Monday, February 17, 2014


By John Fensterwald | EdSource Today


February 14th, 2014   ::  The parent activists who formed Educate Our State say it’s time for the state to stop robbing Peter to pay Paul. Peter, in their view, being the schools and the theft being billions in property taxes.


The San Francisco-based parent organization is circulating an initiative for the November ballot that it says would sever budget machinations that have contributed to school districts’ and community colleges’ financial distress since the Great Recession and leave them vulnerable when the next economic downturn comes.

The nine-page ballot measure, involving a constitutional amendment and four statutory changes, would delve into the complexities of the “triple flip” of 2004 and other clever financing moves that legislators invented while playing a shell game with shrinking public money. But the result of the initiative, “Protection of Local School Revenues Act of 2014,” would be simple: permanently return about $7 billion in property taxes that school districts would have had this year if then-Gov. Armold Schwarzenegger and the Legislature hadn’t shifted the money to cities and counties to cover, in turn, what the state owed to them. The ballot measure would prevent the state from tampering with school districts’ property taxes in the future. Voters already have given cities and counties that protection; they did that by passing Proposition 1A in 2004.


Budget gymnastics

The siphoning of property taxes for schools that the Educate Our State ballot measure would end dates back to 2004. That’s when newly elected Gov. Arnold Schwarzenegger found the state deeply in debt yet fulfilled his campaign promise and cut the car tax.

The diversion from schools happened twice:

  • In order to close a huge budget deficit, voters approved $15 billion in Economic Recovery Bonds in March 2004. To reduce the interest rate on the bonds, the state secured the bonds by pledging ¼ cent of the state sales tax that had gone to cities and counties. In order to hold them harmless, the state shifted $1.5 billion in property taxes from schools contained in a special fund in each county, the County Education Revenue Augmentation Fund or ERAF. Then, to keep the schools happy, the state agreed to shore up their lost money with state revenue. This fiscal somersault was called “the triple flip.” Gov. Brown is proposing to speed the repayment of the last installment of the Economic Recovery Bonds next year, after which the $1.5 billion in property taxes would return to the school districts through the ERAF.
  • Schwarzenegger rode into office promising to cut by two-thirds an increase to the Vehicle License Fee or VLF, an annual tax based on a car’s value, that Gov. Gray Davis had reinstated before he was bounced from office. And Schwarzenegger did, early in 2004. That meant a loss of revenue of about $4.3 billion to cities and counties, the main beneficiaries of the VLF. To hold them harmless, the Legislature diverted property taxes from school districts and then agreed to backfill the districts’ losses with state revenue. The Legislature further agreed that counties and cities could keep additional revenue from increased assessed property values from 2004 on. That has now produced an additional $2.5 billion for cities and counties for a total of about $6.8 billion (the amounts fluctuate somewhat every year). Educate Our State’s proposed ballot measure, by giving schools back property taxes, would free up $6.8 billion from the General Fund. It would guarantee that the state repay cities and counties $4.3 billion and, at its discretion, the additional $2.5 billion. Cities and counties, nonetheless, could lobby each year for the full amount.

– John Fensterwald

Schools and community colleges are funded through a combination of local property taxes and state taxes. This year, property taxes contributed 16.7 percent of revenue for K-12 and community colleges; that portion would have doubled, to 33.3 percent, if the state hadn’t redirected more than $7 billion owed to schools, according to calculations by Jennifer Bestor, an Educate Our State parent from Menlo Park with a background in finance, who has been deeply involved with the initiative.

The ballot measure wouldn’t increase money for schools and community colleges; that’s not the intent, Bestor said. Instead, the initiative would swap a volatile source of revenue currently coming to schools – state taxes – for property taxes, a more stable and reliable source that had previously belonged to the schools, she said.

Late payments to school districts illustrate why this is important, Bestor said. After state revenues plunged in 2008, the state responded by postponing payments of money owed to K-12 schools and community colleges to the following fiscal year. Known as deferrals, the late payments grew to nearly $10 billion in 2010-11, nearly a third of the state’s portion of school funding. Those districts that couldn’t borrow money from their county treasurer turned to other lenders and paid higher interest rates; districts in the worst financial shape, which couldn’t borrow, cut programs and jobs.

The districts most adversely affected by deferrals included districts in San Bernardino County and Ravenswood School District in East Palo Alto, which had the least property wealth per student and therefore relied on state revenue for most of their school funding. They also generally have high percentages of low-income children. Increasing districts’ reliance on state revenue to fund schools created more pain for schools, Bestor argues.

Gov. Jerry Brown is the first to acknowledge that deferrals, part of what he calls the state’s “wall of debt,” have harmed schools and community colleges. That’s why he is proposing to expedite ending late payments by paying off the last $6 billion in deferrals in the 2014-15 state budget. And, to deal with the volatility of state revenues, Brown wants the Legislature to create a bigger rainy day fund tied to fluctuations in capital gains revenue. He would add a second tier of protection within the rainy day fund to smooth out spending under Proposition 98, the formula that determines the annual level of school funding.

Bestor takes cold comfort in these measures. As Brown observed in his summary for the 2014-15 budget, since the Second World War, the state has seen an economic recession every five years, on average, and it’s been 4 ½ years since the last one, leaving schools vulnerable once again to manipulations of the Prop. 98 guarantee if revenues fall.

And a rainy day fund doesn’t address the issue at hand: “First, make us whole; give us our stable, reliable stream back, instead of protecting us from the volatile conditions we have been force-fed,” she said.

Screen Shot 2014-02-12 at 9.36.11 PMStiff opposition from counties, cities

For supporters of the initiative, the cause is just and the need self-evident. But qualifying for the November ballot by relying on parent volunteers to collect 1.3 million signatures at farmers markets and outside school property by mid-April will be challenging. (Signature gatherers can be spotted wearing Dr. Seuss red-and-white striped “Cat in the Hat” stovepipe hats.) And if the initiative does make the ballot, it will face formidable opposition from cities and counties, which already are complaining that Brown and the Legislature have cut social services severely and unloaded public safety responsibilities on them.


This chart by the Legislative Analyst's Office shows that over 30 years, the personal income tax, which drives state revenue, has been three times as volatile as revenue from the 1 percent tax on property. Property tax revenue tends to lag state economic trends by a year or two. Source: Understanding California's Property Taxes, by the LAO, November 2012.

This chart by the Legislative Analyst’s Office shows that over 30 years, the personal income tax, which drives state revenue, has been three times as volatile as revenue from the 1 percent tax on property. Property tax revenue tends to lag state economic trends by a year or two. Source: Understanding California’s Property Taxes, by the LAO, Nov. 2012.

The initiative would free up $6.8 billion in the General Fund but requires that the state backfill only $4.3 billion that cities and counties would lose in property taxes. That was the initial amount that was transferred to them in 2004. Since then, the revenue, tied to growth in assessed valuation, has grown by $2.5 billion, which the Legislature may or may not cover when the changes take effect.

“The Educate Our State initiative would impose a severe and immediate reduction to county and city property taxes of about $2.5 billion in 2015-16 and growing over time,” Matthew Cate, executive director of the California State Association of Counties, wrote in an email. “This means counties and cities across the state would have to reduce public services that rely on general purpose revenues, which essentially means public safety reductions. It is difficult to contemplate what a reduction of $2.5 billion in public safety services looks like in our communities, particularly when counties have assumed significant new responsibilities for incarcerating, supervising and rehabilitating new offender populations.”

Katherine Welch, a board member of Educate Our State, said that the organization will announce endorsers of the ballot measure on April 1. Meanwhile, it is asking school boards to back a resolution of support and let elected officials know they’re behind it.

  • John Fensterwald covers education policy. Contact him and follow him on Twitter @jfenster. Sign up here for a no-cost online subscription to EdSource Today for reports from the largest education reporting team in California.
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