A Historical Review of Proposition 98

A Historical Review of Proposition 98 MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • JANUARY 2017 AN LAO REPORT 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT TABLE OF CONTENTS Executive Summary ............................................................................................................................5 Introduction ........................................................................................................................................7 Formulas ..............................................................................................................................................7 Three Ballot Measures ....................................................................................................................................................7 Rules for Determining Minimum Guarantee ...........................................................................................................8 Test 3 Supplemental Appropriation ...........................................................................................................................9 Maintenance Factor .......................................................................................................................................................10 Other Key Provisions .....................................................................................................................................................11 True Ups ............................................................................................................................................12 True Up Process ................................................................................................................................................................12 Upward and Downward Revisions ............................................................................................................................13 Unexpected Results of True Ups ................................................................................................................................15 Certification ......................................................................................................................................................................16 Revenue and Program Shifts ...........................................................................................................16 Revenue Shifts .................................................................................................................................................................16 Program Shifts ..................................................................................................................................................................17 Major Controversies .........................................................................................................................21 Poison Pills, Litigation, and Settlements ................................................................................................................21 Maintenance Factor Debates .....................................................................................................................................22 Program Debates ...........................................................................................................................................................24 Impact on School Funding ...............................................................................................................25 Lessons Learned ...............................................................................................................................27 Conclusion .........................................................................................................................................28 www.lao.ca.gov Legislative Analyst’s Office 3 AN LAO REPORT 4 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT EXECUTIVE SUMMARY Voters Approved Proposition 98 in 1988. Proposition 98, a measure on the November 1988 ballot, was intended to increase state funding for schools. The proponents of Proposition 98 argued that school funding at the time was too low and associated state budget decisions too political. Approved by 51 percent of voters, Proposition 98 added certain constitutional provisions setting forth rules for calculating a minimum annual funding level for K-14 education. The state commonly refers to this level as the minimum guarantee. Our report provides a historical review of the state’s more-than-quarter-century experience with Proposition 98. A Tale of Complexity A Plethora of Tests and Rules Govern the Minimum Guarantee. Proposition 98 added two formulas or tests (Test 1 and Test 2) to the State Constitution. Test 1 links the minimum guarantee to a share of state General Fund revenue (about 40 percent), whereas Test 2 adjusts prior-year Proposition 98 funding for changes in student attendance and California per capita personal income. Under Proposition 98, the minimum guarantee is to be the higher of the Test 1 or Test 2 funding levels. In 1990, the state entered a recession and found the two original Proposition 98 formulas difficult to implement. In response, the Legislature placed Proposition 111 on the ballot. Approved by 52 percent of voters, Proposition 111 added various new school funding formulas to the Constitution. Most notably, Proposition 111 added Test 3, which allows the state to provide a lower level of funding than the Test 2 level when state revenue growth is relatively weak. Proposition 111 also added a formula known as “maintenance factor,” which requires the state to accelerate school funding in strong revenue years to compensate for the lower funding provided when Test 3 applies. Other formulas affecting the guarantee are intended to ensure that school funding is not reduced more quickly than the rest of the state budget during tight economic times or increased to unsustainably high levels during unusually strong economic times. Altogether, the minimum guarantee is now governed by eight interacting formulas and nearly a dozen different inputs. State Has Made Myriad Adjustments to the Proposition 98 Calculations. Since 1988, barely a year has passed when the state has not adjusted the Proposition 98 calculations in some way. Twenty four times the state has taken revenue-related actions affecting the Proposition 98 calculations. These adjustments have involved excluding certain sales tax revenue that would otherwise affect the minimum guarantee, shifting property tax revenue to schools and community colleges to provide more state General Fund for the rest of the budget, shifting property tax revenue away from schools and community colleges to backfill local governments for the loss of other revenue streams, and counting certain Proposition 98 funds as loans. In addition to these adjustments, the state has shifted various programs into and out of the minimum guarantee. In some of these cases, the state adjusted the minimum guarantee up or down accordingly. In other cases, the program shift crowded out school funding (when shifted into the guarantee) or crowded out other state funding (when shifted out of the guarantee). www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO REPORT A Tale of Controversy Proposition 98 Has Been Associated With Sundry Poison Pills, Lawsuits, Rulings, and Settlements. In certain cases, the state realized that some of the adjustments it was making to the Proposition 98 calculations might be challenged. In some of these cases, it adopted “poison pills” that set forth seemingly dire repercussions (including suspending the guarantee) if the state’s actions were challenged. In other instances, the state took no specific action to address potential challenges. In some cases, state actions ultimately were challenged, with the state sued five times over Proposition 98 issues. Four of these cases resulted in published court decisions, with the state prevailing in two of the four cases. In the other case, the parties reached a settlement prior to the superior court ruling. Ongoing Debates Linger Over Still Unresolved Proposition 98 Issues. Despite the lawsuits and court rulings, some key Proposition 98 issues remain unresolved. Debates continue to exist regarding both when the state is to create new maintenance factor obligations and how the state is to make maintenance factor payments. Ongoing debates also exist regarding which programs should count toward the guarantee. Many examples exist of the state supporting certain programs with Proposition 98 funds but very similar programs with non-Proposition 98 funds. In some cases, programs have been funded from one source some years and the other source in other years. No court ruling has definitively settled or clarified these issues. A Tale of Caution No Evidence School Funding Is Higher as a Result of the Formulas. Although no one knows for certain how much funding the state would have provided schools in the absence of Proposition 98, we use various methods to assess how schools fared over the 1988-89 through 2014-15 period. One method compares actual Proposition 98 funding each year with a simulated level that takes the 1988-89 school funding level and increases it each year for student attendance and inflation. We also compare growth in Proposition 98 funding with growth in the rest of the state General Fund budget, as well as growth in the entire state budget (General Fund and special funds combined). Lastly, we compare K-12 spending per pupil in California with the rest of the country. The results are similar across the four methods. School funding grows neither notably more nor less than the comparison levels. State’s Experience Suggests Serious Caution in Adopting More Budget Formulas. In reviewing the state’s experience with Proposition 98, we think the formulas repeatedly have shown that they are unable to address real world developments. So many adjustments to the formulas, undertaken so frequently, suggests that even a complex set of eight interacting formulas could not foresee or respond well to the salient budget issues of the day. The formulas also have muddled the budget process, requiring legislators to dedicate considerable time to understanding a plethora of formulas and rules, while leaving less time for legislators to focus on the education system’s overall effectiveness and efficiency. Perhaps most notably, the state has no clear evidence that school funding is higher today or school funding decisions are less political today than they would have been absent the formulas. All these factors suggest the state should be extremely cautious about adopting new budget formulas in the future. 6 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT INTRODUCTION Since 1988, Proposition 98 has been funding requirement rises or falls during the constitutionally governing the amount of funding year. The third part traces the many revenue and provided to public schools and community colleges program shifts the state has made over the years in California. This report uses data from 1988 affecting Proposition 98 calculations. The fourth through 2015 to review and analyze the impact part covers key controversies surrounding these of Proposition 98. The report has six parts. The calculations. The fifth part analyzes the impact of first part describes the formulas the state uses Proposition 98 on K-12 funding, and the final part to calculate the annual Proposition 98 funding gleans some lessons from the state’s more-than- requirement. The second part explains how the quarter-century experience with Proposition 98. state “trues up” when the annual Proposition 98 FORMULAS Below, we provide background on the ballot Guarantee. In June 1990—facing an economic measures that established constitutional funding recession and having difficulty meeting the formulas for K-14 education, the rules used for Proposition 98 minimum guarantee—the determining the minimum funding requirement, Legislature placed Proposition 111 on the ballot. and related constitutional and statutory funding Approved by 52 percent of voters, Proposition 111 provisions. further amended Section 8 of Article XVI of the Constitution. Specifically, Proposition 111 allowed Three Ballot Measures for a lower minimum guarantee when state General Proposition 98 Created the “Minimum Fund revenue was relatively weak but then required Guarantee.” Approved by 51 percent of voters in future growth in K-14 funding to be accelerated November 1988, Proposition 98 amended Section 8 when General Fund revenue improved. of Article XVI of the California Constitution. Proposition 2 Created Reserve Inside Specifically, Proposition 98 added constitutional Minimum Guarantee. Approved by 69 percent provisions setting forth rules for calculating a of voters in November 2014, Proposition 2 added minimum annual funding level for K-14 education. Section 21 to Article XVI of the Constitution. The state commonly refers to this calculated This new section created the Public School System funding level as the minimum guarantee. The state Stabilization Account (School Stabilization meets the guarantee using both state General Fund Account) and set forth rules governing the account. and local property tax revenue. The Legislature can Generally, the rules are intended to require the state suspend the minimum guarantee for one year at a to make deposits when growth in state General time with a two-thirds vote of each house. The box Fund revenue is strong and make withdrawals on page 8 summarizes the original arguments for when needed to ensure prior-year school funding and against Proposition 98. can grow for changes in student enrollment Two Years Later, Proposition 111 Made and inflation. The measure does not change the Substantial Changes to Calculation of Minimum calculation of the minimum guarantee, but it can www.lao.ca.gov Legislative Analyst’s Office 7 AN LAO REPORT result in a portion of funding that counts toward capita personal income. Below, we discuss various the guarantee sometimes being reserved for aspects of the tests in detail. spending in a future year. Test 1 Factor Linked to Share of General Fund Revenue. Test 1 links K-14 funding to the Rules for Determining Minimum Guarantee percentage of General Fund revenue the state Minimum Guarantee Determined by provided to K-14 education in 1986-87. In that One of Three “Tests.” Under the provisions of year, K-14 funding was 41 percent of the General the Constitution, the minimum guarantee is Fund. Since that year, the Test 1 share has ranged determined by one of three formulas or tests. from 35 percent to 41 percent. It has varied as Figure 1 describes these tests. Proposition 98 a result of statutorily authorized recalibrations created two tests, commonly referred to as “Test 1” or “rebenchings” (discussed later in this report). and “Test 2,” and specified that the guarantee In Test 1 years, schools and community colleges was to be the higher of the two test levels. receive local property tax revenue on top of Proposition 111 modified one aspect of Test 2 and whatever state General Fund revenue they receive. added another test, commonly called “Test 3.” Test 2 and Test 3 Based on Prior-Year Under Proposition 111, the Test 2 and Test 3 Proposition 98 Funding. Whereas Test 1 earmarks levels are to be compared, with the lower test level a minimum portion of state revenue for K-14 prevailing. The rationale for this comparison is to education, Test 2 and Test 3 are based on prior-year allow the state to provide less K-14 funding when Proposition 98 funding adjusted for key factors. Both state General Fund revenue is weak relative to per tests adjust for the change in student enrollment, Original Arguments For and Against Proposition 98 The November 1988 voter guide contained arguments for and against Proposition 98. Whereas the proponents argued that school funding was too low and associated state budget decisions too political, the opponents argued that school funding was sufficient and associated decision making appropriately political. Arguments in Support of Measure. Those in favor of Proposition 98 claimed that classes were overcrowded, insufficient attention was being given to core subjects, schools had too few counselors, and local and state funding for schools was on the decline. Proponents pointed to disagreement among state politicians as an obstacle to addressing these problems. Proponents argued that Proposition 98 would take “school financing out of politics by ensuring a minimum funding level for schools which the Legislature and Governor must honor except in fiscal emergencies.” Arguments in Opposition to Measure. Those opposed to the measure claimed that education already was California’s top budget priority, school funding had increased significantly in recent years, and average teacher salaries were among the highest in the nation. Opponents further argued that Proposition 98 was an attempt to guarantee a certain level of state funding for schools and community colleges “regardless of whether they are going a good job in spending those funds” and “regardless of any other vital state and local needs.” 8 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT as measured by K-12 average Figure 1 daily attendance (ADA). Test 2 Three Proposition 98 “Tests” further adjusts for the change in inflation. Proposition 98 Test 1 Test 2 Test 3 defined inflation as the lower Share of General Change in Per Change in General Fund Revenue Capita Personal Fund Revenue of the United States Consumer Income (PCPI) Price Index and California PCPI Ge F n u e n r d al per capita personal income. ADA ADA 40% Proposition 111 modified the Prior-Year Prior-Year definition—linking inflation Funding Funding solely with the change in California per capita personal Guarantee based on share Guarantee based on prior- Guarantee based on prior- income. Instead of adjusting of state General Fund year funding level adjusted year funding level adjusted revenue going to K-14 for year-over-year changes for year-over-year changes for inflation, Test 3 adjusts for education in 1986-87. in K-12 attendance and in K-12 attendance and California PCPI. state General Fund revenue. the change in state General Fund revenue. (Technically, ADA = average daily attendance. Test 3 is based on the change in state General Fund revenue Test 3 Supplemental Appropriation plus 0.5 percent.) In both Test 2 and Test 3 years, the Test 3 Linked With Statutory Supplemental state’s Proposition 98 General Fund obligation is the Appropriation. In 1990, the state adopted minimum guarantee less local property tax revenue legislation creating an additional K-14 funding provided for K-14 education. formula. Calculated when Test 3 is operative, the Test 2 Operative More Frequently Than Other formula is intended to ensure that Proposition 98 Tests. Figure 2 (see next page) shows the operative funding still grows at least as much as the test used to determine the minimum guarantee non-Proposition 98 side of the budget. Given its each year since 1988-89. Test 2 has been most intent, the formula is commonly known as the common over the entire period—operative more “equal pain/equal gain” formula. Technically, the than half the time. Test 1 was the least common formula links the rate of change in Proposition 98 test during the first 22 years of the period, being funding per K-14 pupil to the rate of change in operative only once. More recently, Test 1 has non-Proposition 98 General Fund revenue per become much more common, operative four of capita. The state provides any resulting amount as a the last five years. The Legislature has overridden supplemental appropriation on top of the minimum the operative test and unconditionally suspended guarantee otherwise calculated for that year. Proposition 98 twice (in 2004-05 and 2010-11). In Most Test 3 Years Require Supplemental three other years (1989-90, 1992-93, and 1993-94), Appropriations. Figure 3 (see next page) shows the state adopted “poison pills” that suspended every Test 3 supplemental appropriation the state Proposition 98 if certain conditions subsequently has made to date. Of the seven years that Test 3 were met. In none of these three cases did the has been operative, a supplemental appropriation conditions triggering suspension materialize. (We has been made six times. The size of these discuss poison pills in detail later in the report.) appropriations has ranged from $68 million in 1990-91 to $1.4 billion in 2001-02. The only www.lao.ca.gov Legislative Analyst’s Office 9 AN LAO REPORT Test 3 year the state did not make a supplemental Figure 2 appropriation was in 1993-94. That year the state Operative Proposition 98 Test shifted more local property tax revenue to schools Operative Test and community colleges to free up General Fund 1 2 3 support for the rest of the budget. Under the 1988‑89 X equal pain/equal gain provision, the freed-up 1989‑90 Xa General Fund for the rest of the budget would have 1990‑91 X triggered a supplemental school payment of nearly 1991‑92 X 1992‑93 Xa $900 million, negating a significant portion of 1993‑94 Xa the desired state benefit. In response, the 1993-94 1994‑95 X budget plan excluded the shift from the equal pain/ 1995‑96 X 1996‑97 X equal gain calculation. Under this approach, the 1997‑98 X state did not owe a supplemental appropriation. 1998‑99 X 1999‑00 X Maintenance Factor 2000‑01 X 2001‑02 X A “Maintenance Factor” Is Created in Two 2002‑03 X Situations. In addition to its other changes, 2003‑04 X 2004‑05 Xb Proposition 111 added constitutional provisions 2005‑06 X creating a maintenance factor under certain 2006‑07 X conditions. Specifically, the state creates a 2007‑08 X 2008‑09 X maintenance factor when Test 3 is operative or 2009‑10 X the minimum guarantee is suspended. These two 2010‑11 Xb situations tend to arise either when the state is 2011‑12 X 2012‑13 X experiencing an economic downturn or a structural 2013‑14 X budget imbalance. The maintenance factor reflects 2014‑15 X the difference between the actual level of funding Totals 5 15 7 a appropriated that year and the Test 1 or Test 2 In these years, the state adopted “poison pills” that suspended Proposition 98 under certain conditions. level (whichever is higher). Until paid off, the b In these years, the state suspended Proposition 98 and funded at a legislatively determined level rather than the formulaically derived outstanding maintenance factor obligation grows level. each year moving forward for changes in student enrollment and per capita personal income. Figure 3 New Maintenance Factor Obligations Created Supplemental Appropriations in Eight Times Since Proposition 111 Approved. Test 3 Years The first column of Figure 4 shows the eight years (In Millions) that the state has had new maintenance factor Amount obligations. To date, the largest maintenance factor 1990‑91 $68 obligation created in a single year was $9.9 billion 1992‑93 639 in 2008-09. A new maintenance factor obligation 1993‑94 — 2001‑02 1,367 does not necessarily imply that the minimum 2006‑07 93 guarantee has fallen from the prior year. In five 2007‑08 403 of the eight years in which the state created new 2008‑09 687 10 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT maintenance factor, Proposition 98 funding Figure 4 increased from the prior year. The three exceptions Maintenance Factor Obligations (1993-94, 2008-09, and 2010-11) occurred following (In Billions) the onset of deep recessions. New Paid Outstandinga Maintenance Factor Payments Derived by Formula. The second column of Figure 4 shows 1990‑91 $1.6 — $1.6 1991‑92 — $0.8 0.9 maintenance factor payments. The state is to make 1992‑93b — — 1.0 a maintenance factor payment when state revenue 1993‑94 1.2 — 2.2 is strong relative to per capita personal income. The 1994‑95 — 1.2 1.0 1995‑96 — 0.8 0.3 size of the required maintenance factor payment 1996‑97 — 0.2 0.2 depends on the difference between the growth 1997‑98 — 0.2 — in General Fund revenue and per capita personal 1998‑99 — — — 1999‑00 — — — income, with larger payments required when 2000‑01 — — — General Fund growth is significantly outpacing 2001‑02 3.8 — 3.8 growth in personal income. To date, the state 2002‑03 — 0.7 3.1 2003‑04 — 1.3 1.9 has been required to make maintenance factor 2004‑05 —c — 2.0 payments 11 times. The largest payment made to 2005‑06 — 2.1 — date was $5.7 billion in 2014-15. 2006‑07 0.2 — 0.2 2007‑08 1.1 — 1.3 State Typically Carrying Outstanding 2008‑09 9.9 — 11.2 Maintenance Factor. The third column of Figure 4 2009‑10 — 2.1 9.2 tracks the state’s total outstanding maintenance 2010‑11 1.4 — 10.4 2011‑12 — — 10.6 factor obligation. The state typically is carrying 2012‑13 — 5.2 5.9 some amount of outstanding maintenance factor, 2013‑14 — — 6.2 with an outstanding obligation existing 20 of the 2014‑15 — 5.7 0.5 a Outstanding maintenance factor is adjusted annually for the past 25 years. The largest outstanding maintenance change in student attendance and California per capita personal income. factor the state has ever carried was $11.2 billion b Though Test 3 was operative, the state created no new at the end of 2008-09. The only prolonged period maintenance factor because it made a supplemental appropriation resulting in the total amount of Proposition 98 funding equaling the without any outstanding maintenance factor Test 2 level. c Test 2 was operative but the state retained roughly the same level obligation was the four-year period extending from of outstanding maintenance factor due to the suspension of the minimum guarantee. 1997-98 through 2000-01, a period of sustained economic prosperity for California. Specifically, if Test 1 is operative and exceeds the Test 2 level by more than 1.5 percent of General Other Key Provisions Fund revenue, then any amount in excess of the Constitution Includes a Formula to Address 1.5 percent threshold does not count for purposes Revenue Spikes. In addition to creating Test 3 of calculating the minimum guarantee the and maintenance factor, Proposition 111 created following year. To date, this provision has been a constitutional formula commonly referred to operative twice. In 2012-13, the spike protection as “spike protection.” The formula is intended to provision had the effect of lowering the 2013-14 estimate the portion of school funding associated minimum guarantee by $2.2 billion from what it with one-time revenue spikes and exclude that otherwise would have been, and in 2014-15, the funding from future Proposition 98 calculations. www.lao.ca.gov Legislative Analyst’s Office 11 AN LAO REPORT provision had the effect of lowering the 2015-16 conditions, tax revenue related to capital gains minimum guarantee by $1 billion. must exceed 8 percent of total General Fund Constitution Includes Rules for Deposits revenue. The Legislature can suspend or reduce Into and Withdrawals From School Stabilization an otherwise required deposit if the Governor Account. Proposition 2 set forth a complex set of declares a fiscal emergency. If the state is to make rules governing the timing and size of the state’s a deposit, the size of the deposit is capped at the deposits into and withdrawals from the School difference between the Test 1 and Test 2 levels Stabilization Account. The state is to make a that year. The cumulative amount in the School deposit if all of the following conditions are met: Stabilization Account is capped at 10 percent of Test 1 is operative, the state has not suspended total Proposition 98 funding provided that year. the minimum guarantee, the state has retired all The measure requires the state to make withdrawals maintenance factor existing prior to 2014-15, and whenever the account has a positive balance and the state has first funded the prior-year funding Proposition 98 funding is insufficient to support level adjusted for changes in ADA and the higher the prior-year funding level adjusted for ADA and of two inflationary measures—the change in the higher of the two inflationary measures. To per capita personal income or the state and local date, the state has not made any deposits into the government price index. In addition to these account. TRUE UPS The formulas governing Proposition 98 and General Fund revenue. The state does not depend upon many inputs that can change after lock down most Proposition 98 inputs until after the adoption of the state budget. The state revises the end of a fiscal year. Particularly in the case its estimates and trues up the guarantee for of General Fund revenue, revisions can be made these changes. Below, we describe how the state over many months and changes between initial trues up the guarantee; track how the state has and final budget estimates can be notable. When addressed resulting increases and decreases in estimates of Proposition 98 inputs are revised, the the guarantee; highlight some of the unexpected state recalculates the minimum guarantee. The results of true ups; and explain “certification,” the state then typically adjusts Proposition 98 funding statutory mechanism the state created to finalize its to align it with the final estimate of the minimum Proposition 98 calculations. guarantee. Often Big Differences Between Initial and True Up Process Final Proposition 98 Funding Levels. For each State Updates Proposition 98 Inputs and year since 1988-89, Figure 5 compares initial and Correspondingly Revises Estimates of the final Proposition 98 funding levels. Over the past Minimum Guarantee. At the time of initial 27 years, the final Proposition 98 funding level budget enactment, the state typically funds at the has been higher than the original budget act level minimum guarantee. Over subsequent months, 15 years and lower 12 years. Differences have been the state updates most of the Proposition 98 as large as $6.3 billion on the upside (in 2014-15, inputs, including estimates of student attendance reflecting a 10 percent increase from the original 12 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT budget act level) and as large as $8.9 billion on the ending or shortly thereafter several times, including downside (in 2008-09, reflecting a 15 percent drop in 2003-04, 2005-06, 2012-13, and 2013-14. from the original budget act level). At Other Times, State Has Settled Up Several Years Later. In other cases, the state has not settled Upward and Downward Revisions up immediately. In some of these instances, the State “Settles Up” When the Guarantee state has created out-year payment plans. For Exceeds Initial Budget Estimate. When the final example, in 2004, the state estimated it had a total minimum guarantee is higher than the initial outstanding settle-up obligation of $1.4 billion estimate, the state is required to settle up—making associated with increases in the minimum an additional appropriation to meet the higher guarantees for 1995-96, 1996-97, 2002-03, and guarantee. 2003-04. Chapter 216 of 2004 (SB 1108, Committee State Sometimes Has Settled Up Immediately. on Budget and Fiscal Review) appropriated Sometimes the state has settled up as a fiscal year $150 million annually beginning in 2006-07 for the is ending. For example, in 2014-15, an upward Figure 5 revision to the estimate Initial and Final Proposition 98 Funding Levels of state General Fund (Dollars in Billions) revenue increased the Difference Original Budget Final minimum guarantee Act Funding Level Funding Levela Amount Percent by $5.4 billion, and 1988‑89 $18.9 $19.4 $0.4 2.3% the state provided 1989‑90 20.8 21.1 0.3 1.2 the corresponding 1990‑91 22.7 21.2 ‑1.5 ‑6.7 1991‑92 24.6 23.6 ‑1.0 ‑4.1 Proposition 98 1992‑93 24.6 23.8 ‑0.8 ‑3.1 augmentation as part of its 1993‑94 24.5 23.5 ‑1.0 ‑4.0 June 2015 budget package. 1994‑95 24.9 25.2 0.4 1.5 1995‑96 26.3 27.9 1.6 6.0 Sometimes the state has 1996‑97 29.1 30.3 1.2 4.1 been required to settle 1997‑98 32.5 32.8 0.3 1.1 up again due to further 1998‑99 35.2 35.6 0.4 1.1 1999‑00 37.8 39.8 1.9 5.1 upward revisions to the 2000‑01 42.8 42.9 0.1 0.2 minimum guarantee. For 2001‑02 45.4 43.4 ‑2.0 ‑4.5 example, when the 2014-15 2002‑03 46.5 44.3 ‑2.2 ‑4.8 2003‑04 45.7 47.0 1.3 2.8 minimum guarantee later 2004‑05 49.3 48.7 ‑0.6 ‑1.2 increased by an additional 2005‑06 49.2 53.3 4.1 8.3 $843 million due to even 2006‑07 55.1 54.8 ‑0.3 ‑0.5 2007‑08 57.1 56.6 ‑0.5 ‑1.0 higher revenue estimates, 2008‑09 58.1 49.2 ‑8.9 ‑15.3 the state provided 2009‑10 50.4 51.6 1.2 2.4 the corresponding 2010‑11 49.7 49.6 ‑0.0 ‑0.0 2011‑12 49.7 47.3 ‑2.4 ‑4.9 augmentation as part of its 2012‑13 53.5 58.0 4.4 8.3 June 2016 budget package. 2013‑14 55.3 58.9 3.6 6.6 The state has settled up 2014‑15 60.9 67.1 6.3 10.3 a while the fiscal year is Reflects higher of actual appropriation or minimum guarantee including settle‑up obligation. www.lao.ca.gov Legislative Analyst’s Office 13 AN LAO REPORT purpose of paying off this outstanding obligation. payment deferrals initiated in previous years. In (The state later superseded this payment schedule weaker economic times, the state has used settle-up with one-time payments of $300 million in 2006-07 payments as one-time backfills for ongoing and $1.1 billion in 2008-09.) In other instances, the programs. For example, in 2008-09 the state state has recorded an obligation but scheduled the dedicated $1.1 billion in settle-up funding toward payment far in the future. For example, in July 2009 K-12 revenue limits. the state identified a $212 million obligation related State Has $1 Billion Outstanding Settle-Up to meeting the 2006-07 minimum guarantee and Obligation. As of July 2016, the state has retired the scheduled the payment for 2014-15 (later changed settle-up obligations for all years prior to 2009-10. to 2015-16). In some cases, the state has recorded It has a total outstanding settle-up obligation of an obligation without adopting a complete payment $1 billion, consisting of $903 million for 2009-10, schedule. For example, in October 2010, the state $98 million for 2011-12, and $13 million for recorded a $1.8 billion settle-up obligation for 2013-14. To date, the state has not established an 2009-10. At that time, the state made an initial associated payment plan. payment of $300 million but adopted no specific State Has Taken Various Actions When the plan for paying the remainder of the obligation. Guarantee Has Dropped. Eleven of the 12 times (The state nonetheless made partial settle-up that the minimum guarantee has dropped payments for 2009-10 in 2015-16 and 2016-17.) after initial budget enactment, the state has State Has Designated Settle-Up Funding for taken action to reduce Proposition 98 funding Various Proposition 98 Initiatives and Programs. to the updated estimate of the guarantee. (The When the state provides additional funding to meet exception is 2010-11, when spending adjusted a higher minimum guarantee, it may designate that downward automatically due to a decline in additional funding for any Proposition 98 purpose. student attendance.) Specific state actions to reduce In strong economic times, the state has designated Proposition 98 spending have included (1) deferring settle-up funding for a wide range of one-time some program payments until the next fiscal year, purposes, from paying down the education (2) swapping ongoing Proposition 98 General mandates backlog to creating or temporarily Fund monies with special fund monies and expanding discretionary school district and school unspent Proposition 98 monies from prior years, site block grants; art, music, and physical education (3) reclassifying spending as paying outstanding block grants; school and staff performance settle-up obligations, (4) no longer forward funding awards; teacher recruitment initiatives; staff certain programs, (5) postponing first-year funding development; programs for English learners; for certain programs, and (6) making various adult education; school safety and community midyear cuts to education programs. Regarding policing; instructional materials; computers and programmatic cuts, the state typically has reduced other education technology; deferred maintenance; funding in targeted ways, for example, making emergency facility repairs; child care facilities; cuts to teacher professional development and new facilities to support class size reduction; and facility maintenance programs. In a few cases, the career technical education equipment. During state has applied across-the-board reductions to the most recent economic recovery, the state also Proposition 98 programs. used settle-up funding for eliminating education 14 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Unexpected Results of True Ups of the 2002-03 minimum guarantee increased by $1.2 billion. This increase largely was attributable Some Changes in Inputs Can Lead to to an upward revision in per capita personal Unexpected Results. Sometimes updating the income (from -3 percent to -1.3 percent), the key Proposition 98 inputs has changed the minimum Proposition 98 growth factor that year. guarantee in ways that legislators and others have Guarantee Can Increase When State not expected. The most common surprises have Population Drops. Estimates of the state’s involved how changes in state revenue, per capita civilian population affect both per capita personal personal income, and state population estimates income and per capita General Fund revenue. affect the guarantee. Legislators and others also When the state revises its estimate of the civilian sometimes have been surprised that the minimum population, these two key Proposition 98 inputs guarantee has moved in one direction while the in turn change. Drops in the civilian population Proposition 98 General Fund share of the guarantee increase per capita amounts. For example, as part has moved in the opposite direction. These latter of the 1997-98 May Revision, the Department of surprises are connected to changes in property Finance reduced its 1996 estimate of the state’s tax revenue estimates. We describe each of these population, which increased per capita General counterintuitive situations in detail below. Fund revenue growth. In turn, the minimum Guarantee Can Increase When State Revenue guarantees for 1995-96, 1996-97, and 1997-98 Drops. When General Fund revenue estimates increased (by almost $600 million combined over for the current year and the budget year fall, the the three years, largely as a result of higher required budget-year minimum guarantee can increase. maintenance factor payments). Later, as part of the This happened, for example, when the state was 2000-01 May Revision, the minimum guarantees building the 2012-13 budget. At the time of the for these three years were increased again (by more 2012-13 May Revision, General Fund revenue than $500 million) as a result of new census data estimates dropped below January estimates by reflecting even less population growth. $2.1 billion in 2011-12 and $300 million in 2012-13. Guarantee Can Fall While Proposition 98 Because the drop in 2011-12 was greater than the General Fund Cost Rises. This dynamic occurs drop in 2012-13, the year-over-year growth rate in when estimates of local property tax revenue fall per capita General Fund revenue increased (from more than estimates of the guarantee. In this 7.5 percent to 10.1 percent). The higher growth rate situation, the General Fund backfills for the loss required the state to make a larger maintenance of local property tax revenue, thereby increasing factor payment, which in turn increased the the Proposition 98 General Fund share. Factors 2012-13 minimum guarantee by $1.2 billion over unfolded in this way, for example, in 2007-08. the January level. In a few cases, revisions to other Between July 2007 and July 2009, estimates of Proposition 98 inputs have resulted in higher the 2007-08 minimum guarantee fell by about minimum guarantees despite declines in state $550 million, but the General Fund share of the revenue. One notable instance occurred during the guarantee increased by $540 million. The increase development of the 2002-03 budget. At the time of in the General Fund share was due to a more than the 2002-03 May Revision, General Fund revenue $1 billion drop in projected local property tax estimates for 2001-02 and 2002-03 had fallen a total revenue. of $9.5 billion from January levels, yet the estimate www.lao.ca.gov Legislative Analyst’s Office 15 AN LAO REPORT Certification about which programs should be funded through Proposition 98 delayed certification of the 1988-89 State Created Certification Process to Finalize guarantee until 1992. Disagreements primarily Proposition 98 Calculations. Proposition 98 did about the amount of property tax revenue to not contain any specific mechanism to finalize count toward the guarantee delayed certification the calculation of the minimum guarantee. for the 1990-91 through 1994-95 years until 1996. Implementing legislation adopted in 1989 assigned Further disagreements resulted in no additional this responsibility to the Director of Finance, the certifications until 2006—at which time the State Superintendent of Public Instruction, and the 1995-96 through 2003-04 years were certified. As Chancellor of the California Community Colleges. of this writing, 2007-08 is the last year for which Under state law, these individuals are to agree upon the state has certified the guarantee. (In 2008-09, and certify a final calculation of the minimum the state adopted legislation specifying the final guarantee within nine months following the end of minimum guarantee for that year, but it did not the fiscal year. explicitly certify it.) When the state certifies the Certification Has Happened a Few Times. minimum guarantee for a particular year, any Though the law is designed such that certification amount exceeding the previous estimate of that is to occur annually, the state agencies responsible guarantee becomes a settle-up obligation. for certification rarely have agreed on all aspects of the Proposition 98 calculations. Disagreements REVENUE AND PROGRAM SHIFTS Whereas the earlier parts of this report focus state has struggled to balance its budget. The only on basic funding formulas and routine true ups, prolonged period when the state did not make this section tracks the various ways the state has any revenue shifts was from 1995-96 through adjusted the formulas. Below, we first identify 2001-02—a period throughout most of which state revenue shifts affecting the Proposition 98 revenue grew rapidly. calculations. We then track programs shifted into Most Revenue Adjustments Have Entailed or out of the minimum guarantee. Local Property Tax Shifts. Of the 24 revenue- related actions with Proposition 98 implications, Revenue Shifts 19 involved property tax shifts. The vast majority Twenty Four Revenue Shifts Affecting of the property tax shifts (17 of the 19) involved Proposition 98 Calculations. As evident in shifting local property tax revenue from other local Figure 6 (see pages 18 and 19), few years have governments (cities, counties, special districts, or passed since 1988 without the state making at redevelopment agencies) to school districts and least one revenue shift affecting the Proposition 98 community colleges. In these cases, the shifts formulas. The state has authorized most of these helped the state balance its budget by reducing shifts via statute, typically as part of a budget the General Fund share of the Proposition 98 package, though the state has placed a few of minimum guarantee. To ensure the state obtained the shifts before voters via ballot measure. Shifts both initial and ongoing General Fund benefit, have been most common during times when the the state rebenched the Test 1 factor for these 16 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT shifts. Specifically, the state lowered the share of Program Shifts the General Fund used for Test 1 to account for Proposition 98 Implementing Legislation the additional property tax revenue directed to Specified What to Include and Exclude From schools and community colleges. (If Test 1 was Minimum Guarantee. Proposition 98 specified not operative the year a shift occurred, the state that its funding formulas and rules were “to be still rebenched to ensure out-year General Fund applied by the State for the support of school benefit.) In the other two shifts—the vehicle license districts and community college districts.” In fee swap and the triple flip—property tax revenue 1989, the state enacted implementing legislation was shifted away from schools and colleges. In specifying certain programs that were and were these two cases, the state also rebenched the not to count toward the minimum guarantee. General Fund Test 1 factor, but the factor was The implementing legislation specified that “any increased to account for the reduced property appropriation not made for allocation to a school tax revenue directed to schools and community district…or to a community college district” be colleges. excluded from the guarantee. The same legislation, Remaining Actions Involved Sales Tax however, specified that all subsidized child care Revenue. Since 1988, the state has taken five and preschool programs (some of which were not sales tax-related actions that have had significant operated by districts) be included in the minimum Proposition 98 implications. Two of the five actions guarantee. Additionally, the implementing involved the devolution of certain programs from legislation specifically excluded state appropriations the state to the local level. For both the 1991-92 and for the Teachers’ Retirement Fund and the 2011-12 realignments, the state designated sales Public Employees’ Retirement Fund, as well as tax revenue for the program realignments and state appropriations made to service any public permanently excluded the associated revenue from debt approved by California voters. In 1996, the the Proposition 98 calculations. Two other cases state enacted related legislation specifying that involved gasoline. In 2010-11, the state replaced appropriations not made for allocation to school the sales tax on gasoline, which had counted districts or community college districts could count toward the Proposition 98 calculations, with an toward the minimum guarantee only if provided excise tax on gasoline, which otherwise would not “statutory authorization independent of the annual count. To hold schools and community colleges Budget Act.” harmless from the change, the state estimated the Several Programmatic Shifts Linked With amount generated if the sales tax on gasoline had Rebenchings of Minimum Guarantee. On several remained in effect and counted that amount toward occasions, the state has shifted programs between the Proposition 98 calculations. In 2011-12, the the Proposition 98 and non-Proposition 98 sides of state retracted this hold harmless provision. The the budget. When the state has made these shifts, it other action occurred in 1989-90 when the state has continued to support the program but replaced levied a temporary sales tax increase and used all Proposition 98 funds with non-Proposition 98 proceeds for disaster relief in response to the Loma funds or vice versa. Figure 7 (see page 20) lists Prieta earthquake, excluding the revenue from the the instances when the state shifted programs Proposition 98 calculations. and correspondingly rebenched the guarantee. Rebenching entailed increasing the minimum guarantee for programs shifted into Proposition 98 www.lao.ca.gov Legislative Analyst’s Office 17 AN LAO REPORT Figure 6 Major Revenue-Related Actions Affecting Proposition 98 Calculations State Action Fiscal Effecta 1989-90 Loma Prieta Earthquake Disaster Relief. State excluded revenue Raised a total of $800 million in state generated by a temporary quarter-cent sales tax increase from the revenue over 1989-90 and 1990-91, Proposition 98 calculations. State dedicated revenues to disaster relief. with no associated increase in the minimum guarantee. 1991-92 1991 Realignment. State provided revenue from a new ongoing Raised $1.4 billion in state revenue, half-cent sales tax increase to local governments as part of realigning with no associated increase in the certain health and human services programs. State excluded revenue minimum guarantee. from Proposition 98 calculations. 1992-93 Educational Revenue Augmentation Fund (ERAF) Shift. State Reduced Proposition 98 General Fund required cities, counties, and special districts to shift property tax cost by $1.1 billion. revenue on an ongoing basis to school and community college districts. Redevelopment Agencies (RDAs) Shift. State required RDAs to shift Reduced Proposition 98 General Fund revenue on a one-time basis to school and community college districts. cost by $205 million. Vehicle License Fee (VLF) Roundabout. State required cities and Reduced Proposition 98 General Fund counties to shift property tax revenue on a one-time basis to schools. cost by $100 million. Cities and counties were backfilled with VLF revenue. 1993-94 ERAF Shift. State required cities, counties, and special districts to Reduced Proposition 98 General Fund shift additional property tax revenue on an ongoing basis to school and cost by $2.6 billion. community college districts. RDA Shift. State required RDAs to shift revenue on a one-time basis to Reduced Proposition 98 General Fund school and community college districts. cost by $65 million. 1994-95 RDA Shift. State required RDAs to shift revenue on a one-time basis to Reduced Proposition 98 General Fund school and community college districts. cost by $65 million. 2002-03 RDA Shift. State required RDAs to shift revenue on a one-time basis to Reduced Proposition 98 General Fund school and community college districts cost by $75 million. 2003-04 RDA Shift. State required RDAs to shift revenue on a one-time basis to Reduced Proposition 98 General Fund school and community college districts. cost by $135 million. 2004-05 VLF Swap. State required school and community college districts to Increased Proposition 98 General Fund shift property tax revenue on an ongoing basis to cities and counties to cost by $4.1 billion. backfill for reduced VLF revenue. ERAF Shift. State required cities, counties, special districts, and Reduced Proposition 98 General Fund RDAs to shift property tax revenue on a one-time basis to school and cost by $1.3 billion. community college districts. Triple Flip. State shifted property tax revenue from school and Increased Proposition 98 General Fund community college districts to cities and counties to backfill for cost by $1.1 billion per year until ERBs redirected local sales tax revenue used to retire state Economic retired. Recovery Bonds (ERBs). 2005-06 ERAF Shift. State required cities, counties, special districts, and Reduced Proposition 98 General Fund RDAs to shift property tax revenue on a one-time basis to school and cost by $1.3 billion. community college districts. (Continued) 18 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT State Action Fiscal Effecta 2008-09 RDA Shift. State required RDAs on a one-time basis to shift Would have reduced Proposition 98 $350 million into ERAF. A superior court invalidated the action in April General Fund cost by $350 million. 2009 and the state subsequently retracted it. 2009-10 Supplemental Educational Revenue Augmentation Fund (SERAF) Reduced Proposition 98 General Fund and Supplemental Revenue Augmentation Fund (SRAF) Shifts. cost by $850 million. In a complicated financing mechanism, RDAs deposited revenue into SERAF, which triggered a reduction in certain school districts’ base property tax allocations, with the base revenue in turn shifted to SRAF. SRAF first paid for various state costs within counties, with the remainder transferred to ERAF and used to reduce Proposition 98 General Fund costs. 2010-11 SERAF and SRAF. State continued using SERAF, SRAF, and ERAF to Reduced Proposition 98 General Fund reduce Proposition 98 General Fund costs. cost by $350 million. 2011-12 2011 Realignment. State redirected a portion of its existing sales tax Stopped counting $5.1 billion in rate (1.0625 cent) on an ongoing basis to various local public safety state General Fund toward the programs. Statute excluded associated revenue from Proposition 98 Proposition 98 calculations, dropping calculations as long as voters approved a ballot measure before the guarantee by $2.1 billion. November 17, 2012 that (1) authorized the exclusion and (2) provided an equal amount of Proposition 98 funding. Voters approved Proposition 30, which met these conditions. RDA Dissolution and Remittance Payments. State dissolved RDAs Would have reduced Proposition 98 but allowed them to retain some power by making remittance payments General Fund cost by $1.7 billion. to schools, fire protection districts, and transit districts. The California Supreme Court upheld RDA dissolution but deemed the remittance payments unconstitutional, negating the General Fund benefit. Gas Tax Swap. State eliminated its sales tax on gasoline, which had Increased minimum guarantee and counted toward the guarantee, and replaced it with an excise tax that Proposition 98 General Fund cost by otherwise would not count toward the guarantee. The state initially held $578 million. schools and community colleges harmless by assuming the gas sales tax revenue still existed for the purposes of Proposition 98 calculations. 2012-13 Revenue From Former RDAs. State required former RDAs to shift Reduced Proposition 98 General Fund all their existing revenue and assets, less debt, to cities, counties, cost by $3.2 billion. schools, and community colleges. Gas Tax Swap. The state retracted its earlier decision and decided not Reduced 2011-12 minimum guarantee to hold schools and community colleges harmless for the elimination of and Proposition 98 General Fund cost the sales tax on gasoline. by $609 million. 2013-14 Revenue From Former RDAs. For Test 1 years, state stopped Upon completion of revenue shift, reducing Proposition 98 General Fund costs for the increase in former potential benefit to school and RDA revenue shifted to school and community college districts, community college districts of up to meaning districts receive greater total funding these years. $1 billion, but no benefit provided in Test 2 and Test 3 years. 2015-16 Triple Flip. State paid off a portion of the ERBs in 2015-16, with the Reduced Proposition 98 General Fund remainder retired in 2016-17. The end of the triple flip shifted property cost by $1.2 billion in 2015-16 and tax revenue back to school and community college districts. $1.7 billion on an ongoing basis. a Reflects estimate for that year at the time of initial enactment. In several cases, final amounts for that year varied significantly from initial budget estimates. www.lao.ca.gov Legislative Analyst’s Office 19 AN LAO REPORT Figure 7 Program Shifts Affecting Minimum Guarantee Shifted In or Program(s) Out? Description of Action and Fiscal Effect 1995-96 15 programs (Subject Matter Projects; Bilingual Out State shifted $22 million for these programs out of Teacher Recruitment; Math, Engineering, Proposition 98, lowering the minimum guarantee and Science Achievement; California School dollar for dollar. State began supporting the Leadership Academies; Advancement Via Individual programs with non-Proposition 98 General Fund. Determination; International Studies; School Crime Report; Interstate Collaboratives; Exploratorium; Interactive Television; Intersegmental Committee; School Law Enforcement Project; Student Vocational Education Programs; Intergenerational Program; Geography Education Alliances) 2011-12 Child care programs and preschool wraparound care Out The state shifted $1.1 billion for child care programs and preschool wraparound care out of Proposition 98, lowering the minimum guarantee dollar for dollar. State began supporting programs with non-Proposition 98 General Fund. Student Mental Health Services In State shifted program into Proposition 98 and provided $222 million (about $70 million more than estimated prior-year program costs), increasing the minimum guarantee dollar for dollar. 2012-13 Student Mental Health Services In State provided $99 million Proposition 98 funds to backfill for the loss of one-time Proposition 63 funds, increasing the minimum guarantee dollar for dollar. State general obligation bond debt service for school In State created a trigger that would have begun facilities paying these costs with Proposition 98 funds. Under the trigger, the state would have increased the minimum guarantee by $190 million, while increasing Proposition 98 costs by $2.5 billion. Voters approved Proposition 30, so the change did not go into effect. and decreasing the guarantee for programs shifted out of the minimum guarantee in 2011-12, the out of Proposition 98. For programs shifted into state rebenched the guarantee downward dollar Proposition 98, rebenching avoided crowding out for dollar based on the value of the programs in other school spending. For programs shifted out of the prior year. By comparison, for the shift of Proposition 98, rebenching avoided crowding out student mental health services into the guarantee other state spending. in 2011-12, the state first augmented funding for Various Methods Used to Rebench for the services and then rebenched the guarantee. Program Shifts. Though rebenching the minimum For the shift of debt service proposed in 2011-12, guarantee occurred for all the programs shown the state took yet another approach, rebenching in Figure 7, the specific method the state used to the minimum guarantee based on the ratio of rebench varied. In some of the instances shown on debt-service payments to total K-14 spending in Figure 7, such as the shift of child care programs 1986-87, when debt-service costs were much lower. 20 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Several Programmatic Shifts Made Without a corresponding reduction in the minimum Rebenching Minimum Guarantee. In several cases, guarantee. The next year, the state switched back the state has undertaken program shifts without to funding the program with Proposition 98 funds, rebenching the guarantee. Programs shifted into without increasing the guarantee. the guarantee without a corresponding increase in Two Authorized Shifts Linked With Triggers, the guarantee include the University of California One With, One Without Rebenching. In 2012-13, (UC) Professional Development Institutes (2002- the state authorized two shifts but made them 03), the K-12 High Speed Network (2004-05), and conditional on a ballot measure (Proposition 30) preschool wraparound care provided by local not passing. One of these shifts, involving school educational agencies (2015-16). In a few cases, facility debt service, was to entail rebenching programs were shifted out and back again in quick (as mentioned above), whereas the other shift, succession. Most notably, in 2008-09, the state involving the Early Start program, was not to replaced Proposition 98 funding for the Home-to- involve rebenching. As voters approved the School Transportation program with $593 million measure, neither of these two programs ultimately from the Public Transportation Account, without were shifted into the guarantee. MAJOR CONTROVERSIES In certain cases, the state has realized that the suspension of Proposition 98, meaning if state adjustments it was making to the Proposition 98 actions were challenged, the state would suspend calculations might be challenged. In some of these the guarantee. The fourth poison pill halted a tax cases, the state adopted poison pills that set forth increase if the state’s exclusion of the associated seemingly dire repercussions if the state’s actions revenue from the Proposition 98 calculations were were challenged. In other instances, the state took no challenged. Each poison pill is described briefly in specific action to address potential challenges. On Figure 8 (see next page). None of the consequences set several occasions, the state was sued over its actions. forth in the poison pill provisions ultimately occured. Below, we discuss Proposition 98-related poison Five Lawsuits, One Appellate Ruling, and Two pills, litigation, court rulings, and settlements. We Settlements. The state has been sued five times over then discuss longstanding debates surrounding its Proposition 98-related actions. In three of these the payment and creation of maintenance factor suits, the California Teachers Association (CTA) in Test 1 years. We conclude this part of the report led the suit against the state and, in the other two by discussing longstanding debates regarding suits, the California School Boards Association led which programs should be funded within the the suits. Four of these cases resulted in published Proposition 98 minimum guarantee. court decisions, with the state prevailing in two of the four cases. One of these four cases (CTA Poison Pills, Litigation, and Settlements v. Hayes) had an appellate court ruling, thereby Four Poison Pills. In the period immediately providing legal precedent for future Proposition 98 following enactment of Proposition 98, the state cases. In CTA v. Schwarzenegger, the parties adopted four Proposition 98-related poison pills. reached a settlement prior to the superior court Three of the four poison pills involved a conditional ruling. The state also reached a settlement in the www.lao.ca.gov Legislative Analyst’s Office 21 AN LAO REPORT Figure 8 Proposition 98-Related Poison Pills Poison Pill Legislation 1989-90 State adopted language suspending Proposition 98 “to the extent Chapter 14 of 1989-90 First Extraordinary Session that its provisions conflict” with the state’s treatment of sales tax (SBX1 33, Mello) revenue for disaster relief. 1991-92 State adopted language ceasing a new sales tax rate increase Chapter 85 of 1991 (AB 2181, Vasconcellos) if a court ruled that the revenues counted toward the minimum guarantee. (Associated revenues were designated for various locally realigned programs.) 1992-93 State adopted language suspending Proposition 98 if an Chapter 703 of 1992 (SB 766, no named author) appellate court deemed “unconstitutional, unenforceable, or otherwise invalid” either the calculation of the Test 1 factor due to certain shifts of local property tax revenue or the designation of certain Proposition 98 funding as an “emergency loan.” 1993-94 State adopted language suspending Proposition 98 “to the extent Chapter 73 of 1993 (SB 509, Committee on Budget that its provisions conflict” with the state’s treatment of a sales tax and Fiscal Review) rate increase for public safety realignment. CTA v. Gould lawsuit after a superior court ruled on top of the higher test. This approach would have against the state. These agreements were codified increased school funding beyond the level required in state law. Figure 9 summarizes the challenge and to keep pace with per capita personal income. outcome of each of the five lawsuits. The 1996 CTA v. Gould settlement acknowledged this dispute but did not resolve it. Instead, the Maintenance Factor Debates parties to the lawsuit agreed that they would use Debate Over Payment of Maintenance the administration’s calculation for 1994-95 but Factor. Only a few years after the passage of not consider it precedent for any future litigation Proposition 111, disputes began arising over how involving Proposition 98. the Proposition 98 and Proposition 111 formulas Debate Over Creation of Maintenance Factor. were to interact in Test 1 years. One of the most In addition to the dispute involving the payment of significant disputes centered around how the state maintenance factor in Test 1 years, a dispute arose was to make a $1.2 billion maintenance factor concerning whether a maintenance factor was payment in 1994-95. The administration contended created in Test 1 years. This dispute came to a head that the state should calculate the minimum in 2008-09. In February 2009, initial Proposition 98 guarantee by adding the maintenance factor projections showed that the state could end up in payment to the Test 2 funding level, comparing an anomalous position—though General Fund the resulting total to the Test 1 funding level, and revenue was expected to grow less quickly than providing schools and community colleges the per capita personal income, Test 1 rather than higher of the two amounts. This approach would Test 3 was expected to be operative. As with the have increased school funding to the level needed 1994-95 dispute, groups took differing positions to keep pace with growth in per capita personal based upon their conceptual understanding of income since 1988-89. The CTA believed that the the purpose of maintenance factor as well as state should calculate the minimum guarantee by the resulting implication for school funding. In first comparing the Test 1 and Test 2 funding levels response to the 2008-09 dispute, the Legislature and then adding the maintenance factor payment placed Proposition 1B on the May 2009 ballot. 22 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Proposition 1B required the state to create a calculations based upon an updated revenue supplemental obligation in lieu of maintenance estimate showing that Test 3 had become operative factor, to be paid over a period of several years. and a maintenance factor obligation was created. Proposition 1B was intended to ensure schools As with Proposition 1B, this agreement did not benefited regardless of which test ultimately address the underlying dispute about the formulas. became operative, but the measure offered no Maintenance Factor Debate Continues. lasting resolution to the dispute. In July 2009, after Decisions about how to pay and whether to create voters rejected the measure, the Legislature and maintenance factor in Test 1 years were key factors Governor agreed to finalize the Proposition 98 affecting the calculations of the 2011-12, 2012-13, Figure 9 Proposition 98-Related Lawsuits and Settlements Challenge Outcome 1992 CTA v. Hayes. CTA challenged the state’s action to count Appellate court ruled the Legislature had not been “arbitrary child care and development funding toward the minimum and unreasonable in its determination that the Child Care guarantee. CTA argued that funding could be counted and Development Services Act furthers the purposes of toward the guarantee only when allocated directly to local public education,” and therefore could be funded within educational agencies. the minimum guarantee. Appellate court also affirmed that “under our Constitution the Legislature is given broad discretion in determining the types of programs and services which further the purposes of education.” 1996 CTA v. Gould. CTA challenged the state’s actions in Superior court ruled the loans invalid. Parties subsequently 1992-93 and 1993-94 to count certain Proposition 98 reached a settlement agreement in April 1996. Chapter 78 appropriations as loans. The loans were intended to of 1996 (SB 1330, Committee on Budget and Fiscal avoid significant midyear cuts or year-over-year drops Review) codified the agreement. Chapter 78 repealed in per-pupil funding while allowing the state to count the certain actions taken in 1992-93 and 1993-94, scheduled funds toward meeting the guarantee the subsequent certain loan repayments from 1996-97 through 2001-02, year(s). increased the state’s outstanding maintenance factor obligation, and declared that such loan mechanisms were not to be used in the future. 2006 CTA v. Schwarzenegger. CTA challenged the state’s Settlement achieved prior to superior court ruling. Proposition 98 appropriation levels for 2004-05 and Chapter 751 of 2006 (SB 1133, Torlakson) recognized 2005-06. CTA argued the state intended to suspend additional Proposition 98 obligations for 2004-05 and the 2004-05 minimum guarantee by $2 billion, and the 2005-06 and scheduled a total of $2.7 billion in associated appropriation level for that year (and the next year) ended payments over the subsequent seven-year period (2007-08 up being lower than intended. CTA sought $2.7 billion in through 2013-14). additional Proposition 98 funding ($1.6 billion for 2004-05 and $1.1 billion for 2005-06). 2012 CSBA v. California. CSBA challenged the state’s decision Superior court ruled that Proposition 98 did not prohibit to exclude certain sales tax revenue from the calculation the state from shifting revenue out of the General of the 2011-12 minimum guarantee. Specifically, CSBA Fund or create an obligation to rebench the guarantee. argued that when the state shifted revenue from the CSBA appealed, but voters subsequently approved General Fund to local governments, it had to rebench the Proposition 30, which ratified the state’s action. Test 1 factor upward to provide schools a higher share of the remaining General Fund. 2016 CSBA v. Cohen. CSBA challenged the state’s decision to Superior court ruled that “rebenching is constitutionally pay preschool wraparound costs using Proposition 98 required to achieve the purposes of the minimum funding funds without a corresponding upward rebenching of the guarantee” and ordered the state to either rebench the minimum guarantee. (The state previously had covered guarantee or discontinue using Proposition 98 to fund the costs using non-Proposition 98 funds.) wraparound costs. The state has appealed the decision. CTA = California Teachers Association and CSBA = California School Boards Association. www.lao.ca.gov Legislative Analyst’s Office 23 AN LAO REPORT and 2014-15 minimum guarantees (all Test 1 fulfill other statewide functions, including supporting years). Regarding payments, the state decided to districts’ career technical education, adult education, pay maintenance factor on top of the Test 1 level preschool, special education, and alternative education in 2012-13 and 2014-15, a reversal of its 1994-95 programs. In these cases, the California Department approach. Regarding the creation of new obligations, of Education has supported districts directly. the state decided not to create any new maintenance Inconsistent Practice for Funding Nonprofit factor in 2011-12, a reversal of its 2008-09 approach. Agencies. A plethora of examples exist of the The state has not been sued over these actions. state using Proposition 98 funds to support some nonprofit educational agencies but Program Debates non-Proposition 98 funds to support other Many Debates Regarding Which Programs to nonprofit educational agencies. For example, Fund Within Minimum Guarantee. Since 1988, the state has funded the Institute for Computer debates involving what programs to fund within the Technology, Center for Civic Education, California minimum guarantee have emerged almost every College Guidance Initiative, and the Corporation year. These debates have arisen primarily because for Education Network Initiatives in California Proposition 98 does not include specific principles with Proposition 98 funds. It has funded other that might guide legislators in determining what nonprofit organizations, such as the Exploratorium, programs qualify for Proposition 98 funding. To California Association of Student Councils, and date, many examples exist of the state supporting Advancement Via Individual Determination with certain programs with Proposition 98 funds but non-Proposition 98 funds. In a few cases, the state very similar programs with non-Proposition 98 has funded the same agency using different fund funds. Such inconsistencies have tended to kindle sources at different points in time. For example, the ongoing debate as to what to fund within the the state began funding the Exploratorium with guarantee. Below, we highlight several notable Proposition 98 funds in 2016-17. program inconsistencies. Inconsistent Practices for Many Other Inconsistent Practice for Funding Statewide Programs. Examples include: Functions. Several examples exist of the state using • Teacher Preparation Programs. The Proposition 98 funds to support some statewide state has funded district-run teacher functions but non-Proposition 98 funds to support internship programs and teacher training other such functions. For example, the state has used programs with Proposition 98 funds but Proposition 98 funds for helping districts in fiscal funded university-run teacher preparation distress (through the Fiscal Crisis and Management programs with non-Proposition 98 funds. Assistance Teams administered by the Kern County Office of Education), supporting districts • Financial Aid for Teachers and Aides. with academic performance issues (through the The state has funded some financial California Collaborative for Educational Excellence aid, such as stipends for teachers and administered by the Riverside County Office of instructional aides, with Proposition 98 Education), and aiding districts in accessing and funds but funded other forms of financial paying for Internet services (through the High Speed aid, such as the Cal Grant T program and Network administered by the Imperial County Office the Assumption Program of Loans for of Education). It has used non-Proposition 98 funds to Education, with non-Proposition 98 funds. 24 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT • Financial Aid for Community College preparation programs administered by UC Students. The state has funded and the California State University with supplemental Cal Grant access awards non-Proposition 98 funds. for full-time community college students • Facilities and Maintenance. The state has using Proposition 98 funds but funded funded debt service on community college their base Cal Grant access awards using lease revenue bonds with Proposition 98 non-Proposition 98 funds. funds but paid debt service on school and • College Outreach Activities. The state has community college general obligation funded college outreach and preparation bonds using non-Proposition 98 funds. The programs administered by the California state also has used Proposition 98 funds for Department of Education and school deferred maintenance, emergency facility districts with Proposition 98 funds but repairs, and charter school facility grants. funded very similar college outreach and IMPACT ON SCHOOL FUNDING Although no one knows for certain how much Proposition 98 funding for K-12 schools with funding the state would have provided since the 1988-89 funding level adjusted for changes 1988-89 in the absence of Proposition 98, we use in enrollment and inflation, as measured by the several methods to assess how schools fared during this Figure 10 time. We first compare actual K-12 Proposition 98 Funding Generally Has Tracked With Enrollment Growth and Inflation Proposition 98 K-12 funding with the 1988-89 school (In Billions) funding level grown for the $70 K-12 student population and inflation. We then compare 60 growth in Proposition 98 and 50 non-Proposition 98 funding Proposition 98a over the period. Lastly, we 40 compare school spending per student in California with the Growth and Inflation 30 rest of the country. Below, we describe the results of these 20 comparisons. 10 Proposition 98 Funding Over Period Generally Has Tracked With Enrollment 1989-90 1994-95 1999-00 2004-05 2009-10 2014-15 Growth and Inflation. a Includes all Proposition 98 funding except the amount going to the California Community Colleges. Figure 10 compares actual www.lao.ca.gov Legislative Analyst’s Office 25 AN LAO REPORT state and local government price index. The state Proposition 98 Funding Has Grown Somewhat uses this “workload” approach to budget for many Slower Than Total Non-Proposition 98 Funding. programs, including most of the educational We also compared K-12 Proposition 98 funding programs funded through Proposition 98. Over with growth in non-Proposition 98 funding from the past 26 years, actual school funding has both the General Fund and special funds. Including been higher than the workload-based simulation special funds has the advantage of taking into 13 years and lower the other 13 years. Over the account certain significant General Fund-related long term, schools have not received notably more actions, such as the 1991 realignment (in which or less than they would have received under this sales tax revenue that otherwise would have been traditional budgeting approach. treated as General Fund was deposited into a Proposition 98 Funding Has Grown at special fund). From 1988-89 through 2014-15, Roughly the Same Pace as the Non-Proposition 98 Proposition 98 school funding generally has grown General Fund Budget. Another way to assess somewhat slower than the rest of the budget. the impact of the Proposition 98 formulas is to Specifically, school funding had grown about compare growth in K-12 Proposition 98 funding 350 percent over the entire period compared with with growth in the rest of the state General non-Proposition 98 General Fund and special fund Fund budget. From 1988-89 through 2014-15, growth of about 380 percent. Proposition 98 school funding generally tracked School District Spending in California with the rest of the state General Fund budget. Generally Has Tracked With Rest of Nation. We Over that 26-year period, school funding grew also examined how K-12 per-student spending in more quickly half the time and less quickly half California has grown compared with the rest of the the time. On a cumulative basis (growth from nation. For this analysis, we relied upon operating 1988-89), school funding was sometimes lower expenditures per pupil, a measure that reflects and sometimes higher. For example, through spending on salaries, supplies, and other program 2011-12, growth in school funding was lower— expenses but excludes capital outlay. This measure having grown by about 240 percent compared to is collected consistently across the states. As shown 250 percent for the rest of the state General Fund in Figure 11, California school spending was very budget. By comparison, through 2014-15, school close to the national average when voters approved funding had grown over the entire period by about Proposition 98. Since that time, school spending 350 percent compared to about 300 percent for in California has grown at about the same pace as the rest of the state General Fund budget. These the rest of the country. In 2014-15, we estimate that comparisons tend to favor schools during economic California schools spent about $10,500 per student. expansions—when the constitutional formulas This level is about $800 (7 percent) less than the require schools to receive large funding increases— national average of $11,300 per student. Given a large but are less favorable to schools during economic increase in state funding in 2015-16 and 2016-17, downturns—when constitutional formulas result in we expect per-student spending in California has lower school funding guarantees. gotten closer to the national average during the past two years. (National data for these two years was not available prior to release of this report.) 26 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT LESSONS LEARNED We believe the state can glean three important more state General Fund for the rest of the budget, lessons from its historical experience with shifting property tax revenue away from school Proposition 98. Below, we discuss each of these and community college districts to backfill local lessons. governments for the loss of other revenue streams, Formulas Tend to React Poorly to Changes in and counting certain Proposition 98 funds as Real World Dynamics. In 1990—only two years loans to avoid midyear cuts to schools while still after voters approved Proposition 98—the state balancing the state budget the next year. So many entered a recession and found the two original adjustments, undertaken so frequently, suggests Proposition 98 formulas difficult to implement. that even a complex set of eight interacting In response, the Legislature placed three more formulas could not account for and react to the constitutional formulas (Test 3, maintenance salient budget issues of the day. factor, and spike protection) before the voters. The Formulas Tend to Muddle Budget Process. Legislature shortly thereafter created a statutory Understanding the mechanics of seven formula to supplement the five constitutional constitutional funding formulas, one statutory funding formulas. In 2014, with the approval of funding formula, almost a dozen inputs, initial Proposition 2, two more constitutional formulas estimates of the guarantee, and final estimates of were added governing deposits and withdrawals the guarantee, along with sundry types of shifts, into a School Stabilization Account that was flips, and swaps is not easy. Even after dedicating established within the guarantee. Even with a Figure 11 set of eight formulas, the California School Spending Legislature has found the Generally Has Tracked With Rest of Nation formulas unresponsive Operating Expenditures Per Studenta to the budget realities $12,000 of the day, with barely a year passing when the 10,000 state has not adjusted the National Average formulas in some way. 8,000 These adjustments have involved excluding revenue 6,000 from the Proposition 98 California calculations to fund 4,000 earthquake relief, excluding sales tax revenue to support 2,000 realignment of certain state programs, shifting 1989-90 1994-95 1999-00 2004-05 2009-10 2014-15 property tax revenue to a Reflects spending data reported by the U.S. Census Bureau. Amounts shown for 1988-89 to 1990-91 have been adjusted for comparability with subsequent years. Amounts shown for 2014-15 reflect an school and community LAO estimate. college districts to provide www.lao.ca.gov Legislative Analyst’s Office 27 AN LAO REPORT significant time to trying to understand how supporters seem to have believed that their Proposition 98 works, legislators (as well as staffers formulas would result in more total school and reporters) commonly express frustration with funding and less controversy in school funding the complexity of state budgeting for schools. decisions. Reviewing the state’s experience with the Nonetheless, legislators must invest time in Proposition 98 formulas reveals no clear evidence understanding the dynamics of Proposition 98 if that these intended benefits were achieved. School they are to participate in the state budget process funding over the long run has grown in tandem in informed ways. Spending so much time on with student attendance and inflation, with little understanding the formulas and the myriad ways of indication that schools benefitted uniquely as a adjusting those formulas seems to have diminished result of the Proposition 98 formulas. Given the the time legislative leaders are able to dedicate numerous poison pills, lawsuits, settlements, and to arguably more important matters of school adjustments to the formulas, one also would be performance, student achievement, program quality, hard pressed to argue that Proposition 98 has made and overall system effectiveness and efficiency. school funding decisions less controversial. Formulas Likely Do Not Result in More Funding and Less Controversy. Proposition 98 CONCLUSION State’s Experience Suggests Serious Caution considerable time to understanding a plethora of in Adopting More Budget Formulas. California’s formulas and their often counterintuitive results, experience with Proposition 98 has been fraught while leaving less time for legislators to focus on with controversy almost since the moment voters the education system’s overall effectiveness and approved the measure by the slimmest of margins efficiency. Perhaps most notably, the state has no in 1988. In reviewing the state’s more-than- clear evidence that school funding is higher today quarter-century experience with Proposition 98, or school funding decisions are less political today the formulas repeatedly have shown that they are than they would have been absent the formulas. All unable to react well to real world developments. these factors suggest the state should be extremely The formulas also have muddled the budget cautious about adopting new budget formulas in process, requiring legislators to dedicate the future. LAO Publications This report was prepared by Kenneth Kapphahn and Jennifer Kuhn. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 28 Legislative Analyst’s Office www.lao.ca.gov