Why California school funding isn’t keeping up with rising costs

Possible teacher strikes throughout California are a scary symptom of an education funding system that has not kept pace with the real costs of providing a quality education for every child. Trimming a budget is one thing — slashing programs to pay for salary increases and other rising costs is quite another.

This is a complex problem. Solving it will require guts and creativity. This post unpacks the elements of the challenge to examine them individually, then reviews some of the possible options.

The overall news is rough. Increases in California education funding are not keeping up with the combined rising costs of special education, pensions, health benefits, liability insurance, and teacher compensation.

California's proposed budget for 2026-27 calls for a small cost of living adjustment (COLA) of just 2.41%. This isn’t a random number — it’s based on a measure of inflation that is established in law and consistently applied — but it’s lower than the familiar Consumer Price Index and out of step with the growth of housing costs in California. Teacher unions and school districts will struggle to reach local agreements in this context.

The California Teachers Association has organized a campaign across 32 school districts to demand changes under the slogan We Can’t Wait. It calls on school districts to improve educator pay and address staffing shortages. In many districts, unions are threatening to strike.

The campaign is disrupting school communities intentionally in an effort to raise the profile of these issues. Unfortunately, the campaign cannot achieve its real objectives. Districts don’t have the power to address the root issue at stake: money.

Neither the educators nor the districts are the bad guys.

California school districts don’t control how much money they get from the state, and they can’t control how much money they get from local property taxes. Short term wins on the picket line might lead to local teacher raises, but at the expense of something else. The wins are zero-sum. They may even add risk to school district financial stability in the long term.

Strikes are costly. School districts lose funding when students are absent. Larger districts may lose millions of dollars a day, putting their ability to make payroll at risk. Strikes involve additional costs for districts, unions, and families alike.

These dollars don’t come from a magic well — they are diverted from classrooms and from the work of improving student success.

Why school funding is low

High cost of living

Just like everyone else, teachers pay for housing, transportation, food, and child care.

California school funding per student is about average compared to other states, but the cost of living isn’t. As we explain in Ed100 lesson 8.2, money is only good for what it can buy. The Public Policy Institute of California reports that, when differences in labor costs across states are accounted for, California funding per student ranks 31st in the nation. Not the best, not the worst — somewhere between.

Special education

Each public school is obligated to educate all of its students, including those who need extra help. Both federal and state laws enforce this obligation. Unfortunately, the federal government has never come close to meeting its financial expectations. State funding has increased but not enough, leaving districts to fill in the gap. The charts below show the dramatic increase.

The bottom line: to pay for the costs of special education, districts have to use money from their general funds, reducing funding for all the other children. This also means there is less money for teacher raises.

The chart above compares 2018-19, and there’s little reason to believe that the problem has gotten better, according to this EdSource report in 2026. The governor’s budget proposal for 2026-27 calls for $6.016 billion in state funding for special education. Perhaps that sounds like a lot, but that amount wouldn't have filled the gap ten years ago, and it certainly won’t come close now.

While the number of students in California is declining, the proportion of students who are identified as needing special education services is increasing, particularly among students who require higher levels of support.

The high cost of pensions

Once upon a time, California’s pension system for teachers was largely funded by teachers and their employers, with steady investment gains in the state’s rock-solid pension fund, CalSTRS. At the turn of the millennium, the system seemed so secure that lawmakers judged it to be overfunded. The dot-com boom would go on forever, right? Confident that the good times would roll on, California lawmakers voted almost unanimously to change the system, taking in less and paying out more. It was a disaster.

For more than a decade, the amounts paid into the pension system didn’t keep up with rising costs. To paraphrase Cory Koedel, who wrote an influential analysis of the situation, the pension fund worked like a credit card account. Teachers and school districts made minimum payments, but didn’t pay the full bill. As time went by, shortfalls expanded into a debt spiral.

In 2014, the state legislature finally committed to a long-term recovery plan. It rescued the system for future retirees, but at a withering cost to current and future school budgets.

As shown in the chart above, payments into the pension system (contributions) come from current teachers (about 10% of their salaries), school districts (about 20% of teacher salaries), and the state (about 10% of salaries). It’s become a huge diversion of funds away from today’s schools, teachers, and other needs of the state. In San Francisco, for example, the shortfall led to a strike in 2026.

Learn a lot more about California’s teacher pension system in Ed100 Lesson 3.11.

Health care costs

Good health insurance has long been a traditional part of compensation for teachers and their families. As the costs of health care have skyrocketed, teachers and school systems have felt the pinch.

According to Shelly Ehrke, a member of Santa Monica-Malibu Classroom Teachers Association, “Ever-increasing insurance premiums are siphoning billions of public education dollars away from our schools.”

The National Council on Teacher Quality echoed this conclusion in a 2024 report: “the skyrocketing price of health insurance means that this coverage comes at an increasing cost for both teachers and school districts. Since 2018, the average monthly premium that teachers pay for health insurance has increased at a faster pace than the rate of their average salary increase.”

Absences

With few exceptions, funding for California schools is based on attendance. When students show up for school, funding flows. When they don’t, it doesn’t. Immigration enforcement raids have made this a scary time for school districts that serve immigrant populations. When families don’t feel safe, they stay away.

As an example of the financial impact of absences, in the 2024–25 school year alone, San Francisco Unified School District students lost an estimated 4.4 million hours of learning and SFUSD lost over $60 million in funding for teachers and staff due to student absence.

Declining enrollment

Schools throughout California are experiencing declining enrollment driven in large part by declining birth rates. Fewer kids means less attendance, which means less money for schools.

Expiring funding needs renewal

Voters in 2016 overwhelmingly passed Proposition 55, a tax on California’s highest-income filers for the benefit of public K-12 schools and community colleges. The tax, which generates significant but highly varying amounts each year (for example, about $7.7 billion in 2019) has a built-in sunset clause — it needs voter renewal before it expires in 2030.

The California Teachers Association has developed campaign materials to help communicate the amount of educational funding at stake for each school district.

What can be done for education funding?

California school districts need funding streams that respond to costs as they grow. As explored in Ed100 Lesson 8.9, there are a variety of possible solutions, all of which would require at least substantial change in laws — and probably amendment of the California constitution, with approval of voters.

Here are a few ideas that would increase funding for education, generally at the expense of other government programs and services:

Adopt an additional funding mechanism that responds to California education costs beyond the existing COLA.

For many years, cost of living adjustments (COLAs) have been tied by law to increases in costs as measured by the Implicit Price Deflator for State and Local Government, a national statistic developed by the Federal Reserve Bank of St. Louis.

Increases to the COLA are set during the state budgeting process using economic data from the prior three fiscal quarters. Because the adjustment relies on historical price indexes, and is finalized before a school’s academic year, it can lag behind the cost pressures districts face.

The state legislative process could extend additional funds separate from the COLA in anticipation of higher future rates. Such a process could take into account cost factors that exceed those captured by the Fed series. For example, in California many cost pressures are driven by expansion in the costs of special education and health care.

Identify low-income students through direct certification rather than Free and Reduced Priced Meals (FRPM).

California allocates education funds to districts based on the Local Control Funding Formula (LCFF — see Ed100 Lesson 8.5). Under this formula, districts receive additional funds for students from poor families. To be counted as poor, students must be enrolled in the federal free and reduced-price meals program.

Now that there is universal free lunch for all, families in low-wealth communities no longer have an incentive to complete the application for free and reduced lunch, leaving districts with the time-consuming task of chasing down families for paperwork. The result is that many low income students are not counted as poor for purposes of LCFF.

The Public Policy Institute of California (PPIC) suggests that enrollment in programs such as CalFresh, CalWORKS, and Medi-Cal may be better indicators of student and community need. Preliminary results indicate that this direct certification method might shift about 2.4% of funding to higher-need schools.

Fund school districts according to their regional costs.

California state funding per student is consistent regardless of where students live. Districts in high-cost areas don’t get extra money from the state. Should they?

Here’s an example: the average teacher salary in Fresno is about the same as in San Francisco: roughly $103,000. But the cost of living in the two cities differs massively. According to the MIT Wage Calculator, whereas the average annual salary needed before taxes for a family of four with two working adults living in Fresno is $118,751, a family of four living in higher-cost San Francisco needs $178,000.

To shift more state funding to teachers in San Francisco, the Public Policy Institute recommends considering Comparable Wage Index for Teachers (CWIFT). Created by the National Center for Education Statistics (NCES), this experimental index measures regional differences in wages and salaries of college graduates who are not PK-12 educators and allows for adjustments to school district compensation using geographic comparisons.

Fund schools based on enrollment, not attendance.

As explained in Ed100 Lesson 4.8, California is one of only a handful of states that funds schools on the basis of attendance, not enrollment. Because there are stark patterns in absenteeism, the results are predictable. The chart below shows absence rates by ethnicity.

The Legislative Analyst Office (LAO) notes that basing funding on enrollment could make school district funding more predictable, avoiding revenue swings caused by short-term drops in attendance. It would also reduce the risk of penalizing districts that serve higher need communities where absenteeism rates may be higher due to health or economic factors. The risk of ICE enforcement is a new factor that affects attendance rates in some communities more than others.

The LAO stops short of recommending this change, cautioning that a shift to enrollment-based funding could weaken incentives to improve attendance. If the LCFF system were simply funded as if every child attended, the statewide cost would amount to more than $5.7 billion.

Change the funding system that allows some high wealth districts to provide their schools with high levels of local funding.

A small percentage of California students attend a public school in a basic aid district. In these districts, local property taxes exceed the minimum funding level guaranteed by the state’s Local Control Funding Formula (LCFF). A major study of basic aid districts by Policy Analysis of California Education (PACE) found that in 2023-24, 139 districts serving just 5.5% of California’s TK-12 students received $1.3 billion in “excess” property taxes above what they would have gotten through LCFF.

As Fair Funding CA reports, certain districts receive thousands more per student than their neighbors, even within the same county. Edsource reports that in some of these districts teachers earn an average of $27,000 more than in state funded districts. The PACE analysis suggests policy options, including taking funds from these lucky districts and redistributing them to other schools. Other options include sharing services, interdistrict transfers, establishing regional COLAs, and providing more state aid to less affluent districts.

Increase funding for special education in a new fund.

To help the state to fund special education appropriately, create a new fund — within the General Fund but outside of Prop 98 — to pay for rising special education needs.

This approach, already used for dedicated funding for arts education, could reduce the encroachment of special education obligations into local LCFF funds. Separately, pressure federal legislators to increase federal funding for special education.

Don’t cut the state education funding guarantee when K-12 enrollment declines.

When statewide enrollment drops, maintain the prior year’s student count to calculate the Proposition 98 minimum funding guarantee. This would mean that Prop. 98 funding would not drop because of lost enrollment/attendance and there would be more money per student.

Solutions: A Bigger Pie

The sources of revenue for California’s public K-12 education have been consistent for many years. In total, revenue from federal, state and local sources generate funding at a level equivalent to between three and four percent of the state’s economy, a relatively low level of economic effort compared to other states and countries.

In order to materially improve the capacity to hire teachers and run programs that make the future better for kids in California, a higher level of effort is required. That means not just maintaining existing sources of revenue, but finding new ones that can earn the support of California voters and legislators.

Here are some possible approaches.

Regularly assess the taxable value of commercial property.

Many large commercial properties in California are taxed on the basis of values assessed long, long ago. This protection gives incumbent businesses an anti-competitive edge over new ones, distorting market forces. Over time, this has chilled property tax revenues in the state and shifted the tax burden to residential properties and homeowners. Evolve California, an advocacy organization, describes this as closing a corporate loophole.

Tax service transactions

Long ago, the economy was built mostly on sales of stuff, not of services. The tax system was designed to generate revenue through these transactions. Today, most of the economy is driven by selling services, not physical products — but the tax system hasn't caught up. A few states have implemented taxes on service revenues, and California could join them. The California Legislative Analyst has noted the long-term economic shift from sale of products (taxed) to sale of services (untaxed). The California Chamber of Commerce studied options in a 2019 report in 2019. In 2024 The Tax Foundation reported that 101 countries around the world tax services through a Value Added Tax (VAT) or General Service Tax (GST), but it recommends extension of consumption taxes to include services as an approach to broaden the tax base more neutrally.

Tax social media

In contrast to broad taxes on services, a social media platform tax would be a fee based on the sale of media user data. Since the inception of social media, data collection has been a crucial part of their business model. This tax is a fee on social media companies that collect consumer data and sell to third-party buyers. The 2026 proposed budget (p. 72) in Illinois includes a social media platform tax. The fee rate structure is based on the number of monthly active Illinois users on whom the company collects data. In 2026 a related bill in California died in committee.

Tax wealth

The income tax system that fuels America’s state and local governments has been built on the expectation that growth in the value of assets can be taxed when they are sold, generating a taxable capital gain. But what if the asset isn’t sold? When does society participate in the economic gain?

In 2026, California unions led by SEIU announced a plan for a ballot initiative known as the Billionaire Tax Act. The initiative calls for a one-time tax on the wealth of the state’s richest taxpayers for the benefit of health care in the state. As CalMatters reports, although there are many precedents for such taxes in Europe, most have been rescinded.

Tax inheritance

When wealthy people die, their estates may owe the federal estate tax, which is a version of a wealth tax. According to the Tax Foundation, like most states, California doesn’t have an estate tax. The Center for Policy and Budget Priorities (CBPP) has collected data about the historical effect of the estate tax, which currently applies to very few, very large cases. As ProPublica reports, there are lots of loopholes that could be addressed. The DC Fiscal Policy Institute describes one common strategy as Buy, Borrow, Die.

California follows the federal tax code’s generous treatment of stepped-up basis for inherited property. California can’t easily change federal income-tax rules, but voters did tighten a related inheritance benefit in property taxes through passage of Proposition 19 (2020). This issue might appear again on the November 2026 ballot.

Reduce or reform tax expenditures

California forgoes tens of billions annually through tax credits, exclusions, rebates, and exemptions. These tax expenditures have the same budget impact as ordinary spending, but they are not routinely questioned during the budget process. As explained in this post from Jason Sisney, policymakers should scrutinize these expenditures with the same intensity as other recurring budget items.

Prune or grow?

As this post has explained, districts and teachers unions have found themselves in a difficult position. There isn’t a single villain here — and there isn’t a single fix. California’s school finance system is being squeezed from all sides: rising special education obligations, pension and health costs, a high cost of living, and enrollment declines that reduce revenue faster than expenses can fall.

If we want schools that can attract and keep great educators and deliver the programs kids need, California has to make deliberate choices. That could mean changing formulas to better match real costs, distributing resources more fairly, and/or raising new revenue that voters will support.

When money runs short, the instinct is to prune — trim programs here, cut staff there — and hope for the best. Some pruning is healthy, right? Perhaps, but California's education system is already lean by any reasonable comparison. We have an obligation to do right by each student. Do we want to keep trimming our schools back, or are we ready to give them what they need for all students to thrive?

Thanks also to Leslie Reckler, who contributed to this post.