Education Finance:

How California’s Budget Crises Affect Schools

1107 9th Street,
Suite 310
Sacramento,
California 95814
(916) 444-0500
www.cbp.org JONATHAN KAPLAN
cbp@cbp.org THE CALIFORNIA BUDGET PROJECT
March 2011
A Quick Quiz
„ Which of the following represents the most spending in the
state budget?
– Health and human services;
– Prisons and corrections;
– K-12 public education; or
– Higher education.

1
The Information Gap
„ A January 2011 poll by the Public Policy Institute of California found
that:
– Only 16 percent of adults and 22 percent of likely voters correctly
identified K-12 education as accounting for the largest share of the
state budget. Nearly half (45 percent) of adults and 41 percent of
likely voters believe corrections represents the largest share of the
budget.
– Only 29 percent of adults and 33 percent of likely voters correctly
identified the personal income tax as the largest state revenue
source.
– Just over one out of 20 adults (6 percent) and only 9 percent of
likely voters answered both questions correctly.

2
 Education Accounts for the Largest Share of Proposed 2011-12 Spending
General Fund Spending by Agency
Labor and Workforce K-12 Education
Development 42.8%
0.5%
Legislative, Judicial, and
Executive
3.0%
Natural Resources
2.4%

State and Consumer Services

0.7%

Business, Transportation, and

Housing
0.8% Higher Education
11.6%
Corrections and Rehabilitation
10.8%

Environmental Protection
0.1%
General Government
Health and Human Services
2.3%
25.0%
2011-12 Proposed General Fund Expenditures = $84.6 Billion

Source: Department of Finance

3
 School Districts Received More Than Half of Their Revenues From the State in 2007-08
Other State Revenue
21.2%

State General Purpose

Revenue
38.6%
State Lottery Revenue
1.5%

Federal Revenue
9.1%

Other Local Revenue

7.9%
Local Property Taxes
and Fees
21.8%

Note: Excludes special revenue funds, capital project funds, debt service funds, proprietary funds, fiduciary funds,
and other financing sources. Percentages do not sum to 100 due to rounding.
Source: California Department of Education

4
 More Than Four-Fifths of Statewide Spending for
Schools Supported Salaries and Benefits in 2007-08

Other Staff Salaries Teachers' Salaries

24.7% 38.9%

Services and Other Operating

Expenses
12.0%

Books and Supplies

5.7%
Employee Benefits
18.7%
Note: Excludes spending from special revenue funds, capital project funds, debt service funds, proprietary funds, and fiduciary funds.
Other Staff Salaries includes counselors, instructional aides, clerical staff, supervisors, and administrators.
Source: CBP analysis of California Department of Education data

5
 After 1977-78, California's K-12 Schools Received a Larger Share of Funds From the State
and a Smaller Share From Local Property Tax Revenues
80%
Reflects property tax revenue
70% Proposition 13 approved shifts of 1992 and 1993
by voters in June 1978

60%
Percentage of Total K-12 Funding

50% Reflects redirection of school property

tax revenues to local governments due
40% to change in VLF backfill

30%

20%

10%

0%
70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

*
10
9-

1-

3-

5-

7-

9-

1-

3-

5-

7-

9-

1-

3-

5-

7-

9-

1-

3-

5-

7-

9-
6

0
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20
Local State Federal
* 2009-10 estimated.
Source: National Education Association

6
The Governor’s Budget Proposal
„ The Governor’s Proposed 2011-12 Budget balances
roughly equal levels of spending reductions and
revenue increases and minimizes reliance on temporary
measures, such as those used to address recent years’
shortfalls.
„ If enacted, the Governor’s proposals would bring the
state’s budget into balance for the period of the
temporary tax extensions. The state would, however,
face significant shortfalls after the expiration of the
temporary taxes.

7
 If Fully Implemented, the Governor's Proposals Would
Eliminate Projected Operating Shortfalls Through 2014-15
Gaps Would Emerge When Temporary Taxes Expire
$10,000

$5,082
$5,000
$1,985 $2,362
Operating Deficit/Surplus (Dollars in Millions)

$15 $7
$0

($5,000)

($10,000)

($15,000)

($17,200) ($17,400)
($20,000) ($19,200)
($21,500)
($25,000)
2010-11 2011-12 2012-13 2013-14 2014-15

Baseline Forecast With Governor's Budget Proposals

Source: Department of Finance

8
 How Does the Governor Propose To Balance the Budget?
Borrowing and Fund Shifts
7.2%

Expenditure-Related
Solutions
Temporary Revenue 47.3%
Solutions
37.5%

Permanent Revenue
Solutions
8.0%

Total 2010-11 and 2011-12 Solutions = $26.4 Billion

Source: Legislative Analyst's Office

9
 Half of Proposed Spending Reductions Target Health and Human Services Programs
All Other
20.7%

State Employee
Compensation and
"Efficiencies"
4.6%
Health and Human Services
52.8%
Higher Education
8.3%

Redevelopment Reform
13.6%

Combined 2010-11 and 2011-12 Spending Reductions = $12.5 Billion

Source: Department of Finance

10
The Governor Proposes Flat Funding for K-12 Schools
„ The Governor proposes to:
Ó Provide a K-12 Proposition 98 funding level of
$43.8 billion in both 2010-11 and 2011-12. The
proposed K-14 Proposition 98 spending level is $2
billion above the minimum guarantee in the
absence of additional revenues.
Ó Defer $2.1 billion in K-12 education spending from
2011-12 to 2012-13.
„ As a result of past cuts, California’s K-12 education
spending now ranks 47th in the nation without
adjusting for regional cost differences.

11
 Per Student Spending Would Fall Slightly in 2011-12
Under the Governor's Proposal, After Adjusting for Inflation
$9,000
$8,743

$8,500
K-12 Proposition 98 Per Pupil Spending (2010-11 Dollars)

$8,000

$7,513
$7,500
$7,366 $7,358
$7,229

$7,000

$6,500

$6,000
2007-08 2008-09 2009-10 2010-11* 2011-12*

* 2010-11 estimated and 2011-12 proposed.

Source: Legislative Analyst's Office

12
 The Proposition 98 Minimum Funding Guarantee Would Drop by $2 Billion Under Current Law
$50.5

$50.0 $49.9
$49.7

$49.5
$49.3
Total Proposition 98 Funding (Dollars in Billions)

$49.0

$48.5

$48.0

$47.5
$47.3

$47.0

$46.5

$46.0
2009-10 2010-11* 2011-12* 2011-12**

* 2010-11 estimated and 2011-12 proposed.

** 2011-12 reflects Proposition 98 funding under current law.
Source: Department of Finance and Legislative Analyst's Office

13
 How Do California's Schools Compare?
California Rank California US

K-12 Per Pupil Spending (2010-11) 47 $8,908 $11,397

K-12 Spending as a Percentage of

47 3.5% 4.2%
Personal Income (2009-10)

Number of K-12 Students Per

51 20.5 14.4
Teacher (2010-11)

K-12 Per Pupil Spending, Adjusted for

43 $8,852 $11,223
Regional Cost Differences (2007-08)

Percentage of K-12 Students in Districts

With Adjusted Per Pupil Spending at or 20 33.5% 40.6%
Above the US Average (2007-08)

Percentage of High School Students Who

42 62.7% 68.8%
Graduate With a Diploma (2006-07)

Source: Education Week, National Education Association, and US Bureau of Economic Analysis

14
How Did We Get Here?
„ The economy. Projected 2011-12 revenues are $41.4 billion below
the Legislative Analyst’s 2007 forecast.
„ Tax cuts. Tax cuts enacted since 1993 will cost the state more than
$13 billion in 2011-12. The Legislature continued to cut taxes through
the worst of the state’s budget crisis.
„ Demographic changes. The state’s population continues to grow and
to age, placing demands on the budget.
„ Spending on corrections, debt service, and transportation has
increased, while spending on virtually all other parts of the budget
has declined in recent years.
„ Temporary solutions. A significant portion of recent years’ budget
gaps have been closed with temporary “solutions” and anticipated
savings that didn’t materialize.

15
 Recent General Fund Revenue Projections Are Far Below November 2007 Levels
$10,000

$5,000 $3,606

$0
November 2007 to November 2010 (Dollars in Millions)
Change in General Fund Revenue Projections,

($5,000)

($10,000)

($15,000)

($20,000)
($20,740)
($21,950)
($25,000) ($23,825)

($30,000)

($35,000)

($40,000)
($41,432)
($45,000)
2007-08* 2008-09* 2009-10 2010-11 2011-12

* Actual General Fund revenues.

Source: Legislative Analyst's Office
16
 Tax Cuts Enacted Since 1993 Will Cost an Estimated $13.0 Billion in 2011-12
$14 Drop reflects
temporary VLF $13.0
increase and
Annual Cost of Tax Reductions Enacted Since 1993 (Dollars in Billions)

$12.1 caps on
$12 business tax
$11.3
$10.9 credit use
$10.0 $10.2
$10
$8.6 $8.6

$8 $7.6 $7.6 $7.5

$7.2

$6
$5.3

$3.8
$4

$1.9 $2.1
$2
$1.3
$1.0
$0.7

$0

* 2009-10 and 2010-11 estimated; 2011-12 projected.

Source: Assembly Revenue and Taxation Committee, Board of Equalization,
Department of Finance, Franchise Tax Board, and Legislative Analyst's Office
17
 Corrections Spending Has Grown at More Than Four Times the Rate of General Fund Spending as a Whole
1400%

1200% 1177.6%

1000%
Percent Change

800%

600%

400%
325.1%
290.1%

200%
99.7% 85.0% 77.1% 62.5%
10.2%
0%
1981-82 to 1991-92 1991-92 to 2001-02 2001-02 to 2011-12* 1981-82 to 2011-12*

Corrections and Rehabilitation Spending Total General Fund Spending

* 2011-12 proposed.
Source: Department of Finance
18
 Debt Service as a Share of State Revenues Has More Than Doubled Since 1999-00
8%

7.1%
7%
Debt Service as a Percentage of General Fund Revenues

6%

5%
4.3%

4%
3.5%

3%

2%

1%

0%
1999-00 2004-05 2010-11

Note: Excludes debt service for Economic Recovery Bonds, Enterprise Fund
Self-Liquidating Bonds, and General Obligation Commercial Paper.
Source: State Treasurer's Office
19
California’s Tax System Is Part of the Problem
„ Taxable sales have declined as a share of economic activity due to
the rise of the service sector and untaxed sales.
„ Corporate income tax collections have declined as a share of profits.
„ The state’s estate tax was eliminated as part of the Bush tax cuts
early in the last decade and was not restored as part of the recent
federal tax changes.
„ Low- and middle-income families pay the largest share of their
incomes in state and local taxes. Stagnating incomes at the bottom
and middle of the income distribution have reduced growth in
consumption-based revenues.
„ State and local tax collections have declined as a share of the state’s
economy due to the trends listed above and legislated tax cuts.

20
 Recent Growth in Corporate Profits Has Outpaced Growth in Corporate Tax Payments
225%

200% 192.0%

175%

150%
Percent Change, 2001 to 2009

125%

100%

75% 68.6%

50%

24.2%
25% 16.5%

0%
Total State Net Income of State Corporate Tax Liability Total Adjusted Gross Income of Personal Income Tax Liability
Corporations Personal Income Taxpayers

Source: Franchise Tax Board

21
Eliminating State Subsidies for Local Economic
Development
„ The Governor proposes to end state support for two programs
that subsidize local economic development activities by:
Ó Eliminating redevelopment agencies and using $5.2 billion in
2011-12 “tax increment” revenues to repay redevelopment
agency debt ($2.2 billion); provide pass-through payments to
schools and local agencies ($1.1 billion); offset state costs
($1.7 billion); and make payments to local governments
($210 million). In future years, property tax increment
revenues would be allocated to schools and local
governments and repay redevelopment agency debt.
Ó Eliminating the state’s Enterprise Zone Program and related
tax breaks for savings of $924 million in 2010-11 and 2011-
12 and more than $600 million per year thereafter.

22
 Redevelopment Agencies Received 12 Percent of Statewide
Property Taxes in 2008-09, Compared to 2 Percent in 1977-78
Special Districts Special Districts
Redevelopment 5.0% 6.0%
2.0%
Redevelopment
12.0%

Cities
10.0%

K-14 Education
37.0%
K-14 Education Cities
53.0% 18.0%
Counties
30.0%

Counties
27.0%

2008-09

Note: Redevelopment agencies' share includes taxes ultimately passed through to local agencies.
Source: Legislative Analyst's Office

23
What Does the Research Say About Redevelopment?
„ The Public Policy Institute of California concluded that
“the existing tax increment system is not an effective
way to finance redevelopment. Few projects generate
enough increase in assessed value to account for their
share of these revenues.”
„ The Legislative Analyst’s Office concluded that “there is
no reliable evidence that redevelopment projects attract
businesses to the state or increase overall economic
development in California. The presence of a
redevelopment area might shift development from one
location to another, but does not significantly increase
economic activity statewide.”

24