The ABC's of School Finance

Movie muscleman Arnold Schwarzenegger says he just wanted to do something to help latchkey kids when he sponsored Proposition 49, a ballot measure that California voters approved last November. Schwarzenegger may have been helping himself by laying the groundwork for a 2006 campaign for governor. Unwittingly, perhaps, he also was adding another layer of complexity to what is arguably the state’s most complicated financial obligation, as well as its largest one: public education.

By requiring a certain amount of state money to be spent on after-school programs, Proposition 49 forces the governor and the Legislature to decide whether the funds—as much as $455 million a year—should come from the money the state is already obligated to spend on schools, or be added to that amount. And in an era of multibillion-dollar state budget deficits, that’s no easy decision.

The Schwarzenegger measure is only the latest in a very lengthy string of laws enacted by voters or the Legislature—or effectively decreed by the courts—that set forth not only how much money California will spend on schools but how the funds are to be divvied up.

Since K-12 education is the largest single public enterprise in the state, topping $40 billion in state and local funds and dealing with some 6 million students, the financial complications have been compounded by raw politics as competing interest groups vie for pieces of the pie. It would take a book—a long book—to fully explain how California schools came to be such a financial quagmire, and a masochist to write or read it. So this is only an overview.

Until about 30 years ago, the state played only an indirect role in financing and managing California schools. The essential decisions about schools, including how much in property taxes should be levied to pay for them, were made by locally elected boards of education. More direct state involvement began with a state Supreme Court decision, Serrano v. Priest, that declared California’s property tax–based financing system to be inequitable—and therefore illegal—because the amount of taxable property per student varied widely from district to district.

“Rich” school districts, such as those with oil fields or large commercial districts, could provide lavish educational services with relatively tiny tax rates. “Poor” districts, typically those containing mostly houses, had to impose high tax rates to achieve the same amount of per-pupil revenue, and rarely did. The rich and poor designations, one should note, had nothing to do with the incomes of the families; indeed, many rich districts had lots of poor kids, while the poor districts were often suburban enclaves filled with affluent families. And that anomaly has been a problem ever since.

With the decision, the state began to “Serranoize” or equalize its aid, giving less to rich districts and more to poor districts. And big-city legislators immediately began to ramp up special forms of state aid that were exempt from equalization, the so-called “categorical aids” that were to multiply in such abundance during the 1970s and ’80s. But all of this had scarcely begun to take effect when the state’s voters slashed their property taxes dramatically by passing Proposition 13 in 1978. Quickly, the state virtually took over school financing, combining Sacramento’s money with the remaining property taxes to form a “revenue limit” for each school district that was supposed to move toward the Serrano decision’s goal of equalizing the funds behind each child.

A decade after Proposition 13 passed, the voters struck again, this time enacting a measure sponsored by the California Teachers Association and other elements of the self-named “Education Coalition.” The combine had wanted to raise state taxes and dedicate the new revenues exclusively to the schools, but decided that a tax boost was not salable. It settled, instead, on Proposition 98, an extremely complicated measure that generally provides a floor, in the form of a percentage of state revenues, under state school financing. Each year, in effect, a calculation is made on how much money the state owes the schools. The state can go above the floor, if it wishes—but if it does, the new money becomes part of the base for the next year’s calculations. And while going below the floor is theoretically possible, it’s almost impossible in a practical sense.

Fifteen years after its passage, Proposition 98’s provisions are still understood by only a handful of number-crunchers, but the figure it generates plays a major role in the annual drama over fashioning a new state budget. During the early 1990s, when the state was mired in recession and budget deficits blossomed, the major issue for then-Governor Pete Wilson and legislators was how to handle the Proposition 98 guarantee. One solution to their dilemma was the Educational Revenue Augmentation Fund (ERAF). The state, using the power over property taxes inadvertently granted by Proposition 13, shifted about $3.5 billion a year in property taxes from local governments to schools, thereby relieving the state’s general fund of that much burden. Local government officials fumed—and are still fuming—but there was nothing they could do to stop the shift. It reflected their political weakness and the potency of the union-backed Education Coalition. Last year, when the state faced another budget crisis, one of the steps adopted by the governor and the Legislature was to expand ERAF’s shift to cities’ redevelopment funds.

When the state was rolling in money during the late 1990s, educators demanded, and got, a boost in the state’s commitment. The politics of the situation were not pretty. The California Teachers Association threatened to place on the 2000 ballot a measure that would require California to match the national average in per-pupil spending, which would have cost another $5-6 billion a year. Governor Gray Davis hated the measure, and on the day the initiative signatures were to be submitted, he agreed to a $1.8 billion increase in the budget to forestall it.

During the current fiscal year, the state is spending nearly $27 billion as its share of K-12 school financing total under Proposition 98—several billion more than the measure’s minimum guarantee and more than a third of the state’s general fund. (Another $15 billion in property taxes, plus federal funds, also flows to the schools.) Whether the “overappropriation” that resulted from the CTA-Davis deal two years ago will continue now that the state is awash in red ink is an unsettled question. The school establishment in 2002 agreed to defer some of its allocation to relieve pressure on the general fund, but the money will have to be repaid eventually.

As politicians wrangled over school money during the 1990s, the academic performance of the state’s schools emerged as a major political issue, driven by embarrassing revelations of California’s poor performance on national achievement tests. That elevated political profile gave rise to still another wrinkle in the increasingly complicated school finance picture: earmarking Proposition 98 funds for particular purposes, rather than leaving them to local school boards to disburse. It started under Governor Wilson, most notably with payments to schools for decreasing the class sizes in elementary grades. It has since been expanded under Davis to many other areas.

The effect of these earmarked funds is to make the governor and the Legislature the chief decision makers on where local school money should be spent. Politicians like earmarking, because they can say they did something—such as lowering class sizes—specifically to improve the schools. The unions that represent teachers and other employees generally prefer the state money to be unallocated, thus making it available for salary increases in collective bargaining with the districts. But school trustees and administrators have been willing to give up their autonomy to have more money placed off-limits to salary negotiations. In the case of lowered class sizes, the money goes to hire more teachers rather than to enhance the salaries of existing faculty. Schwarzenegger’s measure represents another step down this road.

There are periodic calls for simplification of school financing, to give each district a set amount of money, to consolidate or eliminate the proliferating categorical aids and earmarked programs, and simply to hold districts responsible for outcomes rather than dictate the process from Sacramento. But no one expects it to happen, because the forces of the complicated status quo are powerful. Indeed, there is every reason to believe that how much money a school gets to educate each child will become even more politically driven and more complicated in the years ahead.

School enrollment and the state’s legal obligation to finance education are growing even as the state’s finances are becoming more critical. The 2002-03 state budget freezes overall spending but puts more of it in the schools to finance the Proposition 98 commitment, while giving less to local governments and health programs. That competition—the schools versus everyone else—will grow more intense during this first decade of the 21st century.

Proposition 13 + More Kids = Less Money

California enrolls more than 6 million students in its public schools and spent $6,837 per pupil in 2000, according to figures compiled by the National Education Association. The state’s schools educate one out of eight K-12 students in the United States, and enrollment continues to grow.

Still, in per-pupil spending, California ranks only 33rd among all states and the District of Columbia—well behind the other top 10 industrial states, including New Jersey ($10,892 per pupil), Illinois ($9,118) and Michigan ($8,107). The average per-pupil expenditure in the United States is $7,640—$803 more than in California.

California has the fifth largest economy in the world, so why doesn’t it spend more on its students?

One factor is that unlike other states, California uses relatively few property tax dollars for schools, and finances the bulk from the state, thanks largely to Proposition 13. Another factor is that, unlike New Jersey and some other high-spending states, California absorbs a huge increase in enrollment each year (roughly 100,000 students more per year), and these growth leaps limit the state’s ability to move upward in per-pupil spending.

Were California schools stagnant in enrollment—as they were during the mid-1970s, when districts were closing schools and selling off school sites—the state could apply that money (plus the “normal” increases under Proposition 98) to raise per-pupil spending. It costs about $6 billion a year to raise per-pupil spending by $1,000 per student, and California would have to jump about $2,000 to approach the top tier of states.

As this issue goes to press, the San Diego Unified School District is grappling with cuts that total an estimated $150 million due to the state’s current budget crisis. —D.W.

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