CSU with the authority to fund capital projects and debt service from their annual support budgets. This provides the universities with the flexibility to prioritize funding sources for their entire operations, including infrastructure development.”

The Plan notes that UC and CSU both submit annual capital outlay proposals for Legislative review and DOF approval to comply with statute. UC submitted 2018-19 capital outlay proposals totaling $266 million, while CSU submitted capital proposals totaling $1.4 billion. The Plan does not assume the proceeds of general obligation bonds will be used for UC or CSU.

UC reports that combining the projects included in its Capital Financial Plan with its current deferred maintenance backlog puts the five-year capital need at nearly $14 billion. However, UC conceded that, of this amount, about $6 billion could be funded with existing resources. CSU reports their capital needs for academic programs total about $8.4 billion. However, about $200 million of the need was anticipated to be met with current revenue bonds.

The last statewide general obligation bond to include support for public higher education was Proposition 1D (AB 127, Núñez and Perata, 2006), which authorized the sale of $10.4 billion in general obligation bonds, of which $3 billion was earmarked for higher education facilities. Of this amount, $1.5 billion was provided for the community colleges, $890 million for UC, and $690 million for CSU. The Governor’s Bond Accountability website (www.bondaccountability.ca.gov) indicates that almost all of these funds have been committed. The author wants the state to issue general obligation bonds to fund additional higher education improvements.

Proposed Law

Senate Bill 1225 enacts the Higher Education Facilities Bond Act of 2018, which places a $4 billion bond before voters at the November, 2018, general election ballot. The measure creates the 2018 Higher Education Capital Outlay Bond Fund, and requires that all bond proceeds be deposited in the Fund. The measure creates a finance committee to administer the bond, consisting of the Treasurer as Chair, the Governor, the Controller, the Director of Finance, the President of the University of California, the Chancellor of the California State University, and the Chancellor of the California Community Colleges, or their designees.

The bill authorizes the Committee to create debts and liabilities on behalf of the state for the purposes of funding aid to UC, CSU, and the Hastings College of the Law for the construction, reconstruction, and remodeling of existing or new facilities authorized in the Budget Act, including:

• Preliminary plans and drawings,
• Acquisition of related fixtures,
• Equipping of new, renovated, or reconstructed facilities,
• Funding for payment of preconstruction costs, or
• Construction of off-campus facilities of CSU, so long as the Trustees approved the construction on or before July 1, 2014, including acquisition of sites upon which the facilities are to be built.

Of the total amount of bonds, one-half must be designated for UC and the Hastings College of the Law, and one-half for CSU.

SB 1225 charges the Committee, pursuant to legislative direction, with the duty to authorize the issuance and sale of its bonds, and incorporates standard provisions in general obligation bond law, either explicitly or by reference, with some modifications.

The measure contains legislative findings and declarations supporting its purposes, and language stating that its provisions clarify authorizations made in the 1986 and 1988 Bond Acts, and is not intended to mark a change.

State Revenue Impact

No estimate.

Comments

1. Purpose of the bill. According to the author, “Since 2006, despite a deteriorated fiscal condition for both the UC and CSU, no higher education-specific bonds have been authorized. Instead, the UC and CSU are able to raise capital funding in limited amounts through their General Revenue Bond Program and Systemwide Revenue Bond Program, respectively. This, however, is an unsustainable way for the segments to meet their capital needs–currently identified to be over $8 billion combined. Further, these bond programs, which must be paid back by the systems themselves, can result in higher costs to students and their families. “The last higher education-specific bond passed was Proposition 153 in 1992, which authorized a bond issue of $900 million for the strengthening, upgrading and constructing of public colleges and universities throughout the state. Public support is growing for improving campus infrastructure: In a December 2016 PPIC statewide survey on higher education, two in three Californians (65%) agree with the general idea of a bond measure on the state ballot for higher education construction projects. This is an 11-point increase in support since December 2014 and the highest level of support since PPIC first began asking the question in 2007”

2. Role reversal? SB 1225 authorizes the sale of $4 billion in general obligation bonds contingent on voter approval to fund capital improvements for UC and CSU authorized in the Budget Act. However, the Legislature recently changed UC and CSU’s capital outlay programs for a future in which no general obligation bond funding would be available; instead, UC and CSU had to integrate capital outlay funding into their general request for resources, and use that funding as security when issuing revenue bonds under its own name. The Legislature increased funding for both systems to compensate. While UC and CSU have significant capital outlay needs, and student fees have escalated significantly in the past decade, should the Legislature again turn to general obligation bonds so soon after making the change? The Committee may wish to consider whether general obligation bonds are the right source to fund UC and CSU capital outlay given its recent shift away from that source.

3. Sixteen tons. Setting the right amount of state general obligation debt is difficult; both the State Treasurer and the Legislative Analyst’s Office state that there’s no correct level. Instead, experts suggest that states should look at three criteria: affordability, comparability, and optimality:^[1]

California currently has $72.7 billion of general obligation and $9.2 billion of lease revenue debt outstanding, which is affordable. The Governor’s 2017 Five-Year Infrastructure Plan states that the Debt Service Ratio, or the ratio between debt service and general fund revenues, as 6.46% in 2016-17 and 5.74% in 2017-18. The State Treasurer calculates a debt service ratio of 6.57% in 2016-17 and 6.4% in 2017-18; the percentages differ because the State Treasurer accounts for offsets of federal government subsidies or transfers from special funds. Annual expenditures on debt service have grown from $2.9 billion in 2000-01 to $7.3 billion in 2017-18, and are estimated to increase to $8.5 billion in 2021-22, assuming voters approve the two proposed bonds pending this year. Additionally, 95% of outstanding debt is paid at a fixed rate of interest. While debt service percentages are reasonable, every dollar spent on debt service reduces the funding that is available for other priorities. The Plan proposes only $848 million in new general obligation bonds.

California’s comparability to other states is less favorable, but improving. The State Treasurer’s 2017 Debt Affordability Report, issued last October, contains the following chart:

Determining optimality or whether government is investing in the quantity and quality of public capital desired by residents, and financing the appropriate share with debt, is more difficult. LAO recommends that the Legislature consider the Five-Year Infrastructure Plan as a starting point to developing a coordinated approach to infrastructure funding, and establish a committee to focus on statewide infrastructure.

4. The good news. Ratings issued from the three major credit rating agencies often inform investors and the public regarding the state’s creditworthiness, and assess any investment risk from investing in California general obligation bonds. Rating agencies Fitch, Standard and Poor’s, and Moody’s praise California’s deep and diverse economy, recent balanced and on-time budgets, reduced budget deficits, and improved reserves and liquidity. However, the agencies also state that California faces challenges: a highly volatile revenue system, constitutionally-imposed governance restrictions, high housing costs that threaten economic growth, minimal prefunding of retiree health care benefits, and a large backlog of maintenance and infrastructure needs, among others. Once considered an outlier, the difference between California bonds and other states as measured by the benchmark 30-year Municipal Market Data Index has tightened from a high of more than 150 basis points at the end of 2009 to around 10 basis points at the end of June 2016, although it increased slightly in 2017. On March 8, 2018, State Treasurer Chiang sold $1.52 billion in bonds for new borrowing, and $663 million to refund outstanding general obligation bonds for debt service savings. Interest rates on the bonds ranged from 2% to 5.25% while yields ranged from 1.3% to 3.72%. The overall true interest cost for the sale was 3.53%, which was almost the same as the interest cost from last March’s bond sale, but higher than the 3.01% from the sale in September, 2017.

5. The bad news. California has a distinct problem: of the $144 billion in general obligation bonds that voters have authorized, more than $30 billion hasn’t been issued yet, with two more bonds totaling $7 billion pending before voters. The state still hasn’t issued more than $8.6 billion in transportation and resources bonds, including around $7 billion to fund high speed rail, plus $7.1 billion from the recent water bond, and $8.1 billion more education bonds (Proposition 51, 2016), among others. While the state has made great progress reducing the amount of authorized, unissued bonds in recent years, many bond-funded projects have not yet received required approvals. While the Treasurer estimates the state will issue a combined $10.5 billion of new money General Fund-supported bonds in 2017-18 and 2018-19, any new bond program may have to wait several years for funding as projects funded by previously authorized bonds get up and running.

6. Do it again. SB 483 (Glazer, 2017) would have placed a $2 billion general obligation bond on the November 2018 ballot for purposes identical to this bill. The measure was held in the Senate Appropriations Committee.

7. Incoming! On March 21^st, the Committee on Education approved SB 1225 by a vote of five to zero. The Committee is hearing the bill as the Committee of second reference.

8. Urgency. As an urgency statute, SB 1225 must be approved by 2/3 vote of each house of the Legislature. Regular legislation takes effect on the January 1 following its passage, but urgency bills take effect as soon as they're passed, signed, and chaptered.

Support and Opposition

(4/6/18)

Support: The California State University, The University of California.

Opposition: Unknown.

-- END --

1. Robert Wassmer and Ronald Fisher “Debt Burdens of California State and Local Governments: Past, Present and Future.” As requested and supported by the California Debt and Investment Advisory Commission. July 2011. ↑

SENATE COMMITTEE ON EDUCATION

Senator Benjamin Allen, Chair

2017 - 2018 Regular

Bill No: Hearing Date: March 21, 2018

Subject:

NOTE: This bill has been referred to the Committees on Education and Governance and Finance. A "do pass" motion should include referral to the Committee on Governance and Finance.

SUMMARY

This bill, an urgency measure, places a $4 billion general obligation bond on the November 2018 ballot for the construction, reconstruction, and remodeling of existing or new facilities at the University of California (UC), the California State University (CSU), and the Hastings College of the Law.

BACKGROUND

From the late 1980s to 2006, the Legislature placed on the ballot and voters approved bonds that have included support for public higher education every two to four years. The last statewide general obligation bond to include support for public higher education was Proposition 1D (AB 127, Núñez and Perata, Chapter 35, Statutes of 2006), authorizing the sale of $10.4 billion in general obligation bonds, of which $3.087 billion was earmarked for higher education facilities. Of this amount, $1.5 billion was provided for the community colleges, $890 million for UC, and $690 million for CSU. All Proposition 1D higher education facilities funds have been depleted.

Since 2006, no general obligation bonds supporting higher education have been enacted. Instead, the higher education segments have received capital funding from lease-revenue bonds through the annual budget acts. Bond funds, whether lease-revenue or general obligation, are allocated through the budget process in accordance with the segments' five-year capital facility plans.

ANALYSIS

This bill places a $4 billion general obligation bond on the November 2018 ballot for the construction, reconstruction, and remodeling of existing or new facilities at UC, CSU, and the Hastings College of the Law. Of the total amount of bonds authorized, one-half are for UC and the Hastings College of the Law and one-half are for CSU.

Specifically, this bill:

1. Enacts the Higher Education Facilities Bond Act of 2018, which, upon approval at the November 2018 statewide election, authorizes no more than $4 billion of state general obligation bonds for the construction, reconstruction, and remodeling of existing or new facilities at the University of California (UC), the California State University (CSU), and the Hastings College of the Law.
2. Specifies that allowable uses of the funds include the following: (1) construction of buildings and the acquisition of related fixtures, (2) the equipping of new, renovated, or reconstructed facilities, including preconstruction costs, including, but not necessarily limited to, preliminary plans and working drawings, (3) renovation and reconstruction of facilities, and (4) the construction or improvement of off-campus facilities of CSU, approved by the CSU Trustees on or before July 1, 2014, including the acquisition of sites upon which these facilities are to be constructed.
3. Authorizes the Higher Education Facilities Finance Committee, consisting of the Governor, the Controller, the Treasurer, the Director of Finance, the UC President, the CSU Chancellor, and the Chancellor of the California Community Colleges, to create debt or debts, liability or liabilities, of the State of California pursuant to this measure.
4. States that any request forwarded to the Legislature and the Department of Finance for funds from this bond issue for expenditure by the UC or CSU shall be accompanied by the five-year capital outlay plan of the particular university or college, and shall include a schedule that prioritizes the seismic retrofitting needed to significantly reduce, by the 2024–25 fiscal year, in the judgment of the particular university or college, seismic hazards in buildings identified as high priority by the university or college.
5. Specifies that the Treasurer shall sell the bonds authorized by the committee at times necessary to service expenditures required by the apportionments and bonds authorized by this part shall be prepared, executed, issued, sold, paid, and redeemed as provided in the State General Obligation Bond Law (Chapter 4 (commencing with Section 16720) of Part 3 of Division 4 of Title 2 of the Government Code).
6. Requires the Committee to authorize the issuance of bonds only to the extent necessary to fund the apportionments that are expressly authorized by the Legislature in the annual Budget Act, as specified.

STAFF COMMENTS

1. Need for the bill. According to the author, “Since 2006, despite a deteriorated fiscal condition for both the UC and CSU, no higher education-specific bonds have been authorized. Instead, the UC and CSU are able to raise capital funding in limited amounts through their General Revenue Bond Program and Systemwide Revenue Bond Program, respectively. This, however, is an unsustainable way for the segments to meet their capital needs–currently identified to be over $8 billion combined. Further, these bond programs, which must be paid back by the systems themselves, can result in higher costs to students and their families.”

“The last higher education-specific bond passed was Proposition 153 in 1992, which authorized a bond issue of $900 million for the strengthening, upgrading and constructing of public colleges and universities throughout the state.”

“Public support is growing for improving campus infrastructure: In a December 2016 PPIC statewide survey on higher education, two in three Californians (65%) agree with the general idea of a bond measure on the state ballot for higher education construction projects. This is an 11-point increase in support since December 2014 and the highest level of support since PPIC first began asking the question in 2007."

1. What are the facilities needs of the segments? The University of California (UC) and California State University (CSU) report the following capital needs:
   1. The UC reported that combining the projects included in its Capital Financial Plan with its current deferred maintenance backlog puts the five- year capital need at nearly $14 billion. However, UC conceded that, of this amount, about $6 billion could be funded with existing resources.
   2. The CSU reported their capital needs for academic programs total about $8.4 billion. However, about $200 million of the need was anticipated to be met with current revenue bonds.

The last statewide general obligation bond supporting the higher education segments, Proposition 1D, provided $890 million for UC and $690 million for CSU. After accounting for the available resources at UC and CSU, the capital needs of the segments appear to be equivalent.

1. How are the segments funded for their facilities needs currently? Over the past few years, the responsibility for capital outlay projects has shifted from the state to the UC and CSU through the state’s annual budget. The segments are now able to use their general fund to support capital outlay projects or to fund revenue bond debt service, with the expectation that they prioritize their capital expenditures within their overall operating budgets. However, UC and CSU maintain that this shift does not preclude them from participating in a state general obligation bond. Further, the segments have expressed that they are not funded adequately for their operations currently, let alone at a level that can also support all of their facilities costs.
2. What is the state’s cost exposure? Based on the legislative analyst office’s analysis of the costs associated with Proposition 51 of 2016, the $4 billion in bonds authorized by this bill would cost about $7.8 billion to repay, including an estimated $3.8 billion in interest, at an annual cost of about $220 million per year.
3. Previous Legislation

SB 483 (Glazer and Allen, 2017) would have placed a $2 billion general obligation bond on the November 2018 ballot for the construction, reconstruction, and remodeling of existing or new facilities at the University of California (UC), the California State University (CSU), and the Hastings College of the Law. The measure was held in the Senate Appropriations Committee.

AB 1433 (Gray, 2016) would have authorized an unspecified amount of state general obligation bonds for the California Community Colleges (CCC), the UC, the Hastings College of the Law, and the CSU to construct and modernize education facilities. The measure was held in the Assembly Appropriations Committee.

AB 1088 (O'Donnell, 2015), would have authorized an unspecified amount of state general obligation bonds for school districts, county superintendents of schools, county boards of education, charter schools, the CCC, the UC, the Hastings College of the Law, and the CSU to construct and modernize education facilities. The measure was held in the Assembly Appropriations Committee.

SUPPORT

California State University

University of California

OPPOSITION

None received

-- END --