California School District Property Sales Are Needed, But Impeded by State Law
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Commentary

California School District Property Sales Are Needed, But Impeded by State Law

School districts have extra land and buildings to sell, but must jump through hoops to do so.

In California, declining public school enrollment means that many school districts have excess real estate on their hands. Selling unused or under-utilized facilities could potentially provide a needed cash infusion for struggling school districts, but state law places restrictions on such property sales.

According to US Department of Education data, enrollment in traditional California schools declined from 6.2 million in Fall 2005 to 5.7 million in Fall 2015, an 8 percent drop. While not as steep, the California Department of Finance projects California public school enrollment will fall a further 4 percent during the decade ending in 2028. The impact on traditional schools could be more pronounced if the growth of charter school enrollment continues.

Enrollment trends vary across the state. While Placer and Kern Counties are both expected to see significantly greater enrollment, several counties are projected to experience declines in excess of 10 percent. One county expected to see a sizable enrollment drop is Los Angeles County, the state’s largest.

Declining enrollment has multiple implications for school districts, but two potentially offset one another. First, is financial distress. Because most school district funding comes in the form of state aid that is based on average daily attendance, declining enrollment means less revenue available to cover fixed costs such as retiree health benefits and debt service (fixed costs are those not dependent on the number of students, while variable costs —like teacher salaries—rise and fall roughly in line with enrollment).

A second implication is that school buildings become underutilized. To the extent districts can shift resources and consolidate into a smaller number of buildings, they will have real estate potentially for sale. In California’s property market, many unused school facilities could command generous sale prices. The proceeds could be devoted to paying off bonds and prefunding other post-employment benefits or employee pensions.

Unlike California cities, school districts are included in statewide pension pools, so making excess contributions to CalSTRS and CalPERS would not make sense.  The extra contributions would benefit the entire pool and not just the individual district. Instead, real estate sale proceeds could be placed in a special fund that could be tapped each year to cover a portion of the district’s CalSTRS and CalPERS bills.

But monetizing unused school properties is not very easy in California.  In 1996—at a time of growing enrollment—the state legislature put in place a complex process for selling or leasing school district property. Under the law, the school district’s board must impanel a committee of between seven and 11 members representing an array of community interests. Further, this committee must conduct hearings to gather further community input. This process gives businesses who don’t want to see competitors occupying former school property or residents who don’t want new neighbors the opportunity to thwart property sales.

The law exempts just two uses from this so-called “7-11 Committee” process: leases to private summer schools and the creation of teacher or school district employee housing. The latter exemption, added in 2018 by AB 1157, was part of the response to California’s housing affordability crisis.

Also, the 1996 law generally restricts the use of surplus property sale and lease proceeds to capital expenditures. This restriction was suspended during the state’s financial crisis in 2009 but came back into effect in 2016.

One district navigating state restrictions to monetize surplus property is Pasadena Unified in Los Angeles County (PUSD).  Since 2000, PUSD has suffered a 23 percent decline in enrollment resulting in the closure of six elementary schools. Its latest financial statement shows an Unrestricted Net Position of -$196 million. The district’s long-term liabilities include $470 million in bonded debt, $222 million in net pension liabilities and $33 million in net OPEB liabilities.

Selling unused real estate could put a substantial dent into PUSD’s debt burden, but it is not a simple option.  For example, Burbank Elementary School in Altadena, which closed in 2011, remains on the district’s books. The school building occupies a 4.25-acre parcel in a neighborhood of million-dollar homes built on relatively small lots. Although the property might fetch $10 million or more in the open market, a sale is not on the horizon.

During its “7-11” hearings on the Burbank Elementary building, committee members were asked to maintain the building as a public school (despite the lack of students), turn it into a park or use it for affordable housing. Fortunately, the committee disregarded these suggestions and declared the property surplus. While still unable to sell the property, the declaration enabled the district to enter into a long-term lease agreement with a private school that will ultimately pay $1.2 million annually to rent most of the facility.

PUSD is now trying to offload its district offices in central Pasadena. With a potential value in the range of $40 million, it would not make sense for the board to devote sale proceeds to new construction given declining enrollment. So the board is attempting to find a counterparty willing to swap the district office for an income producing property of comparable value. This complex transaction may be great for real estate brokers, but taxpayers, teachers and students would be better served if the district could maximize its returns through an outright sale.

Other school districts have not been as successful as PUSD. Glendale Unified School District’s attempt to exchange its administration building was thwarted when the city council refused to rezone the property for dense, multi-family housing.

Meanwhile, Oakland Unified School District (OUSD) has made little progress downsizing its property portfolio, contributing to a financial crisis. Enrollment in Oakland-run schools fell 19 percent between the fall of 2004 and fall if 2012 but stabilized thereafter. OUSD has been hesitant to close schools, which has meant increasing facility maintenance costs per student and earned criticism from Alameda County’s Civil Grand Jury.

More recently OUSD announced plans to close and sell up to 24 schools. It has a strong incentive to do so because the state agreed to provide the district emergency funding on the condition that it make certain reforms, including right-sizing its real estate portfolio. The state legislation also exempts OUSD and three other fiscally distressed school districts from the requirement that they spend sale proceeds on new capital outlays.

Rather than wait for school districts to become distressed, state lawmakers should consider relaxing the rules for all districts. That way, school districts like Pasadena Unified can proactively deal with the financial challenges of declining enrollment.

Marc Joffe is a senior policy analyst at Reason Foundation.