Excess Eraf: a Review of the Calculations Affecting School Funding

Excess ERAF: A Review of the Calculations Affecting School Funding GABRIEL PETEK LEGISLATIVE ANALYST MARCH 6, 2020 analysis full gutter AN LAO REPORT LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Executive Summary Hundreds of Millions of Dollars in Property Tax Revenue at Issue. This report focuses on a state law enacted in the 1990s that shifts some of the property tax revenue in certain counties from schools and community colleges to other local agencies. For historical reasons, the shifted revenue is known as “excess ERAF.” (The acronym refers to the local accounts—known as Educational Revenue Augmentation Funds—that facilitate the shift.) We recently found that some counties are calculating excess ERAF in ways that seem contrary to state law and shift too much property tax revenue from schools to other agencies. We have three specific concerns related to the calculation of excess ERAF that together affect more than $350 million in annual property tax revenue. Earlier this year, the Newsom administration began to address one of these concerns. In this report, we recommend the Legislature direct the administration to enforce state law on our other two concerns. We also recommend improving oversight to prevent similar issues from arising in the future. Background Property Tax Revenue Shared Among Local Agencies. The State Constitution requires the proceeds of the property tax to be allocated among the local agencies in the county where the revenue is collected. Recipients of property tax revenue include cities, counties, special districts, K-12 schools, and community colleges. The county auditor is responsible for allocating property tax revenue to these entities according to state law. Property Tax Changes Can Affect School Funding and the State Budget. Proposition 98 (1988) establishes a minimum funding requirement for schools and community colleges commonly known as the minimum guarantee. The guarantee encompasses state General Fund and local property tax revenue. A set of formulas in the State Constitution determines the guarantee each year. In certain years, the formulas provide that any changes to the amount of property tax revenue received by schools and community colleges have a dollar-for-dollar effect on the size of the guarantee. In other years, property tax changes affect the amount of General Fund the state must allocate to meet the guarantee. ERAF Accounts Created in the Early 1990s. In the early 1990s, the Legislature permanently redirected a significant portion of the property tax revenue from cities, counties, and special districts to schools and community colleges. The redirected revenue is deposited into a countywide account known as ERAF. Revenue from ERAF is allocated to schools and community colleges to offset the funding these entities otherwise would receive from the state General Fund. Excess ERAF Allocated to Noneducation Agencies. In a few counties, ERAF revenue is more than enough to offset all of the General Fund allocated to schools and community colleges. In the mid-1990s, the Legislature enacted a law shifting the portion of ERAF not needed for schools and community colleges to other agencies in the county. The revenue shifted through this process is known as excess ERAF. As of 2018-19, five counties have excess ERAF—Marin, Napa, San Francisco, San Mateo, and Santa Clara. Findings and Concerns Three Specific Concerns. We recently reviewed the calculation of excess ERAF in the five counties and identified three specific concerns. Our first concern is that counties are excluding charter schools from certain calculations related to excess ERAF. Our second concern relates to www.lao.ca.gov 1 analysis full gutter AN LAO REPORT the way counties are accounting for the school share of property tax revenue formerly allocated to redevelopment agencies. (The state dissolved these agencies in 2011-12.) Our third concern pertains to a provision of law known as minimum state aid. In each case, we believe counties are calculating excess ERAF in ways that are contrary to state law and shift too much property tax revenue from schools to other local agencies. All three concerns together affect more than $350 million in annual property tax revenue. Concerns Affect Funding for the School System Overall. One potential misconception about our concerns is that they affect the budgets of individual schools within the five counties. As we discuss in this report, each concern affects the state’s entire school system. For example, to the extent counties incorrectly exclude charter schools, less funding is available for school districts, charter schools, and community colleges throughout the state. Two Broader Concerns. First, we are concerned the current process for calculating excess ERAF provides an insufficient role for the state. We think the lack of state involvement is one reason the law has been implemented in ways the Legislature did not intend. Second, we are concerned that the state has a fragmented system for collecting ERAF data from the counties. This fragmentation makes the calculations difficult to monitor. Administration’s Recent Actions Administration Recently Began to Address Our First Concern. In February, the administration informed the five counties that it expects them to adjust their calculations to address the concern about charter schools. Our current understanding is that the counties have not yet provided a formal response to the administration. The administration also recently became aware of our other concerns related to redevelopment revenue and minimum state aid, but has not taken formal action on these issues. Recommendations Direct the Administration to Enforce State Law on All Three Issues. We credit the administration for its initial actions regarding our concern about charter schools. We would, however, recommend the Legislature direct the administration to enforce state law on our other specific concerns, including the treatment of redevelopment revenue and minimum state aid. Monitor Potential Changes in School Funding. The Governor’s budget assumes the state resolves the concern about charter schools. If this issue were not resolved, however, school property tax estimates would be overstated by about $180 million per year relative to the Governor’s budget. On the other hand, if the administration successfully resolves the other two concerns, school property tax estimates would increase by about $170 million per year relative to the Governor’s budget. Under the Governor’s estimates of the Proposition 98 minimum guarantee, any changes in property tax revenue would affect the size of the guarantee—and by extension, the amount of funding available for K-14 programs. Improve State Oversight Moving Forward. We recommend the Legislature task the California Department of Education or the Department of Finance with developing standardized procedures that all counties would use for the calculation of excess ERAF. We also recommend making one agency responsible for collecting the data necessary to verify these calculations. These improvements would make the calculations easier to monitor, promote greater consistency across the counties, and reduce the likelihood that any future changes to ERAF are implemented in ways the Legislature does not expect. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT INTRODUCTION Since the mid-1990s, a state law has shifted year. Under the constitutional formulas governing some of the property tax revenue in certain education funding, the changes would mean less counties from schools and community colleges to revenue is available for school and community other local agencies. For historical reasons, the college programs in the 2020-21 budget. shifted revenue is known as “excess ERAF.” (The This report provides our assessment of the acronym refers to the local accounts—known as counties’ changes. It also reviews two other issues Educational Revenue Augmentation Funds—that affecting the calculation of excess ERAF. The first facilitate the shift.) section provides historical context and explains the We recently learned that a few counties have relevant laws and formulas. The second section made changes to the way they calculate excess describes our findings and concerns. The third ERAF. The changes would increase the amount of section reviews the recent actions taken by the property tax revenue shifted from schools to other Newsom administration. The final section contains local agencies by hundreds of millions of dollars per our recommendations to the Legislature. BACKGROUND This section provides background on property Property Taxes and School Funding taxes in California and explains how they affect Proposition 98 Establishes Minimum Funding school funding. It then explains the purpose of Level for Schools and Community Colleges. the local accounts (pronounced “E-RAF”) and Proposition 98 (1988) establishes a minimum the concept of excess ERAF. It ends by providing annual funding requirement for schools and background on two related issues. community colleges, commonly known as the Property Tax Basics minimum guarantee. The guarantee encompasses state General Fund and local property tax revenue. Many Local Agencies Receive Property The state determines the guarantee by calculating Tax Revenue. Property owners in California and comparing three main formulas, or “tests” pay a tax of at least 1 percent on the assessed (Figure 2, see next page). These tests depend value of their properties. The State Constitution upon various inputs, such as General Fund revenue requires the proceeds of the property tax to be and changes in student attendance. Depending on allocated for local agencies in the county where these inputs, one of the tests becomes operative the revenue is collected. Recipients of property tax and sets the minimum guarantee for that year. revenue include cities, counties, special districts, Interaction Between Property Tax Revenue K-12 schools, and community colleges. The county and the Proposition 98 Guarantee. The auditor is responsible for allocating property tax amount of property tax revenue received by revenue to these entities according to state law. schools and community colleges affects the The exact share of property tax revenue for each Proposition 98 calculations. The effects vary, entity varies across the state, largely for historical however, depending on which of the three tests is reasons. On a statewide basis, schools and operative. In Test 1 years, the minimum guarantee community colleges receive about 40 percent of equals a fixed percentage of state General Fund all property tax revenue and other local agencies revenue, plus whatever amount of property tax receive about 60 percent (Figure 1, see next page). revenue schools and community colleges receive that year. In Test 1 years, increases or decreases in property tax revenue have a dollar-for-dollar www.lao.ca.gov 3 analysis full gutter AN LAO REPORT effect on school funding. When Figure 1 one of the other tests is operative, Schools Receive Largest Share of Property Taxes changes in property tax revenue 2018-19 do not affect the minimum guarantee or overall school Redevelopment funding. Instead, they affect the Agency Debta amount of General Fund the Schools and Community Colleges state must allocate to meet the Special Districts guarantee. State Law Allocates Funding to Districts Through Formulas. Whereas Proposition 98 establishes a total minimum funding level, Cities the Legislature decides how to allocate this funding. For schools, the Legislature allocates most funding through the Local Control Funding Formula (LCFF). This formula establishes a funding Total: $62 Billion target for each school district Counties based primarily on the number of students attending the district a Redevelopment agencies were dissolved in 2012. Successor agencies continue to and the share of those students use property tax revenue to pay former agencies' debt and obligations. who are low income or English learners. For community colleges, the Legislature allocates most Figure 2 funding through apportionments. The apportionment formula Three Proposition 98 Tests establishes a target for each college district based on its Test 1 Test 2 Test 3 enrollment (as measured by Share of General Change in Per Change in General Fund Revenue Capita Personal Fund Revenue full-time-equivalent students), Income (PCPI) share of students who are low income, and performance General PCPI Fund on certain measures of student About ADA ADA outcomes. 40% Districts Funded With Prior-Year Prior-Year Funding Funding Property Tax Revenue and State General Fund. The state counts the property tax revenue a school Guarantee based on share Guarantee based on prior- Guarantee based on prior- or community college district of state General Fund revenue year funding level adjusted year funding level adjusted receives toward its funding target. going to K-14 education in for year-over-year changes for year-over-year changes 1986-87, plus a share of local in K-12 attendance and in K-12 attendance and The state then provides General property tax revenue. California PCPI. state General Fund revenue. Fund to make up the remaining difference. For the average ADA = average daily attendance. district, property tax revenue covers the first 40 percent of 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT its target and state General Fund covers the ERAF may use it for any local purpose. Figure 3 remaining 60 percent. The exact share varies widely (see next page) illustrates how a county calculates across the state. For approximately 10 percent of excess ERAF. school and community college districts, property State Made Another Change to ERAF in tax revenues exceed their target. For historical 2004-05. In 2004-05, the state began directing reasons, these districts are known as “basic aid” county auditors to use funding in ERAF to districts. State law allows these districts to spend reimburse cities and counties for a reduction in their the additional revenue on their local education Vehicle License Fee (VLF) revenue. (The VLF is a tax priorities. on vehicle ownership and a longstanding source of revenue for cities and counties. The state began Property Tax Shifts and Excess ERAF reducing the VLF rate in the late 1990s.) This shift ERAF Accounts Established in Early 1990s. is known as the VLF swap. Although the VLF swap During the early 1990s, the state experienced reduced the amount of property tax revenue in an economic recession and budget shortfalls. To ERAF available to fund schools, state law specified help balance the budget, the state permanently that the shift would not affect the calculation of redirected almost one-fifth of statewide property tax excess ERAF. revenue from cities, counties, and special districts Current ERAF Allocation Process. Figure 4 to schools and community colleges. The redirected (see page 7) shows how the various parts of the property tax revenue is deposited into an account ERAF allocation process fit together. After shifting in the county treasury known as ERAF. Initially, property taxes into ERAF, the county auditor the operation of these accounts was relatively compares the amount in ERAF with the amount of straightforward—all of the property tax revenue state General Fund that schools and community was distributed to schools and colleges within colleges would need to fund their targets. If the the county to offset revenue they would otherwise amount in ERAF is larger, the auditor allocates the receive from the state General Fund. By increasing difference to local agencies as excess ERAF. (If property tax revenue to schools, the ERAF shifts the amount is smaller, the auditor skips this step.) reduced the amount of General Fund needed to Next, the auditor subtracts funding from ERAF to meet the Proposition 98 guarantee. Basic aid reimburse cities and counties for the VLF swap. districts did not receive any allocations from ERAF Finally, the auditor distributes the funds remaining because they received no General Fund revenue in ERAF to schools and community colleges. The the state could offset. specific distribution of ERAF among the school Local Agencies in Certain Counties Receive districts in the county is determined by the county Excess ERAF. In 1994-95, Marin County reported superintendent of schools. a new development—it had more than enough Charter Schools Receive Property Tax funding in ERAF to offset all of the General Fund its Revenue Indirectly. Charter schools educate schools would receive from the state. At the time, K-12 students under locally developed agreements the law did not specify how ERAF revenue above (or “charters”) that describe their educational the amount needed for schools should be used. goals and programs. Most charter schools are In response, the Legislature specified that some approved and monitored by the school districts in of the funds would be used for special education which they are located. The first charter schools programs and the remainder would be allocated to opened in 1992-93. Since that time, the Legislature other agencies in the county, including the county has taken steps to integrate charter schools into government, cities, and special districts. The the K-12 funding system. For example, state law ERAF funds allocated to noneducation agencies deems charter schools to be school districts for the through this process are known as excess ERAF. purposes of allocating LCFF funding and meeting An agency’s share of excess ERAF is proportional the Proposition 98 guarantee. Unlike school to the share of its property tax revenue originally districts, however, charter schools do not receive shifted into ERAF. The agencies receiving excess an automatic allocation of property tax revenue. www.lao.ca.gov 5 analysis full gutter AN LAO REPORT Instead, the law requires school Figure 3 districts to share their property How a County Calculates Excess ERAF tax revenue—including ERAF—by making payments in-lieu of taxes Additional Funding Needed to their charter schools. Generally, Property Tax Revenue each charter school receives a share of the property tax revenue that is proportional to its share 1. Schools and community colleges require additional funding of students in the school district. to meet their targets: The state then backfills the school Total district for the reductions to its Funding property tax revenue. (Somewhat Target different rules apply for charter schools in basic aid school districts.) Recent Trends in Excess ERAF Five Counties Currently School School Community Report Excess ERAF. Until the District A District B College District mid-2000s, Marin was the only county with excess ERAF. Since 2. County has more than enough funding in ERAF that time, four other counties in to meet each district’s target: the Bay Area have joined Marin— San Mateo, San Francisco, Santa Clara, and Napa. San Francisco, the most recent addition, began reporting excess ERAF in 2016-17. As Figure 5 (see page 8) shows, all of these counties have very high levels of property tax revenue relative to their overall populations. High levels of property tax revenue increase the total amount of funding shifted into ERAF and, by extension, the likelihood of having excess ERAF. Excess ERAF Has Grown Rapidly in Recent Years. Figure 6 (see page 9) shows how the amount of excess ERAF reported by counties has changed Total ERAF School School Community Excess ERAF Available District A District B College District over time. In 2006-07, counties reported excess ERAF totaling about $100 million—equating to ERAF = Educational Revenue Augmentation Fund. about 1.5 percent of all property tax revenue allocated from ERAF 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT accounts statewide. Over the Figure 4 next decade, excess ERAF grew Process for Allocating ERAF steadily. Within the past three years, however, growth in excess ERAF has accelerated. Preliminary County auditors shift reports show excess ERAF property tax revenue from totaling $820 million in 2018-19— counties, cities, and equating to about 8 percent of special districts to ERAF. all funding allocated from ERAF statewide. Several factors explain this large uptick. Most notably, Allocate some funding San Francisco became an Does the amount in ERAF YES to special education programs, excess ERAF county beginning in exceed the state General Fund then allocate excess ERAF to needed to fund schools cities, counties, and special 2016-17. In 2017-18, growth in and community colleges? districts. property tax revenue among Bay Area counties was particularly NO strong relative to the increase in school funding that year. County decisions about the calculation of excess ERAF have also played an Use ERAF to reimburse important role, as discussed later cities and counties for reductions in their in this report. Vehicle License Fee revenue.a Redevelopment Dissolution Dissolution of Redevelopment Increased Property Tax Revenue for Schools and Distribute remaining funds in ERAF to K-14 districts. Other Local Agencies. Prior to 2011-12, the state had more than 400 redevelopment agencies engaged in various redevelopment projects around the YES Each school district shares a Do any of the school districts state. Redevelopment agencies have charter schools? portion of its ERAF funding with its charter schools. financed their activities using a portion of the property tax revenue collected in their jurisdictions. NO The 2011-12 budget package dissolved redevelopment agencies End effective February 2012. Under the dissolution process, property a If the amount in ERAF is insufficient to fund this reimbursement, county auditors tax revenue formerly allocated are to shift property taxes from K-14 districts to ERAF to cover the difference (a process known as “negative ERAF”). to these agencies is used first to pay off redevelopment debts ERAF = Educational Revenue Augmentation Fund. and obligations. The remaining revenue is distributed to schools, www.lao.ca.gov 7 analysis full gutter AN LAO REPORT community colleges, and other local agencies. revenue. As former redevelopment debts and Each agency’s share of this revenue generally is obligations are retired, these distributions will grow proportional to its share of all other property tax over time. State Law Specified Figure 5 That Dissolution Would Not Excess ERAF Occurs in High Property Wealth Counties Increase Excess ERAF. By increasing school property Total City, County, and Special District Property Taxes Per Resident tax revenue, the dissolution of Without Counting Excess ERAF redevelopment also reduced the amount of General Fund San Francisco needed to fund schools. For Marin counties with excess ERAF, San Mateo these changes presented a Alameda complication. Specifically, the Napa redevelopment revenue allocated Santa Clara to schools in these counties Los Angeles would have reduced the funding Contra Costa schools could receive from ERAF El Dorado and increased excess ERAF. As Ventura a result, schools would have not Santa Barbara Excess ERAF County experienced an overall increase San Luis Obispo in their property tax revenue. Sonoma To prevent this unintended Orange outcome, the Legislature passed Santa Cruz Chapter 26 of 2012 (AB 1484, Placer Committee on Budget). This Solano legislation instructed county San Diego auditors not to increase excess San Bernardino ERAF as a result of any revenue Riverside attributable to the dissolution Monterey of redevelopment. (The funding Yolo that remains in ERAF as a result Sacramento of this law is available to pay for San Joaquin the VLF swap and fund schools.) Butte Kern Minimum State Aid Shasta Humboldt School Districts Receive Merced a Minimum Level of State Fresno Funding. Certain provisions of Tulare the California Constitution and Imperial state law guarantee all school Madera districts a minimum level of Stanislaus funding from the state General Kings Fund. Generally, this minimum equals the amount of state 500 1,000 1,500 2,000 $2,500 funding each district received in 2012-13 (the year prior to the ERAF = Educational Revenue Augmentation Fund. creation of LCFF) or $120 per 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Figure 6 Excess ERAF Has Increased Notably in Recent Yearsa (In Millions) $900 800 700 600 500 400 300 200 100 2006-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 a Reflects most recent data reported by counties. Excludes amounts allocated for special education programs. ERAF = Educational Revenue Augmentation Fund. student, whichever is higher. For most school represents General Fund revenue a school district districts, this “minimum state aid” counts toward will receive regardless of its property tax revenue. meeting their LCFF targets. (Basic aid districts are The law is implemented such that the portion of an exception, as they receive minimum state aid on each district’s target covered by minimum state top of their targets.) aid cannot be replaced with ERAF. In other words, Minimum State Aid Increases Excess ERAF. minimum state aid reduces the amount of ERAF When counties are calculating excess ERAF, that can be allocated to the schools within a they determine how much General Fund revenue county. Reducing the amount of ERAF allocated to allocated to schools could be replaced with schools, in turn, results in more excess ERAF being property tax revenue. Minimum state aid, however, allocated to other agencies. FINDINGS AND CONCERNS This section explains three specific concerns we in Figure 7 (see next page). The first relates to the identified in our review of the calculation of excess treatment of charter schools, the second to the ERAF. It also explains two broader concerns we dissolution of redevelopment, and the third to the have about the oversight of these calculations. calculation of minimum state aid. In each case, We Recently Reviewed Excess ERAF our concern is that certain counties are calculating Calculations in the Five Counties. For our review, excess ERAF in ways that shift too much property we examined county calculations, spoke with tax revenue from schools to other local agencies. local officials, and reviewed relevant state law. We Apart from the three specific issues, we have two identified three specific concerns regarding the broader concerns that we describe at the end of calculation of excess ERAF, which are summarized this section. www.lao.ca.gov 9 analysis full gutter AN LAO REPORT Concerns Affect Funding for the School in property tax revenue from schools to other local System Overall. One potential misconception agencies. about our findings is that they affect the budgets …Even Though State Law Includes Charter of individual schools within the five counties. In Schools. State law specifically allocates ERAF fact, each issue affects the state’s entire school and other property tax revenue to charter schools system. To the extent a county allocates too little through their school districts. This property tax ERAF to schools, the state provides more General revenue offsets the General Fund revenue charter Fund. Depending upon which test is operative for schools otherwise would receive from the state. calculating the Proposition 98 guarantee, the cost The counties’ approach, however, would involve of this backfill results in (1) less overall funding for calculating excess ERAF as though these parts of school and community college programs (when the allocation process did not exist. The overall Test 1 applies), or (2) higher General Fund costs for effect would be to reduce the amount of ERAF the state (when another tests applies). revenue available for allocation to the school districts in the county. (Charter schools would Three Specific Concerns experience the reduction indirectly, in the form of Counties Are Increasing Excess ERAF by smaller payments in-lieu of taxes.) This approach Excluding Charter Schools... The amount of also runs counter to various state laws declaring excess ERAF in a county depends upon the charter schools to be school districts for funding difference between the amount of (1) ERAF revenue purposes such as LCFF. available and (2) General Fund revenue that schools Redevelopment Revenues Are Increasing within the county are eligible to receive. We recently Excess ERAF. Though state law provides that learned that two counties have been excluding redevelopment revenue allocated to schools should charter schools from this second amount for the not increase excess ERAF, we found that the past few years. That is, these counties are treating five counties are not implementing this provision. charter schools as though they receive no General Instead, redevelopment revenues are displacing Fund revenue that could be replaced with ERAF. property tax revenue that schools otherwise would By reducing the ERAF allocated for schools, this receive from ERAF. This means that revenues practice increases excess ERAF. We also learned intended to benefit schools are instead benefitting that other excess ERAF counties—which previously cities, counties, and special districts through included charter schools—began excluding them additional excess ERAF. We estimate this practice in their most recent calculations. Across all five is shifting roughly $170 million per year from counties, we estimate the exclusion of charter schools to other local agencies. schools would shift roughly $180 million per year Figure 7 Three Specific Concerns About Excess ERAF Calculations Revenue Shifted From Amount Shifted Over Issue Concern Schools to Other Agenciesa Three-Year Budget Perioda Treatment of charter Counties excluding charter schools from calculation $180 million $540 million schools of excess ERAF. Implementation of Counties allowing redevelopment revenue to $170 million $510 million redevelopment increase excess ERAF. dissolution Calculation of At least one county overcounting minimum state aid, $2 million $6 million minimum state aid which increases excess ERAF. a Reflects estimates based on available data and our understanding of counties’ current practices. ERAF = Educational Revenue Augmentation Fund. 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT At Least One County Is Increasing Excess Conversely, other local agencies share an interest in ERAF by Over Counting Minimum State Aid. maximizing their share of the property tax revenue. A third, much smaller concern relates to the This trade-off provides an incentive for counties to calculation of minimum state aid. We found that at implement the law in ways that increase their share least one county is assuming its school districts of the property tax revenue, particularly when so receive more minimum state aid than the law many different steps are involved in the calculation. actually provides. This assumption reduces the We think the lack of state involvement in the ERAF amount of ERAF that can be allocated to schools. allocation process is one reason the law is being Excess ERAF, in turn, increases by a corresponding implemented in ways the Legislature did not intend. amount. We estimate this practice is shifting at State Has Difficulty Monitoring the least $2 million per year from schools to other Calculation of Excess ERAF. Two main issues local agencies. (Technically, this issue stems from limit the state’s ability to monitor the calculation of the assumption that school districts receive both excess ERAF. First, the implementation of the law $120 per student in state funding and the amount varies from county to county. Each county uses its received in 2012-13, whereas the law specifies own procedures to calculate excess ERAF. The five that the minimum level be based on one of these counties, for example, implemented the decision amounts.) to exclude charter schools differently. Second, the state has not assigned responsibility for collecting Two Broader Concerns ERAF data to any single agency. Instead, this State and Schools’ Interests Not Sufficiently responsibility is spread across multiple agencies Represented. Although each of our specific including the State Controller’s Office (SCO), concerns is rooted in a different part of law, taken California Department of Education (CDE), and the together we think they illustrate a broader concern. Department of Finance (DOF). For example, the Each year, the property tax produces a finite SCO collects information on the total amount of amount of revenue for the agencies within each property tax revenue shifted into ERAF, but CDE county. The state and schools share an interest collects information on excess ERAF. Due to these in maximizing the revenue allocated for schools, two issues, the state has difficulty monitoring the as this revenue results in either more overall calculations, identifying errors or inconsistencies, school funding or lower state General Fund costs. and projecting how the amount of excess ERAF might change in the future. ADMINISTRATION’S RECENT ACTIONS This section explains the Governor’s recent of our concerns related to the treatment of actions related to excess ERAF and the redevelopment revenue and minimum state aid, but assumptions embedded in the administration’s has not taken any formal action on these issues. property tax estimates. Property Tax Estimates Assume Charter Administration Recently Began to Address Schools Are Included. The Governor’s budget Concern About Charter Schools. The estimates that total property tax revenue administration indicates it is concerned about the for schools and community colleges will be exclusion of charter schools from the calculation $23.9 billion in 2018-19, $25.2 billion in 2019-20, of excess ERAF. In February, the administration and $26.5 billion in 2020-21. These estimates informed the five counties that it expects them to assume all counties include charter schools for revise their calculations to include charter schools. each year of the period. Regarding our other We understand that as of this writing, the counties concerns, the budget assumes no changes to the have not formally responded to the administration. way counties currently account for redevelopment The administration also recently became aware revenue or minimum state aid. www.lao.ca.gov 11 analysis full gutter AN LAO REPORT Changes to Property Tax Revenue Would property tax revenue would increase or decrease Affect Overall School Funding. The Governor’s the minimum guarantee—and the funding available budget projects that Test 1 is the operative test for schools and community colleges—on a for calculating the Proposition 98 guarantee each dollar-for-dollar basis. year of the period. As a result, any changes to RECOMMENDATIONS This section explains how we suggest the • Develop Clear, Consistent Procedures. We Legislature respond to our specific concerns recommend the Legislature task CDE or DOF and the steps we recommend to prevent similar with developing standardized procedures that concerns from arising in the future. all counties would use for the calculation of Direct the Administration to Enforce excess ERAF. We envision these procedures State Law on All Three Issues. We credit the including instructions and a template to administration for its initial actions to ensure ensure compliance with all of the applicable charter schools are included the calculation of state laws. We think the Legislature could excess ERAF. We would, however, recommend the ask each agency to explain what resources Legislature direct the administration to enforce the it would need for this task, then choose the law on all of our concerns, including the treatment most cost-effective option. of redevelopment revenue and minimum state • Improve Data Collection. We recommend aid. All three issues involve the calculation of the Legislature task CDE with collecting all excess ERAF in ways that seem contrary to state of the relevant data necessary to verify the law and shift too much property tax revenue to calculation of excess ERAF. Having one noneducation agencies. agency collect the data in a consistent manner Monitor Potential Changes in School would allow the state to ensure counties are Funding. Taken together, our three specific following the new instructions. Given that CDE concerns affect the allocation of approximately already collects certain property tax data, $350 million in property tax revenue per year. we think the cost of collecting the additional Over the 2018-19 through 2020-21 period, the information would be modest. amount is more than $1 billion. The Governor’s By improving oversight, these changes would budget assumes the state is able to address the help ensure that the interests of the state and charter school issue, which accounts for about half schools are better represented in the ERAF of this amount. If the administration successfully allocation process. They also would make the resolves the other two issues, annual property calculation of excess ERAF easier to monitor and tax revenue for schools—and the Proposition 98 promote greater consistency across the counties. guarantee—would be around $170 million higher Finally, our recommendations would reduce the than the estimates in the Governor’s budget (about likelihood that future changes to school funding half a billion dollars over the three years). Due or property tax laws affect the allocation of ERAF to the potential swings in funding, we advise the in ways the Legislature does not expect. If the Legislature to monitor the state’s progress on these Legislature were to adopt these recommendations issues. as part of the June budget package, we think they Improve State Oversight Moving Forward. could be implemented during the 2020-21 fiscal We recommend the Legislature address our two year. broader concerns by improving state oversight. Specifically, we recommend the following: 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT CONCLUSION Excess ERAF Is Likely to Remain a and potentially additional counties. These trends Significant Issue. Over the past several years, highlight the importance of understanding the excess ERAF has come to affect five counties calculation of excess ERAF and ensuring effective and hundreds of millions of dollars in property tax state oversight. They also suggest that excess revenue each year. As property values continue to ERAF is likely to be an important factor affecting rise, this shift is likely to affect an even larger share the budget picture for schools and other local of the property tax revenue in those counties— agencies for many years to come. www.lao.ca.gov 13 analysis full gutter AN LAO REPORT LAO PUBLICATIONS This report was prepared by Kenneth Kapphahn, and reviewed by Brian Uhler and Anthony Simbol. 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. 14 LEGISLATIVE ANALYST’S OFFICE