Note: The complete LAO report is available via the link and a condensed version is presented here should the link ever become non-functional.
For a different perspective on Prop 98 read the California Department of Education's Prop 98 Primer.
Proposition 98 is a complex formula for setting a minimum annual funding level for K-12 schools and community colleges. This primer is intended to assist the Legislature in understanding the basic "mechanics" of the proposition and showing how it has affected school spending since its passage in 1988. We also describe the Governor's proposed changes to Proposition 98 and discuss our concerns about how they would diminish legislative budget authority.
California voters enacted Proposition 98 in 1988 as an amendment to the State Constitution. This measure, which was later amended by Proposition 111, establishes a minimum annual funding level for K-14 schools (K-12 schools and community colleges). Proposition 98 funding constitutes over 70 percent of total K-12 funding and about two-thirds of total community college funding.
The Governor recently proposed major changes to the Proposition 98 funding guarantee for K-14 schools. To help the Legislature put the proposed changes into context, it is important to understand how the current guarantee mechanism works. This primer provides some basic information on Proposition 98 and how it has affected spending on K-14 education.
While the formulas get rather complicated at times, the goal of Proposition 98 is a relatively straightforward one. Generally, Proposition 98 provides K-14 schools with a guaranteed funding source that grows each year with the economy and the number of students. The guaranteed funding is provided through a combination of state General Fund and local property tax revenues.
Over the long run, the Proposition 98 calculation increases the prior-year's Proposition 98 funding level by the growth in K-12 attendance and growth in the economy (as measured by per capita personal income). The actual amount the state is required to spend on Proposition 98 each year, however, depends on specific calculations or "tests".
Currently, Proposition 98 spending (General Fund) is almost 45 percent of General Fund revenues. Test 1 of Proposition 98 requires the state to provide K-14 education at least 39 percent of General Fund tax revenues. However, this test was only operative in the first year of Proposition 98 and is not likely to be operative any time in the near future.
Proposition 98 funding usually grows with the economy (that is, Test 2 years). Proposition 98 funding, however, can grow more slowly under two different conditions:
Recall that the intent of Proposition 98 is for K-14 funding to grow with attendance and the economy. When Test 3 years or suspension occurs, the state has provided less growth in K-14 funding than the growth in the economy. This funding gap is called the maintenance factor. Proposition 98 contains a mechanism to accelerate Proposition 98 spending in future years. This is called restoration of maintenance factor.
Some have suggested that when the state creates a maintenance factor, it is borrowing from Proposition 98. This is not the case. When the state creates a maintenance factor, the state is saving the amount of the maintenance factor. And, while the General Fund savings are not permanent, the state never has to repay funding not provided to schools as a result of the maintenance factor.
As noted above, in good revenue years, the state makes accelerated payments to Proposition 98. As a result, the state must dedicate around 55 percent of new General Fund revenues to Proposition 98 in these situations.
Some people get confused by the 55 percent number, wrongly comparing it with Proposition 98's share of General Fund revenues45 percent. The 45 percent figure is the average share of General Fund revenues devoted to Proposition 98 spending. The 55 percent figure only applies to additional General Fund revenues (year over year) and only in years when the state has an outstanding maintenance factor. The 55 percent figure is important to remember in those cases where General Fund revenues may be going up (due to updated projections, final collections, or proposed tax increases).
Yes. The state can provide funding above the Proposition 98 minimum guarantee in any fiscal year. However, since the additional funding becomes part of the Proposition 98 base for the next year's calculation, it becomes a permanent state obligation. Appropriations above the minimum (often referred to as "overappropriations") occurred annually for five years beginning in 1997-98, permanently raising the long-run Proposition 98 obligation level by almost $3.7 billion.
Within the guaranteed funding level, the Legislature has complete discretion on how it spends monies on schools. The Legislature can provide the funds for general purpose uses or for specific categorical programs. The state can also vary the mixture of funding that is used to support K-12 schools, community colleges, and child care.
Usually, but not always. It depends on whether the economy and General Fund revenues grow faster than inflation. In some Test 3 years, the Proposition 98 calculation does not provide enough resources to fully fund growth and cost-of-living adjustments (COLAs). In most other years, the funding growth far exceeds growth and COLAs, leading to significant program expansions like the creation of the K-3 class size reduction program in 1996-97.
The level of funding the state would have provided for K-14 education if the state had spent at the minimum guarantee each year since 1996-97 would be lower. In the current year, the guaranteed level would have been $7.2 billion less than is currently being provided. Much of the gap between actual spending and the minimum guarantee occurs in 2001-02, when General Fund revenues fell 17 percent.
The mystery of Prop. 98
By Joe Mathews, Los Angeles Opinion piece, July 13, 2008
Twenty years ago, with just under 51% of the vote, California voters approved Proposition 98, a constitutional amendment establishing a minimum funding guarantee for education. For years afterward, officials at the California Teachers Assn. (the initiative's main backer) and other proponents made a habit of describing Proposition 98 as having receiving "overwhelming support" from voters.
Today, the education funding guarantee is as popular as the teachers union has long wished -- a true third rail of California government that zaps politicians who dare to suggest altering it. So they rarely dare. Although Proposition 98 has much to do with the state's current $15-billion-plus shortfall, it is not talked about much in the public debate over hiking sales taxes and borrowing against the lottery and finding other ways to boost the state's revenues.
If anything, Proposition 98 appears to be the clear winner of the budget season. Even as the budget picture darkened this spring, the Schwarzenegger administration added $1.1 billion to its budget proposal to meet the guarantee. And buried in the fine print of the governor's plan for a rainy-day fund and spending limit is a provision that would protect Proposition 98 still further by eliminating the Legislature's ability to suspend it, as has been done in bad budget years.
What accounts for the respect given to the education funding guarantee? For one thing, Proposition 98, despite all its problems, has served the useful purpose of enshrining the most important public policy issue -- education -- as the state government's top priority. Second, there's widespread fear on the part of state politicians of challenging the teachers union and the rest of the education lobby.
But there's still another story behind the silence: The multiple formulas of Proposition 98 are so complex that they're difficult to understand, even more difficult to explain -- and, for those who want to know how much education money will go where, next to impossible to predict. Silence, it seems, is safer than wading into the thicket.
This widespread ignorance of Proposition 98's details is most apparent when interest groups make claims about education spending and budget cuts. This spring, for instance, teachers and education advocates protested the governor's budget proposal by claiming that he was proposing to cut education. Conservatives countered that year-over-year spending would go up under the governor's budget. But, in fact, neither side was correct because neither side knows.
No one -- not the governor, not legislators and certainly not journalists -- has any clear idea what Proposition 98's education guarantee will be in the new budget year, what size the cuts will be or whether education spending will be cut at all. And because Proposition 98 typically accounts for about 75% of education spending, and education is roughly half of the state's overall budget, the rule of thumb when it comes to claims about the California budget is this: No one knows anything. Why?
Please be careful before reading on. I promise your head will hurt. Explaining Proposition 98 in a concise, accurate way does not make for easy reading, and even budget experts throw up their hands when Proposition 98 is the subject.
The Legislative Analyst's Office, which employs some of the smartest people in the Capitol, concluded its official "primer" on Proposition 98 with the following surrender: "It involves complex calculations that few fully understand and generates funding results that are often unintuitive or -- even worse -- counterintuitive." Newspapers often report that Proposition 98 guarantees that 40% of the budget should be spent on education. That is at once not entirely false -- there is a provision of Proposition 98 that says that -- and, at the same time, not really to the point, because that provision of Proposition 98 has not been triggered in 19 years.
So what can you reliably know about Proposition 98? The most important thing to understand is that Proposition 98's funding guarantee is an ever-moving target. And because any estimates of cuts or increases in education funding are based on Proposition 98, such estimates are wrong almost as soon as they are calculated. With Proposition 98 spending projected to be about $57 billion in the next budget year, a 1% mistake in a Proposition 98 estimate represents more than $500 million.
Proposition 98 (which was partly intended to make education funding more predictable from year to year) is unstable even by the standards of an unstable state. The formula is actually three separate formulas (there were two in 1988, but one was added by Proposition 111 in 1990) that are themselves based on the interaction between three volatile factors: student enrollment (which can change rapidly after the state experiences a surge in births or a large influx of immigrants), general fund revenues (which are famously unpredictable in a state with progressive income taxes) and the state's per capita income growth (a figure that has been booming and busting since the Gold Rush).
And don't get me started on the "maintenance factor," a formula within the formulas that requires that any shortfall in Proposition 98 revenues in a bad year be restored in future years.
To tell you any more would simply confuse you.
In writing a 2006 book on Gov. Arnold Schwarzenegger, I talked to dozens of people about Proposition 98, and found only one person in the entire state who seemed to have a firm grasp on the formula: its author, former executive director of the state school board and longtime education consultant John Mockler.
In our first conversation, he told me that "nobody ever really knows what Prop. 98 is really."
Mockler drafted the initiative at the direction of the California Teachers Assn., which saw Proposition 98 as a defensive measure in the state funding battles that followed the adoption of Proposition 13 and its restrictions on tax increases. But Mockler has said he is not much of a fan of it or any initiative, even ones he has written. Direct democracy is "mob rule," he once told me.
Mockler insists that Proposition 98 is not as incomprehensible as it seems. He boils it down this way: Proposition 98 ensures that schools get the money they got last year, plus adjustments for inflation and enrollment. But if it were really that simple, would Mockler be hired so frequently to advise policymakers and others who don't understand it?
"You know, the state is complicated. Life is complicated. The Ten Commandments are complicated," he said. "Because people think Prop. 98 is so complicated, I got to send two kids through Stanford."
Could there be any changes made to Proposition 98? The Legislative Analyst's Office suggested in May that the Legislature "systematically review formulas -- both those passed by the voters and those enacted by the Legislature -- to determine if they are still needed and continue to reflect today's priorities."
But in the absence of top-to-bottom tax reform that includes a repeal of Proposition 13, the idea of repealing Proposition 98 should be ruled out. For all its problems, it does, in its strange way, what the voters intended: It protects education funding.
Some critics of Proposition 98 have made a more nuanced argument: They've complained that it allocates money based on revenue growth but without factoring in whether the state budget is in deficit or in surplus. One unusual year -- a very bad drop or a very big increase in state revenue -- can throw the Proposition 98 guarantee and the entire budget out of whack. These critics would like to see the deficit (or surplus) added to the calculations of the formula.
But it is by no means clear that including other variables in the formula -- such as factoring in the state deficit -- would represent an improvement. Adding more factors might only make a nearly incomprehensible equation even more complicated.
Simplifying the formula so that policymakers, not to mention the public, could understand it would be a noble goal, but the powerful California Teachers Assn., which has protected Proposition 98 with a fervor that the early Christians should have applied to the Holy Grail, would be unlikely to agree to reopen the subject. (In secret talks with Schwarzenegger aides in 2005, representatives of the teachers union offered ways to "smooth out" annual spikes in the Proposition 98 formula, but no agreement was ever reached.)
The union likes the formula precisely because it walls off education from some of the annual budget winds. And it is Proposition 98's very complexity that helps education officials defend it. How do you build a better mousetrap when you can't understand how the current mousetrap works?
In fact, the state would be in big trouble if Mockler, Proposition 98's author, is ever so selfish as to die. Perhaps some public-spirited rich person could sponsor a ballot initiative that would require Mockler, who turns 67 later this year, to live forever.
California will need him. Like it or not, Proposition 98 will have a long future.
Joe Mathews, a contributing writer for Opinion, is an Irvine senior fellow at the New America Foundation.
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Last modified: February 9, 2005
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