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April 5, 2005 > School Funding and Proposition 98

School Funding and Proposition 98

School districts rely primarily on the governor and state legislature for their financial support. Local school boards do not have independent authority to raise taxes. Some funds that come from the state are restricted and much of the rest is destined for employee salaries and benefits. There is little room for discretionary spending. Guaranteed funding was sought to help school districts receive predictable and adequate funding.

Voters approved an amendment to the California Constitution in 1988 that guaranteed K-14 education a minimum amount of state revenue each year based on the health of the economy. Proposition 98 funds account for about 70 percent of total K-12 funding and approximately two-thirds of total community college funding. When General Fund revenues are relatively stable, Proposition 98 ensures an amount equal to the previous year adjusted for changes of enrollment and growth in per capita personal income. When faced with volatile and unpredictable revenues as experienced since 2000, allocations have been cut or deferred affecting the guarantee amount for the following year.

The amount of K-14 funding relies on a set of three tests. The test used is dependent on the economy and General Fund revenues. Test one (unused since 1988-89) sets a floor of 39 percent of state General Fund revenues. A second test guarantees at least the amount received in the previous year plus enrollment and per capital personal income adjustments. The third test, added in 1990, is used in times of economic distress to allow adjustments related to enrollment and per capita General Fund revenues with the provision that any shortfall, called a "maintenance factor," be restored in future years of strong state revenues. The legislature can suspend the Proposition 98 guarantee for one year with a two-thirds vote. In this case, a maintenance factor is also created.

Is the "maintenance factor" a loan? According to Legislative Analyst's Office, the idea that the maintenance factor borrows from Proposition 98 is not the case. "When the state creates a maintenance factor, the state is saving the amount of the maintenance factor. And, while the General Fund savings are not permanent, the state never has to repay funding not provided to schools as a result of the maintenance factor."

In good revenue years, when there is an outstanding maintenance factor, the state accelerates payments to Proposition 98 - around 55 percent of new General Fund revenues. The state can, in any fiscal year, increase funding above the minimum amount mandated by Proposition 98. However, if this is done, the increase becomes part of the base for the next year's calculation.

A key to understanding why a particular test is used for each fiscal year is to look at the year-to-year changes in General Fund revenues. In 2001-02, General Fund revenues fell over 17 percent, but in following years, revenues have experienced moderate to strong year-to-year growth. Therefore, test two would be used during those growth years and include restoration of any maintenance factor.

A challenge facing the state is an estimated $8 billion structural deficit coupled with a large increase in General Fund cost of Proposition 98. Because General Fund revenues will grow faster than personal income per capita, the state will be required to restore $375 million of maintenance factor in the 2005-06 budget. This amount is in addition to $2.5 billion in regular Proposition 98 growth.

Some of the additional Proposition 98 pressure on the General Fund is due to shifts by the state and local governments, manipulations of vehicle license fees, sales tax revenues and school property taxes. The result has been more reliance by school districts on state General Fund revenues. Although there are disagreements about the extent to which per pupil funding has suffered, there is general accord that significant additional funds are necessary to return to the real purchasing power of a high point during the 2000-01 fiscal year.

Legislative Analyst's Office
Proposition 98 Primer

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