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April 5, 2005 > Governor's Proposed Changes to Education Funding and Proposition 98

Governor's Proposed Changes to Education Funding and Proposition 98

"Education is one of government's most important duties because nowhere are the stakes higher. Our future depends on the quality of education we give our children today."
Governor Arnold Schwarzenegger
Radio Address, February 12, 2005

The 2005-96 California state budget proposed by Governor Schwarzenegger includes major reforms of the state educational system. In one of his weekly radio addresses to citizens, the governor outlined a program that he says, will "develop and reward the best teachers and give our kids every chance to excel in the classroom." He claims that his budget will spend about $3 billion more on education than the previous budget and "restore local control and reward excellence."

Provisions of the reform include linking pay to performance and student achievement, expanding charter schools and vocational education programs, addressing pension costs and allowing competitive bidding for services such as maintenance, transportation and food services. He also proposes major revisions to Proposition 98.

According to the Legislative Analyst's Office, the largest proposed changes are an elimination of "Suspension" and "Test 3" provisions and "automatic proportional reductions" when the administration determines that the budget is out of balance without legislative resolution. Such reductions could occur at any time of the fiscal year.

These changes would eliminate annual increases of Proposition 98 funding based on the previous year's allocation including monies above minimum guarantee levels. Future new "Maintenance Factor" debt would be eliminated and the existing obligation would be frozen at $3.7 billion payable within a 15-year period. These one-time payments, estimated at $250 million annually, would not be included in the Proposition 98 base for following year calculations.

Prior year Proposition 98 obligations would be reduced and frozen at $1.3 billion. Payments would be similar to Maintenance Factor payments and if spread over 15 years, would average $83 million annually. Currently, annual payments would average $150 million to settle the existing obligations from prior years.

Additionally, past state-mandated program costs of approximately $1.8 billion would be paid from future Proposition 98 funds over the next 15 years.

The effect of these changes, according to the Legislative Analyst's Office "would greatly reduce legislative discretion during difficult budgetary times." The year 2001-02 is cited when General Fund revenues fell by 17 percent. If Test 3 had not been operative and suspension unavailable, the state would have been forced to increase education spending by about $4 billion more than the amount budgeted. Other state programs would have been reduced in response. Proposition 98 spending would be "locked in."

Three potential positives are listed including more stable funding through elimination of Test 3, more possibility of "overappropriations" since these would not be part of the next year's Proposition 98 calculation of minimum funding and a specific deadline (15 years) for payback of existing state obligations.

Positive factors should be weighed against the possibility of "across-the-board" reductions during budgetary distress, loss of Proposition 98 funding base without the Maintenance Factor and the inclusion of overappropriations. These factors introduce more uncertainty into the education budget process.

While the Legislative Analyst's Office agrees that Proposition 98 funding formula has problems that need to be addressed, they recommend that, "The legislature should consider other ways to improve Proposition 98 that do not involve such a serious diminution of legislative budget authority."

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