New School Facilities Improvement Districts Offer the Best Features of a Mello-Roos and a General Obligation Bond

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School Services of California, Inc.
Community College Update
October 17, 1996
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New School Facilities Improvement
Districts Offer the Best Features of a Mello-Roos
and a General Obligation Bond

If you are weary of having every general obligation bond defeated by a small minority of voters in your district, or you are frustrated in attempts to raise sufficient capital through Mello-Roos districts, then school facility improvement districts (SFIDs) (authorized by SB 1544, Chapter 1072/1996 and effective January 1, 1997) may well offer you a cure.

What is a SFID?

SFIDs permit K-12 schools and community college districts to designate areas for general obligation bond levies by including any portion or portions of the district's territory. For example, a SFID area might include the housing development areas that need new schools or the urban center that needs facilities modernization. SFIDs may even be used to carve out voter populations that typically vote "no" to school bonds, such as senior citizen developments.

According to both Lori Raineri, President, and Paul Raineri, Vice President, of Governmental Financial Strategies, Inc., passage of this new law is of major importance to school agencies. Previously, Mello-Roos districts were the only vehicle for reducing assessment areas to less than the districtwide territory. While Mello-Roos districts remain a viable option, there is one major drawback in that a Mello-Roos levy may not be based on assessed valuation. Thus, most Mello-Roos districts utilize measurements such as square footage or an amount per parcel to levy the tax. Unfortunately, these measurements do not consider the value of the property and, by presumption, the property owner's willingness to pay the tax based on relative personal wealth.

For example, a 2,000-square-foot home with an assessed value of $300,000 would be taxed by a Mello-Roos the same as a 2,000-square-foot home with an assessed value of only $100,000. Now, with the SFID, the higher assessed valued home would be taxed more and the entire bond issue might be sized larger or at least be easier to pass on election day, particularly if there is commercial property included in the SFID.

It is interesting to note that SFIDs are not a new creature of law, but have simply taken on an expanded usage. In the past, Mello-Roos community facilities districts have been allowed to define all non-Mello-Roos areas as SFIDs, and this is still permitted. The difference is that the territory may be a portion and not necessarily all of the non-Mello-Roos area and the district need not set up a Mello-Roos district to form a SFID.

Requirements for the Establishment of SFIDs

There are, however, four requirements to be met when establishing a SFID:

A resolution must be passed by a majority vote of the county board of supervisors to permit the formation of the SFID. This requirement has the potential for major political ramifications because it gives the county board of supervisors the apparent authority to create or dissolve SFIDs, resolution by resolution, depending on the merits of each proposal. For example, if a school district or community college district wanted to tax only industrial property and this would result in a harmful effect on the local economy, then it is unlikely that the county board of supervisors would sanction such action. However, we expect the more typical reaction for non-controversial proposals is that the county board of supervisors will pass the resolution perfunctorily.
The K-12 or community college district governing board must pass a resolution that specifies the purpose of the SFID, its boundaries, an estimated cost for the facilities projects in need of the financing, and the time and place of the public hearing(s) on the matter.
The cost of financing the bond issues shall be determined by the governing board to be less than the overall cost of other school facilities financing options available to the school district, including Mello-Roos.
Limits on bonding capacity may not be exceeded as a result of the SFID.

Except for the role of the county board of supervisors, these requirements do not appear to be significant hurdles to overcome. But, unless there is further legal clarification, the county's role cannot be underestimated. School districts seeking to form SFIDs should be careful not to abuse the flexibility afforded in the new law, lest local economic interest groups mount opposition.

Projecting the Expected Tax Rate for a SFID is Problematic

Of major consideration in the defining the area to be included in the SFID is how data on property tax values will be collected neighborhood by neighborhood. Solid assessed value data is essential in order to: (1) properly size a bond issue; (2) remain in compliance with bonding capacity limits; and, (3) provide voters with a reasonably accurate tax estimate. A proposed SFID that makes the district's territory look like swiss cheese would make it very difficult to project the tax rate per $100 of assessed valuation. A county assessor should have the raw data, but it would likely take arduous and careful analysis. On the other hand, a SFID that simply carves out one area from the district total would be easier to estimate.

In either case, make certain you engage expert advisors to perform the assessed value and tax rate analysis. If the SFID bond is improperly structured, voters may end up paying more than your estimates &emdash; and school boards can be recalled over these issues.

&emdash; Christy White, CPA
[Posted 10/15/96]

[Editor's Note: SSC wishes to recognize the contribution that Lori and Paul Raineri of Governmental Financial Strategies, Inc. have provided in researching this Update article. Their independent professional analysis and review is most appreciated.]