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Ballot Initiative Aims to Guarantee School Funding by Eliminating Complex Tax Revenue Swaps

Last week, proponents of a ballot initiative about California school funding got the go-ahead to start collecting petition signatures.

Called the School Funding, Property Tax Revenues, Initiative Constitutional and Statutory Amendment, the proposal has two provisions. The first would prevent the state legislature “from redirecting or reducing the allocation of local property tax revenues designated for K-12 public schools and community college districts.”

The provisions, its authors say, is about guaranteeing funding levels at the 39 percent that voters thought they were establishing in Prop 98.

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The second would require the state to use its own general fund – instead of local property tax revenues – to compensate cities and counties for losses in vehicle license fee revenue. The reason for this provision is that the state’s complicated tax-swapping schemes, say proponents, have created a nearly $7 billion debt owed to schools, based on property tax revenues.

The initiative was put forward by a 501c(4) non-profit called Educate Our State (educateourstate.org, www.yesforeducation.org), which is based in the Bay Area. The two driving forces of the organization are two accountants and financial analysts, Katherine Welch of San Mateo and Jennifer Bestor of Menlo Park. The organization has 150 days to collect the required 807,615 signatures to qualify the measure for the ballot.

After wholesale restructuring of California education funding, some might ask why this measure is needed. The simple answer is that California’s convoluted financing schemes, according to Bestor, still divert nearly $7 billion in property taxes that schools are legally entitled to.

A Trip Down California School Funding’s Memory Lane

Understanding how we got here requires a patient trip back in California school funding history.

Until the mid-1970s, local property taxes funded California schools. In 1976, the California Supreme Court ruled in Serrano v. Priest that this violated the State’s Constitution’s Equal Protection Clause, and expenditures had to be equalized.

This created the Revenue Limited/Basic Aid dual financing system. Districts where property taxes were insufficient (Revenue Limited) got money to bring them up to the state’s per-pupil funding baseline. Those that met or exceeded the baseline (Basic Aid) remained entirely property tax funded.

Then in 1978, voters passed Proposition 13, dramatically cutting property taxes, and with them, money for local services. As a result, most school districts became Revenue Limited and primarily funded by Sacramento.

To offset the local budget hit, the state legislature passed 1979’s AB-8, guaranteeing that counties, cities, and special districts – but not schools – were funded at pre-Prop 13 levels. A third of this money came from schools’ property tax allocations, and state aid to schools was increased.

Prop 13 also drove redevelopment agency expansion, which diverted incremental tax revenues from local agencies, including schools. (For example, after 25 years Menlo Park’s RDA diverted 50 percent of the city’s property tax, and 100 percent of property tax growth, according to Bestor.) By 1988, schools’ share of property taxes had dropped to 35 percent from almost 40 percent.

That year California voters passed Prop 98 mandating a minimum level of school funding, with one catch – the legislature could suspend the law with a two-thirds vote.

Enter the early 1990’s state budget crisis. The legislature cut school funding and created “educational revenue augmentation funds” (ERAFs), shifting property taxes from local governments to a county fund that then compensated Revenue-Limited school districts to bring them up to Prop 98 requirements.

Memory is short in California, and during the 1990s dot-com boom Gov. Pete Wilson lowered vehicle-licensing fees (VLFs) that funded local agencies, offsetting lower fees with higher income taxes for the wealthy. Although the higher fees could be reinstated, when the boom went bust, Arnold Schwarzenegger won the 2003 recall election against Gov. Gray Davis partly because he promised not to increase the VLF.

Face-to-face with economic reality, in 2004 Schwarzenegger persuaded voters to pass a $15 billion bond issue (Prop 57) to consolidate debt and cover the deficit, paid for by a 0.25 percent statewide sales tax.

Doing this without actually raising taxes was accomplished by the “Triple Flip,” which shuffled local sales taxes to the state, property taxes to backfill the local sales tax drop, and state money to backfill the property taxes due school ERAFs. While Prop 57 guaranteed money to other local agencies, it didn’t guarantee the same for schools.

The legislature waved the magic wand again with a VLF revenue swap from local agencies; again back-filling from property taxes, and promising to use RDA funds to repay schools. This also included a payment increase factor for local agencies, based on property tax growth. As a result, by 2015, the VLF swap payment will be some $2 billion more than is actually owed, according to the California Legislative Analyst Office’s report.

Then came the crash of 2008, driving the state legislature to defer Prop 98 funding altogether. Currently, the deferred obligation is $6.2 billion, according to the California Budget Project, with only $4.3 billion covered in the current state budget.

And here’s where we circle back to Educate Our State’s ballot proposition.

“As parents, we see $6.8 billion that’s going to pay a $4.3 billion [VLF] obligation, from property tax money that could be available for schools,” says Bestor. “The measure would relieve the state of the obligation to backfill $6.8 billion for schools. The state can then pay the $4.3 billion VLF from its own revenue. The other $2.5 billion would be at the state’s discretion to appropriate.”

The state’s Legislative Analyst Office differs, saying it would “possibly” increase school funding and decrease city and county revenue by $2.5 billion a year. It’s unclear what, if any, impact this would have on Basic Aid districts, since they don’t receive ERAF funding.

“The value of retaining local property taxes for education can be very attractive and nostalgic, as many decades ago that was the norm,” says Santa Clara Unified Trustee Jim Canova, a member of the SCUSD legislative committee. “The complicated funding formulas that exist today represent many attempts to achieve a balanced level of funding statewide.

“With the Governor’s focus on local control, it would seem this would be in the interest of local control advocates,” he continues. “However, we do need to make public education funding more uniform and supportive of local decision-making.”

You can read the Legislative Analyst’s Office report on the ballot initiative at tinyurl.com/mj9c59w. For more about Prop 13’s unintended consequences, read Jeffrey Chapman’s report at tinyurl.com/kwvt4ae.

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