EOS Backgrounder on Deferrals
30 June 2020
$11 billion dollars of debt – “deferrals” – is buried at the heart of this year’s education budget. Maintaining last year’s spending levels in the face of dramatically lower state general-fund revenue means accepting IOUs instead of cash. The impact of IOUs will be felt first in districts in low-property-value counties like Fresno, Kings, Imperial, and Tulare. Those districts will need to borrow extensively to fund ongoing operations, with the IOUs as collateral.
By June 2021, the impact of $11B of debt will be felt across the education spectrum. This debt will need to be redeemed – rolling it over drags the state’s credit rating down, its borrowing costs up, and puts a tremendous strain on cash flow. Redeeming it has historically meant raising new tax revenues and/or cutting back future spending. Like it or not, the cost of maintaining spending next year is that finding the $11B has landed squarely, again, on the backs of education.
Every year the governor and legislature are constitutionally required to agree upon a budget that balances the state’s expected revenues with planned expenditures. In good times, the tension is between undertaking new programs, expanding existing ones, and setting money aside as a cushion against bad times. In downturns, the hard decision is between which programs to cut, what reserves to use, and how much to borrow.
Spending on public school K-12 education plays an outsize roll in this decision for two reasons. First, K-12 schools constitute the largest single area of state expenditure, typically consuming just under 40% of the General Fund. (1) Second, there is an absolute floor below which combined spending on schools and community colleges constitutionally cannot go. Known as the “Proposition 98 Minimum Guarantee,” this restriction controls about 38% of the General Fund.
The state’s expenditure combines with local and federal money to fund our schools. Compared with other states (2), California’s state contribution is unusually high. The state generally pays around 58% of all K-12 costs, significantly higher than the 47% national average.
The unusual reason for this is that the state has redirected schools’ primary local resource (property tax) to satisfy its own obligations to city and county governments as well as to fund redevelopment activity. Backing out the schools’ share of the $9 billion diversion for the state’s vehicle-license-fee sharing obligation (3) and the $4 billion of remaining redevelopment debts (4), the state’s actual contribution to schools is similar to other states’, at 47.8% vs 47.3% (5).
The decisions in 2004 and 1979 that led to these diversions are long forgotten, hence the ongoing lament about ‘how much’ Sacramento devotes to schools.
Because K-12 education represents a large part of the state budget, it is always the focus of attention in an economic downturn. It is a great temptation to insist that schools take their “fair share” of any budget cuts – which would be a very big share, indeed. Economic assistance, health and human services issues are also at the forefront of people’s minds in times of trouble.
Unfortunately, the “minimum guarantee” turns out to be a triple-edged sword at these times.
- On the one hand, it sets a floor that provides education funding some security. It is the first number that budget staff calculates -- to see what flexibility they have to maintain spending elsewhere.
- Because of that calculation, the minimum guarantee also rapidly becomes a ceiling. It becomes the “voter-approved guarantee,” as if voters had set it as their target.
- Finally, the terms of the proposition constrain future year reductions in the guarantee. Conservative financial management dictates keeping it low and spending any additional available revenue ‘outside the guarantee’ when times are good (6).
Deferrals – The IOU Stopgap
One budget-balancing approach that has emerged in recent recessions is known as “deferrals.” This practice began decades ago, outside of education, when the state delayed its June 30th payroll for one day – to July 1st, over the end of the fiscal year. Effectively an accounting ruse, this reduced nominal current-year personnel spending (and the current-year deficit) without having to make actual program cuts. On the flip side, it also increased the following year’s spending, which necessitated repeating the process until a fiscal year when revenues turned out especially strong. Then the semi-monthly payroll date was moved back to June 30th.
Deferrals are particularly attractive when economic conditions change rapidly and revenues fall, reducing both cash-on-hand and the Proposition 98 Guarantee.
During the financial crises in 2002 and 2008, the state deferred amounts it owed to K-12 school districts. At first, it was just their June apportionment – $1-2B – that was shifted a few days into July. Then, as the 2008 recession deepened, the total grew to $9.4B as all the spring month apportionments were added. This meant shifts in income receipts up to five months long. While originally a budget-balancing maneuver, deferrals had become a cash-flow tool – a necessity since the state usually didn’t have the cash to make five months of payments in July.
When the state defers payments to schools, it is reducing its own current-year spending while allowing school districts to continue to operate without being required to cut programs. This is usually politically expeditious, since districts have to notify any individual teachers subject to impending layoffs no later than mid-March. Since critical indicators of upcoming fiscal year balances are not filed until April – notably, income tax returns and payments – deferrals sidestep dramatic end-of-year reductions.
Furthermore, the state is able to lower the overall Proposition 98 Guarantee in Test 1 down years to reduce pressure on the General Fund when the economy improves. Thus, the administration and legislature give themselves the option to fund above the minimum guarantee in future Test 2 years, but are not constrained to the higher level that direct spending would have created.
The Cost of Deferrals
At the district level, funding ongoing spending with IOUs may require borrowing when the deferral amount is more than a single month’s state aid or when the term of a deferral stretches beyond a month. This has a financial cost as well as consuming administrative time and attention. For 2011-12, the payback stretched into September 2012. In 2012-13, an improving economy and passage of Proposition 30 tightened this up to receiving March and April in late August, but that year’s April, May and June didn’t arrive until mid-July. The 2020-21 budget shows deferrals that run as late as November. Districts in wealthier counties can sometimes file their state IOUs with the county treasurer, then simply run an overdraft. But in poorer counties, that option isn’t necessarily available, so districts have to issue Tax Anticipation Notes individually or as part of a county or state consortium.
Furthermore, because only state-aid funding that is owed to a district may be deferred, deferrals disproportionately burden less advantaged districts. Although statewide an average of 54% of LCFF funding comes from state aid, it ranges by county from 11% - 77%. The ten counties in the top range – above 65% -- tend to have low county-wide property tax per capita. This hits their school districts with a triple whammy.
- First, lower incoming property tax to schools means more state aid to begin with.
- Second, the state’s school funding formula includes supplementary and concentration grants that raise the amount of funding for disadvantaged districts. But this means that the total dollar amount that is deferred is greater -- while requirements for the use of that funding don’t abate.
- Third, more education-allocated property tax is taken to cover the vehicle license fee obligation (mentioned above). It is a transfer of school districts’ property tax to other local governments on a per-capita basis, so more is taken away in populous areas.
Thus, some of the hardest hit districts are in counties like Kings, Fresno, Imperial, Tulare, San Bernardino, Kern and Riverside.
Most importantly, the day of reckoning comes when the crisis is over.
Deferrals are very much like a parent buying a much-needed present for a college-age child – and putting it on the child’s credit card. At the end of the day, there is a debt, which has to be redeemed. And the college student, not the parent, often finds himself on the hook to repay it. Here, since the obligation shows up in education, it becomes education’s job to get it repaid.
This was very evident in 2012, when the governor’s May and June budgets stated clearly that there would be $5.5B of cuts to K-12 education unless a new tax measure were passed to pay back the “Wall of Debt” to schools and set the General Fund on a stronger course. This became Proposition 30 on the November ballot. Just a week before it passed, Governor Brown expressed strong reservations about the likelihood of its passage – suggesting that education was very close to having to swallow the cost of the deferrals it had accepted.
Holding spending steady for a year in a downturn requires not merely a recovery to normal next year but an equal and opposite surplus to repay those IOUs.
Going forward from 2021, this will be further complicated by two issues. First, Proposition 30’s six-year term was extended by Proposition 55 (2016), so the next effort will be additive again to that. Proposition 30 also removed $6B a year of sales tax income from the General Fund Revenue calculation on which the Prop 98 base is calculated.
Second, Proposition 2 (2014) created a Rainy Day Fund along with mandatory payments towards old debts and the pension overhang. New debts will not qualify for this funding, so in good times the equal-and-opposite uptick will have to be even greater before deferrals can be repaid from ongoing revenue streams. Furthermore, there are requirements for funding the separate School Stabilization Fund, which count towards the Prop 98 guarantee.
One brighter light is the possibility that the Federal Government will step in with additional aid to education. To the extent that this is targeted specifically for education (rather than general state support), burying deferrals in K-14 schools allows California to maintain the non-K-12 side of the budget. And the Federal aid would sidestep issues like mandatory pension payments and contributions to the Rainy Day Fund.
The Bottom Line
Deferrals allow California school districts to live on borrowed time – on their own borrowed money. Aside from the immediate debt problem faced by the lowest-resourced districts, education as a whole has to figure out where to find the unfunded $11B being spent this year … and, unless revenues miraculously rebound another $11B next year.
Let’s make good use of the borrowed time.
(2) Rankings of the States 2018 and Estimates of School Statistics 2019, NEA Research, April 2019. Table F-2. Of total funding of $100.6B in 2018-19, $58.1B came from state funds. Nationally, states contribute $345B of $730B. Excluding California – the largest state in the nation for education funding, the national average is 45.6% (286.9/628.9). The California data is corroborated by the LAO at https://lao.ca.gov/Education/EdBudget/Details/388.
(3) http://www.ebudget.ca.gov/budget/publication/#/e/2019-20/FinancialInfo, download Schedule 13, Prop 98 Certification. And from http://www.ebudget.ca.gov/budget/publication/#/p/2018-19/BudgetSummary , download Revenue Estimates, which show $8.5B of property tax removed for VLF Swap (p. 171), with $29B continuing to go to K-14 schools incl. $1.6B from redevelopment dissolution. Splitting the VLF Swap between K-12 and community colleges is difficult, because it is taken first from their common pool of indirect funding, the Educational Revenue Augmentation Fund, in each county, then if that is insufficient, from their direct property tax allocation. Classically, this is split 89%-11%, so I have reduced the state share by 89% of $8.5B = $7.565B. The state contribution becomes $50.6B or 50% of the total, much closer to the average of the rest of the states. Add to that the redevelopment costs still buried in education, $2.4 B, and the state contribution drops to $48.2B or 47.9%. Note: the reason I characterize these as ‘unusual’ is that, in other states, property tax is directly levied by or directed to local services. When Proposition 13 (1978) capped the levy at 1% total for all services without laying out a structure for reallocating shares of that 1%, it set up a titanic battle between cities, counties, special districts, the state and schools. Schools, with 53% of all property taxes going in, have tended to be the loser in that battle. Less than 40% of the general levy now actually gets to their doors.
(4) From the 2017-2018 Governor’s Budget summary, Housing and Local Government section, $10.4B had been returned to cities, counties, special districts and K-14 education from redevelopment agency dissolution. $5.9B of this was returned to (had come from) K-14 education, about 57%. See Redevelopment sheet, showing $7.61B of total tax increment from SCO, less $2.81 estimated overall distribution = $4.8B still flowing to RDAs x 57% to K-14 x 89% to schools = $2.4B
(5) California’s per capita property tax is literally identical to the national average. So, although there are good arguments for why more property tax could and should be flowing to schools, this does not explain why the state devotes a larger proportion of its General Fund to education.
(6) The enacted 2019-20 budget noted that per-pupil Proposition 98 spending would be $12,000 – while spending from all sources (state, federal, and local) would be $17,400. (Typically, about $1,000 of that would be federal revenue, with the remainder local parcel taxes, excess property tax, donations, etc., and finally non-Prop 98 state funding.)
Resolution Against Legislative Diversions of School Property Taxes
WHEREAS, EdWeek’s Quality Counts 2019 shows California earning an F grade for school spending -- a regional-cost adjusted $10,281 per student that is 20% lower than the national average of $12,756; and
WHEREAS, one half of California schoolchildren are not meeting state standards in mathematics or language arts;
WHEREAS, the California Constitution states that, “From all state revenues there shall first be set apart the moneys to be applied by the State for support of the public school system and public institutions of higher education. (Article XVI, Sec. VIII (a)); and
WHEREAS, in 1978 Proposition 13 passed. The proposition decreased property taxes by rolling back assessed values to their 1975 basis and restricting annual increases of assessed value of real property to an inflation factor not to exceed 2 percent per year. Schools lost 49% of their funding overnight; both schools and local services were forced to make severe cuts; and
WHEREAS, in 1979, AB 8 was enacted to satisfy the revenue loss for cities and counties by taking 30% of what remained in schools’ local property tax funding and transferring it to local governments. Schools’ share of property tax fell from 54% to under 40% overnight; and
WHEREAS, in 1992 and 1993, those funds were returned in that same proportion, as Educational Revenue Augmentation Funding (ERAF; Revenue & Taxation Code Sec. 97), with the proviso that they could only be distributed to state-financed districts where local property taxes fail to meet the state’s funding targets; and
WHEREAS, in 2004, the Legislature proposed Proposition 1A to voters, which they approved, which protected ALL property tax allocations EXCEPT those for public K-14 schools dependent upon state funding; and
WHEREAS, in 2013, the Legislature chose to take away County Office of Education property tax in excess of its LCFF Target to fund the state’s own trial court costs, rather than increasing the proportion of said property tax allocated to that county’s Special Education SELPAs (Education Code Sec. 2574); and
WHEREAS, the Legislature has allowed the growing amount of education-allocated property tax (over half a billion dollars in 2017 and almost $900 million currently) to be handed off to non-school entities as “excess” to educational requirements, rather than including regional costs and special education, as recommended to be part of LCFF, the “more rational, more equitable” school finance system outlined by Dr. Michael Kirst et al in the 2008 blueprint for the Local Control Funding Formula; and
WHEREAS, in 2019 the Legislature approved -- but the Governor vetoed -- SB 5 which would have taken $2 billion of school property tax every year for three decades to reintroduce redevelopment, putting over $50 billion of additional pressure on the Proposition 98 Minimum Guarantee, reducing the directly allocated property tax to schools (not just the county educational revenue augmentation fund) in 19 counties. This legislation was re-introduced in 2020 as SB 795 and must be stopped.
NOW, THEREFORE BE IT RESOLVED, that the governing board of the NAME OF SCHOOL DISTRICT, COUNTY BOARD OF EDUCATION OR ORGANIZATION urges the California Legislature to commit to protecting the property taxes currently received by our public schools, to forgo any efforts to further erode such local property tax allocation to schools, to add a regional cost supplement to the Local Control Funding Formula in those high-cost counties with “excess” educational revenue augmentation funding, to increase the allocation of County Office of Education property tax to Special Education before expropriating any local tax to pay state obligations, and to work to reverse historical diversions and increase transparency of local property taxes allocated to schools.
Adopted this day of the month of in 2020.
Motion made by: _________________________________________________
Second made by: : _________________________________________________
List members voting “aye”: _________________________________________________
List members voting “no”: _________________________________________________
List members abstaining: ____________________________________________________________
List members not present: ____________________________________________________________
Signature of CEO/Board Chair and Board members -- contact us at [email protected] for more info. Thank you!
It's time to bring equity to school funding!
With the current public school funding formula (the LCFF) California districts in high cost of living areas that are not funded solely by their property taxes receive the same amount of money per student as districts in low cost of living areas. In some districts it costs more to live than in other parts of California - therefore it also costs more to run a school. As a result we have seen, for example, the following:
- Teacher recruitment and retention is difficult
- Class sizes are large and continuing to grow
- Art, music, libraries and other "extras" are being eliminated due to budget cuts
- Cuts are being made to transitional kindergarten
- The achievement gap becomes larger
One solution to this inequitable funding situation is to revise the LCFF to include a supplement for school districts that serve students in high cost of living areas, without reducing funding for any other districts. [More information is here: https://www.educateourstate.org/impact]
Please sign below and support this effort!
Katherine Welch published What is the ‘excess’ educational funding in San Francisco that you refer to, where did it come from? in Questions and Answers: Analysts 2019-03-16 07:47:20 -0700
What is the ‘excess’ educational funding in San Francisco that you refer to, where did it come from?
San Francisco is unusual in that it is both a county and a city, and contains only one school district, so it illustrates the phenomenon of “excess” school property tax well.
In 1977, before Proposition 13, San Francisco Unified School District’s levied a property tax of 0.83% of assessed (market) value to fund its schools. Every property paid that level of tax for SFUSD because all local levies were independent of one another. (SFUSD’s levy was low for unified districts around the state — the average was 1%.)
Proposition 13 cut the sum of all local levies (for schools, city, and county governments) down to a total of 1%. This reduced SFUSD’s share of the new, consolidated levy to 0.30% — just under a third of local taxes.
At this time, the California state general fund -- fed by income tax -- was running a huge surplus. The Legislature was able to use it to backfill about ⅔ of the property tax losses that Proposition 13 had cost schools, cities, counties and other local districts. So, as school property tax revenues decreased, from $4.7 billion down to $2.3 billion, state funding grew from $3.5 up to $5.6 billion, for a loss of “just” $300 million.
SFUSD per-pupil spending actually grew slightly, from $2,333 to $2,500 per student, with property taxes still providing 30% of total funding. During a period of 10% annual inflation, this wasn’t great, but the property tax rolls continued to grow and enrollment dropped, as the swell of baby boomers aged out of the system.
The following year, 15 months after Proposition 13, the Legislature decided to ease itself out of the roll of backfilling city and county losses. The Legislature directed county controllers across the state to take away educational property tax allocations worth over $507 million (1979 dollars) — about 20% of the property tax still left in education — and give it to city and county governments.
In San Francisco, this meant that SFUSD’s share of total property tax revenues fell from 30% down to 8.5%, where it sits today. In Los Angeles and Alameda counties, the allocation to education shrank to 23%. Elsewhere less was taken, so the median direct allocation education in California counties is 46%.
The financial whizzes among you will have just said, “Whoa! Did you just tell me that schools were forced to swallow a big chunk of the cost of Proposition 13 for three large commercial counties — Los Angeles, San Francisco, and Alameda — and their cities?”
Yes. The AB-8 Split buried the cost of servicing counties and cities with large commercial sectors in school funding, or, put differently, allowed some large counties and cities to keep spending on local services high, subsidized by the rest of the state via the school funding mechanism.
As the state’s general fund fortunes fluctuated over the next decade, the hole in school property taxes, and resultant large state general fund spend "on education," was unsustainable. School funding ended up sliding downwards -- the “First to Worst” of the documentary film. Proposition 98 was passed in 1988, demanding that it fall no further as a proportion of total state spending.
Forced to deplete its general fund monies to meet voters’ Proposition 98 demands for schools and community colleges, the Legislature responded by reversing its earlier AB-8 action. In 1992 and 1993, it shifted property tax allocations away from cities and counties toward “Educational Revenue Augmentation.” But with a twist. The goal was not to grow education funding, but to create a pot of money that could be used to offset the state’s own Proposition 98 obligations to support education.
In San Francisco, this meant the creation of a county Educational Revenue Augmentation Fund with an allocation of 25% of total property taxes, targeted to fund the state’s obligations to SFUSD and SF Community College District.
Thus, the 35% of property taxes allocated to all education in San Francisco at the time of Proposition 13 became available for education again. But the majority of it — the 25% ERAF fund — is only available to the extent that the state’s school and community college funding formulas call for it. If they do not, those property tax dollars are redistributed to the City and County of San Francisco for other civic uses.
This is why San Francisco's controller recently announced that $400 million of “excess” educational revenue was being handed to the mayor to spend, under state law.
Are these the headlines we expect to see in the tenth year of an economic expansion?
Increasing San Mateo County school districts’ LCFF target funding (less any excess local property tax revenue, typically so-called ‘basic-aids’) suggests that specific districts are experiencing approximately the levels of financial pain shown below (above and beyond the general pain described in West-Ed’s “Silent Recession”).
Across the high-cost counties we’ve reviewed, this pain is generally reflected in multiple measures including less-experienced staff, higher staff turnover, less support staff, fewer enrichment programs (unless supported by external funding sources), perennial budget shortfalls, lower reserves, larger schools, larger class sizes, lower salary structures, antagonistic relationships between trustees, parents, unions, and staff. It is often worse, however, in areas of socioeconomic disadvantage, since the fixed Federal free-or-reduced-price-lunch cut-off excludes many high-needs students from LCFF student-need supplementation who are experiencing housing-cost related poverty.
Wonder how districts are educating their communities and taking action? See Redwood City's flyer here.
Time to make an imPACT!
Please contact your state legislators. Here is the state search tool to find them. Their details are below. Rally friends to make a bigger imPACT!
- Email is nice -- tell them how your school is hurting and how you want them to “support a regional cost supplement to the Local Control Funding Formula in the May Revise.” (They’ll be impressed.)
- A phone call is better -- ask their office if they are supporting a regional cost supplement for your school district -- share a personal story and tell them where they can find more information (here!) if they ask.
- Tweet to your representatives -- ask if they will stand up for your schools and your students and support a regional cost supplement! Tag #MakeAnImPACT and @EducateOurState
- Fax your legislators' offices -- phone calls and faxes are always heard. Get your friends to all do it together for a bigger imPACT.
Now dig deeper! Whom do you know in the Education Community? An education researcher at Cal, Stanford, UC Irvine, UCSD or USC? A school board member? Send them an email, too, and link to this site. We need to influence the influencers!
Still willing to work to help your kids, grandkids, neighborhood kids AND the kids on the other side of the tracks in your county? Please, put this on Facebook and Twitter, talk at your school PTA meeting, address your school board. We are here to help -- just reach out to us here and let us know.
WRITE, EMAIL, TWEET and CALL
KEVIN MULLIN: Assembly District 22 https://a22.asmdc.org Capitol Office, Room 3160P.O. Box 942849, Sacramento, CA 94249-0022; (916) 319-2022 District Office 1528 South El Camino Real, Suite 302, San Mateo, CA 94402; (650) 349-2200
Twitter: @KevinMullin Facebook: https://www.facebook.com/AssemblymemberKevinMullin/
MARC BERMAN Assembly District 24 https://a24.asmdc.org Capitol Office, Room 6011 Sacramento, CA 94249-0024; (916) 319-2024 District Office 5050 El Camino Real, Suite 117, Los Altos, CA 94022; (650) 691-2121
Twitter: AsmMarcBerman Facebook: https://www.facebook.com/AsmMarcBerman/
SCOTT WIENER State Senate District 11 https://sd11.senate.ca.gov Capitol Office State Capitol, Room 5100, Sacramento, CA 95814-4900; (916) 651-4011 District Office 455 Golden Gate Avenue, Suite 14800, San Francisco, CA 94102; (415) 557-1300
Twitter: @Scott_Wiener Facebook: https://www.facebook.com/ScottWiener2/
JERRY HILL State Senate District 13 https://sd13.senate.ca.gov Capitol Office State Capitol, Room 5035, Sacramento, CA 95814-4900; (916) 651-4013 District Office 1528 South El Camino Real, Suite 303, San Mateo, CA 94402; (650) 212-3313
Equal isn’t equitable.
We need per student funding to reflect regional cost differences in our most expensive counties.
Children in the poorest schools in our wealthiest counties are seeing the biggest cuts in their schools; this makes it imperative we move to Parity And Cost Transparency (thus our title, imPACT) by giving these districts a supplement to account for the higher costs in these districts.
Make an imPACT and bring equity to these students and these schools in our most expensive counties.
California’s school finance system provides the SAME funding for a student in a less expensive county, where a two bedroom apartment may rent for $900, as it does for a student living in a more expensive county, where the same apartment can rent for three or four times as much (see graph below). This means that, for example, while the teacher shortage may be impacting all districts, it impacts these districts even more. As another example, a family of four – with two parents working as custodians, teachers, school nurses, administrators -- can just make ends meet for $67,000 in Sacramento or San Bernardino county. A similar family needs over $108,000 in the Bay Area to maintain the same modest lifestyle, according to the California Budget & Policy Center.
When the new funding formula was originally developed (it went into effect in the 2013-14 school year), cost of living was intended to be part of the calculation, in addition to student needs. Former State Board of Education Chair Michael Kirst’s 2008 blueprint for this “more rational, more equitable” school finance system in California clearly stated that district revenue should be linked to “student needs and regional costs.” When that funding formula, called the Local Control Funding Formula (LCFF) (click the link for a definition of LCFF) was implemented in 2013, however, regional costs were omitted to achieve full implementation sooner. We have heard several other reasons for this omission; you can read those reasons here.
The misery experienced in the poorest districts in our wealthiest counties goes beyond that experienced by all districts across the state, so well described in West-Ed’s The Silent Recession. Our effort here is to bring equity to school funding by supplementing some districts for cost of living differences; no district in the state would receive less than they currently receive. The state recognizes cost of living for other investments (e.g. childcare); it is time to supplement that difference for K-12 education.
A regional supplement is surprisingly affordable. Although the total shortfall is $1.1 billion -- less than $700 million, or 1% of the total LCFF budget, would be needed from the General Fund. Why? Because over half a billion dollars of “excess” property tax revenue, allocated to education, but redirected, is available to pay for it annually in the four highest-cost counties.
Basically, a fund was created to allocate some property taxes to schools, but the money in that fund only gets to schools up to the level the state says schools should be funded -- which does NOT include a cost of living supplement. We know from county child care allocations, for example, that it is CRITICAL to adjust for cost of living -- otherwise counties could not attract providers. However, we have not made the same adjustment for K-12 funding. It's time. If you have additional questions about how a district could have "excess" education revenue more information is here (the amount), here (the history) and here (an explanation).
imPACT is our campaign to address this inequity, now. The extreme financial crisis facing most schools in the poorest districts in our wealthiest counties makes it imperative we move to Parity And Cost Transparency and supplement funding for cost of living differences in those counties. Please join us in asking the Governor and Legislature to incorporate a regional cost supplement into the school funding formula, LCFF, as originally intended.
Do you live in one of the ten highest-cost counties in California -- including Alameda, Contra Costa, Marin, Orange, San Diego, San Francisco, San Mateo, Santa Clara, Santa Cruz and Ventura? Find out how much additional financial stress your local districts are experiencing by clicking on Counties.
We have provided questions and answers for parents and other concerned community members and one for analysts. We add more every day. If your question is not listed, please add it in the comment box at the bottom of either of those links and we will post your question and a response. Thank you!
Do you wonder how there could be “excess” property tax revenue -- meant for, but not going to, schools -- available to the Legislature for schools in the most expensive counties: San Francisco, San Mateo, Marin and Santa Clara? Click on $623 Million.
Are you asking yourself if this completely fixes California school finance? No. It rectifies an immediate problem, recaptures hundreds of millions of dollars for education starting in July, and serves to reassure voters -- especially in the areas where any new full, fair and adequate funding will predominantly be raised -- that their local needs are respected.
Make an imPACT -- contact your local legislatures if you are in an imPACTed county -- including Alameda, Contra Costa, Marin, Orange, San Diego, San Francisco, San Mateo, Santa Clara, Santa Cruz and Ventura -- click on the counties link here and your county page will have the information to contact your legislators.
We also need to reach out to Governor Newsom, his Education Advisors and the key Legislative committees. Join with other parents and members of the education community to have an imPACT now. Email us here to get involved, and with questions or for connections.
Join the fight for equitable -- not nominally equal -- funding of all children in California.
Katherine Welch wants to volunteer 2016-10-11 19:42:58 -0700
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Warning: The reality of what the state has done with taxpayer money allocated to our children and our public education system can be disheartening. Please believe us when we tell you that together we CAN and we WILL stop this madness.
We welcome the opportunity to explain any of the legislation below; it can seem overwhelming at first. Reach out here. You do not need to become a finance expert, but instead to understand there is a pattern here that is hurting our children, our public education system, the integrity of our government and the future of our state. Here goes...
$10 BILLION A YEAR
How Education Funding Diversions
Have Grown Over Decades
Parents and voters are puzzled. Why are our state and property tax bills so high -- yet local school funding seems to be so low?
School board members are puzzled. Why is funding flat for schools -- when local real estate prices are skyrocketing, home sales are robust, the State General Fund is growing, and so much new construction is sprouting up nearby?
Pundits, politicians and PACs blame perennial scapegoats: Proposition 13, illegal immigrants, “greedy” teachers’ unions, wealthy basic-aid districts, pensions, top-heavy administration, to name a few.
Academic papers dissect school funding from every angle, but miss a black hole:
California government has developed a bad habit of diverting educational funding from our schools
to solve unrelated problems.
As activist parents, we analyzed where our school revenue was raised, looking hardest at local property tax. There we discovered how billions of dollars of revenue allocated to our schools is routinely manipulated away. It was truly disheartening to see how local property taxes were taken, overwhelmingly from our poorest children, weakening our public education system. We came TOGETHER to make a difference -- believing we could expose and stop these diversions. JOIN US -- pause the endless local fundraising for basic programs and step up to reclaim funding statewide. Join us to strengthen school funding and transparency.
Here are the facts that will help you make sense of Legislative Analyst Office Whitepapers and Ed-Data district funding information.
Local Funding Was Stripped Away from Schools (AB 8 Split of 1979)
What Happened: In the aftermath of Proposition 13, the Governor and Legislature told cities and counties to make up their lost revenue by taking an average of 30% of the existing property tax allocation to schools. More was taken away in high-tax, industrial counties that had seen the largest cuts from Proposition 13, less was removed in suburban and rural counties. Sacramento promised to make up the schools’ losses from the State's General Fund.
Result: This significantly reduced the stable, reliable share of property taxes flowing to K-12 schools (dropping the allocation below 10% for San Francisco’s schools and under 25% for schools in Los Angeles, Alameda, and other major industrial counties, while leaving suburban and rural counties at 40%+, including like Marin, Santa Barbara, and Napa).
Lessons: Many schools (especially urban ones) became heavily dependent on the State’s General Fund. Revenue for schools switched from stable local property tax to unstable state income tax revenue—which fluctuates with the State’s economy. Without changes to local property tax allocations, increased tax revenue and changes to Prop 13 only provide minimal extra funding in most urban areas. (In San Francisco, K-12 schools only get 10 cents out of every dollar of increased property tax.)
Proposition 98 is Routinely Manipulated and Undermined
Background: After Proposition 13 reduced education funding, voters approved Proposition 98 (1989) to give K-14 schools a “fair share” of the state’s growing budget. But, no sooner had voters acted than actions were taken to undermine that funding…
Prop 111: “Traffic Congestion Relief and Spending Limitation Act Of 1990”
What Happened: The Legislature, under cover of raising gasoline taxes for highways and requiring a balanced budget, gutted Proposition 98 by introducing “Test 3.”
Result: Test 3 allows the state to cut back funding to education during a slow economy with only “maintenance factor” promises to catch up education funding when times get better. Any reductions to education funding are not repaid.
Proposition 30 (2012): “Temporary Taxes to Fund Education…”
What Happened: The Governor proposed, and the Legislature passed, a state budget that included new funding proposed under Proposition 30 as part of Proposition 98 funding to schools—so funding to schools would be cut if it didn’t pass. Under the “promise” of funding education through increases in personal income and sales taxes, voters approved Prop 30. But …
Result: While the State was able to pay off delayed obligations to schools, the changes Proposition 30 made to the state constitution actually diverted funds away from schools in the long term. $6B of new taxes were added temporarily, but $6B of existing sales tax was removed from the Proposition 98 calculation permanently, resulting in a $2.4B annual loss to education unless Proposition 30 were renewed! Hence the need for Proposition 55 (2016).
Lesson: Be suspicious of any proposition by the Governor or Legislature that impacts education funding -- however neutral the Legislative Analyst’s summary may be.
$1 Billion of School Property Tax is Now Branded “Excess” and Quickly Moved Out of Education
Background - School Districts: After the AB 8 Split and Proposition 98, the Legislature reclaimed the portion of school property tax given away in 1979 for education. It set up an Educational Revenue Augmentation Fund in each county to share the reclaimed portion among its least-wealthy districts. However, the sharing stops once the state’s target district revenue is met -- and then the “excess” is handed off to local governments.
Result: Introduction of the new, flat (not adjusted for regional costs), statewide Local Control Funding Formula in 2013 has meant that districts in the most expensive counties in the state face flat budgets while local costs (and local property tax revenues) skyrocket. $300 million of “excess” school revenue will be redistributed by the mayor in San Francisco this year; $270 million in Santa Clara County; $230 million in San Mateo County, ditto Marin, Napa, etc. This is revenue that was collected from the taxpayers for education, and it would have made a big difference to the poorest children in the richest counties (for more detail see https://www.educateourstate.org/impact).
Background - County Offices: County Office of Education property tax was split between oversight and special education (SELPA) functions -- ranging from 0%-80% depending on how special education funding was levied in July 1977. In 2013, the Legislature ruled that County Offices of Education must hand over all oversight property tax revenues in excess of their LCFF targets to pay state’s trial court costs. COEs weren’t allowed to transfer “excess” oversight funds to support their SELPAs.
Result: In 2014, $17 million was transferred, it has grown to $90 million in five years and will top $100 million next year. Had the money been channeled into Special Education by tweaking the allocation factor, it would have opened up $44 million this year in additional Proposition 98 funding.
Lesson: Cities, counties and the Legislature play the “property tax is inequitable” card to grab as much stable, reliable funding away from schools as they can. Constantly.
The “Triple Flip” & The Vehicle License Fee (VLF) Swap (2004)
What Happened: The Legislature needed to fund $11 billion of deficits AND pay its revenue sharing obligation to local governments for vehicle license fees when the Governor reduced those fees. Both the “Triple Flip” and “VLF Swap” diverted local property taxes allocated to schools to satisfy these debts to cities and counties, promising that "Proposition 98 would hold schools harmless."
Result: Throughout the recession, billions of dollars of stable property tax were removed from schools, then the schools got “deferrals” from the State’s Proposition 98 “hold harmless” guarantee -- IOUs instead of cash. Worse, the mechanics of the VLF Swap actually shifted billions more school property tax away than the State’s underlying obligation ($2.5B extra in 2014-15 alone). The decision to tie the diversion of school property taxes to the increase in county property taxes vs. the underlying obligation of vehicle license fees, drained school and state funding by $10 billion of vital 2008-2015 recession funding. The Triple Flip finished in 2015, but the VLF Swap has no end date, and is growing to $9B next year. Thus $9B of schools’ share of stable, reliable local property taxes will be taken away -- making their funding less secure and their cost to borrow money higher.
Lesson: The Legislature is always eager to ‘make a deal’ handing school property tax to local governments, promising to pay schools back, but the State is a lousy credit risk.
Schools Are the State's Lender of Choice in Hard Times
What Happened: When the State economy contracted (2008-2012), the State not only reduced actual Prop 98 spending to schools but also issued $10B in IOU’s (deferred payments to schools).
Result: This forced schools to incur borrowing costs (though the payments were deferred they still had to pay their staff, etc.), raid reserves (reducing interest income and scaling back capital projects), and cut programs/raise class sizes in order to pay their bills.
Lesson: When hard times come, our schools are forced to bear the costs of the State’s debts.
Unfunded Promises Have Consequences
Background: At the height of the dot-com bubble (1999), the Legislature was persuaded to increase teacher benefits and reduce pension payments, but without anticipating a future funding stream to support these changes.
What Happened: The dot-com bubble burst and state revenues fell. The unfunded liability in CalSTRS grew rapidly to $80B+. The Legislature finally took action in 2015, dumping the majority of the financial burden on school districts without increasing funding to help districts absorb these costs. The state’s 1999 decisions became the schools’ 2019 burdens.
Result: Schools educating today’s and tomorrow's students are forced to pay for these promises now (and for the next 29 years) – with the result that future ‘spending on students’ is really just paying for teaching decades ago plus the lost interest on that obligation.
Lesson: Unfunded commitments and mandates grow until someone is forced to pay them.
Cities Covet School Funding for Redevelopment
What Happened: Cities discovered that redevelopment measures were much more lucrative after Proposition 13. The rollback of property values to 1975 levels built in large tax revenue increases after any sale, even if no redevelopment activity occurred. The Governor and Legislature ignored that fact, allowing cities to remove another 20% of the property taxes that still remained to schools, assuming these losses would be “made up” from the State's General Fund.
Result: By 2010, 14% of all property tax was being consumed by redevelopment agencies -- over half of it out of schools’ allocation. The Governor & Legislature tried to limit redevelopment – only to discover that most funds had been committed to debt service.
Lesson: Cities, hungry for infrastructure revenue, are watching for an opportunity to take property taxes away from schools again. Senate Bill 5 in 2019 passed easily in the Legislature; thankfully it was vetoed by Governor Newsom in October (for details see EducateOurState.org/NoOnSB5). This effort WILL be back in 2020 -- we need YOU to help stop it.
While voters and parents work hard to get money into schools -- others work smart to get it out again.
Inequitable Application of Proposition 13
Background: Commercial property owners have successfully sued and lobbied California governors and legislatures to create loopholes. Real estate partnerships and large commercial investors hide behind small business owners to escape property tax increases.
Result: This reduces overall property tax revenues and shifts the burden of paying for local services onto homeowners. Because fewer homeowners bother to take the $70 homeowners’ exemption, staffers claim this shift hasn’t occurred.
Lesson: Money and successful lobbying have limited local taxes for some privileged property owners, while creating a large group of home-owning voters who, since they’re paying a lot in taxes, expect more from their cities, counties, local services and schools than they receive.
Why are our taxes so high, while our school funding is in the cellar?
Because school funding is the easiest to raise -- and raid.
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Katherine Welch commented on 2014 Initiative 2013-11-21 06:59:14 -0800Time for communities to take matters into their own hands. Let’s fix this mess and make a difference for kids. This initiative will start us on the road to transparent and stable school funding. I’m proud to be a part of this effort!
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