CLEO News

HOAs Set Aside Funds for Major Repairs—School Districts Should, Too

Newport-Mesa Unified School District (NMUSD) in Orange County, Calif., is considering issuing another voter-approved bond to pursue building improvements.

The title of “Classroom Safety/Repair Measure” is being used in the initial phase of this exercise. And the Facilities Master Plan (FMP) is on the district’s website and invites visitors to take a prioritization survey. But that’s about all you’ll see, unless you dig deeper on their website.
What you may not find in doing a search on NMUSD’s website is that “the district contracted the DLR Group to assist with the development of the FMP,” according to a district memo. And that “one of the options includes funding via General Obligation Bonds. Consequently, a general obligation feasibility study is required. … District staff have identified True North Research, Inc. … to design and implement a survey that will produce a … statistically reliable evaluation of voters’ interest in supporting a local bond.”

True North Research’s website may provide the true purpose for why they were retained by the district: “To date, True North has helped its clients raise over $37 billion in voter-approved bonds, taxes, and assessments.” Translation: “We are not a polling firm, we’re a hired gun to pass your bond.”

Having been involved with school bonds during my dozen years as the Orange County Treasurer, let me inform you of what services have really been acquired. School bonds are paid through additional real estate property taxes. Consequently, homeowners and business and rental real property owners will have to pay higher real estate taxes. Renters who are subject to triple-net leases will pay higher rents.

Real property taxes are based on the assessed value, not the market value, of your home. With Proposition 13, your assessed value is the amount that you paid for the home, plus permitted improvements, plus a maximum increase of two percent cost-of-living-increase per year. Therefore, the assessed value of a home purchased 25 years ago for $500,000 may be $804,000 today, while its market value may be $2 million. Consequently, the older home purchaser may be paying $8,040 per year with their property tax bills on or before December 10 and April 10. But the new neighbor is paying $20,000 each year.

The FMP has identified $2.5 billion in needed improvements. If a 25-year bond will cost $5 billion to pay off, then roughly $200 million will be needed every year from real property owners. Let’s try to do the math.

Although the new assessed roll will be released at the end of this month, according to Kristen Seaburn of the Orange County Assessor’s Office, the June 2023 roll states that the total assessed value of real estate (secured) properties in Costa Mesa and Newport Beach was $98,832,322,094.

This means that NMUSD needs to assess $202.36 for every $100,000 in assessed value to pay the principal and interest to the bondholders ($98,832,322,094 divided by $100,000 equals 988,323. $200,000,000 divided by 988,323 equals $202.36).

The old homeowner would see the annual real estate tax bill from the Orange County Treasurer-Tax Collector go up by $1,627 ($202.36 times 8.04), which is only $4.46 a day. Just giving up a daily cup of coffee. The new neighbor, however, would see an increase of $4,047 ($202.36 times 20), or $11.08 a day!

The long-time resident will be asked if they can afford to pay another $136 a month to improve their schools and, theoretically, their home values. The homeowners who paid $2 million for their homes will probably not get an email survey.

It gets more clever but also more insidious. The debt can be structured to pay lower amounts in the first 10 years and higher amounts in the following 15 years. Interest only on a $2.5 billion loan, assuming 4 percent, is $100 million. This would cut the assessment in half. A long-time homeowner would be asked if they could invest $68 per month, or only $2.25 per day, to improve classrooms.

It’s obvious that borrowing $2.5 billion is not in the cards based on the associated costs. It would never be approved by the voters. The real purpose of the survey is to determine how much financial pain homeowners can endure to pay to pass a bond. If the survey says they can only afford $10 a month, then the amount borrowed would be much lower. But the survey would decide the amount borrowed, not the actual cost estimates for materials and labor.

As an aside, the wages may be at union rates if a project labor agreement is also approved. This favoritism has increased total construction costs more than 20 percent for other school districts. Who will fund the “Yes on School Bond” campaign? Historically it’s the potential contractors and subcontractors, as they stand to make a handsome profit if selected.

You can be sure this is how Capistrano Valley Unified probably sized and structured their recent unsuccessful bond measure, asking to only borrow $114 million (see “Hard Lessons From California School District Bond Measures,” March 10, 2023).

It will be interesting to see where NMUSD ends up. Residents in the Tustin Unified School District are also being surveyed via email.

Besides the sizing dilemma, NMUSD has two other awkward matters to explain. The first is that it is one of two basic aid districts in Orange County, which receives its revenues from property taxes versus a lower state funding formula. The other is Laguna Beach Unified School District, the most fiscally sound of Orange County’s 28 school districts (see “Every School District in OC Improved Its Fiscal Health in 2022—Except for 2,” June 19, 2023). With the highest property taxes per parcel, NMUSD should be near the top as well (see “How Unions Influence School Districts’ Financial Rankings,” March 9, 2023). It’s not. It’s near the bottom at 26th place for the fiscal year ending June 30, 2022.

The second concern is this proposed bond ballot measure will be NMUSD’s second. But, when they pursued their first, the district communicated it would be their last. It committed to proper maintenance of existing buildings and setting funds aside, like a homeowner’s association, accumulating reserves for future capital improvements. It also assured voters that its Banning Ranch land holdings would be monetized for future projects.

Perhaps the current board should contact Mike Fine, the district’s chief business officer at the time of the 2000 Measure A effort, and now the chief executive officer of the Fiscal Crisis & Management Assistance Team (FCMAT). He may want to remind them of these agreed-to financial provisions a quarter-century ago. The details were also well documented in a Daily Pilot article at the time, titled “Measure A gets an ‘A’ from Moorlach—County treasurer gives Newport-Mesa’s $110-million school bond measure top grades after studying it,” by Danette Goulet, May 12, 2000.
Residents of school districts that are contemplating capital improvements through debt should be aware that the financial advisors, consultants, and bond underwriters will be nicely compensated. As will the contractors. Before voting for another tax increase, take a hard look at those benefiting the most, which may not necessarily be the students. And ask pressing questions, because if it is approved, this tax increase will be around for the next quarter-century.

This article originally appeared in The Epoch Times

John Moorlach is the director of the CPC’s Center for Public Accountability. He has served as a California State Senator and Orange County Supervisor and Treasurer-Tax Collector. 
California Local Elected Officials (CLEO) is a membership organization that networks, educates, supports and advises local elected officials throughout California’s thousands of cities, counties, school and special districts. CLEO offers policy guidance, detailed financial analyses, legal perspectives and communications assistance to our members on principled governance. Find out more at Calelecteds.org.




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