Can Proposition 15 Untangle California's Funding Problems?

by Carol Kocivar | August 30, 2020 | 9 Comments
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Knitting a Solution

The pandemic has unraveled California’s economy. Local governments are knitting fragile nets out of hope and debt. California schools need $20 billion next year to avoid widespread layoffs and cuts to essential programs, according to estimates from the Education Coalition. Across the nation, cities, municipal governments and pension funds face similar budget shortfalls.

At the same time, the stock market has risen to historic highs and federal tax rates on businesses profits have been reduced to historic lows.

What are the options?

  1. Do nothing and hope the problems disappear.
  2. Identify fair ways to collect taxes to fund our schools and communities.

That’s essentially what voters will decide this November when they vote on Proposition 15. (And yes, there is a long back story that involves political intrigue and heated debate — more on that later.)

What Does Proposition 15 Do?

Prop. 15 does something relatively straightforward: It requires commercial and industrial real property worth more than $3 million to be taxed on the basis of its current fair market value. Right now, the tax is based on property's market value at the time of purchase (adjusted annually for inflation with increases capped at 2 percent per year) even if the purchase was decades ago.

If passed, this measure will not change residential property taxes. It will, however, bring California in line with the way other states tax commercial and industrial property: based on market value. Existing property tax rate limits remain the same. That’s it!

Wait Wait Wait!!! It must do something more than that.

A great deal of money will be spent on campaigns both for and against Proposition 15. And sometimes this results in muddled thinking by voters. Just to be clear, here is clarification for some common confusions.

  • I’ve heard people warn me that it will increase taxes on my home. (NOPE.)
  • I’ve heard that agricultural property will be taxed. (NOPE.)
  • What about the personal property tax on small businesses? Won’t that go up? (NOPE.)
  • Doesn’t it get rid of Prop. 13? (NOPE.)

The official Title and Summary for Prop.15 states that it exempts “residential properties; agricultural land; and owners of commercial and industrial properties with combined value of $3 million or less. It also exempts small businesses from personal property tax; for other businesses, provides $500,000 exemption.”

How much money will schools and communities get?

By taxing properties on the basis of their current value, Prop 15 will generate between $6.5 billion to $11.5 billion in new funding according to the California Legislative Analyst. About 60 percent of these funds will go to cities, counties, and special districts. The other 40 percent will go to K-12 schools and community colleges.

Money for K-12 schools will be distributed based on the Local Control Funding Formula (LCFF). All school districts and charter schools will get more money, with additional funds directed toward schools where needs are greatest.

Prop 15 estimated impact on schools and communities, selected counties

Alameda

Butte

Contra Costa

El Dorado

Fresno

Kern

Los Angeles

Marin

Merced

Monterey

Orange

Placer

Riverside

Sacramento

San Bernardino

San Diego

San Francisco

San Joaquin

San Luis Obispo

San Mateo

Santa Barbara

Santa Clara

Santa Cruz

Solano

Stanislaus

Tulare

 

Now let’s get to the politics!

Discussions of property tax policy in California are dominated by Proposition 13. Since it was passed in 1978, Prop. 13 has been the third rail of California politics. Don’t touch it!

In effect, Proposition 13 protects property owners by limiting increases in taxes on their property, even if their property goes up in value. California voters passed this initiative to protect Californians from being taxed out of their homes at a time when spiraling inflation was driving property prices (and thus property taxes) through the roof.

Prop 13 is the "third rail" of California politics.

California's low property tax rates on residential properties are overwhelmingly popular, and Proposition 15 doesn't touch them. The scope of the initiative is limited to commercial and industrial property.

Under Prop 13, California businesses that have owned property for a long time have enjoyed significant protection from property tax increases, even as the value of their property has risen. (Disneyland is a frequently cited example.) If Proposition 15 passes, this tax protection — basing taxes on the original purchase price — will be phased out for commercial and industrial property worth more than $3 million. As this change takes effect, businesses in California will pay taxes on property they own based on the market value of the property.

The sale of a property generally triggers reassessment of its taxable value, because it establishes a clear price. Transactions involving real property owned by a business entity, however, can sometimes be structured to avoid reassessment. Proposition 15 aims to close these loopholes.

According to former legislative staff member Jim Shultz, the politics of property taxes have evolved over the decades. In 1978 some business leaders were vocal opponents of Prop 13, which Shultz describes as a multibillion-dollar tax break they didn’t want.

“The corporations warned that the initiative would damage public schools and services, and gave serious cash to the campaign to defeat it. A Southern California Edison executive declared, 'Although business stands to receive at least $4 billion of the anticipated $6 billion in property tax relief, we felt it was time for the private sector to stand up for principle and fight this measure as financially unsound.'”

Battle over ballot language

Prop. 15’s political season started with a court battle over the statements submitted for the voter pamphlet. The court ruled that the arguments below, submitted by opponents, were false and/or misleading.

False or misleading statements submitted in opposition Prop 15, and court action

“Prop 15 gives the Legislature the power to increase property taxes on those homeowners”

ENTIRE PARAGRAPH DELETED

“Prop 15 allows state politicians to raise property taxes on millions of home-based businesses”

DELETED

“There’s no accountability how the money is spent”

DELETED

"...and allows state politicians to raise property taxes on millions of homeowners”

DELETED

A separate lawsuit challenged the title in the voter pamphlet: “This blatant manipulation of the ballot label as well as the title and summary is in direct contravention of the Attorney General’s fiduciary duty to prepare impartial ballot material,” said Jon Coupal, President of Howard Jarvis Taxpayers Association. As of this date, this challenge was unsuccessful, as reported by Calmatters: Judge Earl wrote that while one portion of the title “may be somewhat misleading, the Court is not convinced the sentence is so misleading that it justifies judicial intervention.”

Because the stakes are high, court rulings may become part of the political message on both sides of the issue.

Campaign Messages for and against Proposition 15

https://www.yes15.org

https://noonprop15.org

While the wealthiest corporations avoid paying their fair share, our schools have the most crowded classrooms in the nation and our local communities are struggling to respond to the impact of COVID.

Just 10% of California’s most expensive nonresidential commercial properties account for 92% of Prop 15’s loophole-closing revenues.

Prop 15 will reclaim billions every year for our schools, community colleges, and essential local services in EVERY county to invest in things like:

  • Class sizes
  • Health care services
  • Fighting homelessness
  • Firefighters and their equipment
  • Safe drinking water
  • Preparing for future disasters such as wildfire, pandemic or earthquake

Amid an unprecedented economic crisis, special interests are pushing Prop. 15 on the November 2020 statewide ballot. It will be the largest property tax increase in California history, and it will destroy Prop. 13’s property tax protections.

The measure will raise taxes on business property. Those taxes will ultimately be passed on to consumers in the form of increased costs on just about everything people buy and use, including groceries, fuel, utilities, day care and health care.

If businesses lose their Prop. 13 protections, homeowners will be next. Supporters of Prop. 15 even admitted that this initiative was the first step in a plan to end Prop. 13, which could mean skyrocketing property taxes for all California homeowners.

Proposition 13 is working exceedingly well at keeping homeowners and small business owners from losing their properties, while delivering government a reliable source of revenue.

Major supporters

  • Tony Thurmond, California Superintendent of Public Instruction
  • Latino Community Foundation
  • California Teachers Association
  • League of Women Voters
  • California State PTA
  • California Democratic Party and Green Party

Full list from Ballotpedia

Major opponents:

  • Howard Jarvis Taxpayers Association
  • California State Conference of the NAACP
  • California Small Business Association
  • California Taxpayers Association
  • California Chamber of Commerce
  • California Restaurants Association
  • California Black Chamber of Commerce

Full list from Ballotpedia

Questions & Comments

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user avatar
Jennifer B September 3, 2020 at 2:10 pm
What hole are WE digging ourselves into with Proposition 15? Best case, it will generate $4.6B—in 2025—towards next year's $20B education deficit.

And it mandates removal of over $1.5B of property tax from counties for the first time. When do we tell parents and voters in San Francisco, Santa Clara, San Mateo and Orange: your poorest schools will get under $750 a kid- while $200-$550 million goes elsewhere? (Or voters in Alameda, Contra Costa, Monterey, Marin, Napa and Sonoma, each with over $30 million leaving?) Especially with Los Angeles the big winner just because it allocates so little to education?

The news will not improve with time. It will be used as a prime example of our own duplicity. Saying “wealthy” counties should "pay their fair share” will ring even more contemptuous after the fact. This is not a simple proposition. Unless it is sold transparently, we will find 2022 voters chanting ‘… fool me twice, shame on me.’
user avatar
Carol Kocivar September 4, 2020 at 12:14 pm
1. Good point on the amount of money Prop. 15 generates. It is not enough to fill the funding gap. Additional revenue over time will be needed. California is still below the national average in school funding. 2. The education funding under Prop. 15 is distributed according to the local control funding formula. It was purposely designed to provide more money to school districts with more low income students, English language learners and foster youth. Because the Prop. 15 funding is split 40 percent for schools and 60 percent to local communities, those communities you mention will benefit from the 60 percent of the funding. You can find estimates of the amounts in the blog.
user avatar
Leslie1 September 3, 2020 at 9:42 am
Thank you Carol for another great article. For West Contra Costa Unified School District, Prop. 15 will not untangle our district's funding problems. We are expected to receive about $18 million a year. According to American Institutes for Research for Getting Down to Facts, a project that was published in 2018 by Stanford University and Policy Analysis for California Education (PACE) using 2016-2017 data, our need is about $280 million more a year just to provide an adequate education. Not even an exceptional one. Prop 15 won't even supply us with a 10% funding increase. Don't get me wrong - I'll take it. But it is disheartening that millions of us need to work this hard for such a small increase. And, we'll still be at the bottom in per-pupil spending when compared to other states.
user avatar
Todd Maddison September 1, 2020 at 9:19 pm
In 2012 we passed Prop 30, to better fund education. Funding is up from $9656/ADA in 2012 to $14,983/ADA in 2019.

That's an increase of $5,327/ADA or 55.17%. A 6.48% compound annual growth rate, which is almost three times the rate of inflation - 2.37%/year.

But yet, that's not enough.

Why? Because most of that increased revenue has been going into pay and benefits for employees, not the list of things we were promised (similar to the list being promised in Prop 15)
In my district (Oceanside Unified), median Administrator total comp (including benefits) was $157,650 last year. Median teacher total comp $120,242.

Increase rates for both are averaging over twice inflation during this time as well.

Given it is clear the education establishment took the additional revenue we gave them and did few of the things we were promised, why would anyone think something different is going to happen this time?
user avatar
Carol Kocivar September 2, 2020 at 11:34 am
This kind of analysis comes up frequently but unfortunately does not reflect the real financial picture . We have a blog “More Money for Schools? that digs into this question. https://ed100.org/blog/more-money-for-schools-not-really As you know, local school boards make decisions on how to spend education money based on their community needs. Parents with concerns should participate in community meetings which should be going on right now.
user avatar
Todd Maddison September 2, 2020 at 12:35 pm
Thanks. The real financial picture IS more complicated but the fact is (from CDE SACS data) that revenue/ADA has increased at a rate almost three times inflation since we passed Prop 30. Your article makes the point that costs have also risen. True, but the bulk of those costs is "pay and benefits for employees." To use your analogy it's not that the price of bread is jumping from $2 to $5 but the fact that the household members are taking most of their increased income and putting it in their pockets – and then saying the household can’t afford bread. Special Ed costs have also gone up but last spring the Union Tribune showed SD SPED costs were up 26% - a rate lower than the general revenue increase - meaning SPED spending is not driving the financial distress. Sorry, but it's clear that our education establishment took the extra revenue last time has been spending it on themselves, and, again, there is no prohibition for this built into Prop 15.
user avatar
Carol Kocivar September 7, 2020 at 7:15 pm
See reports below.
Getting Down to Facts: Effects of the Local Control Funding Formula on Revenues, Expenditures and Student Outcomes:
• The data provide initial evidence that money targeted to districts with the greatest student needs has led to improvements in student outcomes.
• Expenditure increases largely went toward teachers, pensions, and special education.
For low income students, a $1,000 increase in district per-pupil spending during ages 13 to 16 led to an average increase in 11th-grade mathematics test scores equivalent to approximately seven months of learning.

Learning Policy Institute: Money and Freedom:
LCFF-induced revenue increases:
DISTRICT: significant reduction in the average school-level student-to-teacher ratio and significant increases in average teacher salaries and instructional expenditures.
SCHOOL: significant increases in high school graduation rates and academic achievement, particularly among children from low-income families.
user avatar
Todd Maddison September 13, 2020 at 5:16 am
Expenditure increases may have gone to "teachers, pensions, and special ed", but lumping them together like that obscures the fact that the rate of increase was significantly higher for the "teachers, pensions" side of that than the "special ed" side. As I pointed out, at least in SD County the increase rate for special ed is BELOW the overall increase rate in funding. The bulk of the revenue from the Prop 30 increases is going elsewhere (obviously "teachers, pensions".) I'm all for targeting low income and special ed. Where is there language in this legislation that does that? If I gave you an extra $1000 for your household and you spent $900 on new shoes and $100 on groceries, you could say "my family is less hungry as a result of that additional revenue, therefore we need more revenue to continue the improvement", but some might say “maybe you should have spent the rest of it on groceries too?”
user avatar
Carol Kocivar September 15, 2020 at 3:05 pm
Spending on special education students in California has increased by just over 20 percent over the past decade — from $10.8 billion to $13 billion in inflation-adjusted figures, according to a new report. Ed Source In inflation-adjusted terms, average statewide teacher compensation was $8,900 (11 percent) higher in 2016-17 than 2000-01. Increases in health benefit expenditures accounted for about two-thirds of compensation growth over the period, whereas salary increases accounted for about one-third. (These figures exclude pension-related increases.) CA Legislative Analyst. Find more about pension increase in lesson 3.11 Ed100 California Legislative analyst
user avatar
Carol Kocivar September 15, 2020 at 3:18 pm
Education Funding under Prop. 15 is pursuant to the Local Control Funding Formula. Preamble: Text of Proposition: To school districts and charter schools in proportion to each school district's or charter school’s total funding calculated pursuant to subdivisions (a)-(i), inclusive, of section 42238.02 of the Education Code, as those provisions read on July 1, 2019. Law: 42238.02. (a) The amount computed pursuant to this section shall be known as the school district and charter school local control funding formula.
user avatar
jroubanis September 1, 2020 at 5:11 pm
The California State PTA is listed as a "Major Supporter". Does that mean unit PTAs can advocate for Prop 15 (on behalf of the CAPTA)?
user avatar
Carol Kocivar September 2, 2020 at 11:42 am
Yes, that's right. Thanks for the question.
user avatar
Carol Kocivar August 31, 2020 at 6:00 pm
Good Questions! The money for education in Prop. 15 will be in addition to other education funding.

The initiative says in Section 3 Purpose and Intent:

Ensure that the portion of any new revenues going to local schools and community colleges as a result of this measure is treated as new revenues that are in addition to all other funding for schools and community colleges, including Proposition 98.

The text of the initiative also says:

SEC. 4. Section 8.7 of Article XVI of the California Constitution is added to read:
(c) Moneys allocated to local education agencies, as that term is defined in section 421 of the Education Code as that statute read on January 1, 2020, and to community college districts from the Local School and Community College Property Tax Fund shall supplement, and shall not replace, other funding for education.
user avatar
Sonya Hendren August 31, 2020 at 12:08 pm
Hi Carol,
Can you address what in the Prop 15 language assures us that the increased property tax revenue will be in addition to the Prop 98 school funding minimums, rather than simply used to meet those minimums?
Thank you!
user avatar
Andy Wheeler August 31, 2020 at 11:28 am
Based on LCFF funding methods there is nothing in this bill that changes the amount funded to schools. It increase the amount that comes from property taxes which allows the state to decrease the funding that comes from the budget.
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