VOL. 17 ISSUE NO. 24   |   JUNE 15 – 21, 2011


Special laws for individual school districts under fire

‘Reportedly, the district will return to voters in the fall of 2011 to seek a special 15 percent operating override’

PHOENIX – Apparently Sen. Nancy Barto, R-Dist. 7, is not the only legislator under fire for coming up with special laws that apply to a small and finite number of school districts, contrary to the Arizona Constitution.

rich crandallSen. Rich Crandall (l), R-Dist. 19, appears to be joining Barto on the hot seat, this time over the provisions of SB 1263, which he sponsored to allow school districts to temporarily increase their class B bonding capacity limits but only for bonds approved by voters prior to April 2011.

Crandall was previously dubbed one of the “Sanctuary Six,” when he was a member of the House, for walking out with then Rep. Barto and four others to defeat a bill that would have prohibited sanctuary cities for illegal aliens. 

SB 1263 allows common school or union high school districts to raise their bonding capacity from 5 percent to 10 percent of the net assessed value (NAV) and from 10 percent to 20 percent of NAV for unified school districts.

Because of plummeting home values, some school districts, like homeowners that are underwater on their mortgages, have found themselves to be over their bonding capacity limit.

The bill also prohibits a school district from issuing any new class B bonds approved after April 15, 2011 until that district’s indebtedness falls under statutory limits.

The law firm Gust Rosenfeld has asked Arizona Attorney General Tom Horne for an opinion on the law’s constitutionality, as it only benefits a few districts, much like Barto’s law, which appears to benefit only CCUSD.

The law firm indicated it would prefer to see a ruling from the Arizona Supreme Court on the law’s constitutionality before it will validate the sale of bonds under the new law.

In April, the Goldwater Institute filed a complaint against the Cave Creek Unified School District on behalf of district taxpayers, challenging the constitutionality of a floor amendment to the omnibus budget bill sponsored by then Rep. Barto, which effectively allows a minimum of three CCUSD school board members to circumvent the will of the voters by voting to use bond proceeds for projects other than those enumerated in the November 2000 voter information pamphlet.

The board issued bonds in 2006 just before they would have expired, for the purpose of building a new high school. However, the district never built a high school with the bond proceeds.

As time went on it became clear the district had no intention of building a second high school.

Two board members, David Schaefer and Mark Warren, acting as legislative liaisons for the district, convinced Barto to introduce legislation that would permit CCUSD to use the bond proceeds for other projects.

The verbiage in the bill was so specific it most likely only applies to CCUSD, which is in violation of IRS regulations that require projects to be substantially completed within three years of the bonds being issued.

In fact, the district was also required to have signed contracts for the approved projects within six months of issuing the bonds.

CCUSD complied with neither rule.

After four years, the district still had no plans to build a new high school, but couldn’t legally use the money for anything else.

And, since issuing the bonds in 2006, taxpayers have been saddled with paying the equivalent of approximately $50,000 per month in interest alone on money that is not being used for any legitimate purpose. And, rather than using the funds to pay down its debt, as required, the district used Barto to write a law that would do away with the district’s obligations to its taxpayers.

In September 2010, Fitch Ratings, the global rating agency that provides credit markets with independent and prospective credit opinions, research and data, which previously rated CCUSD as having a “negative outlook,” revised the district’s outlook to “stable,” while affirming approximately $21 million in school improvement and refunding bonds affirmed at “AA.”

Fitch stated its revision in outlook was based on the “favorable resolution of the district’s capital needs and restoration of reserves to satisfactory levels despite recent state and local revenue declines; management anticipates maintaining comparable reserves in fiscal 2011 as recently proposed tax overrides denied by voters have been addressed with necessary budget cuts.”

The key rating driver: “The district's ability to maintain comparable reserve levels and fiscal balance in light of enrollment trends and a tax averse electorate is integral to maintaining credit quality.”

In its credit summary of the district, Fitch notes: “Capital plans for the district's high school facility needs were initially delayed due to the state's recent budget woes and resulting cuts in state support for facilities. Subsequently, the district was unable to obtain further support from its voters for additional capital funding needs. (Voters had previously approved a $41.6 million bond authorization in 2000 for new facilities that included a second high school and anticipated a certain level of state funding). Most recently, however, the district was informed it will receive approximately $6.4 million in state School Facilities Board funding for new classrooms at the existing high school. In addition, recent legislation was passed that will permit the district to utilize the bond monies originally designated for a second high school for various capital improvements district-wide. Fitch believes these measures will favorably resolve the district's capital needs for the near term as management reports existing facilities after the high school expansion should provide adequate capacity over the next five or more years based on projected enrollment trends.”

What’s interesting, considering the Fitch report was issued in September 2010, it states, “Reportedly, the district will return to voters in the fall of 2011 to seek a special 15 percent operating override (now allowed by state law), that, if approved, would restart both of the operating overrides.”

The possibility of an override wasn’t on a CCUSD agenda for discussion until late last month when it was approved by the board.

So, for bonding purposes, Fitch likes to see a school district with good capital reserves, which, by statute, may not exceed 4 percent.

CCUSD’s 2009 audit results reflected an unreserved general fund surplus of $1.1 million, or 3.5 percent, which Fitch stated was “much improved over the modestly negative unreserved fund balance positions recorded in fiscal 2006 and 2008.”

Taxpayers view those “reserves” as surpluses and are generally not inclined to tax themselves solely for the purpose of providing the district with a good bond rating and improved “Outlook.”

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