Modern myths about school funding: misunderstandings often breed contempt, especially when money is involved. This article dispels the myths about where school funding originates and how it compares to non-education funding at the state and local levels.

The early Europeans feared that ships sailing west would fall off the face of earth. Spanish explorers devoted considerable time and resources in search of a mythical "fountain of youth." Some in the early 1800s theorized that the human body would not withstand speeds above 25 miles per hour. Since the dawn of time, myths and legends have permeated every aspect of human development, and influenced public opinion and policies related to that progression.

It should come as no surprise, therefore, that the world of school finance has not been immune from its share of mythical perennials. This is especially true when we consider what the average parent and voter believes when it comes to how their schools are paid for when compared to other local government entities and the state budget in general.

Most folks, and a fair number of elected officials, are not fully informed when it comes to public education and local government financing. For example, many believe that because public education has Proposition 98, we have been exempt from budget cuts and funding shortfalls in recent years.

Unfortunately, such a misunderstanding can often breed contempt and mistrust for public education's level of need and funding among those in local government and other public sectors. As the state continues to tackle budgetary challenges and local government faces yet another property tax shift, there is a growing chorus of comments regarding the size of K-12 funding and the misinterpretation that public education has not done its fair share during this budget crisis. In some policy circles, K-12 education is sometimes referred to as the "pig at the trough." Education's insatiable appetite gobbles up most of the food, leaving less for everyone else.

Those of us in public education know these things to be false. But in the words of T.S. Elliot, "Between the idea and reality ... falls the shadow." It is in this shadow that myths and misunderstandings often lurk. The purpose of this article is to dispel some of these myths. In doing so, the authors will focus on where school funding originates, how it compares to other local government financing, and where it stands compared to non-education funding statewide. It is our intent that K-12 educators and leaders use this information to inform parents and their local government and non-education colleagues about the realities of public education financing.

Myth 1: Schools get all their money from property and sales taxes

This has to be one of the most enduring myths about school district financing. Despite 25 years of evidence to the contrary, a significant share of voters and non-education policy makers continue to believe that schools are financed via local property and sales taxes. Sales tax does not go to local schools. Sales tax has traditionally been a state and local government revenue source. Property tax, however, has historical implications that apply to both school districts and local governments.

Prior to Proposition 13, California's public schools received the lion's share of property tax revenue. Approximately 60-70 percent of local property tax revenue went to K-14 school districts pre-Proposition 13. With the enactment of Proposition 13 and related legislation (AB 8), the state cut K-14 property tax funding in half and shifted those dollars to local governments (cities, counties and special districts) with the promise to backfill that funding and bold K-14 funding harmless (Walrath, 2004).

School districts, however, were indeed subjected to harm. In the years prior to and subsequent to Proposition 13, K-12 funding was reduced significantly. In 1973-74, the first year of revenue limits for public schools, California ranked ninth nationwide in terms of public school revenue as a percent of personal income. Four years later, and one year prior to Proposition 13, we ranked 33rd. One budget year after the passage of Proposition 13 (1978-79), state education spending dropped to 44th in the nation (Jamison, 1981). In just five years, California's K-12 spending went from ninth to 44th.

In 1974-75, we spent $38 million more on our schools than the national average in terms of expenditures per $1,000 of personal income. By 1979-80, we were spending $1.1 billion less than the national average (Jamison, 1981).

These reductions, and subsequent cuts during the 1980s, were the primary factors behind the enactment of Proposition 98. With the passage of Proposition 98, a minimum funding guarantee was established for California's K-14 education system. Although Proposition 98 established a funding "floor" for school districts, it did create a funding "ceiling" when it came to property taxes.

With the exception of roughly 60 Basic Aid districts, school districts do not realize any benefits from increased property taxes. Increases to local property taxes go to backfill the state's Proposition 98 obligation, not to school district budgets. Sacramento determines school districts' funding, not local taxes. Increases to property tax revenues benefit the state and local governments, not schools and community colleges.

Myth 2: Schools get more money than local governments

Another common misperception is how local governments and school districts compare when it comes to financing. It is true that local governments have had to manage a barrage of property tax raids by the state. In the early 1990s, the state enacted three property tax shifts that, in some cases, amounted to more than a 20 percent reduction in property tax revenues for some local governments. Commonly referred to as "ERAF," these maneuvers were used by the state to backfill its Proposition 98 funding obligations. But they did not, contrary to opinion, increase overall Proposition 98 funding. The governor has proposed a fourth shift totaling $1.3 billion for 2004-05 as a way to provide additional relief to the state for its K-14 funding obligation.

No doubt local governments have taken a fair share of hits in the past decade, but there are a number of striking differences between local government and school district financing. First, since 2001-02, local government sales tax receipts have grown by 17.2 percent. School districts do not typically receive sales tax funding. Second, local government's share of property tax revenues has increased in the same time period by 26 percent. Even accounting for the governor's proposed $1.3 billion shift, local governments will still realize an 18 percent increase in property tax revenues since 2001-02.

The same cannot be said for schools. Recent property tax growth has helped the state meet its Proposition 98 obligation. None of that funding has been used to increase overall K-12 funding (ACSA/CLUE, 2004).

Local governments also have an easier ability to raise revenues to cover costs and operating expenses. Proposition 13 allows such increases so long as funding is dedicated to growth in operating costs and not general fund budgets. School districts, on the other hand, are generally prohibited from charging any fees. Instead, school districts must rely on the state for COLA and enrollment growth to cover cost increases. Some years, K-14 COLA and growth funding does not cover actual operating cost increases; in bad years, the state provides a zero-COLA and such costs are incurred by school district general funds--the same funds that pay for classroom-based instruction.

We do not want to leave the impression that local governments have not been hard hit by the state's budgetary woes. Counties, because they are the statutory stepchildren of the state, have been particularly hard hit since the state attempted to respond to Proposition 13. But cities and special districts that operate a utility-based service (electric, water and sewer) have been able to cover their operating costs much easier than their school district counterparts.

In addition, local governments have, on average, seen their revenues increase faster than school districts. Proposition 98 revenues have increased since 2001-02 a mere 8 percent. Compare that to the sales and property tax increases noted above, and the difference becomes striking. The above chart displays this discrepancy in vivid detail. The simple fact is that local government revenues have grown by a greater percentage than school districts--even when you account for ERAF property tax shifts.

Myth 3: Proposition 98 is one of the main reasons for California's budget mess

This is one of the latest myths about education that is being heard throughout the halls of our state Capitol. Officials inside the state Department of Finance have stated that even though the new administration has a commitment to our schools, it is clear that Proposition 98 is part of the state's structural budget problem (Summary, 2004). Like the other myths, this simply is not the case. In fact, the following analysis of state expenditure and revenue data shows that education is providing more than its fair share of cuts.

In analyzing the state's current budget problem, it is appropriate to focus on state educational expenditures and not on federal or local revenues, because this is a state fiscal problem. In its initial audit findings, the Department of Finance uses 1998-99 as its base year, because of the dramatic increase in state revenues that occurred primarily from capital gains and stock options. In 1999-00, the state experienced a general fund revenue increase of almost 23 percent, the largest percentage increase in the last 28 years.

Unfortunately, state revenues then became basically flat for the next three years, while state expenditures continued to increase by 16.5 percent. This is what produced our current fiscal crisis. However, during this three-year period from 1999-00 to 2002-03, state Proposition 98 expenditures increased by only 2.7 percent compared to a 26.7 percent increase for the other state programs in the budget. Clearly, Proposition 98 was not the problem.

This pattern also holds if we analyze the time period from 1998-99 to 2004-05, under the governor's proposal. The chart on page 9 shows that during this six year period state General Fund revenues and expenditures will have increased by over 30 percent. Proposition 98 state expenditures will have only increased by 21 percent, compared to a dramatic 40 percent increase for the other state programs (Budget, 2004-05). Clearly Proposition 98 is not the problem.

From 2002-03 to 2004-05, assuming the governor's proposal is adopted, K-12 Proposition 98 has experienced more than $8.9 billion in cuts and deferrals (LAO, 2003 and 2004). From this vantage point, K-12 education is not the "pig at the trough." Instead, we've given up a large portion of our share so other programs do not have to decrease their caloric intake.

Crafting long-term solutions

When times are tough, everyone has to share in the pain and be part of a solution. But policy solutions should be based on fact, not myth. All of us affected by state policy makers are in this together. All those who operate in the state's arena have been impacted by this latest budget crisis, but some in different ways than others. Whether we represent schools, local governments or non-profit services, we play a vital role in serving the children and other residents of California.

When budgets become tight or are reduced, our inclination should not be to look over the fence in search of greener grass, but rather to work together to craft long-term solutions that benefit Californians as a whole. The first step to accomplishing this is to understand how we are both similar and different from each other.

State's budget problem: Proposition 98 not to blame

                        Percent increase, 1988-89 to 2004-05

State revenues                          30%
State expenditures                      32%
Prop. 98 expenditures                   21%
Other state programs                    40%

Note: Table made from bar graph.

Local Government vs. School District Revenues

                                      Percent revenue increase,
                                         2001-02 to 2003-04

Share allocated to local government
  Sales tax receipts                             17%
  Property tax receipts                          26%
Primary revenue source to districts
  Prop. 98 revenue growth                         8%

Note: Table made from bar graph.

References

ACSA/CLUE 2004 Budget Workshops. (January 2004). School District vs. Local Government Financing (Handout 8). Available at www.acsa.org.

Elliot, T.S. (1925). The Hollow Men.

Governor's Budget Summary 2004-05. (January 2004), pg. 51

Governor's Proposed 2004-05 Budget. (January 2004).

Jamison, Conrad C. (1981). Before and After Proposition 13: Expenditures by State and Local Government in California.

Legislative Analyst's Office. (January 2004). 2004-05 Analysis of Governor's Budget, pp. E 13-21.

Legislative Analyst's Office. (October 2003). California Spending Plan 2003-04, pp. 22-27.

Walrath, David. Executive Director of Small School Districts Association of California. Interview conducted Feb. 12, 2004.

Brett McFadden is a legislative advocate for the Association of California School Administrators. Stephen Rhoads is a legislative advocate with the Sacramento-based lobbying / consulting firm Strategic Education Services.