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Credit: Allison Shelley for American Education
A math teacher explains how to calculate the angles of a star using trigonometry.
Credit: Allison Shelley for American Education
A math teacher explains how to calculate the angles of a star using trigonometry.
Patrick Murphy and Erin Heys
January 30, 2023
Gov. Gavin Newsom just released his budget for the 2023-24 year. The message regarding education funding was guardedly optimistic. Total K-12 education resources under his proposal would rise to $109 billion, a change of just 0.3% over the prior year. That very modest increase, however, might be the best-case scenario.
Unless someone in the Department of Finance has a crystal ball that we don’t know about, the future of K-12 funding is decidedly uncertain. In fact, school districts may be facing a rather dismal year — or years — from a fiscal perspective. A potential economic downturn that would result in a significant drop in state revenues overall, alongside growing cost pressures in district budgets, drives our pessimism.
A number of factors could shove California off its slow-growth path into an economic recession. Individual calamities like pandemics and national disasters spring to mind. But stubborn inflation leading to persistent high interest rates is a more likely scenario. And schools will face growing pension costs, teacher shortages and special education enrollment even if the economy holds on.
More importantly, we are concerned about the unstable revenue structure supporting schools. Education funding is directly related to total state tax revenue, and total revenue is tied to the economy. Let us explain. Government revenue, in general, is affected by changes in the level of economic activity, but California is particularly sensitive to shifts in the economic winds. The state’s dependence upon its very progressive personal income taxes, which accounts for two-thirds of total general fund revenue, and are highly dependent on the fortunes of the state’s wealthiest taxpayers, drives this sensitivity.
The relationship between total state revenues and funding for education is even more direct. Proposition 98 established a minimum funding level for K-12 schools and California’s community colleges. As a result, when total tax revenues go up, so does K-12 funding. But, when tax receipts fall, so does K-12 funding.
State lawmakers are to be commended for working to safeguard against this volatility by backfilling rainy-day funds to historic levels, but even a moderate recession could quickly deplete these resources and result in cuts to schools. While subtly acknowledged in their fiscal forecast, the LAO notes that a more severe recession could result in a situation where “revenues could be $30 billion to $50 billion below our revenue outlook in the budget window” and has recently urged lawmakers to find $14 billion more in cuts beyond the governor’s plan. Buried deep in their budget document, the Finance Department admits that a moderate to severe recession could result in revenue falling $60 billion below their projections.
The consequences of the state’s unstable revenue structure can most clearly be seen during the last major fiscal crisis, the Great Recession that began in 2008. It is no secret that funding for education took a major hit. However, what is less known is that lawmakers used drastic budgeting maneuvers to balance the state budget that went beyond simple cuts. Lawmakers deferred funding to school districts, “swapped” funding with local government, and in 2010 suspended the Proposition 98 guarantee altogether. Lawmakers even went as far as to change the education code — the laws guiding the state’s K-12 school system — to encourage districts to increase class sizes and reduce the number of instructional days in the school year. These maneuvers created major cash flow issues at the district level, prompting many districts to make programmatic cuts that greatly diminished school quality.
The Great Recession demonstrated just how bad it can get. With uncertainty on the horizon, now would seem to be a good time to have an honest conversation about California’s structural budget problems. The place to start is keeping the conversation going about the fiscal elephant in the room, Proposition 13. Reforming the measure would help broaden the sources of education funding, reduce dependence on volatile personal income taxes, and make the system fairer.
The recent effort to tax commercial property at market rates (Proposition 15, 2020) is but one example of the type of change that would introduce more stability into the overall funding structure. While the effort was narrowly defeated, there are other ways to reform the many dimensions of Proposition 13. For example, what would the impact be if Proposition 13 protections were lifted for vacant land and/or vacation homes? Is it possible that such a switch would both increase revenue as well as add to the supply of housing in the state? Or, to preserve local neighborhoods, it probably is time to stop extending the Proposition 13 subsidy to homes owned by investment funds, individuals residing beyond California’s borders or units used primarily as short-term rentals.
Rebalancing the state’s revenue mix by reforming parts of Proposition 13 can help prevent some of the mistakes of the past, and education stakeholders must keep ideas for reform alive. Ignoring the structural fiscal problems means the state is willing to subject another generation to underfunded, low-quality education when the next recession hits.
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Patrick Murphy is director of resource equity and public finance at The Opportunity Institute, a national education policy organization that focuses broadly on cradle-to-career education policy, practice issues and adjacent areas of social policy.
Erin Heys is policy director and senior researcher at the Berkeley Institute for Young Americans, a research center affiliated with the Goldman School of Public Policy at the University of California, Berkeley.
The opinions in this commentary are those of the authors. If you would like to submit a commentary, please review our guidelines and contact us.
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