Borrowed Money: Opportunities for Stronger Bond Oversight

BORROWED MONEY: OPPORTUNITIES FOR STRONGER BOND OVERSIGHT Report #236, February 2017 A Little Hoover Commission Letter Report to the Governor and Legislature of California To Promote Economy and Efficiency Little Hoover Commission The Little Hoover Commission, formally known as the Milton Marks “Little Hoover” Commission on California State Government Organization and Pedro Nava Economy, is an independent state oversight agency. Chairman Jack Flanigan By statute, the Commission is a bipartisan board composed of five public Vice Chairman members appointed by the governor, four public members appointed by the Legislature, two senators and two assemblymembers. Scott Barnett David Beier In creating the Commission in 1962, the Legislature declared its purpose: Anthony Cannella ...to secure assistance for the Governor and itself in promoting economy, Senator efficiency and improved services in the transaction of the public business in Chad Mayes the various departments, agencies and instrumentalities of the executive Assemblymember branch of the state government, and in making the operation of all state departments, agencies and instrumentalities, and all expenditures of public Don Perata funds, more directly responsive to the wishes of the people as expressed by Sebastian Ridley-Thomas their elected representatives... Assemblymember The Commission fulfills this charge by listening to the public, consulting with Richard Roth Senator the experts and conferring with the wise. In the course of its investigations, the Commission typically empanels advisory committees, conducts public Jonathan Shapiro hearings and visits government operations in action. Janna Sidley Its conclusions are submitted to the Governor and the Legislature for their Helen Torres consideration. Recommendations often take the form of legislation, which the Commission supports through the legislative process. Sean Varner Commission Staff Carole D’Elia Executive Director Contacting the Commission Jim Wasserman Deputy Executive Director All correspondence should be addressed to the Commission Office: Ciana Gallardo Little Hoover Commission Research Analyst 925 L Street, Suite 805 Sacramento, CA 95814 (916) 445-2125 littlehoover@lhc.ca.gov This report is available from the Commission’s website at www.lhc.ca.gov. Letter from the Chair Letter from the Chair February 14, 2017 The Honorable Kevin de León The Honorable Jean Fuller President pro Tempore of the Senate Senate Minority Leader and members of the Senate The Honorable Anthony Rendon The Honorable Chad Mayes Speaker of the Assembly Assembly Minority Leader and members of the Assembly Dear Governor and Members of the Legislature: Taking on long-term debt is a very serious and important government decision. Paying down bond debt makes a long-term claim on every annual budget and limits all other spending for decades to come. Because of this, bond measures typically require a vote of the people. Bonds are most frequently used to finance large projects such roads, schools, dams and other infrastructure that is expected to last for generations and would be difficult to pay for all at once. California voters have been exceedingly supportive of bond measures. In the past decade, voters have approved more than $70 billion in statewide bond financing. They have been equally supportive of local bonds, with some $138 billion in local school facilities bonds enacted since voters reduced the threshold for approving these measures in 2000. Spreading the costs of major infrastructure projects across generations makes sense. But as Californians have put more and more on the tab, a day of reckoning will arrive. When the next recession hits and revenues fall, the payment on the debt remains. Now is a critical time to assess and reevaluate whether current oversight mechanisms are enough to ensure both state and local bond proceeds are spent as efficiently as possible and as voters intended. Governor Brown, in his 2017-18 proposed budget, highlighted the need for improved oversight on the nearly $10 billion statewide school construction bond enacted by voters in 2016. The Commission agrees with and applauds the Governor. But oversight should not be implemented bond by bond. The Commission urges the Governor and the Legislature to develop a strategy for oversight of all statewide bond measures that links bond expenditures with results and makes this information easily available to the public. This brief updates and builds on recommendations the Commission made in a 2009 report, Bond Spending: Expanding and Enhancing Oversight. At a September 2016 hearing as part of this update, the Commission found progress in statewide bond oversight and promise in legislation enacted in 2016. SB 1029 (Hertzberg) gave the California Debt Limit Allocation Committee within the State Treasurer’s Office the authority to annually track the use of bond proceeds from both state and local debt-issuing agencies. Policymakers should ensure adequate resources are provided to implement this legislation. It holds the potential for making Little Hoover Commission | 1 Borrowed Money: Opportunities for Stronger Bond Oversight all state and local bond information available on one statewide Web platform in a format that is easy for researchers, policymakers, the media and the public to understand. With the table set by the Governor for legislative discussion on statewide bond oversight, the Commission also urges policymakers to assess and improve local bond oversight. A record $28 billion in local school facility bonding capacity was approved by voters in 2016 alone. In this update, the Commission learned that the vast majority of borrowing is done by local governments, particularly local school and community college districts. Local government officials often lack the sophistication or experience issuing and managing bonds. The Commission was told this is unnecessarily costing Californians hundreds of millions of dollars. When poor financing choices are made or when money is spent inefficiently, or on projects not listed in a bond measure, it hurts taxpayers and limits other local spending. Even worse, it very often robs California school children of the benefits of clean and modern learning environments that voters have indicated are a top priority. Better training on bond issuances and prudent debt ratios, truth in borrowing statements and more involvement of county treasurers could help prevent poor municipal financing decisions. The Commission also recommends that policymakers update and overhaul statutory code enacted in 2000 that created Citizens’ Bond Oversight Committees for local school facility construction bonds. The law was written to give these committees active oversight, yet by and large, this is not happening. Some 200 new local bond oversight committees will be formed in the next year with 1,400 Californians volunteering their time to participate on these committees. Policymakers should make sure their time is used as efficiently and effectively as possible so that these important local oversight committees can live up to their promise. This briefing includes a list of specific changes, including improved training for committee members and enhanced performance audits that assess the effectiveness and results of the bond program, as well as other opportunities for improvement. With significant new bond capacity added in 2016, the time to act is now and the Commission stands ready to assist. Pedro Nava Chair, Little Hoover Commission 2 | www.lhc.ca.gov Contents Contents 5 Bond Spending: Expanding and Enhancing Oversight - An Update Why It Matters ....................................................................................................................... 5 Commission’s 2009 Report ..................................................................................................... 6 7 Statewide Bonds Administrative Improvements in Bond Oversight .......................................................... 8 An Important Step Forward to Improve Transparency ................................................... 11 Legislation Improves Clarity for Voters ........................................................................... 11 2017 Recommendations for Statewide Bond Oversight ........................................................ 12 Recommendation 1: The Governor and the Legislature should adopt a consistent system to improve transparency and oversight of all statewide bonds, particularly the 2008 high-speed rail and the 2016 school facility construction bonds, which currently lack such requirements, as well as all future statewide bond measures. Recommendation 2: The Governor and Legislature should ensure adequate resources are available for the California Debt Limit Allocation Committee’s implementation of SB 1029. 13 Local Bonds Playing With Financial Matches ..................................................................................... 14 Limited Progress Improving Local Bond Oversight ......................................................... 15 Independent Training is Key ........................................................................................... 18 Performance Audits Tailored to Results ......................................................................... 18 Other Opportunities for Improving Local Oversight ....................................................... 19 2017 Recommendations for Local Bond Oversight ................................................................ 20 Recommendation 3: The California Debt and Investment Advisory Committee is encouraged to expedite the development of training materials for locally-elected officials on bond issuance. Recommendation 4: Policymakers should enact legislation requiring a truth in bonding statement be provided for review by elected officials prior to authorizing a bond issuance. Recommendation 5: Policymakers should enact legislation requiring the county treasurer to review and comment on bond issuance proposals prior to authorization. The county treasurer also should advise policymakers on maintaining a prudent debt ratio. Little Hoover Commission | 3 Borrowed Money: Opportunities for Stronger Bond Oversight Contents Recommendation 6: Develop easy-to-access online training materials for members of Citizens’ Bond Oversight Committees. Recommendation 7: The Governor and Legislature should update and overhaul the education code related to the Strict Accountability in Local School Construction Bonds Act of 2000. Recommendation 8: Impose sanctions for school and community college districts that fail to adhere to constitutional and statutory requirements of Proposition 39, including preventing the district from adopting future bond measures under the reduced voter threshold. 21 Appendices Appendix A: Public Hearing Witnesses .................................................................................. 21 Appendix B: Cover Photo Credits ........................................................................................... 22 23 Notes 4 | www.lhc.ca.gov Bond Spending: Expanding and Enhancing Oversight - An Update Bond Spending: Expanding and Enhancing Oversight - An Update Californians have been exceptionally generous in Californians were faced with the choice to authorize their willingness to incur long-term debt to pay for another $43 billion in bond spending on the November infrastructure. Since 2006, Californians have enacted 2016 ballot – nearly $10 billion for a statewide school nine statewide bond measures authorizing more than facility construction bond measure and $33 billion $70 billion in financing. The proceeds from these proposed through 196 local bond measures.3 With the bonds have paid for school facilities, transportation specter of this additional state and local debt looming on infrastructure, including high-speed rail, housing, the horizon, the Commission held a hearing in September natural resource projects and other public works 2016 to get an update on implementation of its 2009 projects. Californians have been equally generous with recommendations – to improve transparency and their support of local debt financing. In 2016 alone, oversight of bond spending – and to assess what more Californians gave local K-12 school and community might be necessary to ensure voters are actually getting college districts the authority to issue $28 billion in bonds what was promised in bond measures. and authorized 10 other local governments to issue $7.2 billion for various public works projects.1 Why It Matters “California and its local governments have borrowed more than $1.5 trillion from Wall Street over the The decision to take on debt warrants serious past three decades to build roads, schools, and other consideration whether it is a family considering a car or critical public works,” according to written testimony home purchase or state or local government building submitted to the Commission by the State Treasurer’s schools, roads or other infrastructure. “The responsibility Office. Californians repay statewide bonds with money of issuing and managing debt cannot be taken lightly,” from the state General Fund. In 2016, California spent municipal finance expert Jay Goldstone told the approximately $7.7 billion or approximately 6.5 percent Commission in written testimony.4 It is a long-term of its total budget on debt service for general obligation commitment to repay debt. Repaying bond debt goes bonds.2 To finance local bond measures, Californians to the front of the line when decisions are made each agree to increase their property taxes. year on how governments will spend taxpayer dollars. “These are obligations that require repayment and a The Little Hoover Commission first raised concerns commitment to a bond means that there will be, in regarding state and local oversight of bond measures – some instances, dollars not available for other things specifically the mechanisms or lack thereof, that are in in communities,” Tim Schaefer, deputy treasurer for place to monitor spending and ensure that the proceeds public finance in the State Treasurer’s Office, told the from bond measures are spent as the voters intended – in Commission at its September 2016 hearing. “That’s why a 2009 report, Bond Spending: Expanding and Enhancing bond oversight is so critical,” he added. Oversight. The impetus for the Commission’s 2009 review was a $43 billion statewide infrastructure bond When voters enact statewide bond measures – whether package enacted by voters in 2006, by far the largest they know it or not – they are setting a budget priority bond package ever enacted at one time in California. for decades to come, for themselves, their children and Due to its sheer size, the Commission was concerned that even their grandchildren. Projects and programs funded the bond package be spent as efficiently and effectively through statewide general obligation bond measures as possible and as voters intended. take priority over nearly all other budget areas. General obligation bonds are guaranteed by the California Constitution, and as a result, repayment of the bonds Little Hoover Commission | 5 Borrowed Money: Opportunities for Stronger Bond Oversight takes priority over virtually all other state government 44 bond measures from 1974 to 2004.6 California’s debt expenses beyond education, which has locked-in funding is higher than a majority of other large-population states. through Proposition 98. When voters enact a general California ranks third highest of the 10 most populous obligation bond, they are indicating a willingness to tax states, behind only Illinois and New York as measured by either themselves to repay the bond debt or reduce debt per capita, debt as a percentage of personal income spending in other areas. and debt as a percentage of GDP.7 It is generally agreed that general obligation bonds are a useful government financing tool for major Commission’s 2009 Report infrastructure projects. Bonds are not necessarily good or bad. They are one financing tool in the government The Commission convened the September 2016 toolbox. Just as it makes sense for most people who hearing to get an update on its recommendations for could not otherwise afford to purchase a house without improved transparency and oversight of state and local a 30-year mortgage, it makes sense for government bond spending in its 2009 report. The report focused to finance bridges, highways, schools, dams, parks on improving accountability and transparency of and other major infrastructure over 30 or 40 years. statewide bonds, including specific recommendations Government infrastructure projects provide benefits to for improving oversight of natural resource bonds, multiple generations so it is appropriate that the costs improving clarity about statewide bonds on voter ballots of the projects are spread across multiple generations of and bolstering the effectiveness of local Citizens’ Bond taxpayers. Oversight Committees. The following pages are split into two discussions – a focus on oversight of statewide Californians’ willingness to finance projects by bond measures followed by an analysis of local bond accumulating debt, however, has grown considerably measures, an area of even greater concern than when in the past decade. Repayment of bond debt – or debt the Commission conducting its first review in 2009. This service – has risen to 6.5 percent of California’s total increased concern is fueled by the sheer size of the budget in 2016 from less than 1 percent in the 1980s.5 growing local debt and the fact that local oversight and Since 1974, Californians have authorized approximately transparency, as well as the sophistication required to $145 billion in statewide general obligation bonds. manage bond issuances and spending, lags behind the Nearly half of that – approximately $71 billion from experience and improvements in oversight taking place at 10 bond measures – was enacted just in the past decade. the state level. As a comparison, voters enacted $74 billion through 6 | www.lhc.ca.gov Statewide Bonds Statewide Bonds In its 2009 report, three of the Commission’s four transparency for bond-funded programs. These steps recommendations focused on improving oversight and can provide a model and should be mandatory for all transparency on statewide bond measures. Through statewide bond measures. Legislation enacted in 2016, administrative efforts, as well as legislation, witnesses SB 1029 (Hertzberg), also discussed at the Commission’s at the September 2016 hearing described noticeable September 2016 hearing, holds promise for improved improvements in bond oversight, with even greater oversight and transparency for both state and local opportunities on the horizon. Since 2009, expanded bonds, particularly an opportunity to make much auditing and transparency has improved significantly more information available online to the public in an in some, although not all departments responsible for easily understandable and digestible format. Ensuring administering programs funded with bond proceeds. adequate resources for implementation of this legislation As a result, further steps to improve consistency in should be a priority. Finally, legislation enacted in 2011 oversight are warranted. At the September 2016 improved clarity for voters on the costs of statewide hearing, the Commission heard specifically about steps bonds. The state should consider requiring the same the Natural Resources Agency has taken to improve clarity for voters for local bond measures. Prior Recommendations: Statewide Bond Oversight and Transparency In its June 2009 report, Bond Spending: Expanding and Enhancing Oversight, the Commission had three recommendations for improving state bond oversight. Recommendation 1: The Legislature and state government entities administering bond programs must improve oversight to ensure bond money is spent efficiently and effectively and as voters intended. Specifically: ▪ Both houses of the Legislature should establish a bond oversight committee to review performance and financial audits of bond-funded programs and the annual reports statutorily required of bond-administering agencies. ▪ The Legislature should require independent audits, conducted by a private accounting firm or entity independent from the executive branch – such as the State Controller’s Office or the Bureau of State Audits – that are systematic and transparent. The audit should cover the performance of the bond project, as well as the dollar amount spent. The independent audit should include: the cost to the state, the level of overall bond indebtedness, and additional overhead, as well as hard costs. This should be funded from the portion of the bonds available for administrative purposes. ▪ Additionally, the governor should charge the Office of the State Chief Information Officer with streamlining and managing the bond accountability website and developing mandatory uniform standards for tracking bond expenditures and the outcomes of those expenditures. These uniform standards must include common definitions for allocations and fund commitment so the public can easily understand what bond money has been spent and what is still available. Little Hoover Commission | 7 Borrowed Money: Opportunities for Stronger Bond Oversight Recommendation 2: The state should reconstitute the California Water Commission as the California Natural Resources Commission and charge it with prioritizing and overseeing bond-funded programs currently managed within the California Natural Resources Agency. Specifically, using a public process, the California Natural Resources Commission should: ▪ Develop an overarching plan for funding state natural resources programs. ▪ Address cross-cutting issues within the bond-funded programs to ensure all government entities work in concert and not at cross purposes. ▪ Allocate bond money authorized for natural resource projects and programs. Recommendation 3: To improve transparency and clarity for voters, the state must establish fundamental criteria for ballot measures and these criteria should be evaluated and included as a simple and easy-to-understand report card in the voter guide for all bond measures placed on the ballot. Administrative Improvements in Bond Oversight although at that point in time few, if any, projects were finished. The follow-up accountability was planned but Administrative steps to improve bond oversight had had not actually occurred.8 already begun as the Commission began its 2009 study process. After voters enacted the $43 billion bond The Commission commended the implementation of the package in 2006, Governor Arnold Schwarzenegger accountability framework and the bond accountability issued an executive order to implement a multi-phase website, but found shortcomings with both. The accountability framework and provide expanded Commission found a need for more independent transparency by creating a new website to track bond oversight with audits conducted by entities outside expenditures: www.bondaccountability.ca.gov. the Administration. The Commission found the bond accountability website to be cumbersome and difficult Governor Schwarzenegger’s plan to ensure accountability to navigate. An economist with significant expertise in included three parts: government budgets told the Commission regarding the bond accountability website, “I should have a greater • Before spending the money – Developing a ability than the average person to wade through it strategic plan and performance standards for and I find it difficult to impossible.”9 The Department projects on the front end. of Finance developed the website and served as the portal host, but the data and links are provided by the • During project implementation – In-progress departments administering the bonds. As a result, the accountability documenting ongoing actions website was and remains as varied as the departments needed to ensure that infrastructure projects or that administer the bonds. other bond-funded activities stayed within the cost and scope. Additionally, the website and the accountability framework focused solely on the 2006 bond package and • After the project is finished – Follow-up neither the website nor the accountability framework accountability in the form of audits to determine were expanded to include two bond measures enacted whether expenditures were in line with goals laid in 2008. The 2008 bond measures provided nearly out in the strategic plan. $10 billion for high-speed rail and nearly $1 billion for The State Auditor found in a February 2009 report specified childrens’ hospitals. The childrens’ hospital that most of the bond-administering departments had bond was very prescriptive regarding which hospitals established the three-part accountability framework, would receive funding and how much. Spending from the 8 | www.lhc.ca.gov Statewide Bonds high-speed rail bond, on the other hand, is less clear and representing over $3 billion in Proposition 1D funds is not readily available on the High-Speed Rail Authority have been closed without an expenditure audit to website or on the bond accountability website. determine program compliance, expenditure eligibility or total project savings. Although OPSC has performed Two additional bond measures were enacted in 2014, a 102 comprehensive project desk reviews, their efforts $600 million veterans housing bond (which redirected to conduct on-site expenditure audits have been money from a 2008 bond measure that funded home unsuccessful.”10 loans for veterans) and Proposition 1, the state’s $7.5 billion water bond. The water bond included In its response to the audit, the Office of Public School requirements for increased accountability and the Natural Construction in August 2016 indicated if Proposition Resources Agency developed detailed information on 51, the nearly $10 billion bond on the November 2016 it, as well as prior resource bonds on its own bond ballot, got enacted it would “explore various methods for accountability website, http://bondaccountability. auditing/reviewing the proper use of bond funds based resources.ca.gov/PropBondMenu.aspx. There also is an on the resources available for this activity. In the past, active link to these Web pages on the Department of OPSC has been unsuccessful at contracting with Finance Finance bond accountability website. or the State Controller’s Office for on-site expenditure audits.”11 The Department of Finance bond accountability website also includes a link to all the audits it has conducted on This response is hardly reassuring from an entity that now various bonds. However, there are no links to audits will have another nearly $10 billion in bond proceeds to conducted on the bond measures by other entities. For distribute since voters statewide approved Proposition example, the California State Auditor conducted several 51, the 2016 school facility construction measures, by a audits on nearly $5 billion in housing bonds enacted by 55.2 percent to 44.8 percent vote.12 voters in 2002 and 2006. But there is no link to these audits on the bond accountability website. And the link Governor Edmund G. Brown, Jr., noted the shortcomings to the 2006 housing bond program, Proposition 1C, on in oversight of the School Facilities Program found in the bond accountability website, goes nowhere. the 2016 Department of Finance report in his proposed 2017-18 budget and stated that the Administration Although the Schwarzenegger three-part accountability would support expenditures of Proposition 51 funds plan provided a model for the five bonds enacted in once appropriate oversight mechanisms are in place. 2006, there since has been no consistency in how the As stated in the 2017-18 Governor’s Budget Summary, state monitors its bond spending or makes information “the Administration will work with the State Allocation on bond-funded programs available electronically Board and the Office of Public School Construction to the public. For the five bonds that fell under the to revise policies and regulations to implement front- requirements of the Schwarzenegger executive order, end agreements that define basic terms, conditions, bond program administrators have not all complied with and accountability measures for participants that the executive order or, in the case of Proposition 1D, the request funding through the School Facilities Program. school facility construction bond, statutory requirements To compliment this front-end accountability, the for audits. Administration will introduce legislation requiring facility bond expenditures to be included in the annual K-12 In an August 2016 update to a 2011 audit of the 2006 Audit Guide. Independent auditors will verify that local school facility construction bond, the Department of education agencies participating in the School Facilities Finance found the Office of Public School Construction Program have appropriately expended state resources.”13 (OPSC), which administers public school construction bonds awarded by the State Allocation Board, had Although the Commission would caution against a one- not conducted required audits. According to the size-fits-all approach to oversight and accountability of report, “Statutorily required expenditure audits have statewide bonds, given that the bond programs are as not been performed since the passage of Proposition varied as the departments that administer the programs, 1D in 2006. As of September 2015, 1,533 projects it is clear the state should set some general rules and Little Hoover Commission | 9 Borrowed Money: Opportunities for Stronger Bond Oversight guidelines for front-end accountability as well as ongoing recipient reporting. In addition to setting the reporting auditing of bond expenditures. Audits should include requirements, departments must also follow through a breakdown of administrative costs, project oversight with collecting and reviewing grantee reports. costs, expected versus actual costs, change orders and other data that would provide a complete picture of Additionally, the Legislature should hold departments how bond money is being spent. It is clear from some accountable by requiring regular and public reporting bond program audits that some, if not a majority, of on expenditures and through legislative budget and departments have set these expectations for grant oversight hearings. In its 2009 report, the Commission Natural Resources Bonds – Improvements in Oversight In its 2009 report, the Commission specifically called for greater oversight and transparency for natural resource bonds. All of the other infrastructure bonds enacted in 2006 typically had one or two entities administering bond proceeds, which theoretically should make them easier to track. At a minimum, the administering departments are more easily identifiable and can be held accountable for bond programs, policies and expenditures. In contrast, 11 resources bonds are administered by 23 departments within the Natural Resources Agency. These fund some 66 programs and approximately 16,000 projects, making it much more difficult to track spending. At the time of the Commission’s 2009 review, little, if any, information on resource bond expenditures was available on the bond accountability website. Beyond the sheer volume, the Commission in its 2009 review was told the resources bonds were often “money in search of a mission.” Because they were spread across so many departments, policies sometimes worked at cross purposes. The Commission also learned that portions of resources bonds were used for studies or plans to determine ecosystem restoration, flood control or water supply needs rather than actually building infrastructure. In response, the Commission in 2009 recommended reconstituting what at the time was the defunct California Water Commission, renaming it and tasking it with oversight of natural resource bond funds. Proposition 1, the water bond enacted by voters in 2014, included a requirement that each state agency receiving an appropriation of funding be responsible for establishing metrics of success and report the status of projects and all uses of money website. The California Water Commission was reconstituted, but its role in administering the water bond is limited to the water storage portion of the bond measure. At its September 2016 hearing, the Commission learned that California’s Natural Resource Agency has taken significant steps toward improving oversight of bond expenditures. According to testimony provided by Bryan Cash, deputy assistant secretary, bond and grants, California Natural Resources Agency, “With each bond measure, oversight and accountability have improved and transparency of expenditures has greatly increased.” These improvements were driven in part by changes to funding methods made by the Pooled Money Investment Board in response to the Great Recession. Prior to the recession, loans were available to keep projects moving before state bonds were issued. Now, bonds are sold upfront requiring more reporting. In response, the Natural Resources Agency has upgraded its bond reporting system. This system also was able to seamlessly adapt, according to Mr. Cash, to accommodate reporting requirements for Proposition 1. The Resources Agency now has information available on its bond accountability website on past bond measures, as well as detailed information on Proposition 1 programs and projects. In addition to the new reporting system and website, according to Mr. Cash, the agency also has worked with the Department of Finance to “adjust the audit program for the bonds to include more project audits, to create an audit guide and to develop on-site workshops for departments.” 10 | www.lhc.ca.gov Statewide Bonds highlighted the transparency provided by Caltrans, which made publicly available on the CDIAC website. provided details on bond expenditures on projects by county and by Zip code. Since the early 1980s, CDIAC has had the authority to track and report on all state and local debt This same level of detail is now available on bond authorizations and issuances in California. In 2016, the expenditures on natural resource projects also and should State Treasurer’s Office unveiled DebtWatch (http:// be required for all bond expenditures. The Legislature debtwatch.treasurer.ca.gov), which provides all of this could enact guidelines for oversight of bond expenditures information electronically on the State Treasurer’s based on these models and the Schwarzenegger website. While incredibly helpful, the current publicly accountability framework. Similarly, the Governor could available information is static data captured at a point in issue an executive order requiring greater accountability. time. With the enactment of SB 1029, CDIAC now has This is particularly important for such bond measures as the authority to track annual reports from debt-issuing high-speed rail, which currently has very little information agencies on the use of bond proceeds. As a result, the available on expenditures. It is equally important for information will become dynamic, allowing the public the 2016 school facility construction bond since the to better understand how state and local bond proceeds Office of Public School Construction has previously are being used. “So now in addition to its statutory proven unsuccessful at ensuring prior bond proceeds requirement to track and report on all state and local were audited as required. This accountability should debt authorization and issuance, CDIAC will now take be required for all infrastructure bonds going forward. annual reports from California’s debt-issuing agencies – According to testimony from Mr. Schaefer, “California and both state and local,” Mr. Schaefer told the Commission her public agencies would do well to adopt a system to is his testimony. “We believe, strongly, this will create improve transparency and oversight of borrowed money. a more fertile environment for accountability to the Such a system should link proceeds of this borrowed taxpayer.”15 money to results that the public can see. Accountability should be built into the individual plans and policies that State Treasurer John Chiang, in his previous role as State use borrowed money.”14 Controller, and in his current role along with his staff has pioneered making mundane, yet highly important data available to researchers, the media and the general An Important Step Forward to Improve Transparency public in an easily understandable format. Policymakers should ensure adequate resources are available to fully As stated previously, the Commission’s concerns about implement the requirements of SB 1029 so the public the lack of consistent, easily understandable information can access, use and understand this newly available on the state’s bond accountability website remains information on bond expenditures. The Commission unchanged. The Commission is encouraged, however, by sees an opportunity for an expanded State Treasurer’s the enactment of 2016 legislation which holds promise website, which, if developed similarly to the DebtWatch for significantly improving transparency on state and local website, could supersede the Department of Finance bond proceeds. bond accountability website. SB 1029 (Hertzberg), a measure supported by the Commission, has great potential to improve transparency. Legislation Improves Clarity for Voters This legislation was developed based on the work of the Task Force on Bond Accountability, established by The public plays a pivotal role in authorizing the state the State Treasurer in 2015 in the wake of news reports to borrow money using general obligation bonds. of embezzlement of bond funds by a local government Before any money can be borrowed, a majority of official, as well as Senate oversight hearings held in 2015. voters must approve the bond measure on a statewide SB 1029 tasks the California Debt and Investment Advisory ballot. California has two methods for placing a general Commission (CDIAC) within the State Treasurer’s Office with obligation bond on the statewide ballot, either through tracking and reporting on all state and local outstanding the legislative process, where a proposal is reviewed by debt until fully repaid or redeemed. This information will be various policy committees in public hearings and must Little Hoover Commission | 11 Borrowed Money: Opportunities for Stronger Bond Oversight be approved by the Legislature and Governor, or the 2017 Recommendations for Statewide initiative process, where a measure can be placed on Bond Oversight the ballot if enough signatures are gathered to support placing the measure on the ballot. In this update, the Commission found progress in improving bond oversight, but that progress has not Unfortunately, when bonds are proposed to voters on been consistent for all statewide bond measures. The the ballot, they are not only lengthy and complicated, but Commission sees an opportunity for improving bond also are not presented within the context of the state’s oversight by establishing a consistent framework of overarching needs for infrastructure investment or the accountability for all statewide bonds. It has been nearly state’s overall budget. eight years since the Commission noted the shortcomings in finding online information on bond expenditures Advertisements promoting statewide bond measures and yet this challenge remains. The Commission looks further obscure the picture. Ads promote a particular forward to the implementation of SB 1029, which bond measure and sometimes tell voters that the new provides a much needed opportunity to gain greater investment can be made without new taxes. Although clarity on state and local bond expenditures. technically this is true, the money must come from somewhere – typically existing tax revenues. As stated Recommendation 1: The Governor and the Legislature previously, in enacting bond measures with no source should adopt a consistent system to improve of new revenue, voters are prioritizing funding for the transparency and oversight of all statewide bonds, programs identified in the bond measure above all other particularly the 2008 high-speed rail and the 2016 spending, beyond constitutionally guaranteed education school facility construction bonds, which currently spending. lack such requirements, as well as all future statewide bond measures. This oversight system should link bond Throughout its 2009 study process, the Commission expenditures to results that can be seen and measured by discussed opportunities to improve voter awareness. the public in an easy-to-understand online format. After weighing various options the Commission ultimately recommended adding simple and easy-to-understand Recommendation 2: The Governor and Legislature language to the voter guide when statewide bond should ensure adequate resources are available for measures are on the ballot. the California Debt Limit Allocation Committee’s implementation of SB 1029. Legislation enacted in 2011 implementing the Commission’s recommendation, AB 732 (Buchanan), added an explanatory table to statewide election ballot pamphlets that include bond measures. Per the legislation, the Legislative Analyst, who already had a role reviewing ballot initiatives, provides details about how much the proposed bond will cost over time and how the state will pay for the bond. This information is included at the top of the proposed bond measure description. For example, the Legislative Analyst’s Office in its analysis of Proposition 51, the nearly $10 billion school construction bond on the November 2016 statewide ballot, estimated the total cost of the bond, with principal and interest, to be $17.6 billion, and estimated it will require $500 million annually from the General Fund for 35 years.16 12 | www.lhc.ca.gov Local Bonds Local Bonds Although the Commission’s primary concern and Commission saw a role for the state in ensuring this local focus in its 2009 review of bond oversight was on oversight was efficient and effective. statewide bonds, the Commission devoted one chapter and provided recommendations on improving local bond In its 2009 report, the Commission found the concept oversight, specifically bolstering the effectiveness of of the local oversight committees appealing because Citizens’ Bond Oversight Committees. These committees it put hundreds, if not thousands, of eyes and ears on were established by an act of the state Legislature in the ground to ensure that school facility bonds were 2000, in part to help ensure that Proposition 39, a 2000 spent efficiently and as described in the text of the bond initiative enacted by voters to lower the threshold of measures provided to voters. By and large, however, votes required for local school facilities bonds from two- these committees have proven ineffective and some thirds majority to 55 percent, would pass. Additionally, committee members have told the Commission that is at the local bonds the committees oversee – school facility least in part, by design. As one witness at the September construction bonds – are very often used in tandem 2016 hearing told the Commission, “The watchdog has with statewide school facilities bonds. As a result, the no bite.”17 Prior Recommendations: Improve Local School Bond Oversight In its June 2009 report, Bond Spending: Expanding and Enhancing Oversight, the Commission had recommendations for improving local bond oversight. Recommendation 4: To improve local oversight of school and community college school facility construction projects passed under the reduced threshold established by Proposition 39, the state should bolster the capabilities of local bond oversight committees. Specifically, the state must: ▪ Require mandatory independent training for bond oversight committee members. The State Allocation Board and the California Community Colleges should develop and host a website with easy-to-access training materials and easy-to-understand descriptions of the roles and responsibilities of the local citizens’ oversight committee members. The website should include a mandatory online training course. ▪ Require civic groups to nominate local committee members, allowing veto power for the school or community college district. ▪ Clearly delineate the role and responsibility of the local oversight committees and define the purpose and objectives of the annual financial and performance audits. ▪ Encourage county grand juries to review the annual financial and performance audits of expenditures from local school and community college bond measures. ▪ Impose sanctions for school and community college districts that fail to adhere to constitutional and statutory requirements of Proposition 39, such as preventing the district from adopting future bond measures under the reduced voter threshold. Little Hoover Commission | 13 Borrowed Money: Opportunities for Stronger Bond Oversight The Commission’s 2009 recommendations for improving most finance directors and staff were not hired because local bond oversight were based on testimony from a of their knowledge and experience in the capital markets, co-founder of what in 2008 was a fledging organization, but rather for their accounting, budgeting or other more the California League of Bond Oversight Committees traditional finance-related knowledge and skills. They (CalBOC), and recommendations from a scathing 2008 often work with a small staff and wear multiple hats and State Controller’s Office audit of a community college juggle multiple tasks simultaneously,” Jay Goldstone, district’s expenditures from state and local bond fund managing director of public finance for MUFG Americas proceeds. and co-chair of the previously mentioned Task Force on Bond Accountability, told the Commission. During the Commission’s update on its 2009 report, The Commission also received written comments it learned that very little progress has been made suggesting that a significant amount of money has and implementing the Commission’s recommendations in this continues to be wasted through poor financial practices, area. Although the Commission’s 2009 review of local both when bonds are initially sold and when they later bond oversight focused on bond expenditures, its 2016 are refinanced, often multiple times.19 The comments update brought alarming testimony on bond issuances and witness testimony suggested many, if not a majority, and their sometimes questionable background stories. of the school and community college districts and their Written comments to the Commission described the boards lack the financial savvy to avoid unnecessarily significant and unnecessary costs to taxpayers resulting expensive bonds. Unscrupulous financial advisors, from decisions by local officials who often unknowingly who stand to gain from bond issuances that are poorly are heavily influenced by those who stand to gain by designed, can dupe unsuspecting district staff who may these decisions. not know any better, significantly raising the cost of the bond. Local officials also may lack the context of how As a result, this update on local bond oversight is divided new debt issuance fits within the overall budget and into two sections focusing on local bond measure the future impact on the budget. Financial staff should language and issuances, as well as oversight of local bond inform local elected officials considering debt issuance on expenditures. current debt ratio, how it will change after issuing more debt, and what is considered a prudent ceiling for debt ratio. Playing With Financial Matches Hearing witnesses suggested that the California Debt and Unfortunately, but understandably, many locally-elected Investment Advisory Committee could have an expanded government officials who must make multimillion- and role before districts sell bonds or the state could require multibillion-dollar decisions on bond issuances lack a review by the county treasurer prior to bond issuances. experience in municipal finance. School and community Several concerned with this aspect of bond oversight college board members, who authorize more bond pointed to a July 2016 report from the Los Angeles debt than their counterparts in other local government County Grand Jury on school bond debt. The report entities – more than $15 billion in 2016 alone – often found that taxpayers were paying between 25 percent are concerned citizens who run for office to make a and 50 percent too much for poorly designed debt contribution to their community and ensure local schools issuances, costing hundreds of millions of dollars more are efficient and effective.18 Suddenly, these individuals, than necessary.20 who are contributing to society as part of their civic duty, find themselves confronted with municipal finance One former deputy school superintendent told decisions that will have far-reaching implications on their Commission staff that “excess bond payments take district and local taxpayers. dollars out of local economies. That loss harms the local economy. In addition, this excess payment results in a loss One municipal finance expert with more than three of taxes to local, county and state government as those decades of experience testified that the vast majority of local property taxes reduce other tax payments. This, in finance professionals are honest and try to do the right turn, reduces the ability of local and state government to thing with limited resources. “It is safe to assume that provide needed services to Californians. These negative 14 | www.lhc.ca.gov Local Bonds impacts of poorly planned and structured bonds last for they vote on a bond issuance, similar to the “truth in decades.”21 lending statement” required for consumers signing a home mortgage. In his written testimony to the Mr. Schaefer, in his testimony to the Commission, Commission, Mr. Turnipseed recommended, “Before final said that the California Debt and Investment Advisory bond issuance documents are signed by the district, a Commission provides workshops for public officials simple, readable summary of costs, fees and projected several times each year and has numerous resources interest costs should be provided to the district to sign for available on its website on public works financing. But disclosure, with the other bond documents.”23 he also expressed concerns about a continual lack of financial sophistication at the local level. “Elected officials appear to be absent from that kind of training … Limited Progress Improving Local Bond Oversight If a concerned citizen wants to become engaged in his or her political system in this state, what does she do? She In its 2009 report, the Commission found great promise runs for the school board. Now we have five folks at the in local bond oversight committees, although also many beginning of their political career, well-intentioned folks shortcomings in their current design. The Commission in who wish to make a contribution to the community, and 2009 focused solely on the bond oversight committees suddenly they are confronted with these multimillion- overseeing local school construction bonds. But the co- dollar decisions that have to be made and experts telling chairs of the Task Force on Accountability also described them it’s okay. That strikes me as playing with financial the importance of independent oversight for all bonds. matches,” Mr. Schaefer told the Commission. Mr. Keeley relayed statements made at a meeting of the Former Assemblymember Fred Keeley, who also has Task Force on Bond Accountability. He said that ensuring served on the Santa Cruz County Board of Supervisors that bond funds are spent appropriately really depends and as the Treasurer of Santa Cruz County and co- on prevention and detection.24 Fellow task force co-chair, chaired the Task Force on Bond Accountability with Mr. Goldstone added that one of the main conclusions Mr. Goldstone, also spoke to the Commission at the from the task force was the constant need for oversight – September 2016 hearing. Local officials making these “Bond oversight is a key element of any bond issuance.”25 decisions have so much information to digest they are literally drinking out of a fire hose, he told the The task force recommended that public agencies Commission. Mr. Keeley agreed that additional disclosure establish oversight bodies to provide independent review information for local officials was a good idea, but of bond programs. “This may be internal or external to suggested it be condensed to a page or two.22 the agency, but it must be afforded the authority and resources needed to exercise control over the program Mr. Schaefer indicated that the State Treasurer’s Office is when necessary.”26 The task force was not prescriptive working on developing ways to assist and educate local in what the oversight body should look like, but it did officials, either through on-demand videos, webinars include a set of 17 guidelines that, if used, would help or written materials. Commissioners encouraged the to ensure that bond funds are appropriately managed. development of these tools, particularly a one-or two- Those guidelines are available as an appendix to the task page guide as suggested by Mr. Keeley, that would help force report on the CDIAC website, at http://treasurer. officials understand bond issuances, but more specifically ca.gov/tfba/final_report.pdf. would help them understand the questions they need to ask of their financial advisors. The task force also found that it is extremely important that all public agencies with bond programs establish a Another witness, Michael Turnipseed, president of good and current debt policy. With the enactment of CalBOC and executive director of the Kern County SB 1029, all public entities that have bond programs now Taxpayers Association, agreed that “intervention up will be required to have a current debt policy. This should front is the most effective tool” in bond oversight. result in improvements in bond oversight at the local Mr. Turnipseed recommended that bond issuers provide level. a “truth in bonding statement” to local officials before Little Hoover Commission | 15 Borrowed Money: Opportunities for Stronger Bond Oversight Since its inception in 2006, the California League of Bond Since 2001, voters have enacted more than 1,100 local Oversight Committees (CalBOC) has grown in size and school bond measures under the reduced threshold stature. It is an all-volunteer, nonpartisan association of totaling approximately $138 billion in local bonding bond oversight committee members who are interested capacity.27 One fifth, or more than $28 billion of that total in helping other committee members across California was added in 2016. Voters approved 41 measures in access better training so that they can perform their June 2016 and another 169 in November 2016. In June, duties. In recent years, CalBOC has championed voters enacted 91 percent of all local measures on the legislative changes to improve the effectiveness of local ballot under the reduced threshold and 95 percent in bond oversight. Legislation enacted in 2010, SB 1473 November.28 (Wyland), set standards for performance audits required for local school facility construction bonds. In 2011, The Strict Accountability in Local School Construction SB 423 (Wyland), set a timeline for when the audits Bonds Act of 2000, AB 1908 (Lempert), required school are submitted to the local bond oversight committee. and community college districts to establish a local bond Legislation in 2013, SB 581 (Wyland), required that oversight committee and conduct annual fiscal and local bond oversight committees receive the annual performance audits on any school construction project performance and financial audits at the same time the financed with bond money approved under the reduced district receives the audits. Finally, SB 584 (Wyland) voter threshold. In its 2009 study, the Commission saw required the Education Audits Appeals Panel to include great promise in these oversight committees’ ability to explicit guidelines for financial and performance audits ensure school facility bond money was spent efficiently for bond funds. These new guidelines were included in and effectively and as authorized by voters in the bond the 2016 edition of the panel’s Guide for Annual Audits measure. In many cases, this local bond funding is paired of K-12 Local Education Agencies and State Compliance with state bond money, which means the local bond Reporting. oversight committees also could ensure state school construction bond funds are spent appropriately and Although considered progress, local bond oversight efficiently. In its 2009 study, however, the Commission committee experts suggest these measures did not found not all local bond oversight committees lived up to go far enough. The audit guide, for example, includes this promise. compliance performance audit procedures, but did not provide guidance for measuring program effectiveness At the Commission’s September 2016 hearing, it heard and results. Current CalBOC members participated in from the current president of the California League of the Commission’s September 2016 hearing and were Bond Oversight Committees (CalBOC), a co-founder asked to discuss whether the recommendations the of CalBOC and current member of the West Contra Commission made in 2009 are still valid or if other or Costa Unified School District’s Citizens’ Bond Oversight additional measures are necessary to ensure local bond Committee and the chair of the Sweetwater Union High accountability. They also were asked what might be School District Bond Oversight Committee. The West required to overcome the logjam that has prevented Contra Costa and Sweetwater school districts have one progress in improving local bond oversight. commonality – both have been plagued by scandals in spending bond proceeds and both have since seen As mentioned previously, one of the most common forms constructive changes in their bond oversight committees, of oversight for local bond measures is a Citizens’ Bond providing insight for the hundreds of other oversight Oversight Committee, and bolstering the effectiveness committees in California. The West Contra Costa of these committees was a focus of the Commission’s bond oversight committee benefitted from a district 2009 report. Some local governments establish oversight employee who blew a whistle on serious bond program committees for various other types of bonds. However, mismanagement, which led to a forensic investigation of they are only mandatory for local school bond measures the bond program.29 In the Sweetwater district, actions enacted under the 55 percent majority option created by were so egregious that numerous officials were charged Proposition 39, enacted by voters in 2000. and convicted of crimes. 16 | www.lhc.ca.gov Local Bonds According to Sweetwater Citizens’ Bond Oversight Committee Chair Nick Marinovich, “The reason why bond Sweetwater: Scandal Gives Rise to oversight has become effective at the Sweetwater Union Model Oversight Committee High School District is that there are nine committed members who understand their role, realize they are In 2012, the Sweetwater High School Unified independent and it is their role to speak out, and they School District was part of a large corruption have sufficient tools/information to make their reports scandal involving local school facility construction to the public. The primary tool used to assess the overall bond proceeds. Sweetwater, located in San Diego program effectiveness is an expanded performance County, is the largest high school district in the audit.”30 state with 32 campuses in four Southern California cities. The district superintendent and several Several others who have either served or currently serve school board members were convicted of accepting on local bond oversight committees, as well as other gifts above the state limit and failure to report concerned Californians, submitted written comments gifts. A vendor was convicted of offering something to the Commission. These comments came from of value to a board member. This pay-to-play Californians in communities both large and small, across scandal revolved around the superintendent and the state, but all painted a grim picture of local oversight. board members encouraging and accepting lavish Most of the concerns revolved around bond oversight dinners and expensive professional sports tickets committee members who lack training, have conflicts from vendors bidding on bond-funded school of interest, either real or perceived, and the difficulty construction projects. An extreme example was the committee members have receiving required documents district superintendent inviting vendors to attend from the districts. Others stated that districts are not his daughter’s bridal shower and encouraging them following Proposition 39 requirements to specifically list to contribute to a money tree. At the time of the projects that will be paid for with local bond proceeds. scandal, there was not an active independent bond Some expressed concerns about the role that bond oversight committee. counsel, bond issuers and construction companies – all who stand to profit when a bond measure is enacted – In the wake of the scandal, with a new play in supporting bond measures, often called “pay-to- superintendent and new board members, the bond play” practices. When bond measures are vague about oversight committee has evolved into a model what is going to be paid for with bond proceeds, it adds for other districts. According to Nick Marinovich, yet another hurdle to effective oversight by the bond chair of the Sweetwater Citizens’ Bond Oversight oversight committees. Committee, key elements of a successful bond oversight committee include comprehensive In written comments to the Commission, Ivette Ricco, training for committee members, performance appointed to the West Contra Costa County Unified audits that include experts in the field of design, School District’s Citizens’ Bond Oversight Committee in construction and project management and a 2010, describes how she nearly “threw in the towel” after modest budget from the district. her first three years as a member and then significantly turned the committee around after being elected chair. Additionally, Mr. Marinovich said that Sweetwater She relayed that the challenges were many and that the now has “a fair and open process for committee Legislature “had not done the taxpayers any favors when member selection, strong support for an expanded they created the Citizens’ Bond Oversight Committee in performance audit and ongoing efforts to improve 2000.”31 Shortcomings, according to Ms. Ricco as well as transparency. Effective bond oversight requires others: district “buy in” to the process.” • A Citizens’ Bond Oversight Committee (CBOC) can Source: Nick Marinovich, Chair, Sweetwater High School Unified School meet as infrequently as once a year. District Bond Oversight Committee. September 22, 2016. Written testimony to the Commission. Little Hoover Commission | 17 Borrowed Money: Opportunities for Stronger Bond Oversight • The same district that the committee is tasked have the most effective bond oversight, the volunteer with overseeing, appoints its members. citizens must have a basic understanding of the role of the bond oversight committee and its required reports.” • The CBOC is not allocated or budgeted resources Mr. Turnipseed and other members of CalBOC suggested for training. that the Fiscal Crisis and Management Assistance Team (FCMAT), a state agency whose mission is to • The district is under no obligation to provide help California local educational agencies fulfill their timely data or respond to inquiries within a financial and management responsibilities by providing specific timeframe. training and related school business services, might be • The CBOC is charged with actively reviewing, an appropriate entity to develop online training, with assistance from CalBOC members.34 reporting and informing the community on the expenditures of bond funds, but only after the In part, for a Citizens’ Bond Oversight Committee to fact. be effective, it must know the right questions to ask. Ms. Ricco added, “We are powerless to effect changes. Current law requires that school districts change auditors, Our only real tool is the media.”32 or, at a minimum, audit partners every six years.35 Bond oversight committee members can ensure local districts With hundreds of new bond measures enacted in 2016 abide by this statutorily-required practice by asking how under the reduced threshold allowed by Proposition auditors are selected and how audit scopes are created, 39, some 1,400 Californians will be appointed in 2017 or even have a role in that process. According to an to serve on over 200 new Citizens’ Bond Oversight independent public finance consultant, bond oversight Committees. It is imperative that the volunteers who committee members should start by learning more serve on these committees have every opportunity to about the policies and procedures in place in the district use their time wisely and effectively and to live up to the and any concerns public officials may have in this area. implied promise of oversight. To ensure this happens, They should ask district staff questions, such as, “How the Legislature should update and overhaul the education do you ensure that expenditures are made only for the code created by AB 1908, the Strict Accountability in projects on the project list,” or “How do you ensure that Local School Construction Bonds Act of 2000, that created we get the best price?” These types of questions not the Citizens’ Bond Oversight Committees. only will help the bond oversight committee members better understand district operations, but may spark a district to inject more rigor into its practices with bond Independent Training is Key expenditures.36 Bond oversight committees in many communities act In its 2009 report, the Commission recommended simply as cheerleaders for the district, often because mandatory training for CBOC members. Witnesses members simply do not understand their roles or know at the 2016 hearing and other CBOC members who what actions they can take. Key to the success of bond reached out to the Commission suggested that training oversight committees is adequately training members at this juncture, although highly important for successful so that they understand their role and the tools they oversight, should be voluntary as mandatory training have at their disposal to ensure they are effective. might create a recruitment barrier in smaller districts. Ideally, training is provided by an organization that is independent from the district. According to the chair of the Sweetwater Union High School District Bond Performance Audits Tailored to Results Oversight Committee, the system works when you have “members who are qualified, trained and believe what The Commission also received detailed testimony on they are doing can make a difference.”33 improving and better defining performance audits and giving local bond oversight committees a greater CalBOC president Michael Turnipseed, in written role in selecting the auditors and greater freedom comments to the Commission, said that “in order to communicating with the auditors. Currently, according to 18 | www.lhc.ca.gov Local Bonds witnesses, almost all performance audits are compliance with the requirements of Proposition 39, there is very audits. The audits focus solely on whether any money little recourse. In certain instances, such as with the went to teacher salaries or operating expenses, and Sweetwater Union High School District, activities may whether bond dollars were spent on projects authorized be so egregious as to warrant criminal charges. In many by voters. According to Mr. Marinovich, these audits instances, the only available sanction for districts that do not address how effectively the program is being violate the requirements of Proposition 39, such as managed or identify possible cost saving measures. when money is not being spent on the projects outlined He told the Commission that expanded performance in the bond measure, is for a local taxpayer to obtain audits after the scandal in Sweetwater have provided a restraining order to prevent expenditures of funds, an invaluable tool in identifying process improvements. as delineated through California education code or to Additionally, he said the consultants performing challenge an actual expenditure in court.41 This section the audits were not just accountants, but included of education code states that “it is the intent of the professionals with project management and construction Legislature that, upon receipt of allegations of waste experience.37 or misuse of bonds funds authorized in this chapter, appropriate law enforcement officials shall expeditiously Anton Jungherr, co-founder of CalBOC, told the pursue the investigation and prosecution of any violation Commission at the September 2016 hearing, “The single of law associated with the expenditure of those funds.”42 most important thing that you could do to assist CBOCs in California would be to require a performance audit that Although this appears to give some teeth to ensuring speaks to effectiveness and results.”38 bond funds are not wasted or spent differently than outlined in the bond measure, in reality, these sanctions are rarely used. One concerned citizen and former bond Other Opportunities for Improving Local Oversight oversight committee member provided the Commission with a copy of a complaint that he filed against the The Commission recommended in 2009 that the state Anderson Union High School District in Shasta County consider changing the appointing authority for the regarding misuse of bond funds, the lack of a competitive committee members. Oversight committee members bidding process and the lack of a bond oversight are appointed by the district officials they oversee. committee. In a conversation with Commission staff, At the September 2016 hearing, Mr. Keeley told the he said the district was able to do whatever it wanted Commission, “Keys to ensuring effective local bond and local law enforcement did not have the resources to oversight revolve around the composition of the investigate his complaint. “If the laws aren’t enforced, oversight body – to who and how frequently do they they’re just no good,” he told Commission staff.43 report.”39 The state also could consider rethinking the makeup of the bond oversight committee members, which was established when the Legislature created the requirement for the committees in 2000. Others suggested the district provide a modest budget for the Citizens’ Bond Oversight Committee to ensure they have the capacity for independent assistance when needed. According to Mr. Marinovich, there are times when issues may arise requiring independent counsel, for example, if there is a dispute over whether a particular expenditure was authorized by the voters.40 Additionally, Mr. Keeley said that local CBOCs could benefit from an online presence so that the public can access information. Agendas and reports should be posted online, he said. Finally, even when a district is found out of compliance Little Hoover Commission | 19 Borrowed Money: Opportunities for Stronger Bond Oversight 2017 Recommendations for Local Bond Recommendation 7: The Governor and Legislature should update and overhaul the education code related Oversight to the Strict Accountability in Local School Construction Bonds Act of 2000. Specifically, In its update of its 2009 bond oversight study, the Commission heard testimony and recommendations focusing both on improving the bond issuance ▪ Amend statutory code on performance audits process and improving local oversight, particularly to include the effectiveness and results of the in bolstering the effectiveness of local Citizens’ Bond bond program. Oversight Committees as previously recommended by the Commission. Based on the testimony and written ▪ Expand the role of Citizens’ Bond Oversight comments received, the Commission expands on and Committees in selecting and interacting with refines its prior recommendations for improving local bond program auditors. bond oversight. ▪ Require bond measures proposed to voters Recommendation 3: The California Debt and Investment under the reduced threshold to include specific Advisory Committee is encouraged to expedite the project lists. development of training materials for locally-elected officials on bond issuance. Specifically, in addition to ▪ Change the appointment authority for members webinars, online training and other written materials, this of Citizens’ Bond Oversight Committees. should include a one- or two-page guide for local officials including key questions that should be answered by staff ▪ Require districts to provide a minimal budget and consultants on the terms of any bond authorization, for the oversight committees, including a including total cost of the bond, including interest and budget to hire independent counsel with fees and the effect of a bond issuance on debt ratio. municipal bond expertise. Recommendation 4: Policymakers should enact ▪ Require districts to provide a Web presence legislation requiring a truth in bonding statement for Citizens’ Bond Oversight Committees to be provided for review by elected officials prior to prominently display meeting agendas and authorizing a bond issuance. reports. Recommendation 5: Policymakers should enact legislation requiring the county treasurer to review Recommendation 8: Impose sanctions for school and comment on bond issuance proposals prior to and community college districts that fail to adhere authorization. The county treasurer also should advise to constitutional and statutory requirements of policymakers on maintaining a prudent debt ratio. Proposition 39, including preventing the district from adopting future bond measures under the reduced voter Recommendation 6: Develop easy-to-access online threshold. training materials for members of Citizens’ Bond Oversight Committees. Specifically, the Governor and Legislature should direct and authorize one-time funding to the Fiscal Crisis and Management Assistance Team to develop online training for local Citizens’ Bond Oversight Committee members, with input and assistance from the California Debt and Investment Advisory Committee and the California League of Bond Oversight Committees. 20 | www.lhc.ca.gov Appendices Appendices Appendix A Public Hearing Witnesses September 22, 2016 Sacramento, California Bryan Cash, Deputy Assistant Secretary, California Nick Marinovich, Chair, Sweetwater Union High School Natural Resources Agency District Bond Oversight Committee Fred Keeley, Former Speaker Pro Tempore, California Tim Schaefer, Deputy Treasurer for Public Finance, State Assembly, and Co-Chair, Task Force on Bond State Treasurer’s Office Accountability Michael Turnipseed, President, California League of Jay Goldstone, Managing Director, Public Finance, Bond Oversight Committees MUFG Americas, and Co-Chair, Task Force on Bond Accountability Anton Jungherr, Member and Secretary, West Contra Costa Unified School District’s Citizens’ Bond Oversight Committee, and Co-Founder, California League of Bond Oversight Committees Little Hoover Commission | 21 Borrowed Money: Opportunities for Stronger Bond Oversight Appendix B Cover Photo Credits Photos: Courtesy of Florence Low and the California Department of Water Resources. http://pixel-ca-dwr.photoshelter.com/index. Accessed on February 9, 2017. Also, courtesy of the California-High Speed Rail Authority. http://www.hsr.ca.gov/Newsroom/Multimedia/images.html. Accessed on February 9, 2017. 22 www.lhc.ca.gov Notes Notes 10 Department of Finance. August Commission. 2016. “Final Report: Department of 1 Michael Coleman, Principal, General Services, Office of Public School 20 Los Angeles County Grand Jury. CaliforniaCityFinance.com. December Construction’s Proposition 1D Audit.” July 2016. “Capital Appreciation 10, 2016. “Local Revenue Measure http://www.dof.ca.gov/Programs/OSAE/ Bonds and Other School Bond Debt: Results November 2016.” Also, July 5, Audit_Memos/documents/WEBDepar Consequences of Poor Financial 2016. “Local Tax and Bond Measure tmentofGeneralServicesOfficeofPublic Practices.” Results, California, June 2016.” www. SchoolConstructionsProposition1DBon 21 Mark Fulmer, Retired Deputy californiacityfinance.com. Website dFundAudit-BA.pdf. Website accessed Superintendent, Office of the Kern accessed December 30, 2016. January 3, 2017. County Superintendent of Schools. 2 California State Treasurer’s Office. 11 Department of Finance. Refer to September 8, 2016. Personal 2016. “California Bonds 101: A endnote 10. and written communication with Citizen’s Guide to General Obligation Commission staff. Bonds.” http://www.treasurer.ca.gov/ 12 California Secretary of State. publications/bonds101.pdf. Website “Statement of Vote: November 8, 2016 22 Fred Keeley, Former Speaker Pro accessed December 27, 2016. General Election.” http://elections.cdn. Tempore, California State Assembly, sos.ca.gov/sov/2016-general/sov/2016- and Co-Chair, Task Force on Bond 3 Michael Coleman. Refer to endnote 1. complete-sov.pdf. Website accessed Accountability. September 22, 2016. January 3, 2017. Testimony to the Commission 4 Jay M. Goldstone. Managing Director, Public Finance, MUFG 13 Governor Edmund G. Brown Jr. 23 Michael Turnipseed, President, Americas, and Co-Chair, Task Force January 10, 2017. “2017-18 Governor’s California League of Bond Oversight on Bond Accountability. September Budget Summary.” Committees. September 22, 2016. 22, 2016. Written testimony to the Written testimony to the Commission. Commission. 14 Tim Schaefer, Deputy Treasurer of Public Finance, State Treasurer’s Office. 24 Fred Keeley. Refer to endote 22. 5 California State Treasurer’s Office. September 22, 2016. Testimony to the 25 Jay M. Goldstone. Refer to Refer to endnote 2. (2016 debt service). Commission. endnote 4. Legislative Analyst’s Office. August 2015. “State of California Expenditures, 15 Tim Schaefer. Refer to endnote 14. 26 Jay M. Goldstone. Refer to 1984-85 to 2015-16. (1980s debt 16 Proposition 51. School Bond. endnote 4. service data.) Funding for K-12 School and Community 27 Kevin Dayton, Policy Analyst, 6 California State Treasurer’s Office. College Facilities. California General California Policy Center. July 2015. October 2016. “Strong Investor Election November 8, 2016 . “Official “For the Kids: California Voters Must Demand for California Tax-Exempt Voter Guide.” http://voterguide.sos. Become Wary of Borrowing Billions Bonds – Debt Affordability Report.” ca.gov/en/propositions/51/. Website More From Wealthy Investors for Pages 15-17. accessed December 27, 2016. Educational Construction.” (From 7 California State Treasurer’s Office. 17 Anton Jungherr, Member and 2001 to 2014, California voters Refer to endnote 2. Secretary, West Contra Costa Unified have considered 1,147 ballot School District’s Citizens’ Bond measures proposed by K-12 school 8 California State Auditor. Oversight Committee, and Co-Founder, and community college districts for February 26, 2009. “High-Risk California League of Bond Oversight construction and renovation projects. Update – Maintaining and Improving Committees. September 22, 2016. Voters approved 911 or nearly 80 Infrastructure. State Agencies Have Testimony to the Commission. percent of these measures authorizing Established Controls That, if Followed, approximately $110 billion for these Should Provide Reasonable Assurance 18 California State Treasurer. http:// local bonds.) Also, Michael Coleman, that Infrastructure Bond Proceeds are debtwatch.treasurer.ca.gov/ Website Principal, CaliforniaCityFinance.com. Used as Intended.” accessed January 3, 2017. July 5, 2016. “Local Tax and Bond Measure Results California June 2016.” 9 Adrian Moore, Vice President of 19 Richard Michael, California School Also, December 10, 2016. “Local Research, Reason Foundation. October Bond Clearinghouse Project. September Revenue Measure Results November 23, 2008. Testimony to the Commission. 6, 2016. Written comments to the 2016.” www.californiacityfinance.com. Little Hoover Commission | 23 Borrowed Money: Opportunities for Stronger Bond Oversight Website accessed January 5, 2017. 39 Fred Keeley. Refer to endnote 22. (Data on 2016 bond measures is from the CaliforniaCityFinance website.) 40 Nick Marinovich. Refer to endnote 30. 28 Michael Coleman, Principal, CaliforniaCityFinance.com. July 5, 41 California Education Code 15284. 2016. “Local Tax and Bond Measure 42 California Education Code 15288. Results California June 2016.” Also, December 10, 2016. “Local Revenue 43 Richard G. Urban. September 7, Measure Results November 2016.” 2016. Personal communication with www.californiacityfinance.com. Website Commission staff and written testimony accessed January 5, 2017. to the Commission. 29 Dennis Clay, Fiscal/Project Account Analyst, West Contra Costa Unified School District. September 22, 2016. Public comments and written testimony to the Commission. 30 Nick Marinovich, Chair, Sweetwater Union High School District Bond Oversight Committee. September 22, 2016. Written testimony to the Commission. 31 Ivette Ricco, Former Member and Chair of the West Contra Costa County Unified School District’s Citizens’ Bond Oversight Committee, 2010-2016. August 24, 2016. Written testimony to the Commission. 32 Ivette Ricco. Refer to endnote 31. 33 Nick Marinovich, Chair, Sweetwater Union High School District Bond Oversight Committee. September 22, 2016. Testimony to the Commission. 34 Michael Turnipseed. Refer to endnote 23. 35 California Education Code 41020 (f)(2). 36 Lori Raineri, President, Government Financial Strategies. February 2, 2017. Written communication. 37 Nick Marinovich. Refer to endnote 30. 38 Anton Jungherr. Refer to endnote 17. 24 | www.lhc.ca.gov Little Hoover Commission Members Chairman Pedro Nava (D-Santa Barbara) Appointed to the Commission by former Speaker of the Assembly John Pérez in April 2013. Government relations consultant. Former state Assemblymember from 2004 to 2010. Former civil litigator, deputy district attorney and member of the state Coastal Commission. Elected chair of the Commission in March 2014. Vice Chairman Jack Flanigan (R-Granite Bay) Appointed to the Commission by Governor Edmund G. Brown Jr. in April 2012. A member of the Flanigan Law Firm. Co-founded California Strategies, a public affairs consulting firm, in 1997. Scott Barnett (R-San Diego) Appointed to the Commission by former Speaker of the Assembly Toni Atkins in February 2016. Founder of Scott Barnett LLC, a public advocacy company, whose clients include local non- profits, public charter schools, organized labor and local businesses. Former member of Del Mar City Council and San Diego Unified School District Board of Trustees. David Beier (D-San Francisco) Appointed to the Commission by Governor Edmund G. Brown Jr. in June 2014. Managing director of Bay City Capital. Former senior officer of Genentech and Amgen. Former counsel to the U.S. House of Representatives Committee on the Judiciary. Serves on the board of directors for the Constitution Project. Senator Anthony Cannella (R-Ceres) Appointed to the Commission by the Senate Rules Committee in January 2014. Elected in November 2010 and re-elected in 2014 to represent the 12th Senate District. Represents Merced and San Benito counties and a portion of Fresno, Madera, Monterey and Stanislaus counties. Assemblymember Chad Mayes (R-Yucca Valley) Appointed to the Commission by former Speaker of the Assembly Toni Atkins in September 2015. Elected in November 2014 to represent the 42nd Assembly District. Represents Beaumont, Hemet, La Quinta, Palm Desert, Palm Springs, San Jacinto, Twentynine Palms, Yucaipa, Yucca Valley and surrounding areas. Don Perata (D-Orinda) Appointed to the Commission in February 2014 and reappointed in January 2015 by the Senate Rules Committee. Political consultant. Former president pro tempore of the state Senate, from 2004 to 2008. Former Assemblymember, Alameda County supervisor and high school teacher. Assemblymember Sebastian Ridley-Thomas (D-Los Angeles) Appointed to the Commission by former Speaker of the Assembly Toni Atkins in January 2015. Elected in December 2013 and re-elected in 2014 to represent the 54th Assembly District. Represents Century City, Culver City, Westwood, Mar Vista, Palms, Baldwin Hills, Windsor Hills, Ladera Heights, View Park, Crenshaw, Leimert Park, Mid City, and West Los Angeles. Senator Richard Roth (D-Riverside) Appointed to the Commission by the Senate Rules Committee in February 2013. Elected in November 2012 to represent the 31st Senate District. Represents Corona, Coronita, Eastvale, El Cerrito, Highgrove, Home Gardens, Jurupa Valley, March Air Reserve Base, Mead Valley, Moreno Valley, Norco, Perris and Riverside. Jonathan Shapiro (D-Beverly Hills) Appointed to the Commission in April 2010 and reappointed in January 2014 by the Senate Rules Committee. Writer and producer for Amazon Studios, FX, HBO and Warner Brothers. Former counsel to Kirkland & Ellis LLP, chief of staff to Lt. Governor Cruz Bustamante, counsel for the law firm of O’Melveny & Myers LLP, federal prosecutor for the U.S. Department of Justice Criminal Division in Washington, D.C., and the Central District of California. Janna Sidley (D-Los Angeles) Appointed to the Little Hoover Commission by Governor Edmund Brown Jr. in April 2016. General counsel at the Port of Los Angeles since 2013. Former deputy city attorney at the Los Angeles City Attorney’s Office from 2003 to 2013. Helen Torres (NPP-San Bernardino) Appointed to the Little Hoover Commission by Governor Edmund Brown Jr. in April 2016. Executive director of Hispanas Organized for Political Equality (HOPE), a women’s leadership and advocacy organization. Sean Varner (R-Riverside) Appointed to the Little Hoover Commission by Governor Edmund Brown Jr. in April 2016. Managing partner at Varner & Brandt LLP where he practices as a transactional attorney focusing on mergers and acquisitions, finance, real estate and general counsel work. Full biographies available on the Commission’s website at www.lhc.ca.gov. “Democracy itself is a process of change, and satisfaction and complacency are enemies of good government.” Governor Edmund G. “Pat” Brown, addressing the inaugural meeting of the Little Hoover Commission, April 24, 1962, Sacramento, California