A voucher initiative on the Nov. 2 ballot in California would radically alter the education picture in the state, those on both sides of the debate agree.

Proponents and opponents disagree, however, on the impact of the initiative, Proposition 174, on capital financing and long-term debt for public and private schools.

Proposition 174 would amend the California Constitution to require the state to give parents a minimum of $2,600 in tax-supported vouchers to help them send their children to any school that will accept them, including private and parochial schools.

By fiscal 1996, funding the voucher program for existing private school students would siphon $1.3 billion from the state's general fund, according to the state Office of the Legislative Analyst.

The analyst's office also said that the state could save money as the number of students moving from public school to voucher-redeeming schools increases beyond a certain threshold. Total per-pupil spending in public schools is now about $5,200 a year. The value of the voucher would be at least half that, or $2,600. So the more students who attend private schools, even with vouchers, the less the state will have to pay for their education.

The legislative analyst's office said that 500,000 students now attend private schools at their own expense. Those students, who represent 10% of the state's approximately 5 million students, presumably would take advantage of the annual voucher subsidy. The existing private school students would be phased into the voucher program over two years.

As a result, the proportion of state revenues going to public school districts would shrink. However, the districts' ability to repay existing indebtedness and lease-backed obligations would not be jeopardized if Proposition 174 wins approval, market participants said in an informal survey.

If the initiative is approved, which the recent polls say is unlikely, the Los Angeles Unified School District, the state's largest, would "continue its commitment to repay" outstanding certificates of participation and tax and revenue anticipation notes, said Henry Jones, the district's budget director.

"There would be less dollars available for basic instruction programs, and that has a negative affect on kids," Jones said. If 10,000 students transferred to private schools, the Los Angeles district would lose about $42 million, he said.

Gilbert T. Ray of O'Melveny & Myers, bond counsel for the Los Angeles Unified School District, said, "School districts could have less money, but prudence would dictate that they would continue to pay their obligations."

Approval of Proposition 174 would leave "less money for students for programs and classroom materials," Ray said. "I don't think debt is in jeopardy."

From a credit ratings perspective, passage of Proposition 174 would have negative credit consequences," said David Brodsly, a vice president for Moody's Investors Service.

Brodsly said the initiative's effect on school districts "is impossible to forecast. There are so many variables that would have to play out." If the initiative passes, "that would be the appropriate time for in-depth comment on its impact," he said.

No Signs of Flood

David Hitchcock, a director with Standard & Poor's Corp., said there is no way to know if Proposition 174 will cause a flood of public school students into private schools.

"The number of students in private schools varies widely from county to county," Hitchcock said. A student shift to private schools "would be more of a problem in some areas than in others."

Meanwhile, State Sen. Art Torres, D-Los Angeles, a member of the Senate Education Committee, said that a stream of voucher revenues running to private schools would allow the schools to issue revenue bonds.

Torres called the initiative an entitlement program for nonpublic schools. The initiative would not require state fiscal controls or audits to determine how debt issuance supported by a voucher revenue stream would be handled, he said.

Indeed, Proposition 174 would be "good news for bond underwriters" because it would prompt private schools to sell bonds, Torres said, adding, "The bad news is there is no audit of how expenses are incurred and no control over how the money will be spent" by private schools.

"If schools can't pay the bonds back, what will happen to the investigator?" Torres asked. If a school "goes belly up," Torres said; bondholders would look to the state "as guarantor for those bonds. We are stuck with the bill. It reminds me of the S & L crisis," he said, referring to the federal government's bailout of the savings and loan industry.

Torres pointed out that Sacramento lawmakers have already approved state loans to troubled public school districts in Richmond and Compton. "Once you set that precedent it is going to be hard for a judge to throw out a request for the same support from a quasi-public school," he said.

"There we go again - with our state coffers ready to bail somebody out," Torres said.

But according to David Barulich, a private insurance industry economist and an author of the voucher measure, Torres' scenario, in which voucher schools go en masse to capital markets to issue long-term debt, is unlikely.

Barulich did not rule out the possibility that in "five or six years, when several private schools want to consolidate and build something," they might look to long-term debt.

The immediate consequence of Proposition 174's approval, Barulich said, would be a retrenchment in new public school construction funded with long-term bond issues. "That will be a big negative for the bond markets," he said.

Barulich pointed out that voters in statewide elections are regularly asked to approve state general obligation bonds for kindergarten through 12th grade facilities. As students transfer to private schools from public schools, the need for public schools to issue general obligation bonds for capital outlays would decline, he said.

Barulich's contention is backed by the California legislative analyst's office. In a pamphlet mailed to every voter, the office said, "The state would realize significant future savings in bond debt service costs" by shifting students from public schools. "The amount of these savings is unknown, but could be in excess of $100 million annually in about 10 to 20 years."

The analyst's office also said that local school districts, which often use lease-backed certificates of participation in anticipation of future bond sales and grants, also would realize savings of more than $100 million annually within one or two decades.

Barulich said long-term capital financing by private schools would not be a likely result of the passage of Proposition 174, despite his expectations of an influx of new students.

"A lot of smaller schools, between 50 and 200 students, will proliferate in urban areas, using existing commercial facilities," Barulich said. "We now have a 20% vacancy rate in urban areas. Most private schools are located in converted commercial buildings, and you don't need capital outlay for that."

Barulich argues that private schools would be able to capture 40% of school enrollment within a decade. Opponents disagree, saying most private schools are at or near capacity. They say it is unlikely that more than a tiny fraction of students will transfer out of the public schools.

The state's projections show enrollment in primary and secondary schools at 5.2 million in 1,009 public school districts. By the year 2000, the number of students is expected to increase by 27% to 6.6 million.

Parents May Seek Vouchers

The predicted increase in public school enrollment is viewed by voucher supporters as motivation for parents of public school children to seek alternatives.

Sean Walsh, director of communications for Yes on 174 - A Better Choice, said, "Without the private sector taking up some of the slack, where is the money coming from to build the needed schools? Will it be from floating more bonds?"

Walsh said financial institutions "will see that scholarship [voucher-receiving] schools have a constant cash flow from the vouchers. They will be willing to loan money to these institutions for new construction. This will pump up the economy."

The debate over school vouchers is likely to continue beyond Election Day. If Proposition 174 passes, it "inevitably would be court-challenged on the basis of its constitutionality - the separation of church and state," said Barbara Miller, research director for EdSource Inc., a nonprofit education resource center.

A recent poll by the Los Angeles Times found that 45% of California voters oppose Proposition 174, while 39% said they would vote for it. With less than four weeks to go until the election, each side is trying to fine-tune its message.

Despite the passion the voucher initiative arouses in both sides, voter turnout is expected to be light. The "No on 174" campaign said it plans to spend $10 million on advertising. The pro-voucher effort has substantially smaller financial resources, with "Yes on 174" budgeting $5 million for ads.

Even if the voucher initiative doesn't succeed, another proposition on the Nov. 2 ballot could have a dramatic impact on bond issues for school capital construction.

The measure, Proposition 170, would allow a simple majority of voters, rather than two-thirds majority, to approve bonds for schools, said Duwayne Brooks, assistant superintendent of school facilities planning for the California Department of Education.

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