Debt Financing for California School Districts

Overview of Bond Funding and Statutory Requirements

What Are School Bonds?

Local general obligation (GO) bonds are the primary financing mechanism California school districts use to fund major capital projects that cannot be paid from annual operating budgets. GO bonds are voter-approved debt repaid through ad valorem* property taxes levied by the county which allow districts to borrow money upfront and repay the debt over time.

*An ad valorem property tax is a tax based on the assessed value of real property (such as homes, commercial buildings, and land). The higher the property's assessed value, the more property tax the owner pays. Therefore, the county repays the school district's GO bonds by collecting a property tax that is proportional to each property's assessed value.

Bond repayment typically ranges from 25–30 years depending on the issuance structure, and is generally designed to align with the expected useful life of the project.

What Can Bond Funds Be Used For?

Bond proceeds are generally used for:

• New school construction
• Modernization and renovation of existing facilities
• Classroom additions and campus expansions
• Health and safety improvements
• Technology infrastructure and permanent educational equipment (under Proposition 39)
• Acquisition of school sites and real property

What Bond Funds Cannot Be Used For

California law prohibits bond proceeds from being used for:

• Teacher and staff salaries
• Routine maintenance and operations
• Utility costs
• General operating expenses

Key Constitutional and Statutory Authorities

Prop. 39 bond elections are subject to specified statutory election dates, generally aligned with statewide primary or general elections. Prop. 46 bond elections may have greater flexibility, including the ability to be called as a special election.

Proposition 46 (1986)

• Requires two-thirds (66.67 percent) voter approval
• Permits school districts to issue GO bonds supported by ad valorem property taxes
• Funds may be used primarily for acquisition or improvement of real property
• Does not generally permit furniture, vehicles, or movable equipment*

Proposition 39 (2000)

• Reduced voter approval threshold of 55 percent
• Allows bond proceeds to be used for:
  • Construction
  • Reconstruction
  • Rehabilitation
  • Replacement of facilities
  • Furnishing and equipping school facilities
• Requires additional accountability measures:
  • Citizens' Bond Oversight Committee
  • Annual financial audits
  • Annual performance audits

Accountability Requirements Under Proposition 39

Districts must:

• Establish a Citizens' Bond Oversight Committee within 60 days of certification of election results. (See California Education Code (EC) sections 15278-15282)
• Conduct annual independent financial audits.
• Conduct annual performance audits.
• Ensure bond proceeds are spent only on projects described in the ballot measure.

*Disclaimer: The eligibility of certain expenditures for bond funding, including vehicles and equipment, may involve fact-specific considerations. Districts should review applicable legal requirements and the terms of their voter-approved bond measure and should consult with general counsel or bond counsel when eligibility is unclear.

How to Determine District Bonding Capacity

Understanding Bonding Capacity

Bonding Capacity refers to the maximum amount of GO debt a district may legally have outstanding.

California law establishes statutory debt limits based on assessed valuation (AV).
Specified Tax Cap: Set by EC sections 15102,15106,15268, and 15270

Statutory Debt Limits

Example Formula for Bonding Capacity

Unified School District

Bonding Capacity = Assessed Valuation × 2.5 percent

Elementary/High School District

Bonding Capacity = Assessed Valuation × 1.25 percent

A school district should consult with their legal counsel, county assessor and municipal advisor to determine bonding capacity.

Additional Proposition 39 Tax Rate Limits

Before issuing bonds, districts must demonstrate they can remain within statutory tax-rate limits:

Therefore, bonding capacity is often constrained by:

1. Legal debt limit
2. Tax rate limit
3. Assessed value growth projections
4. Existing debt obligations

Source: B.1.3.1 Local General Obligation Bonds – California Debt Financing Guide

School Bond Prcess

While this section provides a general overview of the school bond process, school legal counsel should be consulted before beginning the school bond process.

Phase 1 – Needs Assessment

District leadership identifies facility and infrastructure needs:

• Aging facilities
• Enrollment growth
• Modernization requirements
• Technology upgrades
• Health and safety improvements
• Educational program needs

Phase 2 – Facilities Planning and Cost Estimation

The district develops:

• Facilities Master Plan
• Technology Master Plan
• Project scope
• Cost estimates
• Prioritized project lists

Phase 3 – Community Engagement

Districts provide information regarding:

• Facility needs
• Project benefits
• Expected tax rates
• Accountability measures
• Polling (to see if there’s community interest in approving a bond)

Phase 4 – Board Authorization

The Governing Board:

• Reviews capital needs
• Adopts a resolution calling for an election
• Establishes proposed bond amount
• Approves ballot language

Phase 5 – Voter Approval

Election requirements:

Phase 6 – Bond Sale

Following voter approval:

• Bond counsel prepares legal documents
• Financial advisor develops issuance strategy
• Credit ratings are obtained
• Bonds are sold through:
  • Competitive Sale or
  • Negotiated Sale

Phase 7 – Construction and Program Delivery

Funds are used for approved projects such as:

• New campuses
• Classroom modernization
• HVAC replacement
• Roofing projects
• Technology infrastructure
• Safety/security upgrades

Phase 8 – Oversight and Reporting

Districts conduct:

• Annual financial audits
• Annual performance audits
• Citizens' Oversight Committee reporting
• Board and public reporting

Phase 9 – Debt Repayment

Property taxes collected by the County are used to:

• Repay principal
• Pay interest
• Meet debt service obligations

Bond repayment typically ranges from 25–30 years depending on the issuance structure.

Certificates of Participation (COPs)

What Are Certificates of Participation?

COPs are a common form of lease financing used by school districts to fund facility and capital improvement projects without voter approval.

Rather than borrowing money through a traditional loan or voter-approved general obligation (GO) bond, a district enters into a lease financing arrangement. Investors purchase certificates representing a share of the lease payments made by the district, and those payments are used to repay investors over time.

In COP financing:

• A trustee bank structures and administers the transaction.
• Investors purchase interests in the lease payments.
• The district makes annual lease payments.
• Lease payments are distributed to investors through the trustee.

Because COPs are sold in the tax-exempt municipal market, school districts often obtain lower borrowing costs than they would through conventional equipment leases or bank financing, particularly for large capital projects.

Why School Districts Use COPs

Key Advantages

• No voter approval required
• Unlike GO bonds, COPs can be authorized by the Governing Board without a public election.
• Access to capital more quickly
• Lower interest rates for large projects
  • Because COPs are sold in the tax-exempt municipal market, they often provide lower borrowing costs than traditional lease financing.
• Flexible Financing Tool

COPs provide a faster financing option when:

• Urgent facility needs exist
• Bond elections are not feasible
• Interim financing is needed pending future funding

COPs can finance:

• School construction projects
• Facility modernization
• Site acquisitions
• Relocatable classrooms
• School buses
• Computers and technology equipment
• Refinancing of existing leases
• Interim financing before GO bond issuance or State facility funding

Typical Uses of COP Financing

School Facilities

• New classroom buildings
• Multipurpose rooms
• Gymnasiums
• Administrative facilities
• Site improvements

Modernization Projects

• Heating, ventilation, and air conditioning (HVAC) replacement
• Roofing
• Electrical upgrades
• Plumbing improvements
• Safety and security projects

Capital Equipment

• Portable classrooms
• School buses
• Technology devices
• District-wide infrastructure systems

Interim Financing

Many districts use COPs as a bridge financing tool while waiting for:

• School Facility Program funds
• Future GO bond sales
• Developer fee collections
• Other capital revenues

Key Rules and Considerations

The COP repayment term generally cannot exceed the useful life of the project being financed.

Examples:

Cannot Fund Operations

COPs may not be used for:

• Salaries
• Benefits
• General operating costs
• Instructional programs
• Routine district operations

COPs must finance long-term capital assets.

General Fund Obligation

Unlike GO bonds, which are repaid through dedicated property taxes, COPs are typically secured by the district's General Fund.

The district pledges to:

• Appropriate funds annually
• Budget sufficient payments each year
• Make lease payments through the duration of the financing

This is often referred to as an annual appropriation pledge.

Impact on State Hardship Eligibility

An important California consideration is that:

• COP debt is generally considered debt when evaluating State hardship funding eligibility.
• Traditional leases generally are not considered debt for this purpose.

Districts should analyze potential impacts on future State school facility funding applications.

COP Financing Structure

Simplified Transaction Flow

The trustee serves as the intermediary between the district and investors.

COP Issuance Process

Step 1 – Identify Capital Need

District identifies:

• Construction projects
• Facility improvements
• Equipment purchases
• Refinancing opportunities

Step 2 – Financial Analysis

District financial advisors evaluate:

• Debt capacity
• Repayment affordability
• General Fund impact
• Market conditions

Step 3 – Board Approval

• Unlike GO bonds, voter approval is not required.
• The Governing Board authorizes the financing and approves legal documentation.

Step 4 – Preparation of Financing Documents

• Legal and financing teams prepare transaction documents.

Step 5 – Market and Sell COPs

• The financing is offered to investors in the municipal bond market.

Step 6 – Receive Project Proceeds

• District receives funds for approved capital projects.

Step 7 – Annual Lease Payments

• The district budgets and makes lease payments until the financing is fully repaid.

Major COP Documents

The Governing Board typically approves the following legal documents:

Preliminary Official Statement (POS)

Provides investors with information regarding:

• District finances
• Project description
• Repayment security
• Risks associated with the financing

Final Official Statement (OS)

The final disclosure document distributed to investors.

Lease Agreement

Defines:

• Property being leased
• Payment schedule
• Financing terms

Ground Lease

Transfers leasehold interest in district property used as collateral for the financing structure.

Trust Agreement

Establishes the trustee's responsibilities.

Assignment Agreement

Assigns lease payment rights to the trustee for the benefit of investors.

Continuing Disclosure Certificate

Requires ongoing financial reporting and disclosure to investors throughout the life of the financing.

Local General Obligation Bonds at a Glance

Purpose

Fund major capital improvements and school facility projects.

Repayment Source

Voter-approved property taxes.

Voter Thresholds

• Proposition 46: 66.67 percent
• Proposition 39: 55 percent

Bonding Capacity

Proposition 39 Tax Rate Limits

Allowable Uses

• New construction
  
• Modernization and renovation
  
• Safety improvements
  
• Classroom additions
  
• Technology infrastructure
  
• Furniture and equipment (Prop 39 – check with legal counsel for specific guidance)

Not Allowable

• Salaries
  
• Operating expenses
  
• Routine maintenance
  
• Utilities

Required Accountability Measures

• Citizens' Oversight Committee
  
• Annual Performance Audit
  
• Annual Financial Audit

Typical Bond Term

• 25 years (Education Code authority)
• Up to 40 years (Government Code authority)

Key Takeaway

A district's ability to issue bonds depends on three key factors:

1. Voter authorization (55 percent or 2/3 approval)
2. Statutory debt limit based on assessed valuation
3. Ability to keep projected tax rates within Proposition 39 limits while repaying debt

School bonds provide districts with the long-term financing necessary to build, modernize, and equip school facilities while spreading repayment across future taxpayers who benefit from the infrastructure.