The Bottom Line

The road to the real world.

By Roni Lifshitz  Ha'afetz 10/18/00

A great story was written yesterday on the Israeli financial press. But it wasn't written in Israel. It appeared in the Internet version of the U.S.-based Forbes magazine. Yesterday morning, the Web site posted a report about an enormous deal in which Marvell of California is buying out the Israeli Galileo for $2.7 billion. The share movements of the two parties after the fact altered the value of the deal, but not the information written by Forbes and distributed around the globe by the news Web site of Yahoo!

"Hours before a cease-fire was announced in the Middle East," wrote Forbes, "Israelis had other good news as Marvell Technology Group... bought its Israeli rival and recent partner Galileo Technologies for $2.7 billion in shares. The deal provides further confirmation of Israel's status as a worldwide technology power," continued the site. In Israel, the deal is being studied avidly. Not because of doubts about any special synergy in the deal, or the phenomenal success of Marvell. But because during the past few weeks, Israeli industry has been quite depressed. The fall of the technology stocks on Nasdaq in the past month, together with the shock that gripped Israeli society following the riotous violence by the Palestinians, created in many the feeling that the high-tech sector had reached the end of its road.

"Foreign investors caught a cold," wrote Ha'aretz this week. Many have certainly got cold feet over Israel, but does this mean it's all over for the local industry? "The situation in Israel did not influence our decision," said Sehat Sutardja, the president and CEO of Marvell, yesterday. "This highly complementary merger combines two best-of-breed technology companies. The transaction is a win-win for customers and shareholders alike."

Don't forget the Israeli tendency to pass swiftly from ecstasy to severe depression in a matter of moments. The Israeli high tech field began its journey in times of war. Only seven years ago, Israel had to cope with the Arab boycott. Then the investors were not only distant. They were nonexistent. It is hard to believe that today, with the Arab boycott over and a general war a fanciful possibility, that investors and customers have disappeared as if the earth swallowed them whole.

In a sense, this is a real test. If other players in the Israeli industrial scene can prove that they can grow and conduct business deals, even when the territories are tense and many investors have grown cold, then we will know that Israeli high tech is a stable and deep-rooted part of society. Many companies that will be hurt and hurt badly, may discover that the foreign capital that flowed their way served only to cover their weaknesses.

And here's something to think about: Forbes was the only financial paper that mentioned the unrest in Israel in its introduction to the deal. In other publications, only the pure economics of the merger were reported. In the business world, it seems that despite the sensitivity, high tech is first and foremost industry, and not politics



Chapter 5

New School Facilities

Even before the passage of Proposition 13 in 1978, school budgets were largely determined by the state in compliance with the California Supreme Court's decision in Serrano v. Priest (1976) 18 C.3d 728. In that landmark case the court held that the California public school financing scheme violated constitutional equal protection guarantees by basing the availability of school revenues upon district wealth. The aftermath of the Serrano decision was state equalization of each district's allowable revenue limit and apportionment of state aid funds as the difference between that revenue limit and the district's proportional share of the county's local property tax revenues. Districts which receive a relatively greater share as a result of property tax revenues receive less money from the state.

Nonetheless, prior to Proposition 13 schools traditionally relied upon property taxes as a major revenue source. Proposition 13 affected schools by reducing this local income and making them more dependent upon state funding. Impact fee legislation passed in the early 1980's to fund interim school facilities provided some relief, but required the cooperation of affected cities and counties in levying a fee (revenue would be collected by the city or county and then transferred to the district). The 1984 California State Lottery Act provided schools with a new income source. However, lottery funds cannot be used for capital improvements such as school buildings (Government Code section 8880).

Today, squeezed between reduced property tax derived income and increased population, schools are employing several alternatives for funding new school construction. The following methods give school districts some measure of local control over financing.



Developer Fees

Unlike cities and counties, school districts do not have independent police power authority to impose development fees. Their authority to impose this kind of fee derives solely from Government Code section 53080 (note: in 1998, this section will be recodified as Education Code section 17620, pursuant to SB 1562 of 1996) and is subject to the limits discussed below (California Building Industry Association v. Newhall School District, etc. et al. (1988) 206 Cal.App.3d 212).

In 1986, the State Legislature approved AB 2926 (Chap. 887) which authorized school districts to levy development fees and at the same time placed a cap on the total amount of fees that could be levied. This method of financing new facilities immediately came into widespread use. In brief, it enables school districts to directly impose developer fees to pay for new school construction (Government Code section 53080). It also establishes that the maximum fees (adjustable for inflation) which may be collected under this and any other school fee authorization are $1.50/square foot of residential development and $0.25/square foot of commercial and industrial space (Government Code section 65995).

Legislative actions since 1986 have alternatively expanded and contracted the limits placed on school fees by AB 2926. In addition, AB 1600 of 1987 (discussed in Chapter II) has established a requirement that there be a nexus between school fees and the impacts created by new development. The current state of school exactions is summarized in the following paragraphs.

School districts may only impose fees, charges and dedications upon new industrial or commercial and new or other residential development as follows:

The study must include employee generation estimates that are made by the district or based on the January 1990 edition of "San Diego Traffic Generators," a report of the San Diego Association of Governments. (Government Code sections 53080.1) Similar requirements were discussed in Balch Enterprises v. New Haven Unified School District (1990) 219 Cal.App.3d 783 which overturned commercial and industrial development fees imposed by a school district in Hayward and Union City.

If fees are charged, the district must also provide the opportunity to appeal those fees on an individual basis. The party making the appeal carries the burden of proving that the fee was improper (Government Code section 53080.1).

A resolution imposing development exactions takes effect 60 days after its passage. The statute allows a school board, upon four-fifths vote of its membership, to pass an urgency resolution imposing the exaction immediately. Any party upon which an exaction is imposed may protest or appeal the exaction. (Government Code section 53080.1).

The School Facilities Act (Government Code section 65970) provides a means for overcrowded school districts to receive fees for interim school facilities necessitated by new residential development. Such districts, upon making written findings of overcrowding and establishing a schedule of fees to pay for the interim facilities, must request that the local city council or board of supervisors adopt an ordinance imposing such fees. Fees are collected by the local government, placed in a separate account for the school district, and disbursed to the district each year.

The Schools Facilities Act differs from AB 2926 in that the district must be deemed overcrowded by the local school board in order for exactions to be levied. Further, the fee is always levied and collected by the local city or county on behalf of the school district (and upon the district's request). Previously, fees collected under the School Facilities Act could only be used for interim facilities. However, new law now enables a school district board that receives fees collected under a local regulation in existence on September 1, 1986 to use those funds for any "construction or reconstruction" allowable under section 53080, provided that the board first holds a public hearing on the subject of the proposed expenditure (Government Code section 65974.5).

AB 2926, on the other hand, is not restricted to overcrowded districts, the resulting funds may be used for either interim or permanent facilities, and fees are imposed directly by the school district. Because AB 2926 allows for the funding of permanent facilities, it has generally supplanted the use of the School Facilities Act.

School fees are subject to certain additional statutory restrictions:


Mello-Roos Act

The Mello-Roos Community Facilities District Act (Government Code section 53311 et seq.) allows financing districts to be established to fund school construction. The owners of land within the boundaries of a Mello-Roos Community Facilities District (CFD) are assessed a special tax to finance specific improvements within that district. Mello-Roos special taxes must be approved by 2/3 of the voters within the proposed CFD or, when the district has fewer than 12 property owners, by majority vote of the owners. Property owner elections may be held by mailed ballot, when approved by the county registrar of voters. The Rocklin Unified School District used this method in February 1989 when it created a 4454-acre Mello-Roos district to fund school construction in a rural area slated for rapid development. This taxing district will help finance six new K-6 schools and cost the eventual homeowners up to $400 per year. Proceeds from a Mello-Roos tax can be used to directly fund improvements such as new schools and also, if bonds have been issued, pay debt service on those bonds.

Mello-Roos financing affects the matching funds available from the State for school construction under the Leroy F. Greene State School Building Lease-Purchase Law of 1976. Under certain conditions, the amount of matching funds that the local school district must put up will be reduced by the amount of funding received as a result of CFD special taxes (Education Code section 17705.6). In effect, the funding provided by the CFD is counted toward the local matching share.

One advantage of the Mello-Roos Act over other sorts of financing is that it allows a school district to establish a financing district that does not include all the land within the boundaries of the school district. This means that newly developing areas, where demand for additional school facilities is greatest, can be isolated from those parts of the district in which facilities are adequate or where demand is otherwise low.

The Elk Grove Unified School District in Sacramento County made good use of this aspect of the Mello-Roos Act when faced with neighborhood opposition to its proposed special tax and school bonds. After its first attempt at forming a Mello-Roos CFD failed narrowly, the Elk Grove USD redrew the boundaries of the proposed financing district to eliminate mobilehome parks where citizens tended to be elderly and generally in opposition to the special tax. On its second attempt, the Mello-Roos district and its maximum bond issue limit of $70,000,000 were successfully ratified. The proceeds of the CFD will be used in conjunction with developer fees and state funds to meet the district's planned facility needs.

As of the end of 1988, the following were among the school districts using Mello-Roos financing:

By the end of 1988, approximately $175 million worth of Mello-Roos bonds had been issued to finance school construction or for other educational uses. Of this total, approximately $85 million worth were sold in 1988 alone.



General Obligation Bonds

As a result of the passage of Proposition 46 in 1986, cities, counties, and school districts are again empowered to issue general obligation (G.O.) bonds to finance land acquisition and capital improvements, subject to voter approval. G.O. bonds are repaid with the revenues from increased property taxes (authorized by local voters as part of the G.O. bond measure). Approval by two-thirds of the voters within the school district is required for passage of a G.O. bond measure.

Statewide, the rate of passage for G.O. bond issues has averaged about 50%. The success rate was substantially higher in the first half of 1997. The amount of money being raised by bonds is considerable. Some $327 million worth of school bonds were approved in five Los Angeles basin districts in the June 1997 election alone.



Special Taxes

School districts may impose special taxes in the same manner as counties and cities, provided that the tax applies uniformly to all taxpayers or all real property within the district. This rule of uniformity contains an exception allowing taxpayers 65 years of age or older to be exempted from this kind of special tax. Under the provisions of Government Code section 50079, "qualified special taxes" (also called parcel taxes) may only be imposed when 2/3 of the school district's voters approve the school board's specific proposal for such a tax.

Proposition 218 has defined school districts as "special districts" for purposes of defining the type of taxes which a school district may impose and the voting requirements for those taxes. Under Article XIIIC of the California Constitution, a school district "shall have no power to levy general taxes." Taxes imposed by a school district, even if placed into the general fund of that district, are considered "special taxes" and cannot be imposed, extended or increased without approval of 2/3 of the district's voters.

According to information compiled by the School Service of California and Cal-Tax, 63 special tax elections for schools were held during the period between 1983 and April of 1988 with one-in-three being approved. Taxes proposed since that time have fared similarly

California Building Industry Association v. Newhall School District (1988) 206 Cal.App.3d 212 illustrates how careful school districts must be when creating a special tax. In overturning alleged special taxes in five Santa Clarita Valley school districts the Court of Appeal concluded that they were not special taxes because: (1) they applied solely to developers rather than uniformly to all taxpayers or landowners in the district; (2) they could be characterized as a development fee because they did not exceed the cost of contemplated school facilities and were imposed solely on those who were seeking to develop land; and, (3) at that time, school districts had no specific legislative authorization to levy special taxes (this has since been rectified by Government Code section 50079). Furthermore, the court held that because the exaction exceeded the limits imposed on development fees by Government Code section 65995, it was not valid as a development fee either.

Grupe Development Co. v. Superior Court (1993) 4 Cal.4th 911 is a recent court case which rules out the use of special taxes in districts which have levied full developer fees. In overturning a special tax levied by the Chino Unified School District, the state Supreme Court concluded that Government Code Section 65995 preempts all school district authority to levy special taxes for school construction if such taxes would cause the district to exceed the fee cap stipulated in the code, even though special taxes except for Mello-Roos taxesare not explicitly mentioned in the code. This decision was based on the language of section 65995 which placed a cap on fees of $1.50 per square foot of accessible space in residential dwellings. While exempting Mello-Roos taxes from this limit, the court concluded that as a matter of statutory construction, the explicit exemption of Mello-Roos special taxes indicated that the cap applied to all other special taxes. The court held that the intent of the legislature was to strike a balance between the need for adequate school facilities and affordable housing. The court said that "It would manifestly upset that balance to construe section 65995 to allow school districts to collect - as the District does here - special taxes to offset development costs in addition to the maximum amount authorized" under the code.


Special Assessments

In recent years, there has been a debate over whether a school district may impose assessments under the Landscaping and Lighting Act of 1972 for the maintenance of school yards. School districts have argued that they should be able to utilize the Act because they may be considered "special districts" for purposes of the Act and because they are authorized to undertake the sorts of improvements and carry out maintenance which the Act could finance. Further, they are statutorily authorized to make their facilities and grounds available for public use as civic centers and thereby offer a benefit to surrounding properties. Others have contended that the Act was not intended to apply to schools and in the absence of explicit reference, school districts should not be considered special districts under the Act.

The California Second District Court of Appeal rendered an opinion in May 1993 affirming the ability of two Southern California school districts to levy assessments to pay for the maintenance of school auditoriums, meeting rooms, gyms, stadiums, recreation and civic centers for the surrounding community (Howard Jarvis Taxpayers Association v. Whittier Union School District (1993) 15 Cal.App.4th 730). The court held that a school district is a special district for purposes of the 1972 Act. In addition, the levy of this special assessment by the districts does not violate the Serrano principle that limits the imposition of ad valorum property taxes that would make the quality of educational opportunity dependent upon the wealth of the school district's property owners. The assessment is not based on property value, but rather on the relative degree of benefit which a parcel derives from the community facilities provided by the school.

In this case, the assessments were not levied for educational purposes (which was not approved by the court), but to finance recreational improvements to benefit the community. The districts demonstrated this by limiting their assessments to that portion of the total facility use that could be attributed to community activities.

This case does not offer carte blanche to school districts for the use of the Landscaping and Lighting Act. It does illustrate that a carefully designed assessment, limited strictly to financing those community facilities which the school provides, may offer an alternative financing method.

These assessments are subject to the voting requirements and are limited by Proposition 218 to properties which can be shown to derive a "special benefit" from the assessment (see Chapter III). Proposition 218 raises a substantial hurdle before districts that wish to use the Landscaping and Lighting Act.

Next: Chapter 6: Leasing

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