Proposition 98 Requirement for Budget Year Uncertain

The Proposition 98 minimum guarantee for 2009–10 is difficult to estimate at this time because it is heavily dependent upon inputs that remain very uncertain. The budget–year minimum guarantee depends upon General Fund revenues, local property taxes, and K–12 attendance—estimates of which will fluctuate over the course of the next 18 months. Although some of these inputs (such as K–12 attendance) likely will fluctuate only modestly, others (such as General Fund revenues) likely will fluctuate to a much greater degree. General Fund revenues remain particularly uncertain both because of broader economic trends and potential legislative actions to increase tax revenues. Furthermore, the 2009–10 minimum guarantee depends upon final current–year Proposition 98 spending, which, at the time of this analysis, also remained uncertain.

Technical Debate Over Proposition 98 Mechanics Also Could Affect 2009–10 Requirement. In addition to the uncertainty regarding revenues and current–year spending levels, differing interpretations of Proposition 98 could lead to different estimates of the funding requirement for 2009–10. As of this analysis, the administration is forecasting the Proposition 98 minimum guarantee will be calculated using the “Test 1” formula in 2008–09 and 2009–10. Under Test 1, the state spends roughly 40 percent of General Fund revenues on K–14 education. Other than the first year under Proposition 98 in 1988–89, the state has always provided more for K–14 education than Test 1 required and has calculated the minimum guarantee using either the “Test 2” or “Test 3” formula. Now in uncharted territory, debate has arisen over how the mechanics of Proposition 98 are supposed to work under Test 1. The debate tends to hinge on whether the constitutional provisions are read literally (sometimes leading to odd outcomes) or in a way that avoids strange outcomes (but conflicts with the literal language).

Different Views of What Happens Under Test 1. Specifically, different views have emerged regarding the treatment of the “maintenance factor” under Test 1. The first issue (potentially relevant in 2008–09) relates to whether the state needs to establish a maintenance factor in a year when Test 1 is applicable. Historically, a maintenance factor has been established only in Test 3 years to record the difference between the Test 3 level and the higher Test 2 level. Whereas some believe a maintenance factor continues to be established in Test 1 years that are lower than the Test 2 level, others believe no maintenance factor is generated. The second issue relates to how the maintenance factor is paid (potentially relevant in 2009–10). Whereas some believe maintenance factor payments are to be made on top of the Test 2 level, others believe it is to be made on top of the Test 1 level. While the outcome of this debate is not likely to affect the minimum guarantee in 2008–09, it could have a multibillion effect on the 2009–10 funding requirement.