What is Proposition 98?

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Proposition 98 was added to the California Constitution by the voters in 1988. Its goal was to provide some predictability to school funding and a minimum level of funding for K-12 public schools and community colleges. In general, Prop 98 guarantees that about 40% of the state’s general fund be spent on these two levels of education and that school funding keep pace with student enrollment and the growth of personal income in the state.

In 1990, the provisions of Prop 98 were modified by the creation of three “Tests” to determine the amount of funding owed K-14 education based on economic conditions and the health of the state’s budget.

Test 1, a fallback for tough economic times, requires K-14 education receive a flat percentage of the state general fund (about 40%). This was the situation used in Prop 98’s first year of implementation and is to be used only when this flat percentage provides more money than either Test 2 or test 3. It was put into effect for the 2009-2010 school year, for only  the second time.

Test 2 requires that K-14 education receive at least as much as the previous year adjusted for enrollment growth and per capita personal income. This test usually applies when the state’s General Fund has normal or strong growth (faster growth than per capita income growth). Since Prop 98’s adoption Test 2 has been in effect for 12 budget years.

Test 3 requires that K-14 education receive at least as much as the previous year adjusted for enrollment growth and per capita General Fund plus 0.5% of the prior year Prop 98 amount. This test usually applies when General Fund revenues fall or grow slowly (slower growth than per capital income growth). Test 3 has been used 7 times including the 2008-2009 budget year.

If Test 3 is implemented, the state is required to “make up” over time the money schools lost (the difference between the Test 2 amount and the Test 3 amount allocated) beginning the next year after Test 2 comes back into effect. There is a specific formula for determining this “Maintenance Factor” for each year that it is required until the lost funding is restored.

Prop 98 can also be suspended by a 2/3 vote of the Legislature and the agreement of the Governor. This has happened only once (in 2004-5) and the Legislature has been very reluctant to consider this option. When suspended, the state has an obligation to make up any funds lost in future years just as when Test 3 is used. The Legislature and governor also can appropriate more money than Prop 98 calls for but once done, this amount becomes the new “floor” for calculating future school funding. The state has appropriated above the Prop 98 minimum on several occasions, most notably in 1999-2000 when class-size reduction was implemented in grades K-3.

There is some debate within the education community and within government as to whether Prop 98 has outlived its usefulness.  Some argue that Prop 98’s provisions are so complicated that it is difficult to understand and implement and that in some years its results are counterintuitive. Many in education argue that Prop 98 has protected education during bad economic times by guaranteeing a specific percentage of the general fund go to education. Others argue that it has restrained education spending by focusing attention on formulas instead of tying spending to specific goals and desired outcomes.

In the past year, there have been attempts to reduce the Prop 98 guarantee by simply removing certain tax streams such as the sales tax on fuel from the General Fund so that education gets a percentage of a smaller pie or by manipulating or eliminating the Maintenance Factor for certain years.

Many would agree that a complete overhaul of the school funding system is necessary if not a complete overhaul of the state’s fiscal and budget system. In either case, the state’s history with Prop 98 will be a major factor in the discussion.

Bob Nichols is education manager for the Silicon Valley Education Foundation.

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