California voters passed Proposition 39 on November 7, 2000, which amended provisions to the California Constitution and subsequently amended the California Education Code accordingly.

The purpose and intent of the initiative was “to implement class size reduction, to ensure that our children learn in a secure and safe environment, and to ensure that school districts are accountable for prudent and responsible spending for school facilities.”

It provided for the following amendments to the California Constitution:

1. “To provide an exception to the limitation on ad valorem property taxes and the two-thirds vote requirements to allow school districts, community college districts, and county offices of education to equip our schools for the 21st Century, to provide our children with smaller classes, and to ensure our children’s safety by repairing, building, furnishing and equipping school facilities;
2. To require school district boards, community college boards, and county offices of education to evaluate safety, class size reduction, and information technology needs in developing a list of specific projects to present to the voters;
3. To ensure that before they vote, voters will be given a list of specific projects their bond money will be used for;
4. To require an annual, independent financial audit of the proceeds from the sale of the school facilities bonds until all of the proceeds have been expended for the specified school facilities projects; and
5. To ensure that the proceeds from the sale of school facilities bonds are used for specified school facilities projects only, and not for teacher and administrator salaries and other school operating expenses, by requiring an annual independent performance audit to ensure that the funds have been expended on specific projects only.”

Proposition 39 bond programs are often the largest portion of a K–14 school district’s annual expenditures.

With program costs ranging from a few million to several billion dollars, stakeholders want to know where and how funds are spent.

High-profile, high-dollar projects—such upgrades to schools and facilities—receive extra scrutiny from the various stakeholders, including taxpayers, given the many requirements and best practices expectations by district and community members.

To that end, Proposition 39 created several accountability requirements associated with the lower 55% threshold for approval.

Accountability Requirements for Proposition 39

• Present voters with specific project list that indicates how the money would be spent
• Establish a Citizens Oversight Committee to oversee the spending and reporting of such expenditures to the public
• Don’t use funds for salaries or operating expenses

Conduct annual performance and financial audits that comply with generally accepted government auditing standards (GAGAS)

Proposition 39 requires school districts that pass bonds to establish and appoint members to an independent Citizens Oversight Committee to support a successful, transparent, and accountable bond program.

Based on Education Code Sections 15278, the Committee’s three core duties are:

1. Inform the public on the district’s expenditures of bond revenue
2. Actively review and report on the proper expenditures of taxpayer’s money for school districts
3. Produce and present an annual report to summarize the committee’s findings, proceedings, and activities within the prior year

The Citizens Oversight Committee must consist of at least seven members to serve for a two-year term without compensation and for no more than two consecutive terms.

Members are required to meet certain requirements to ensure a well-balanced committee—such as one member needs to be active in a bona fide taxpayers' organization, one member needs to be a parent or guardian of a child enrolled in the district, and more.

They should specifically engage in any of the following activities to maximize the benefit to the school district or community college organization and the community they serve:

• Receive and review the annual independent performance audit and financial audit reports
• Inspect school facilities and grounds to ensure that bond revenue is expended in compliance with bond requirements
• Receive and review copies of any deferred maintenance proposal or plans developed by the K–14 school district
• Review efforts by the school district or community college district to maximize bond revenue by implementing cost-saving measures

Cost-Saving Measures

Cost-saving measures include the following:

• Mechanisms designed to reduce the costs of professional fees, site preparation, and school site design by incorporating efficiencies
• Recommendations regarding the joint use of core facilities and a cost effective and efficient reusable facility plan

The performance audit mentioned in the constitutional amendment can provide a tool for the Citizens Oversight Committee to report on the compliance of Bond expenditures.

However, there was little legislative guidance on the specific components of such a performance audit other than an audit must determine two things—that funds:

• Were spent on projects approved by the voters
• Weren’t spent on operating expenses—such as teacher and administration salaries and other school operating expenses

The Government Accountability Office (GAO) issues the GAGAS, also known as the Yellow Book. It provides performance auditors with standards and an understanding of how to apply them to complete audit objectives.

It’s important to note that not all performance audit reports result in conclusions that improve efficiency and reduce business risk exposures. Most schools perform the minimum requirement assessing whether expenditures were for List Projects, as defined in the Bond Documents, only.

This audit objective may not be broad enough to provide information to an organization that would allow the organization to reduce its risks.

Such limited performance audits are termed compliance audits. Compliance performance audits are most often used by school districts and cited as so-called clean audits if there are no exceptions noted.

If an auditor doesn’t have the technical background in construction and bond programs, the following performance audit components may be at risk of not being properly addressed:

• Objectives
• Criteria
• Methodology and Scope

Objectives

The most appropriate objectives to address the various performance aspects of your capital program may not be selected. Your bond program may be experiencing cost overruns, inadequate identification of project scope, gaps in funding availability, or schedule delays.

Audit objectives may need to be selected that review project processes, procedures for managing scope, prioritization of projects, quality, schedule, budget, or change-control methodologies and reporting.

Criteria

The most appropriate criteria to evaluate results, controls, efficiency, and compliance may not be utilized.

Setting appropriate criteria is a critical step and may include purposes or goals prescribed by law, regulations, or the audited entity’s officials; policies and procedures; and technically developed standards or norms.

Methodology and Scope

The methodology and scope selected may not result in sufficient and appropriate evidence to support meaningful audit conclusions.

Scope and methodology should be designed to obtain sufficient, appropriate evidence that addresses the program’s objectives and provides a reasonable basis to support the report’s conclusions.

All performance audits should at a minimum comply with standards outlined under Proposition 39.

There are, however, benefits for the school district to provide a more expansive audit that looks at the efficiency and effectiveness of spending. This more expansive audit often results in significant control improvements and cost savings to districts, which often exceed the fees of the expanded audit.

The challenge is convincing the school district to go beyond the basic performance audit requirements of reporting on whether funds were spent on authorized projects and not on operating expenses.