As good times roll, ed funds ruled by recession relief valve
(Calif.) Despite a robust economy and a surging stock market, Gov. Jerry Brown’s revised budget plan would trim state payments to schools by invoking an arcane funding formula typically associated with recession and bad times.
Under the byzantine workings of the Proposition 98 funding guarantee, the state’s current revenue picture is such that money for schools this fiscal year is governed by the “Test 3” formula.
Test 3 was most recently used from 2006 through 2009 as California and much of the nation suffered through the worst economic conditions since the Great Depression and resulted in billions of dollars in cuts to schools.
The formula, which generally allows the Legislature to decide how much money to give schools, would seem an unlikely regulator given that unemployment is at its lowest point in a decade, that the housing industry is booming in many regions and the S&P stock index continues to press past record highs.
But, administration officials said Friday, Test 3 is operative for the 2016-17 fiscal year.
“There’s no question about it,” said H.D. Palmer, spokesman for the governor’s Department of Finance. “The state is doing well, it’s just not doing as well as the economy.”
Proposition 98, approved by voters in 1988, imposed on the Legislature a requirement that K-12 schools and community colleges receive a minimum share of state revenues. Originally, there were just two formulas: Test 1, which calls for about 40 percent of state tax collections to go to schools; and Test 2, where funding is based on prior year funding adjusted for student attendance and per capita spending.
Test 3 was added to give lawmakers the ability to fund schools at a lower level during poor economic times, with the condition that those lost dollars are paid back once the economy has recovered.
Under state law, deciding which of the three tests are operative is a function of relatively simple math.
“The formula looks at year-over-year growth in revenues versus year-over-year growth in per-capita per-income,” Palmer said. “When year-over-year growth in per-capita per-income is higher than the year-over-year growth in revenues, that triggers the Test 3.”
Use of Test 3 during the recession was needed to make drastic reductions in school spending, but Brown’s May budget would take advantage of only part of the provision.
The concept of the Test 3 was to give lawmakers the ability to suspend the minimum funding guarantee so that schools didn’t take too big a share of the budget, leaving other programs and services to be scaled back dramatically. But to ensure that schools didn’t get cut back too much, a provision was added that mandated schools receive a supplemental payment intended to keep Proposition 98 spending at the same rate as the rest of the budget.
It is this supplemental payment, known as Test 3B, that Brown wants to eliminate for this fiscal year, in 2018-19 and on through 2020-21. These payment suspensions, however, would only be needed if the state’s economic conditions would also trigger Test 3 overall.
In the past the 3B payments have ranged from a low of $68 million in 1990-91 to $1.4 billion in 2001-02.
At issue for the governor are concerns that the state will end this fiscal year having over appropriated schools by close to $478 million.
“When we passed the budget last year and we funded Prop 98 for 2016-17 at what was at the time a minimum guarantee projected by the numbers we had at the time,” said Palmer. “In January, we updated our revenue forecast and low and behold, they’re a lot lower for the current fiscal year than we projected back in June.”
To resolve the problem, the governor proposed in January to cut school funding in the current fiscal year significantly and impose an $860 million payment deferral.
Palmer said the state’s revenues have improved in recent months, allowing the governor to eliminate the payment deferral and reduce the amount of spending rollback. But, he said, as things stand now there remains an over appropriation that has to be dealt with.
“The vast majority of the school community expressed concerns about what we proposed in January,” he said. “So what we did in response in the May revision was say, ‘Ok we won’t do what we proposed in January–which was to address the over-appropriation in the current year but, going forward, we will achieve the same amount of savings over a longer period of time.”
There are, however, some fiscal experts who believe the state will close the 2016-17 fiscal year with a lot more tax money than the governor has forecast in the May revision.
Payments of taxes had been usual all year with projections being missed one month, only to be regained in the next. April turned out to be a very disappointing month and clearly colored Brown’s outlook, even though his perspective had improved from January.
The governor and legislative leaders have little choice but to carry on with the existing revenue numbers, but if tax collections rebound in the coming weeks, there could be a far smaller amount of money that has been over-paid to costs and far less cuttings needed. If so, the imbalance will be taken up in next year’s budget negotiations.