Sunday, November 28, 2010

JOHN MOCKLER ON PROP 98’s RELEVANCE: Initiative's father looks back & bleakly ahead

By John Fensterwald - Educated Guess |

This year, the Legislature suspended Proposition 98 because revenues actually increased, and lawmakers and the governor didn’t want to pay K-12 schools and community colleges all that they were legally owed. Next year, they can meet the Prop 98 minimum while slashing at least $2 billion for K-12 education.

Is Prop 98 still useful – or is it working to schools’ disadvantage? Is there something better? I posed these and other questions to John Mockler, the architect of Prop 98 and the man who best knows its arcane details (he may be the only one). Mockler is president of John B. Mockler and Associates, a consulting firm specializing in education policy and finance. He’s the former executive director of the California State Board of Education in the Davis administration and served as interim secretary of education. For more than three decades, he has worked in both the public and private sectors, including a decade working for the Legislature on education funding and educational achievement.

What follows is a partial transcript of our conversation (my clarifications are in italics). Prop 98, which voters passed in 1988, sets the state’s minimum annual level of spending for K-12 schools and community colleges, under one of three “tests” determined by state revenue and economic conditions. Over the years, governors and legislators have become adept at manipulating factors behind Prop 98 calculations. For a primer on Prop 98, see here.

JF: When you created Proposition 98 in 1988, did you envision the kind of recession that we would have now, and what would happen to revenues for schools if that happened?

JM:            No,  I didn’t envision the political forces cutting taxes in such a regular manner. The vehicle license fee, which this governor cut, is a $6.5 billion-a-year-giveaway to local government. That comes directly out of the state general fund. Well, actually, what they did is, they moved property taxes away from schools. So, no, I didn’t envision that.

JF:            Prop 98 was always envisioned as a floor, no?

JM:           Exactly. It’s called “minimum guarantee,” of course, for that purpose. That’s what its title is.

JF:            But does it address the fundamental question of, are we supporting enough education?

JM:            It does not, and it never was designed to do that.

JF:            Explain that.

JM:          Well, it was designed to have the governor and Legislature cut less. I mean, when you looked at the preceding decade of funding (before 1988), the Legislature and governors would say education was their highest priority. And then they would cut it. And even in years when they had all the excess money above the Gann Limit, under Gov. Deukmejian, they could have given that money to schools. Instead, they cut the schools, and they gave that money back to the taxpayers. And that’s when people sitting around the room said, “Well, they ain’t gonna give money to schools even when they have money. So let’s do something! Not the perfect solution, but something.”

JF:   So, in the context in which it was created, it served a great purpose. Did you envision it becoming a permanent fixture the way it has?

JM: No. I presumed that it would be a minimum and that, in better years, we would increase money above it. And, in fact, there have been two years when we did do that – went above it – and that is locked in for subsequent years. But Prop 98 said you only go up until you reach the average of the top 10 states.

JF:            I didn’t realize that.

JM:            Yeah. That  is in the guarantee and so it was envisioned as doing that: It was moving California to the average of the top 10 states. That it has never done.

JF:            Well,  last year the Legislature suspended it; and next year, according to the LAO (Legislative Analyst’s Office) projection, you would — you could — meet 98 with at least $2 billion less for schools because of the expiration of $8 billion in temporary taxes. So should we be looking at a different measure? Is Prop 98 still useful?

JM:            Well, I think it’s still useful, although I think there are a number of things you could do to adjust it in a different way. When the Legislature implemented Prop 98, it wanted data to be current, so it used the ADA (average daily attendance) of the current year compared to the previous year, as well as current revenues. So, in fact, you don’t know what the guarantee is going to be in the budget until a year after the budget is passed. So it’s unpredictable.

Something like that could be fixed: Essentially you could use an average of the immediately-preceding three years, and then you’d actually know what the guarantee is in every year before you finish the budget.

If revenues go down in one year and then pop back up, you get to lower the guarantee. But then you’ve got to pop it right back up the next year, and those real sharp lines mirror the problems with the capital-gains and income taxes and with cuts. But if you averaged it over a 3-year period, then the downs would be a little lower, and the ups would be a little lower, so it would be more manageable in a budget sense. I’m not certain how to do it, but I think something like that is worthwhile.

Whereas now, they pass the budget and make an estimate, and it turns out they were wrong by a lot or a little – mostly, it’s a lot – because they tend to understate it, and then they owe money, and they tend to underfund it.

JF:            But as you often say, “The schools are different. The population is different. The needs are different – very different – from what they were 20 years ago.” And so does Prop 98, because it becomes this very difficult-to-understand formula, not address the issue of, “Are we funding the schools enough to meet the needs of our students, and the demands that we placed on them?” Is that a better conversation?

JM:            No, that certainly doesn’t answer that question. And that question certainly is a serious question, and one that ought to be talked about. But if tomorrow the good Lord eviscerated Prop 98, would that change the conversation? If it would, I’d give it up in a heartbeat; but I don’t think so. Those conversations didn’t go on before we had Prop 98, so why would we think they’d go on if we took it away?

‘That is in the guarantee: It was moving California to the average of the top 10 states. That it has never done.’

JF:            In the next four or five years, things look bleak, so what do you recommend? What’s the strategy one should use?

JM: I think there’s a series of strategies; none of them, at this point, are going to be successful until we figure out what to do about this, the first $25, $28 billion (projected state budget deficit for next year). In the context of that, it’s very hard to talk about improvements in public-school funding, because it’s a disaster. It’s gotten worse both because of the tax structure and because of the tax behavior. That is to say, of the essentially $15 billion ongoing current-income to current-expense debt (the ongoing structural deficit), $10 billion of that is caused by the car-tax elimination, the $2 billion giveaway to the multinational corporations, and $1.5 billion  in debt repayment that the current governor borrowed to finance the budget he said he was going to balance.

So these are self-inflicted acts of the Legislature and the governor and the people of California.

JF:            Given this current way we fund schools and distribute the money, categoricals and the like, are there ways that we could at least make them more efficient and fair without increasing any money in the near term?

JM:            Well, quite little. I could walk in and rip off all of Palo Alto’s basic aid and distribute it among low-income districts. The people in Fresno would feel good, and the people in Palo Alto would feel very bad. I don’t know that would solve anything, but we could do that.

JF:            Right. Well, the problem is, whatever you do, you’d have to hold all the districts harmless.

JM:            Well, but to hold them harmless, there’s no policy change, is there?

JF:            Well, you hear a lot about the legacy of disparities in revenue limits (among neighboring, similar-sized districts).

JM:            Yeah, but they’re there, and ought to be fixed; but it’s not a major reform.

JF:            Well, if you were going to make the argument to Jerry Brown that he should go out and argue for more money for the schools, how would you make that?

JM:           I would say, “Let’s assume you didn’t have a $25 billion deficit to deal with. Now, would you go out and try to help the schools get a little more money?” I would say, “What are the structural impediments to moving schools towards a national-average funding model?” Then I would talk probably more about the ability of locals to raise money, not the state. And I would talk about some simplification, some power equalization. I would talk about some trade-offs locally, the things they’d have to do. We’d give them more flexibility, but we’d require some substantive minimums.

In other words, if you call yourself a school, you have to have books and paper and pencils and technology for your kids, and you have to have clean places for them to go to school.  I’d say, “We’ll give you more flexibility, and then we’ll give the right to raise money locally.”

I don’t think there’s a chance of big money coming from the state in my lifetime. And there are tough issues in this, too. We have so many little teeny districts, it’s very hard to do a taxing authority at the district level. So, in some areas you may have to do it by combining in high school boundaries or countywide or something like that, but you have to do something to make the tax broader.

JF:            How would you deal with the equity factor?  The tax burden on poor districts to raise money versus wealthy districts?

JM:            The problem is a little less than most people think. It is a problem in some areas, but the fact is that the majority of poor kids live in high property-wealth areas. High property-wealth areas are like Oakland and Richmond and San Francisco and Los Angeles and Long Beach and Pasadena and San Diego. Those are all high property-wealth school districts.

JF:            I didn’t know L.A. was among them.…

JM:            The Serrano case (declaring unconstitutional the disparities in school funding derived from local property taxes) hinged on the finding of the Court testified to by the professors at Cal who said, “Oh, yes, sir, your Honor. The majority of poor children live in low-wealth school districts.” And that of course was their supposition, but they had no data. And as soon as the court decision came out, we ran the data, and 73 percent of all free-lunch kids lived in high-wealth districts. So, in fact, they just were wrong, which was sad. And those are the [kinds] of mistakes you make when you have lawyers make your policy.

JF:            And presumably that would still be true today?

JM:            I don’t know if it’s true today. The capacity is there, but remember, the distributions were done by the Legislature after Prop 13, so you may have to offer a variety of tax possibilities – a mix of maybe locals or sales or income tax. That’s why you need a broader base.

JF:            I have assumed that there would be some kind of state matches in it.

JM:            We did all that in AB 65 just before Prop 13 passed. Jerry Brown signed it, and then, bammo! Prop 13 passed, and it was all theoretical.

JF:            So what would your advice be to Jerry Brown with regard to –

JM:            Oh, you know. I don’t give governors advice through the press. If he wants my advice, he’ll call.

JF:            Okay. Well, for the Legislature. Too many of them to call you, John, so you can tell them through the blog.

JM:            Well, I think they have to continue the taxes that they have (temporary sales and income taxes set to expire next year). They can’t kick out those taxes. They can’t – I think there’s no question. In the short run, there’s going to be some cuts, but I don’t think the cuts ought to be as major; I mean $25 billion– that’s about 22 percent of all budgets.

JF:            Yeah.

JM:            That would be $7 billion out of education.

JF:            At what point do folks see a breaking point? I mean at what point is there a breaking point?

JM:            I don’t know what the voters see. Look at the election. About 43 percent of the electorate voted in favor of that small fee for the parks, and about 44 percent or a little less voted to stop giving the tax giveaways to the multinational corporations.

JF:            But parcel taxes, although they got a beating in this last election, most of them got over 50 percent.

JM:            Yes, yes, so that’s another way to go. But it’s a small, poor revenue source, but it’s certainly a way. And most of the parcel taxes don’t  cover very many students in the state.

JF:            The point I was making was that it reflects an attitude, that folks are willing to spend on education.

JM:            Yeah, I think the public is much more attuned to raising taxes to support the public schools. What they fear is the money will go to Sacramento and somehow be eaten up by some unknowable something, and they fear that it won’t be spent in the classroom. Perceived fears are very powerful things. So if you need to get around that hurdle, you need to say, “Okay. We’re gonna adjust your taxes at some point, and you’re going to spend them locally, and you have to spend them on instruction, not on joy rides.”

JF:            Well, that brings to the Robles-Wong v California (the lawsuit, one of two this year that challenges adequacy of funding levels for all districts, low-income schools in particular). If there were some kind of an adequacy settlement that did that, and redistributed the money, and brought local control as part of that settlement, could a governor go out and sell that, along with higher taxes?

JM:            Not in the current circumstance, but perhaps in a future circumstance.

Maintenance factor and manipulations

Under Prop 98, annual expenditures for schools are supposed to grow at least as much as Californians’ personal income, adjusted as well for growth in student population. For about half of the years since Prop 98’s enactment, it has. In years when the economy falters and state revenues fall, Prop 98 allows the Legislature to fund schools less (but not less than about 40 percent of the general fund). But the Legislature is obligated to keep track of what the schools don’t get and then make up the difference when good times return.

This is known as the “maintenance factor” – the debt that the Legislature must restore to schools, under a set formula. I asked Mockler about the maintenance factor, which is a source of confusion to the uninitiated, and about deferrals, another source of Prop 98 manipulation.

JF: So what is the current Prop 98 obligation to K-12 schools and community colleges?

JM:         $60 billion. But the governor and legislators have borrowed $10 billion from schools, so they’re only paying us $50 billion. (These are round numbers. It’s really $59.7 and $49.7.) So they owe us $10 billion.

JF:            Okay. That’s an accumulation –

JM:            It’s accumulated basically from the past four years.

JF:            Okay. And the LAO predicts it will soon be $13 billion?

JM:            Well, that could well be. That is, what they’re saying, if they borrow the money they want to borrow from us in the next year.

JF: When will this be paid back? And…will the schools see the money in …

JM:            It’s never paid back. Remember this. When you borrow from local government, you pay it back with interest within two years. When you borrow from the New York bankers, you pay it back with interest. When you borrow from the schools, you only restore it. You don’t pay for the years you haven’t paid it, and you only restore it in years in which general-fund revenues grow more quickly than personal income. And so schools get half of the amount of revenues, general-fund revenue growth, that exceeds the growth in personal income, which happened, by the way, in the current year, and of course they suspended Prop 98 and didn’t pay it.

JF:            In other words, when good years return, you will not be paid for the past years in which you were owed the money.

JM:            Right.

JF:            But you will be paid …

JM:           You restore the base going forward.

JF:            And at an accelerated rate?

JM:           Right. Well, it’s a mathematical formula.

JF:            Okay. Can the Legislature play with how the payment will be made?

JM:            Well, they just suspended Prop 98. Which is legal. One would think, when revenues were growing faster than personal income, you would not have to suspend it, but they have this state in such a mess that that, in fact, occurred. One would not imagine that occurring in a government that was run by adults.

JF:            Yeah. And the reason they suspended it was the fear of the maintenance factor?

JM:            Yeah. There was fear that they had to pay more than they wanted to pay. And they did. It’s suspended by $3 billion.

JF:           Do you foresee that happening repeatedly?

JM:            Well, I always have hope, but I’m often disappointed.

JF:            Is this one of the fixes that you would make to Prop 98?

JM:            No. I mean I don’t know. The “fix” is kind of the smoothing idea I talked about. That would make the “downs” lower and the “ups” lower, so you wouldn’t have jerky revenue changes, right?

JF:            If you did this fix, what would happen to the maintenance factor?

JM:            The maintenance factor stays the same, but it gets restored at a slower pace. The guarantee goes down (more slowly). Now, because the revenues are very volatile, the Prop 98 maintenance factor goes up. And when they go down, the maintenance factor is recreated, because general-fund revenues grow more slowly than personal income, in which case, they take money away from us fast. So this would just slow that.

JF:            So the other way that schools have been played with is through deferrals.  I think it’s around $8 billion now.

JM:            I’ll pay you Tuesday for a hot dog today.

JF:            Right! Is that outside 98, right?

JM:            Well, no. It’s a manipulation of it. It’s a huge manipulation, because what it’s saying is, “We owe you the money, but we’re going move the cash to next year. Charge it against next year’s guarantee but let you book it as if it was this year. [There are] two kinds of deferrals. There’s one deferral at the end of the year, where they’re supposed to pay you in September, and they didn’t pay you till July. That has a huge cost to schools. And then [there are] the cross-fiscal-year deferrals.

Both have costs to school districts, but the one across the year is simply a manipulation of Prop 98.

JF:            Did you imagine that would happen, as well?

JM:            No. No.

JF:            In other words, technically, they’re meeting the responsibility of 98.

JM:            They were.

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