After 25 years, California should rethink citizen bond oversight committees

When California voters approved Proposition 39 in November 2000, they accepted a bargain: school districts could issue general obligation bonds with 55% approval instead of two-thirds, but only if they submitted to new accountability requirements. Those requirements include annual independent financial and performance audits — and citizens' bond oversight committees to review the audits and report to the public.

California school districts have issued more than $155 billion in Proposition 39 bonds since 2001, according to the California Debt and Investment Advisory Commission. Yet 25 years later, neither accountability mechanism has demonstrated effectiveness at detecting fraud or misappropriation.

The original problem

The impetus for Proposition 39's accountability provisions was real. In the late 1990s, investigations at a major urban district revealed that more than 20% of bond funds had been used illegally to pay administrative salaries.

The scandal involved poor management, nonexistent financial controls, fraud, and kickbacks. A pre-existing citizens' oversight committee had been kept in the dark throughout.

The architects of Proposition 39 sought to prevent such abuses through a two-pronged approach: professional audits conducted by licensed CPAs in accordance with Government Auditing Standards, and citizen committees that would review those audits and inform the public. The audits would detect problems; the committees would publicize them.

What the evidence shows

The fraud cases that have come to light since Proposition 39's passage — including a case involving 74 counts of misappropriation and embezzlement — have not been discovered by the accountability mechanisms the proposition created.

They were uncovered by law enforcement, new administrators examining the books, or the state's Fiscal Crisis and Management Assistance Team conducting targeted investigations triggered by specific complaints. When FCMAT investigates districts where red flags have already emerged, it finds problems in a significant majority of cases. But these targeted investigations are not the routine annual audits Proposition 39 requires.

The annual audits mandated by the constitution are compliance audits — they verify that expenditures match the voter-approved project list and were not used for teacher or administrator salaries.

As one accounting firm that conducts these audits has noted, most districts "perform the minimum requirement assessing whether expenditures were for List Projects" and these are "cited as so-called clean audits if there are no exceptions noted." Research has not identified any documented case of a routine Proposition 39 compliance audit uncovering significant fraud that would not otherwise have been detected.

CBOCs fare no better. As one county grand jury concluded: "COCs in themselves cannot ensure that bond money is spent effectively, cost overruns are avoided and fraudulent practices or mismanagement of funds do not occur because their review occurs after spending and other project decisions are made." Committee members themselves, the grand jury found, "viewed their function as irrelevant because they review projects and expenditures after projects have been approved and monies spent."

The statute requires no expertise among committee members. They are constituency representatives — a business owner, a senior, a taxpayer advocate, a parent — not auditors or construction professionals. They receive summary reports prepared by district staff, review audits conducted by professionals, and issue annual statements that largely confirm what the audits already found.

The costs of symbolic oversight

If CBOCs merely added a ceremonial layer to the accountability structure, the costs would be modest. But over the past two decades, advocacy organizations have promoted an expanded vision of CBOC authority that creates real problems for issuers.

The California Association of Bond Oversight Committees and the Little Hoover Commission have recommended that CBOCs receive independent legal counsel, control their own bylaws, set their own meeting schedules, and review expenditures before they are made. Some committees have adopted practices of issuing resolutions recommending specific expenditures to their boards — prospective policy influence that the statute never contemplated.

This expanded authority creates structural problems familiar to any bond professional.

Independent legal counsel produces conflicting opinions with no mechanism for resolution; the district must ultimately follow its own counsel's advice because board members bear fiduciary responsibility.

Attorneys who might serve as CBOC counsel compete with bond counsel for engagements, creating incentives toward adversarial rather than collaborative oversight. Prospective expenditure review transfers policy influence to unelected volunteers accountable to no one — undermining the democratic accountability that runs from voters to elected school boards.

And every dollar spent on duplicative oversight is a dollar not spent on school facilities — contradicting the CBOCs' own statutory charge to review "efforts by the district to maximize bond revenues by implementing cost-saving measures."

The Legislature can act

Some assume that modifying the CBOC requirement would require another vote of the people. It would not.

Proposition 39 had two components: a constitutional amendment and accompanying legislation. The constitutional amendment, codified in Article XIIIA, reduced the vote threshold to 55% and required annual independent audits. The CBOC requirement is not in the constitution. It is in Education Code Section 15278, enacted through AB 1908 — ordinary legislation that "can be changed by a simple majority vote of the Legislature and approval of the governor," as the Legislative Analyst's Office noted in 2000.

Proposition 39's text permits the Legislature to amend implementing statutes "to further the purposes of the proposition." The stated purpose was "to ensure that school districts are accountable for prudent and responsible spending for school facilities." Replacing an ineffective accountability mechanism with more effective ones would further this purpose, not contradict it.

Better alternatives exist

The resources currently devoted to CBOCs could be redirected to accountability measures that actually work.

State-level random and risk-based audits would provide the deterrent effect that Proposition 39's current mechanisms lack.

FCMAT has demonstrated that substantive, expert-level audits find problems when they look for them — the agency has uncovered evidence of fraud or misappropriation in a significant majority of its targeted investigations. But these investigations occur only after complaints have already emerged. A proactive program modeled on the IRS approach — where any district might be subject to a substantive state audit in any given year — would create compliance incentives across all bond programs. Selection could be weighted by risk factors such as bond program size, prior audit findings, or unusual expenditure patterns. This approach leverages existing state expertise rather than relying on lay volunteers at over a thousand individual districts.

Enhanced local audit requirements could expand the scope of existing professional audits beyond basic compliance verification to include targeted risk assessments and internal control evaluations.

Critically, auditors could be required to prepare a plain-language summary — separate from the technical audit report — written for a general audience and posted prominently on district websites. This summary would explain in accessible terms what projects were funded, whether expenditures complied with the bond measure, and any concerns identified. This approach ensures that the transparency function currently assigned to CBOCs is performed by professionals who understand what they are reviewing.

Whistleblower protections and confidential reporting channels would harness the knowledge of employees and contractors with direct involvement in bond programs.

Individuals with firsthand information are better positioned to identify waste than volunteers reviewing summary reports after the fact. This is how fraud is actually detected — by people with inside knowledge, not by lay committees reviewing documents at quarterly meetings.

These measures would provide accountability that is more expert, more timely, and more enforceable than CBOC oversight. They would operate through institutions with clear authority and democratic accountability — elected boards, professional auditors, state agencies, and courts — rather than through advisory committees that lack the expertise to identify problems and the authority to address them.

Low-hanging fruit: voluntary oversight committees

While the Legislature considers reform of Proposition 39's statutory CBOC requirement, issuers themselves can take immediate action. Across California, cities, counties, school districts, and special districts have voluntarily created citizen oversight committees for bonds and parcel taxes that do not require them by law.

For parcel taxes, citizen oversight is entirely optional. As one education policy organization has noted, "Citizen oversight is not a legal stipulation for passing a parcel tax, but many districts include the creation of an oversight committee in the ballot language." School districts routinely establish parcel tax oversight committees to build public trust, even though no statute mandates them. Cities and counties do the same for local sales tax measures, transient occupancy taxes, and other revenue measures where oversight committees are included as political sweeteners rather than legal requirements.

These voluntary committees represent the lowest-hanging fruit for reform. Issuers who created them can dissolve them. Future ballot measures can omit them. No legislative action is required.

Issuers considering new tax or bond measures should think carefully before including oversight committee provisions in ballot language. The evidence from 25 years of Proposition 39 experience suggests that such committees provide symbolic reassurance rather than substantive accountability. The better approach is to commit to enhanced professional audits with plain-language public summaries, robust whistleblower protections, and transparent online reporting of expenditures. These mechanisms provide accountability that voters can trust because they are administered by professionals with the expertise to identify problems — not by well-meaning volunteers reviewing documents they may not fully understand.

For issuers with existing voluntary oversight committees, the path forward is straightforward: allow the committees to sunset when their authorizing measures expire, and do not include oversight committee provisions in renewal measures. Replace symbolic oversight with substantive transparency.

Conclusion

Proposition 39 represented a reasonable compromise in 2000. California's school bond market has flourished under the reduced vote threshold, financing critical infrastructure improvements across the state. But 25 years of experience have demonstrated that one element of that compromise — citizen oversight committees — has not delivered on its promise.

CBOCs have not detected fraud. They cannot prevent fraud. And expanding their authority to address these limitations creates new problems for issuers without solving the original ones.

Neither the annual compliance audits nor the CBOCs have demonstrated effectiveness at detecting the kind of fraud that prompted Proposition 39 in the first place. The fraud that has been detected was found through other means entirely—targeted state investigations, law enforcement, and internal whistleblowers.

The Legislature can modify or replace the CBOC requirement through ordinary legislation. The question is not whether it has authority to act, but whether it has the will to replace symbolic accountability with substantive accountability—state-level audits that actually deter misconduct, enhanced local audits that go beyond checkbox compliance, and whistleblower protections that harness insider knowledge.

In the meantime, issuers need not wait. Voluntary oversight committees can be retired now. Future measures can be drafted without them. The market deserves oversight that works. After a quarter-century, it is time to acknowledge what the evidence shows and try something better.