Analysis of the 2008-09 Budget Bill: Education

Introduction: Proposition 98

Background

California voters enacted Proposition 98 in 1988 as an amendment to the State Constitution. The measure, which was later modified by Proposition 111, establishes a minimum annual funding level for K–12 schools and California Community Colleges (CCC). (A small amount of annual Proposition 98 funding provides support for direct educational services provided by other agencies, such as the State Special Schools and the California Youth Authority.) Proposition 98 funding constitutes around three–fourths of total K–14 funding.

The minimum Proposition 98 funding level is determined by one of three formulas. Figure 1 briefly explains these formulas (or “tests”) and some other key funding provisions. The five major factors underlying the Proposition 98 tests are: (1) General Fund revenues, (2) state population, (3) personal income, (4) local property taxes, and (5) K–12 average daily attendance (ADA). In most years, the key determinants of the Proposition 98 “minimum guarantee” (or required funding level) are the year–to–year changes in ADA, per capita personal income, and per capita General Fund revenues.

The Legislature can provide more or less than required by the formulas. For example, in 1999–00 when state revenues were booming the Legislature decided to spend $1.8 billion more than the minimum guarantee. Alternatively, in 2004–05 the Legislature suspended the minimum guarantee and provided $2 billion less than would have been required. To suspend the minimum guarantee and provide less funding for Proposition 98 requires a two–thirds vote of the Legislature.

Governor's Budget Proposal

The Governor proposes to provide a total of $55.6 billion in Proposition 98 funding for K–14 education in 2008‑09. To put this funding level into some context, Figure 2 compares it to three comparison points: the Governor's proposed funding level for the current year ($56.7 billion), the Governor's estimate of the 2008‑09 Proposition 98 minimum guarantee ($59.6 billion), and the Governor's estimate of how much it would cost to fund a “workload” budget in 2008‑09 ($60.4 billion). As shown in the figure, the Governor's proposed funding level for 2008‑09 is lower than all three of these comparison points.

• Compared to 2007–08: The Governor's proposal for 2008‑09 is $1.1 billion less than what he proposes to provide in the current year.
• Compared to the Minimum Guarantee: The Governor proposes to suspend the Proposition 98 requirement in 2008‑09. His proposed funding level is $4 billion less than what schools and community colleges would receive if the minimum guarantee were met.
• Compared to Workload Budget: In building his Proposition 98 proposal the Governor first constructed a hypothetical workload budget (see below for more detail). From this amount, he then applied an across–the–board reduction roughly equal to the 10 percent level used throughout the budget. His ultimate K–14 funding proposal is $4.8 billion lower than his workload budget total.

Below, we provide further discussion of the Governor's budget proposal in the context of each of these three comparisons.

Compared to Current Year

Figure 3 displays the Governor's proposals for Proposition 98 spending in 2007–08 and 2008‑09. From his proposed current–year funding level of $56.7 billion, the Governor's budget for 2008‑09 would reduce Proposition 98 spending by an additional $1.1 billion, or 1.9 percent. General Fund support for Proposition 98 would drop by $2.1 billion compared to the revised current–year level, offset by a projected increase of $1.1 billion in local property tax revenue.

K–12 Education Funding Drops While Community Colleges See Slight Funding Increase. As shown in Figure 3, the budget proposal would provide about $1.1 billion less in Proposition 98 support for K–12 education than what is proposed for the current year, a drop of 2.2 percent. In contrast, community colleges would receive a slight funding increase ($55 million, or 0.9 percent). The community college augmentation is due largely to the Governor's proposals for funding CCC enrollment growth (discussed in greater detail in the “Higher Education” section of this chapter).

Compared to Minimum Guarantee

Spending at the Governor's proposed level in 2008‑09 ($55.6 billion) would require a two–thirds vote of the Legislature to suspend Proposition 98. This is because the Governor's proposal is $4 billion less than his calculation of the Proposition 98 minimum guarantee—the funding level that otherwise would be required. Suspending the minimum guarantee allows the Legislature to fund K–14 education at whatever level it chooses. (See the “Proposition 98 Technical Update” section of this chapter for more discussion of suspending Proposition 98.)

Compared to Workload Budget

Figure 4 displays the Governor's approach to constructing the Proposition 98 budget proposal. For 2008‑09, the Governor first increases K–14 spending by $3.8 billion for workload adjustments, then makes $4.8 billion in reductions.

Governor First Creates Workload Budget…In constructing his 2008‑09 budget for K–14 education, the Governor first built a hypothetical workload budget, providing workload adjustments to existing K–14 programs totaling almost $3.8 billion. Most of this increase ($2.7 billion) is to provide an estimated 4.9 percent cost–of–living adjustment (COLA) to K–14 apportionments and most categorical programs. Almost $1 billion more results from making existing programs “whole” by restoring (1) the $400 million reduction to K–12 and CCC apportionments the Governor proposes for 2007–08, and (2) the $566 million in ongoing K–12 costs that are being funded with one–time monies in the current year. The other significant workload adjustments are an estimated $182 million in costs to fund 3 percent enrollment growth for CCC, partially offset by $120 million in savings from a projected 0.5 percent decline in statewide K–12 ADA. Notably, the Governor's workload budget exceeds his estimate of the Proposition 98 minimum guarantee for 2008‑09 by $800 million.

…Then He Implements Budget Balancing Reductions. From his workload budget level of $60.5 billion, the Governor makes a 10.9 percent across–the–board reduction to General Fund support for every K–12 and CCC program. These reductions lower the workload budget by $4.8 billion—$4.3 billion for K–12 education and $483 million for CCC—resulting in the Governor's final spending proposal of $55.6 billion.

Effect of Reductions on K–14 Education

The net effect of the across–the–board reductions on actual year–to–year funding levels varies by program. This is because programs received different workload increases—growth and COLA adjustments—before being cut. Furthermore, for programs that receive increases in local property tax revenue—including apportionments and special education—the General Fund reduction is partially offset. However, in all cases, the reductions fully eliminate the 4.9 percent COLA and, for most programs, they also result in lower funding levels than were provided in the current year. These cuts, which range from 2 percent to 11 percent (year–to–year), would generally be achieved by reducing existing funding rates or program participation. The “K–12 Introduction” and “California Community Colleges” sections of this chapter describe programmatic funding changes in greater detail.

Additional One–Time Funds for K–14 Education

In addition to the $55.6 billion in ongoing Proposition 98 funds, the 2008‑09 budget proposal includes $600 million in one–time General Fund monies for K–14 education. These funds are scored as Proposition 98 payments for prior years.

$450 Million for Quality Education Investment Act (QEIA). Chapter 751, Statutes of 2006 (SB 1133, Torlakson), continuously appropriates approximately $2.7 billion in General Fund monies over a seven–year period beginning in 2007–08 for QEIA. Consistent with this legislation, the Governor's budget assumes a $450 million payment in 2008‑09 ($402 million for K–12 education and $48 million for CCC). The K–12 funds are to be used primarily for reducing class sizes in grades 4 through 12, whereas the CCC funds are for expanding career technical education.

$150 Million for “Settle–Up” Payment. Consistent with Chapter 216, Statutes of 2004 (SB 1108, Committee on Budget and Fiscal Review), the budget proposal also includes $150 million from the General Fund to settle up an outstanding Proposition 98 obligation from 2002–03. As directed by Chapter 216, these funds would go to reimburse schools and community colleges for the costs of prior–year mandates ($125 million for K–12 and $25 million for CCC).

Outline

The “Proposition 98” part of this chapter contains three sections, which immediately follow. In “Proposition 98 Priorities,” we offer an alternative plan for the Legislature to consider when constructing a budget for K–14 education. In “Proposition 98 Technical Update,” we describe various Proposition 98 issues, based both on the administration’s revenue forecast and the LAO’s alternative forecast. Finally, in “COLA,” we discuss the Governor's proposal to change the index used to provide inflationary adjustments for K–14 programs and recommend the Legislature adopt an alternative measure.