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React & Act: What are bonds, and how do schools use them?

In addition to private donations, research grants and student fees, bonds make up a large portion of funding for construction projects at the University of California, California State University and community college campuses. A variety of bonds are being used to pay for these projects, representing money that must be repaid in equally diverse ways.

In “Public universities plow ahead with construction despite tight budgets,” reporter Jon Marcus writes about bond-funded construction sprouting up on campuses across the state and the general confusion surrounding bond money.

“People discuss bond money as if it’s free money that isn’t coming out of the taxpayers’ pockets, and that’s exactly where it is coming from,” David Kline, spokesman for the California Taxpayers Association, says in the article.

To help ease that confusion, we’ve created a quick explainer.

What are municipal bonds?

Bonds are promises by a government to repay a certain amount of money at a certain date, plus periodic payments of interest. The term municipal bond is used to refer to those issued by state and local governments, including counties, school districts and redevelopment agencies. (Learn more about the end of redevelopment agencies here.) Municipal bonds usually are sold to cover construction costs or fund other similar long-term projects. They typically are tax-exempt, as are the payments of interest.

Municipalities can sell general obligation or revenue bonds. Revenue bonds are repaid and backed by money generated by the projects they fund, such as bridges or toll roads. General obligation bonds often can be paid for out of a government’s general fund and are backed by the ability of a government to tax its citizens.

What state bonds are being used to fund construction?

In 2006, California voters approved Proposition 1D, which directed $3.1 billion to higher education as part of a $10.4 billion issue of general obligation bonds to fund public education. These bonds represent a debt incurred by the state, and the cost of that debt depends on both the interest rate of the bonds at the time they were sold and the time period for repayment. The Legislative Analyst’s Office calculated in 2006 that the state would likely make principal and interest payments over a period of 30 years. At an average interest rate of 5 percent, the total cost to the state would be $20.3 billion.

Because these are general obligation bonds, the state can pay down this debt with tax revenue.

Under the issue, $1.5 billion was allocated to community college districts, $890 million to the UC system and $690 million to the CSU system. According to the state’s bond accountability website, there is only a small portion of this money that has not already been committed to construction and renovation projects. A little less than a quarter of UC’s allocation is being used for the system’s medical centers. The governor and state Legislature select which projects receive this money.

In 2011, the state audited the use of this bond money in the UC and CSU systems. Both were found in compliance with legal requirements and the established criteria for using the funding.

What bonds has the UC system issued?

Under the Build America Bonds program of the federal American Recovery and Reinvestment Act, UC was able to issue more than $1 billion of federally subsidized municipal bonds. These bonds are taxable. They also came with a higher interest rate, but because 35 percent of the total interest costs are being paid for by the federal government, this money must be repaid by the universities themselves. UC has said it already has identified sources of repayment, and many projects that will be funded by these bonds will generate revenue.

The system also issued $325 million in tax-exempt bonds on its own.

Are there any other bonds being used to fund construction?

Community college districts can issue their own bonds to fund construction, with voter approval. School bonds need at least 55 percent voter approval when on the ballot ina regularly scheduled election. Like the state bonds, costs to the system depend on the face value, life span and interest rate of the bonds.

Filed under: Higher Ed, Money & Politics

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