Summer 2001 Newsletter

LAO Urges Simple Solution: Fund Long-Term Facilities Appropriations

Voters have passed bond measures at both the state and local levels identifying hundreds of millions of dollars for school construction. However, these funds are not structured for creative expenditures and do not include long-term capital maintenance provisions. To combat this current funding mechanism, the state's Legislative Analysts Office has developed a three-tiered plan to offer all districts much needed flexibility and keep newly constructed projects performing at a high level for years to come. NSBN is pleased to excerpt the LAO's suggestions.

By: Elizabeth Hill


Despite significant sums raised for school construction in recent years, about one in three California students attends an overcrowded school, or one in need of significant modernization. According to the State Allocation Board, the cost to address these pressing school facility needs is about $30 billion, with the state's share of cost exceeding $17 billion. Because less than $2 billion of state school construction bond funds remain uncommitted, the state will need to raise more than $15 billion to pay its share of these school facility costs.

Even after these school projects are constructed, however, demand will not abate for state support for school facilities. As enrollments grow and school facilities age, school districts will develop further capital outlay needs. Given the magnitude of the cost to house California school children--and the increasing debate regarding the allocation of state resources to school districts--it is timely for the Legislature to review California's state-local partnership for financing school construction.

This report provides an overview of the state's current process of supporting school capital outlay and identifies shortcomings. To address these problems, we offer a conceptually different approach--a new "blueprint"--for providing state school construction support. We outline a model program, consistent with this blueprint, which the Legislature could phase in as resources permit.


In order to begin to address the problems outlined above, we recommend the Legislature develop a new blueprint for the state-district school facilities partnership. In our view, this new blueprint should include three conceptual changes. First, the Legislature should create an ongoing revenue stream for school facility finance to replace its existing system of bond financing. Second, the Legislature should redirect the state's focus away from funding specific lists of school projects. In its place, the Legislature should establish a program oriented toward helping all districts provide educational facilities for children. Last, the state should clarify the state's and districts' roles and responsibilities regarding school facilities.

Below, we discuss these conceptual changes. In the following section, we outline a model program which would be consistent with this approach, as well as a transition program to assist districts with large backlogs of school improvement projects.

Establish an Ongoing Revenue Stream

A key step toward improving California's program of school facility finance is for the Legislature to designate an ongoing revenue stream for school capital outlay. Just as the state funds school support budgets on an ongoing basis, the state should appropriate a reliable amount of funding on an annual basis to pay a share of school capital outlay programs. This action would greatly improve district capacity to plan and implement local capital outlay programs on a timely and cost-effective basis.

Focus on Children, Not Projects

The next step to improving school facility finance is for the Legislature to change its focus from funding specific school projects to funding the long-term cost of providing school facilities for children. ...Virtually every year, districts construct new schools, remodel facilities, acquire land, or develop architectural plans. Just as districts incur costs and make decisions annually to give children educational programs, districts incur costs and make decisions annually to provide children educational facilities.

Instead of funding specific projects, our suggested financing system would provide for an ongoing stream of revenues to provide an adequate level of school facilities for students. The district could use this annual revenue stream to build, remodel, lease, or acquire land as the district determines appropriate.

How much money should the revenue stream provide? Clearly, every district has unique needs. Some districts must acquire land in expensive urban areas. Other districts must build schools for relatively few students, or in areas with severe environmental conditions. Calculating the actual school facility expense for every school in California would be immensely complicated--and resulting in many district claims that its construction costs were higher than average.

In general, we would urge the Legislature to minimize the differentiation among the revenue streams and provide one facility payment per student. The grant would be calculated at an amount sufficient to cover the cost of building and modernizing school facilities over a 50-year period.

Clarify Roles and Responsibility

The third needed change to California's system of school facility finance is to clarify roles and responsibilities. That is, which level of government shall be responsible for ensuring that districts have a sufficient number of schools and that facilities are modernized as needed?

While the Legislature could divide this responsibility in different ways, we see significant advantages to having school district responsibility for capital outlay be similar to its responsibility for program operations. Accordingly, our model assigns districts the responsibility for developing and implementing school capital outlay programs. The state's role, in turn, would be to support district efforts by:

  • Ensuring the availability of a predictable source of revenues.

  • Supplementing low-wealth districts' revenue raising efforts.

  • Establishing an accountability program to clarify the responsibility of districts and provide for an ongoing dialogue between school officials and local residents regarding school facilities.


The three concepts described in the blueprint above could be implemented in many ways... Our model program includes three ongoing components:

  • A revenue stream to cover the annual expense of school capital outlay programs. In this report we refer to this revenue stream as the California Annual School Allotment (CASA). This program would be a joint financial responsibility of districts and the state.

  • A state-funded program to augment the revenue raising ability of low-wealth districts. We refer to this funding as the Ability-to-Pay Adjustment.

  • An accountability program to clarify state and local responsibilities regarding educational facility planning and implementation.

Finally, our model program provides for a short-term transition program to assist districts with significant immediate facility needs. The goal of the transition program is to bring school districts across the state to more comparable "starting points" so that facility needs can be addressed by the annual funding stream. ...


Proposals for major changes in state policy and finance inevitability pose significant implementation challenges, particularly when viewed against a backdrop of economic and expenditure uncertainty such as exists today. The model program suggested in this report--or any school capital outlay program structured along these lines--would not be an exception.

Of all the challenges associated with providing an annual program of school facilities support, the most difficult for the Legislature would be the demand for state resources. Specifically, funding the annual revenue stream would increase state costs significantly because the state would be supporting school facility programs on a "pay-as-you-go" basis at the same time it was making debt payments on school bonds issued to finance programs in the past. Thus, until the state retired its school bond debt, it would be paying for two school construction programs at once.

The model program outlined in this report also contains provisions which would increase the state's overall support for school capital outlay. Specifically, the model program proposes that the state (1) pay 50 percent of school facility capital outlay costs, rather than the 40 percent it has paid in the past; (2) support a more comprehensive school capital outlay program; and (3) provide additional financial assistance to low-wealth districts. Some of these increased costs would be offset by the state avoiding the need to make interest payments on future bond measures. In addition, the state could avoid payments it is currently making to school districts for deferred maintenance. Still, the state's overall costs under a program containing these provisions would be higher than the state's costs under its existing school facilities program.

Despite the increased costs the state would face, we believe that the significant advantages associated with transforming the existing financing system into one that acknowledges long-term capital outlay costs, focuses accountability, assists poorer communities, and provides significant district flexibility merits going forward with the program--even if the state cannot support full implementation of the program immediately. We note that many other important state policy changes have not been implemented at once, but phased in as resources permitted: state assumption of county trial court costs, reduction of the vehicle license fee, and expansion of the Healthy Families Program.

Accordingly, we recommend the Legislature begin the process of remodeling California school facilities finance by taking the three steps described below.

  • Enact Legislation to Create Programs. The first step would be for the Legislature to hold hearings and enact the CASA, Ability-to-Pay Adjustment, and accountability programs. These actions would declare the Legislature's long-term intent regarding financing K-12 school facilities. While this report suggests some key parameters and policy choices for the new programs, much additional work would be needed to "develop" the detail. The Legislature also may wish to consider options for reducing the CASA program costs. For example, it could set the state's share of CASA costs at some percentage below 50 percent.

  • Identify Transition Program Funding. The Legislature would need to identify the future bond measures and/or cash reserves to fund the transition program. Regardless of how the Legislature chooses to fund the transition program, we recommend the monies be allocated to districts with unmet facility needs exceeding 20 percent of their enrollment. Such an allocation would bring school districts across the state to more comparable "starting points" and facilitate the future success of the CASA program.

  • Phase In CASA & Ability-to-Pay

Given the costs associated with the CASA and Ability-to-Pay Adjustment programs, the Legislature most likely would need to phase in this funding over a several-year period. To give the administration direction in budget development, we recommend the Legislature enact a timetable for this program implementation and specify whether it wishes to use Proposition 98 or non-Proposition 98 funds for this purpose.


In recent years, the Legislature and Governor have devoted considerable attention to improving K-12 education. For any education program to realize its potential, however, students and teachers require adequate facilities. The current state-district partnership does not support the ongoing planning and development of needed school facilities. As a result, about one out of three California students attend overcrowded schools or schools needing modernization or replacement.

Given the problems in California's approach to financing school construction, we recommend the Legislature not respond to these facility needs by continuing to do "more of the same." Instead of placing more school bonds on the state ballot and allocating funds on a project-specific basis, we recommend the Legislature develop a new blue-print for assisting school facilities finance. In our view, this new blueprint should offer all school districts the practical capacity to build and modernize school facilities on an ongoing basis and focus accountability on districts for results.