EDUCATION A TOP STATE TEST ARNOLD, DEMS SQUARE OFF OVER FUNDING LEVELS.

Byline: Harrison Sheppard  Sacramento Bureau

SACRAMENTO - In the upcoming budget fight between Gov. Arnold Schwarzenegger and Democratic legislators, one of the biggest and most tangled battles is likely to be over education funding.

Democratic lawmakers have vowed to make protecting school funding their top priority while Schwarzenegger has launched a broadside against ``cruise-control spending'' measures which, he says, force the state to spend more than it can afford.

The largest measure is Proposition 98, the complex voter initiative that was designed to guarantee funding levels for education.

Schwarzenegger complains that even if the state were to increase taxes to help balance the $9.1 billion deficit - although he opposes new taxes on principle anyway - Proposition 98 would require more than half of those new funds to be used to increase education spending rather than fill the budget gap.

``Cruise-control spending is out-of-control spending,'' Schwarzenegger said when he launched his budget in January. ``The way the budget formulas now work, we will never catch up.

``And as I said, increasing taxes is out of the question because we don't have a revenue problem. We have a spending problem. And the worst is, we also have a formula problem.''

Proposition 98 - approved by voters in 1988 and amended through Proposition 111 in 1990 - guarantees that grades K-12 and community college education get a minimum funding level that works out currently to about 45 percent of the state general fund.

The amount is adjusted every year for personal income and student enrollment growth, or alternately it can be adjusted based on the growth in state revenue and enrollment during a year when general fund growth is sluggish or declining.

But in years when the state suspends Proposition 98 and funds education below the guarantee, as Schwarzenegger and the Legislature did in the current year, a type of debt called the maintenance factor is created.

Under that maintenance factor, if the state were to raise taxes, a greater portion than usual - 54 percent - would go toward education, rather than the rest of the general fund, until that maintenance factor is paid off. That, Schwarzenegger argues, would dilute the effect of any tax increase toward resolving the general fund deficit.

The Republican governor has proposed a constitutional amendment modifying Proposition 98 to remove some of the provisions that create the maintenance factor and lock in growth of education spending.

His proposal has generated opposition from a number of education lobbying groups organized into the Education Coalition, which includes representatives of teachers unions, PTAs, and school administrators.

``I think in the long run, it's a very dangerous idea,'' said Patty Cox, a research specialist with the California Federation of Teachers.

``It would have just a huge impact on education funding. We're seriously underfunded in California already and this would seriously impact our ability to try to build back.''

Ultimately, she said, it would allow the state to continue underfunding education without having to build it back up again in the future.

Schwarzenegger is looking to eliminate a provision that says if the state funds education above the minimum Proposition 98 guarantee, then the increase in the following year's education budget must be calculated based on that increased base amount from the previous year. That provision locks in increases, giving the state less flexibility to decrease education funding when the economy wanes.

He is also proposing to eliminate the option to calculate Proposition 98's increase based on growth in state revenue, instead of growth in personal income.

But supporters of Proposition 98 argue it is the best way to guarantee that schools receive the funding they need, and say the formulas were designed to be flexible enough to accommodate the state when revenues are low.

They say schools are only entitled to extra portions of tax increases during years when they have been shortchanged in the first place through a suspension of Proposition 98, as Schwarzenegger did in the current year.

``Prop. 98 is not autopilot spending,'' said John Mockler, a former state education secretary who authored the measure.

``Prop. 98 has a very special mechanism that says when your revenues are down, you reduce Prop. 98's requirements, and when they come back up, you restore them. You don't pay them back, but you restore them to the level of funding had you not done that borrowing.

``If the governor had not borrowed from the schools, then raising taxes would've given the schools nothing.''

When taxes are increased during a Proposition 98 suspension year, education is entitled to about 54 percent of new taxes, up to the amount owed from the suspension, which is currently about $3.7 billion, according to the state Department of Finance.

That means that more than half of any tax increase up to $6.8 billion would go to education. Any tax increase higher than $6.8 billion would have the first $3.7 billion go to education and the rest could be spent anywhere in the general fund.

However, budget experts also note that the state could choose to suspend Proposition 98 again with regard to the tax increase itself, and spend the money any way it chooses. It took that very approach in 1989, when the state imposed a temporary quarter-cent sales tax to fund relief from the Loma Prieta Earthquake and suspended Proposition 98 only in relation to new revenue from that tax so that all funds could go for that specific purpose.

Another aspect of Proposition 98 that has engendered controversy this year relates to the governor's actions last year over the education budget. Last year, Schwarzenegger pre-empted potential controversy over school funding - always the largest item in the state budget - by making a deal with the education lobby, persuading it to accept significant cuts in exchange for a promise that its funding would be restored in the following year.

This year, however, that same powerful alliance is incensed and mobilizing, convinced that the governor broke his promise by failing to fully fund it in his proposed budget for the fiscal year that will begin July 1.

``The governor is breaking his word with the students of California,'' said State Superintendent of Public Instruction Jack O'Connell. ``He promised the education community and the students and parents of this state last year if we took a $2 billion reduction, this year he would fully fund Proposition 98.

``School districts made decisions this year based upon the governor's commitment, in terms of contractual obligations and class-size reduction programs. And now the governor's not fully funding Prop. 98.''

For the 2005-06 fiscal year Schwarzenegger has proposed to fund Proposition 98 education at $50 billion, up from $47 billion in the current year.

Educators, however, say they are barely breaking even because costs are increasing and enrollment is growing. And making matters even worse, they say, is the governor's proposal to shift more than $1 billion in state pension and local government costs onto local school districts. Education officials also believe the governor is shortchanging them by more than $1 billion from what they should receive under Proposition 98's guarantees and the governor's agreements with the education lobby last year.

The Education Coalition argues that overall education has been shortchanged by almost $10 billion in the last five years - about a third of that from underfunding or suspending Proposition 98.

And Democratic lawmakers are planning to dig in their heels over the issue.

``We have looked at what our priorities ought to be this year, and have decided that the very top of that is public education,'' said Assembly Speaker Fabian Nunez, D-Los Angeles. ``That is our No. 1 priority this year.

``Why? Because we think that the threat to the Prop. 98 guarantee is one that is inconsistent (with) the promise we have made to Californians that we will have the best public education system in the country.''

Harrison Sheppard, [phone]

harrison.sheppard(at)dailynews.com

CAPTION(S):

chart

Chart:

NEW MONEY GOES TO SCHOOLS

SOURCE: Daily News Research

Warren Huskey/Staff Artist