California’s complex formulas limit options to close funding gap

May 20, 2019

At this point, many readers will have heard the estimate from the Getting Down to Facts II research collaborative that California needs approximately $26 billion in additional funding to reach an adequate funding level in all schools, i.e. the level necessary for all schools to be able to meet the goals set by the State Board of Education. Such a statistic naturally leads to the question: Where are we going to get that kind of money?

Jennifer Imazeki

Unfortunately, California’s options for raising that revenue are quite limited. Of course, there are statewide taxes (such as the sales and income taxes approved through Prop 30 in 2012 and Prop 55 in 2016); there are also some options at the local level. My own GDTFII report tries to highlight lessons we might learn from other states about school finance systems, but when it comes to local revenue options, California’s context is so different from other states that such comparisons are not particularly useful. Specifically, in most other states local districts have much more flexibility to raise revenue via property taxes and local property taxes typically are the primary source of school funding; in California, we lost that flexibility in the 1970s with Proposition 13.

Instead, California districts currently have four options to raise monies at the local level: sales taxes, parcel taxes, local income taxes and private contributions. Each of these options faces different hurdles.

An additional option that voters will be able to consider in 2020, and that could lead to more local property tax revenue, is the split roll proposal that would amend Prop 13 to allow differential treatment of residential and commercial property. Finally, policies that make it easier for schools and districts to raise money through the above mechanisms (such as lowering vote thresholds) would potentially allow more local revenue for schools as well.

Any of these options would require a heavy lift to convince voters to approve them and some would likely increase inequities in known ways (for example, both parcel taxes and private contributions are more common in more affluent communities). However, what is less obvious to many policymakers is that any scenario to raise more local revenue will interact with state-specific factors in ways that make it very difficult to predict a) how much additional funding individual schools would actually receive and b) the implications for equity.

One such factor is Prop 98, a highly complex initiative approved by voters in 1988 which sets a minimum guarantee for state school spending. The nature of that guarantee depends on a complicated set of circumstances that can involve both General Fund revenue and revenue from local property taxes. In some cases, for example, increases in local revenue (which voters might expect to produce more money for schools) may not actually increase school funding at all; instead, the additional local revenue simply frees up General Fund revenue for other state budget items. Overall, the complexity of Prop 98 formulas makes it very difficult to forecast the actual impact of policy changes that may impact local revenues.

Another complicating factor is the wide variation across counties in the share of local property tax revenue that goes to schools versus counties, cities and other special districts. Because of variation in these allocation shares, an additional dollar of property tax revenue in one county might mean $0.50 more for schools while the same additional dollar in a different county might mean only $0.20 goes to schools. Similar to the irrational variation in revenue limits prior to the adoption of the Local Control Funding Formula, this variation in allocation shares is based on historical patterns that can be traced to pre-Prop 13 days. This variation is largely invisible but greatly complicates attempts to predict how proposals like the split roll, or even simple changes in property values across the state, will translate into actual dollars for schools.

Given the increasing fiscal pressures on schools, particularly from pensions and special education costs, California educators must consider all the options for raising additional revenue. But these conversations must be accompanied by careful consideration of how increased local discretion would interact with existing policies to impact actual allocations and equity.

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Jennifer Imazeki is a professor of economics and director of San Diego State University’s Center for Teaching & Learning. She also authored a report on funding adequacy for the Getting Down to Facts II research project.

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