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Lesson 8.4

Prop 13 and Prop 98:
Then and Now

Prop 13 had another, less intended effect…

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Thanks to California’s initiative process, the state’s voters often have a direct say in important issues. Few voter actions have affected public education more than two such initiatives, Proposition 13 and Proposition 98. Both initiatives dealt with questions of money and both have had deep and far-reaching consequences.

Proposition 13

California's voters passed Proposition 13 in 1978, already a time of enormous upheaval. The economy of the mid-'70's was reeling from a sudden increase in world oil prices driven by the creation of the OPEC oil cartel. America's economy had tipped into "stagflation," a combination of slow growth and rising prices. California home prices had climbed to levels never seen before. Homeowners, grappling with big increases in their property taxes driven by these higher prices, were frustrated and worried. Some found themselves "house rich" but unable to pay rising property tax bills.

Meanwhile, the laws governing local school districts were in a state of flux. Schools in California at the time were funded by local property taxes, levied as a percentage of each property’s assessed market value at rates set by local school boards. In the landmark Serrano v. Priest case, the California Supreme Court ruled that this system violated the state constitution because differences in taxable wealth from one school community to another generated gross inequities in funding per student. As a remedy, the Court imposed a system of local "revenue limits" based on local funding levels in 1972. This change was meant to equalize funding over time, including by redistributing local tax receipts that exceeded the limits. Understandably, this Robin Hood-like approach faced criticism and may have been a factor in the passage of Prop 13.

Proposition 13 /
centralized the budgets /
and left the schools
searching /
for stray budget nuggets

During the decade of the 1970s, the context for education finance was changing dramatically. Collective bargaining for teachers in California became mandatory through passage of the Rodda Act in 1975 with the support of a new Governor, Jerry Brown. Teacher pay rose with inflation, union power, a changing labor market that offered new professional options for educated women, and the radical idea of equal pay for equal work. School boards, trying to keep up with these forces and avoid strikes, began to find loopholes and levy new taxes that could not be redistributed.

The authors of Proposition 13 pitched it as a "taxpayers' revolt." Passed by a huge margin (64.8%), this popular initiative stripped local school boards and other entities of their authority to levy taxes, dramatically lowered property taxes to a uniform 1% of assessed value, slammed the door on known loopholes, and presented existing homeowners with a nearly irresistible temptation: a permanent tax break. Under Prop 13, property taxes would go down in real terms because regardless of market value or inflation, the taxable "assessed" value of a home would be allowed to grow at only 2% per year unless sold.

Over time, the market value of property in California has detached from the assessed value, essentially frozen under Proposition 13. The size of the difference varies; in general, the tax advantage is larger for higher-value property than for lower-value property. Trulia, a real estate consultancy, has estimated the size of the difference for each city in the state (click chart to open a new page with an interactive tool to find your district).

New Power in Sacramento

With a single stroke, Proposition 13 flipped the local and state roles in funding schools.

Sacramento suddenly became the center of the universe when it came to school funding in California. In most districts, taxes at 1% of assessed value were not enough to cover the revenue limit requirements set in the Serrano settlement. State appropriations filled in some of the lost funds. California quickly became a state with low property taxes and high state income taxes.

These changes were the starting point for a long decline in California’s investment in public education relative to its history, its economy, and relative to other states and nations. The effect on schools became more and more obvious, much to the dismay of many of the state’s educators and parents. For graphs, see Lesson 8.1 as well as this page on EdSource.

Proposition 98

By 1988, many Californians had become alarmed at the state of their public schools. School construction had failed to keep pace with growth in the state's population, and existing schools were looking crowded and shabby. (See lesson 5.9 for more about facilities.) Class sizes were trending upward, and schools found themselves continuously making difficult cuts. With Prop 13, voters had made Sacramento responsible for education funding - but Sacramento had other priorities. Education shrank as a percentage of the state budget even as the needs of the system were rising.

Proposition 98 gave voters an instrument to force the issue. This ballot measure, passed by a narrow margin, did not add new revenues to the budget. Rather, it amended the constitution to require that a larger and more consistent fraction of the state budget be spent on education, specifically on K-12 education and community colleges (a.k.a K-14 education). In 1990, Proposition 111 changed the rules a bit.

The basic rules for how much K-14 education gets under Proposition 98 are:

  • a set share of the state's General Fund OR at least the same amount as the previous year, adjusted for growth in student population and changes in personal income (whichever is larger);
  • when the state’s revenue growth is low, education will take its “fair share” of the reduction, but that amount is to be restored when state revenues rebound; and
  • the Legislature, with a two-thirds vote, can suspend the funding requirement under Proposition 98 in any single year.

Calculating the precise Prop 98 guarantee each year is complicated. The stakes are high as K-14 education gets about 40% of the state’s general fund. Every year, a cottage industry of lawyers, consultants and advocates earns a living debating and explaining the interpretation of Proposition 98.

The process consumes a great deal of energy in the annual budget process. For a summary of the sequence of legislation that led to Prop 98, this paper by Virginia Alvarez is hard to beat.

It is unfortunate that Proposition 98 has caused California’s leaders to fight budget battles on the grounds of legal details rather than on the real needs of students. On the other hand, having a rule in place does support the idea that the conversation should involve real numbers. For example, the state cut education funding substantially during the recession that began in 2008. Prop 98 was meant to ensure that about 40% of the proceeds would go directly to K-14 education; in practice a wide range of accounting "solutions" diverted funds from education. By 2011, the cumulative shortfall (or “maintenance factor”) gap between the real budget for education and the Prop 98 “guarantee” exceeded $12 billion, roughly $2,000 per student.

The imperative for the state to restore education funds to the level guaranteed by Prop 98 helped convince voters to temporarily raise taxes in 2012. Governor Jerry Brown put Proposition 30 on the ballot asking for an increase of about $6 billion in income and sales taxes to supplement the state’s general fund. To underscore the promise to protect school funding, Proposition 30 also created an “Education Protection Account” for the additional funds. These taxes expire in 2018.

California's seven year education budget drought

Education funding in California shriveled during the Great Recession. It took seven years for funding per student to return to pre-recession levels, adjusted for inflation, in the 2014-15 budget, which substantially addressed the cumulative shortfall.

Review

Which statement about Proposition 13 is FALSE?

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Questions & Comments

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user avatar
Carol Kocivar August 7, 2017 at 10:49 am
If you are interested in a little more on Proposition 98, the legislative analyst has some reading just for you: A Historical Review of Proposition 98.
http://www.lao.ca.gov/reports/2017/3526/review-prop-98-011817.pdf
user avatar
Jeff Camp December 8, 2016 at 10:25 am
Prop 13 freezes the "assessed value" of homes for taxation purposes; homes generally cannot be reassessed until sold. This is not a surprise -- the proposition's intended purpose was to prevent property taxes from rising. An unintended consequence, however, is that over time the overall burden of property taxes in California has shifted to lower-value properties. Economist Ralph McLaughlin of Trulia.com, a real estate consultancy, has assembled data to calculate the effective property tax rate paid in each city in California. Find yours here: https://www.trulia.com/blog/trends/prop-13/
user avatar
Steven N October 1, 2015 at 12:05 pm
Thanks for the June 2015 update. The graph shows one of the realities of Califonia K-12 funding, we have recovered to pre-2012 levels, and, if you do the 'lowest state' comparisons (as ED100 does elsewhere), California is not in the lowest 1/5 anymore. (aproximately). Does more money, itself, solve education problems? Economics Professor Hoxby at Stanford has a section in her undergraduate Education Economics class, answering that (with data) in the negative. Effective programs and their effective implementation are more important that just more enabling dollars.
©2003-2017 Jeff Camp
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