Why DUSD Is Struggling To Pay For School Projects

DUBLIN, CA — By almost any measure, over the past five years the Dublin Unified School District has pursued an aggressive capital improvement program of expanding and modernizing existing buildings, and constructing new schools to accommodate increasing student enrollment fueled by explosive growth in the Tri-Valley.

This laundry list of projects doesn’t come cheap — and cost estimations have ballooned in recent months. The district’s current cost projections for completing its entire building program, including construction of a new middle and high school, is more than $800 million.

For months the district’s Board of Trustees had been grappling with the problem of how to pay for everything. At first glance it appeared district expansion plans might have been bigger than its pocketbook.

Already several projects have been projected to exceed their original 2019 cost estimates, most notably the new Emerald High School where completion has been pushed back one year and is now expected to cost $129 million more than budgeted. The costs for other projects, including a new middle school, have also increased.

But the full magnitude of the issue didn’t come into public focus until January when interim Superintendent Daniel Moirao revealed in a community update the district had an estimated $184 million shortfall in money needed to complete current projects.

Moirao explained that “various factors, including scope creep, supply chain disruptions, approval delays, escalations, human error, and incremental and phased construction contributed to this issue.” Moirao said his staff would make recommendations for addressing the district’s immediate needs and create a new Facilities Master Plan, hopefully by this fall.

What he didn’t explain was the fact that $290 million in Measure J General Obligation Bonds approved by voters in March 2020 couldn’t be sold without permission of state education officials the district was hoping to obtain.

Moirao also didn’t elaborate on how “human error” may have contributed to the problems. An audit on the subject is forthcoming, but a district spokesperson said mistakes were made in calculating project totals.

DUSD Board Vice President Megan Rouse said during the February meeting where the shortfalls were announced, "We're looking at these numbers and I think we're all sort of saying, 'Wow, how did we get here and what happened?"

Read: DUSD Reports At Least $184M Shortfall On School Facility Projects

Bond Debt Builds

State law prohibits districts of Dublin’s size from selling bonds with an aggregate outstanding balance greater than 2.5% of the assessed taxable value of property within its boundaries. This limitation can only be waived by the state Board of Education.

Faced with a similar situation in 2017, the district received a six-year waiver raising its debt limit to 3.1%, permitting the sale of additional bonds authorized when voters approved the $283 million Measure H bond issue the year before. At the time, the district had $318.5 million in outstanding bonds with a legal limit of $343.7 million, according to state documents.

However, the waiver did not apply to Measure J bonds. Despite the district’s assessed value jumping to $19.2 billion since the waiver was approved, with outstanding bond debt totaling some $540 million as of last October, no Measure J bonds could be sold.

District officials hope to solve this problem with a second waiver request they say is scheduled to be considered by the state Board of Education next month. This time the district is seeking a waiver of 3.39%, allowing Measure J bond sales.

DUSD Interim Assistant Superintendent of Business Services Chris Hobbs, in responding to questions submitted by Patch, said if the seven-year waiver is approved the district expects to issue $116 million in bonds during 2021, $87 million in 2023 and $87 million in 2026.

Although Moirao didn’t specifically address the restriction on Measure J Bond sales in his community update, school board members had considered the problem during a November 2019 meeting when the Measure J bond measure was being discussed.

“It was clearly communicated a waiver would be necessary,” Hobbs told Patch.

Ultimately the board authorized the waiver request last August several months after voters approved Measure J, and the request was submitted to the state Board in September.

Although the waiver and any subsequent sale of Measure J bonds is crucial to completing the district’s expansion plans, the additional bond funds won’t be enough to pay for everything and school officials are counting on additional state funding to fill the gap.

Looking To County, State, Federal Funding

Included in the district’s revenue projections are $71.9 million in state matching funds from Proposition 51, a $9 billion Public School Facility Bonds initiative passed in 2016 that earmarked $3 billion for modernization of school facilities, and an additional $90.75 million from “potential future” state matching programs.

Hobbs said the district currently has several applications pending for $18.9 million in Prop 51 matching funds.

Still, the district appears to have enough money for immediate capital expenses. As of March 1 the district’s building fund contained $218.8 million in cash being held in trust by the Alameda County Treasurer and disbursed as needed by the district to pay invoices.

Additional money may also be available from less visible sources to fund various technology and other upgrades at district schools.

One of those is the federal Universal Service Fund’s eRate program that provides funding by reimbursing some of the costs school districts incur for improving wireless connectivity in classrooms, improving district computer networks and internet access. Fund revenues are derived from a Federal Communications Commission mandated surcharge on every telephone bill.

The actual amount of reimbursements is based upon several factors, including the number of students who qualify for the school lunch program. According to the Universal Service Administrative Company, a nonprofit organization that administers the program, since 2016 the district has requested about $2 million in USF funding commitments.

However, a spokesman for the administrative company told Patch actual payments may be less than funding commitment requests if all the funds requested are not used or invoices not submitted.

The district will utilize eRate funding to the maximum extent that it can, Hobbs said.

Another potential source of additional money is the School Energy Efficiency Stimulus Program enacted by the state legislature last year and signed into law on Sept. 20.

Designed to help school districts improve ventilation and repair or replace HVAC systems to facilitate the reopening of schools, the program will be funded by the state’s large investor-owned utilities – PG&E, SoCal Edison, San Diego Gas & Electric and SoCal Gas. In January the California Public Utilities Commission provided directions for calculating the utilities’ contributions, estimated to be $277 million this fiscal year.

The California Energy Commission will administer the program and expects to have program guidelines completed for approval at its April 14 meeting and the amount of funding available soon after.

The district is currently researching its options under the program, Hobbs said. Currently there is $11.9 million budgeted for district-wide HVAC and roofing projects.

If the state waiver is granted, the district will have no problems selling Measure J bonds as it continues to enjoy high credit ratings despite its substantial long-term bond and pension debt.

Mounting Debt Obligations

With interest, paying off the district’s outstanding bonds between now and 2049 will cost about $1.1 billion. Sale of Measure J Bonds will add additional debt and interest. At the same time its direct unfunded pension obligations have reached $130.6 million and will continue to grow.

Although Moody’s gave the district its second-highest credit rating in April 2020 based on what it described as the “district’s healthy financial profile” and “management’s prudent fiscal practices,” the rating agency did find the district would be challenged by its “above average debt burden” and “rising pensions costs,” concerns it expressed in 2018 and 2019 rating reports.

“The district has a history of being incredibly conservative in its revenue projections, as well as budgeting aggressively for spending,” Hobbs said. “The result tends to be that we underspend our original budgets as well as exceed our initial revenue forecasts. For the last decade, this has meant surpluses rather than deficits in the final accounting for each fiscal year. The district continues to improve its budgeting processes.”

As far as our above-average debt burden, Hobbs told Patch the district is proud of the fact it continues to receive high ratings from both Moody’s and S&P, attributing much of this to using conservative growth figures.

Hobbs concedes the district is concerned over rising pension costs, pointing out that since 2013 its required contributions to CalSTRS and CalPERS “have nearly doubled and future hikes are coming. This is something we discuss in every budget presentation to the Board of Trustees,” he said.

CalSTRS, or California State Teachers' Retirement System, and CalPERS, or California Public Employees' Retirement System, manage retirement and health benefits for teachers and government-employed workers, respectively.

During the 2020 Fiscal Year ended last June 30 alone, the district contributed $12.1 million to CalSTRS and $3.5 million to CalPERS – increases of 24% and 25% respectively over 2019 contributions. At the same time the district paid $29.4 million in principal and interest on its bonds.

To what extent “human error” contributed to the district’s problems is uncertain. Hobbs told Patch that errors were made in the district’s procedures for estimating accurate costs of future construction. He said the school board will await the results of a more extensive audit authorized by the board to see what lessons can be learned.

Responses to the district’s solicitation for audit services were expected by March 31.

The school board will meet Tuesday to discuss the timeline for a facilities action plan. A workshop on the plan could be held May 12 or 13.

Watch the meeting here at 6 p.m. Tuesday and view the agenda here.

— Patch Special Correspondent Bob Porterfield contributed to this report

Correction: A previous version of this story misattributed comments made by DUSD Interim Assistant Superintendent of Business Services Chris Hobbs.