Thursday, January 12, 2012

BROWN’S PROP 98 CONTORTION: Shifting debt expense to Prop 98 would be cut to schools

By John Fensterwald - Educated Guess  |

Governors and legislatures have shifted programs and revenues in and out of Proposition 98 – based on policy and expediency – ever since the school funding law was created two decades ago. But what Gov. Jerry Brown is proposing in the event voters reject his tax increase in November is unprecedented in terms of impact on K-12 schools and community colleges – and brazenness.

If the 5-year, $6.9 billion sales and income tax** increase fails, Brown would cut K-14 education by $4.9 billion. Half of that would reflect the drop in Prop 98 obligation (more on that shortly). But the other $2.4 billion would come from saddling Prop 98 with the responsibility for repaying general obligation education bonds – a burden that until now was handled through the General Fund. The effect would be to cut school funding by $2.4 billion without going through the formal process of suspending Prop 98.

The rationale is done through “rebenching,” and it’s one reason that education groups and district officials are reacting ambivalently to Brown’s budget.

Proposition 98 was passed to create a minimum funding level for K-12 and community colleges of about 40 percent of the General Fund, though the amount will vary yearly based on various “tests.” Whenever the Legislature moves items in and out of Prop 98, it goes through an adjustment process to weigh the impact on the Prop 98 obligation. It’s called rebenching, but Rick Simpson, deputy chief of staff for Assembly Speaker John Perez and key adviser to the Legislature for decades, reminds me that it’s a term of art, not found in Prop 98. The courts have not yet ruled on the legality and methods for rebenching, although the California School Boards Association is suing the state over a related move by Brown and the Legislature this year (more on that, too).

Tradition of holding schools harmless

Usually, when the Legislature moves programs in or out of Prop 98, it creates a neutral impact, holding schools and community colleges financially harmless. They did this when they moved child care out of Prop 98, deciding it was not a K-12 expense; when they put Prop 49 after-school activities into Prop 98; and when they shifted the responsibility for funding children’s mental health care.

One method to calculate the impact of rebenching is to go back to 1986-87, when Prop 98 was written, to determine what a program was costing the state at the time and then make certain adjustments to determine the current value. That’s the method that Brown and the Department of Finance have chosen for jamming school bond payments into Prop 98, because, frankly, it works to their benefit. The state was paying several hundred million in interest and principal on school bonds in 1986-87; today, as a result of $23 billion in school bonds that state voters approved in 2002 and 2006, it’s paying $2.6 billion yearly. Subtract about $200 million that Brown would add in new revenue under rebenching, and the net loss to schools – money they won’t get to run programs – is $2.4 billion.

“If the Governor and Legislature can arbitrarily move billions of dollars out of the General Fund to provide a specific government service and at the same time reduce the Proposition 98 guarantee, then they can manipulate the minimum guarantee to be whatever they want,” Robert Manwaring, a former deputy analyst for education for the Legislative Analyst’s Office, told me. “At that point, the constitutional guarantee becomes meaningless.”

On that point, Robert Miyashiro, vice president of the consulting firm School Services of California and another budget expert, agreed. There have been so many contortions of Prop 98 over the years that Miyashiro  has called for abolishing the law and replacing it with a simpler, more comprehensible funding system.

Dennis Meyers, assistant executive director of the California School Boards Assn., says CSBA believes that the school bonds shift, if it happened, would be illegal.

Illegal or not, whether you think it’s necessary depends on your view of the total budget. By cutting K-14 funding an additional $2.4 billion, Brown can avoid further cuts to social services, child care, Medi-Cal and higher ed.

Skirting Prop 98 suspension

But in doing the cutting this way, Brown avoids having to formally vote to suspend Prop 98, which is what voters intended in passing it. Suspension requires a two-thirds majority vote of the Legislature – never easy for a governor to obtain and even harder since voters OKed passage of the total budget by a simple majority. (Refusing to suspend Prop 98 is one of the few remaining levers that the Republican minority still has.)

If Proposition 98 were suspended, the Legislature would have to eventually pay back the $2.4 billion that Prop 98 was shorted, an amount called the maintenance factor. But Brown and the Legislature – assuming it goes along – would not have to pay anything back by rebenching.

Dispute over realignment money

There’s another big reason Meyers says there is “very little to like” about the governor’s budget for education.

In the current budget, Brown and the Legislature moved some state services to counties and cities. To pay for this realignment, they diverted revenue from 1.06 percent of the state sales tax, worth $5 billion, from the General Fund. Doing so also subtracted $2 billion that would have gone to Prop 98. CSBA has sued over this point.

Brown didn’t cut $2 billion for schools, per se. He deferred payment of it until the 2012-13 budget, which allowed school districts to count the money in their budgets this year. And, in the budget trailer bill, AB 114, Brown and the Legislature promised to pay the money back to schools if a tax increase passes – and to find some other way to handle realignment if it doesn’t.

But now Brown is saying that if the tax fails, the $2 billion would stay with the locals, and the schools would be out the money.

CSBA, along with two dozen education and community groups who signed a letter last week, has withheld support of the governor’s tax initiative. There would have to be changes – including a steady, sure source of money for schools – for CSBA’s backing, Meyers said.

** This week, the LAO forecast that the tax initiative would raise only $4.8 billion – $2.1 billion less than the Department of Finance’s projection.

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