Brown’s California School-Bond Pushback Faces Ballot Challenge

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Governor Jerry Brown’s effort to wean California schools off state funding is facing a challenge from advocates saying the aid is needed now more than ever to repair crumbling buildings.

California has sold $35 billion of general obligations for schools since 1998. Brown, a Democrat, wants to shrink the program, while opponents are going around him to gather support for a $9 billion state bond measure. Brown says California’s 1,028 school systems should sell the debt themselves, rather than rely on the program, which provides matching funds for construction.

Brown, 77, wants to reduce the debt California pays from its general fund, part of a financial overhaul he’s undertaken since assuming office in 2011. His efforts have bolstered the most-populous state’s standing on Wall Street: Last week, California won a AA- grade from Standard & Poor’s, its highest in 14 years, and its bond yields are approaching their lowest relative to benchmark debt since 2007.

“The governor is saying we can’t afford to do this,” said Bill Savidge, assistant executive officer to the State Allocation Board, which distributes school aid. “He has other priorities for infrastructure -- our roads and bridges are in terrible shape. And he’s not fond of using long-term bonds as funding sources.”

Biggest Debtor

California has the most net tax-supported debt among U.S. states, Moody’s Investors Service data show. Servicing the $50 billion it owes on school bonds will require an average of $1.7 billion in general-fund revenue annually until the obligations are paid off in 2044, according to the state treasurer.

Combined with local funds, the 17-year-old program has raised about $100 billion and built over 55,000 classrooms while modernizing more than 134,000. It used up its state bonding authority in 2012, meaning lawmakers or voters would need to pass a statewide school-bond measure, something that hasn’t happened since 2006 when Arnold Schwarzenegger was governor.

Californians for Quality Schools, composed of education advocates and homebuilders, has collected almost 500,000 signatures and is on its way to qualifying in September to get a bond on the 2016 ballot, said Dave Cogdill, president of the California Building Industry Association and a former Senate Republican. Lawmakers are considering their own bond plan.

‘Only Opponent’

“It’s a matter of priorities -- we do issue a substantial amount of debt for things like high-speed rail,” Cogdill said. “We are trying to maintain a program that’s proven to be successful and is wildly popular with the people in this state. The only opponent is the governor.”

The governor isn’t commenting on the ballot initiative or potential bond legislation, Evan Westrup, his spokesman, said in an e-mail. Brown blocked a $4.3 billion school-bond measure in 2014 that received widespread support in the legislature. He also hasn’t spelled out how he’d change the existing program.

“I could appreciate the governor doesn’t like debt,” said Senate Minority Leader Bob Huff, a Republican. “The flip side is a lot of lower-income school districts would struggle to support schools if we weren’t helping them.”

The change Brown is backing would saddle local districts with more debt and increase property taxes, according to legislators, educators and homebuilders.

“The state has a fundamental interest in making sure school construction happens,” said Dennis Meyers, an assistant executive director of the California School Boards Association.

Yield Lure

A fresh supply of local school debt may lure tax-exempt buyers searching for higher returns now that California’s improving finances have driven down the state’s yield spreads.

General obligations that mature in 2027 and were issued by Los Angeles Unified School District, the state’s largest system, traded July 1 at an average yield of 2.8 percent, according to data compiled by Bloomberg. That gave investors 0.59 percentage point of extra yield over top-rated munis, compared with about 0.25 percentage point on 10-year California debt. The district has the same S&P rating as the state.

Shifting debt issuance to the districts may add to the stress on already troubled localities, especially those grappling with drought, said Marilyn Cohen, who manages $345 million as president of Envision Capital Management in El Segundo, California.

“Anything that’s in the Central Valley that requires water, whose economies have not come back to more full employment since the credit crisis, their net increase costs are going to escalate,” she said.