Fiscal Report
Public Education's Point of Reference for Making Educated Decisions

What’s in Store for the LCFF COLA, Proposition 98 Minimum Guarantee in the Wake of COVID-19?

In any given year, it is no easy task to estimate California’s minimum guarantee of funding for K–12 and community college districts. This is largely because California’s tax system is extremely progressive, leaving the state’s General Fund and its overall fiscal health relying heavily on the personal income of the state’s top income earners. While this has been the case for quite some time, it became more pronounced with the passage of Proposition 30 (2012) and Proposition 55 (2016), which imposed even higher taxes on California’s wealthiest residents. Personal income tax (PIT) is the most volatile of the “Big Three” taxes—raising over two-thirds of General Fund revenue. The state’s reliance on PIT makes it even more difficult to estimate the Proposition 98 minimum guarantee when earnings among California’s highest earning residents are as volatile as they have been since COVID-19 unleashed its fury.

Since the novel coronavirus began crippling the state in early March, stock markets in the United States and across the globe lost at least a quarter of their value. This sobering news, along with reports of spikes in new unemployment claims and massive reductions in consumer spending, have some economists predicting that U.S. gross domestic product will shrink by nearly one-third in the second quarter of 2020. They warn that the recent uptick on Wall Street—which reflected the collective sigh of relief that Washington D.C. would be setting aside partisan politics for the sake of the nation to pass a $2 trillion relief package—has occurred during economic hard times like the Great Depression and recently the Great Recession, signaling that the market likely has not yet bottomed out.

While PIT is a strong determinant of the state’s General Fund, we acknowledge that it is not the only determinant. Other economic health indicators are also important in forecasting the state’s fiscal future. That said, we at School Services of California Inc. felt that it was time to acknowledge the reality of the coming days and months ahead of us.

We have noted that the Director of the Department of Finance (DOF) is positioning the state to adopt a workload budget (see “DOF Planning for Workload Budget for 2020–21,” in the current Fiscal Report). We can certainly understand that the current crisis and the economic uncertainty it yields warrants this maneuver, and the notable shift in state planning had us thinking, “should districts be planning likewise?” Our answer is simply, “Yes.”

Our sentiment is informed not only by the dizzying news we are all accosted with each day, but also by more nuanced information related to education finance in particular. The Legislative Analyst’s Office (LAO) estimates that for every $2.5 billion in lost state revenue, the Proposition 98 minimum guarantee will decline by $1 billion. Losses from capital gains income alone could cause the state to lose billions of dollars in anticipated revenue, as suggested by the LAO in its recent Fiscal Perspectives report. Consequently, it is certainly within the realm of possibility that last year’s Budget Act provision authorizing the DOF to “autofit” the Local Control Funding Formula (LCFF) cost-of-living adjustment (COLA) to fit within K–12’s portion of the minimum guarantee could be triggered, forcing districts to revise their budgets for next year and beyond. This comes on the heels that the 2.29% COLA for the LCFF anticipated in Governor Gavin Newsom’s January Budget was nearly three-quarters of a percent shy of the 2019 enacted State Budget estimates. The budget implications are clear and, for some, even grim.

As for the Proposition 98 minimum guarantee for the current and budget years, we went back in time to see what the state has done when estimates are higher than reality. A 2017 LAO report, A Historical Review of Proposition 98, notes that in eleven of the twelve occasions that the state over-estimated the guarantee, it took several measures to ensure that the state did not “over-appropriate” the constitutionally-required level of funding for K–14 education. These measures included deferring program payments into the following fiscal year, not forward funding programs, and postponing or cutting planned programs. One-time categorical investments that have been approved by the lawmakers but have not yet been allocated by administering agencies, or proposed one-time investments using Proposition 98 settle-up funds, could be low-hanging fruit for the Legislature and the Newsom Administration in today’s fiscal environment.

As we have mentioned with increasing emphasis, these are rapidly changing times cloaked in uncertainty. Times like these call for prudence and strategic planning.