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Lesson 8.4

Prop 13 and Prop 98:
Initiatives that shaped California's education system

Prop 13 had another, less intended effect…

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California's initiative process enables voters to directly change the state's constitution. Few voter actions have affected public education more than two such initiatives, Proposition 13 and Proposition 98.

How did Proposition 13 happen?

California's voters passed Proposition 13 in 1978, a time of enormous upheaval. The economy of the mid-'70s 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 ruling, the California Supreme Court decided 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 what local funding levels had been in 1972.

This change was meant to equalize funding in Robin Hood style. Over time, the court's plan was to redistribute local tax receipts that exceeded the limits. Understandably, this approach enraged those who stood to lose from it.

At the same time, the context for education finance was changing dramatically. Teacher union membership had expanded dramatically in the 1960s and early 1970s, and in 1975 collective bargaining for teachers became mandatory with passage of the Rodda Act, supported by 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.

What did Prop. 13 do?

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. It 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. At the time, inflation was increasing prices at a rate of six or seven percent annually. Under Prop 13, the tax-relevant assessed value of a home is allowed to grow at only 2% per year unless sold.

In an attempt to prevent the state government from raising new taxes, voters enacted a policy known as the Gann limit in 1979, capping the amount that the state may legally spend. There have only been a few years when this was an issue, but illustrates the density of the legal thicket that surrounds California's education budget. This stuff is seriously complicated.

How did Prop. 13 make inequality worse in California?

Anyone person or business who owned property in 1978 received an immediate economic windfall from Prop 13. Over time, the windfall grew even larger. The market value of properties in California have increased dramatically, while the assessed values, upon which property taxes are based, have remained effectively frozen under Proposition 13. As property values rise faster than the 2% cap, the effective tax rate on property drops. The tax advantage has been even larger for higher-value property than for average property.

In 2022 the Opportunity Institute and Pivot Learning co-released a thorough analysis of the inequitable effects of Proposition 13, titled Unjust Legacies.

How Prop. 13 centralized power in Sacramento

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

As discussed in Ed100 Lesson 8.3, with the passage of Prop 13, Sacramento suddenly became the center of the universe when it came to school funding in California. In most districts, property taxes at 1% of assessed value were not enough to cover the revenue limit requirements established in the Serrano settlement. The state had to fill 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 Ed100 Lesson 8.1.

What is Proposition 98?

By 1988, many Californians had become alarmed at the state of their public schools. School construction had failed to keep pace with population growth, and existing schools were looking crowded and shabby. (See lesson 5.9 for more about facilities, and the role that ballot measures played in that story.) 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.

As a way to force change, voters passed Proposition 98. This ballot measure, passed by a narrow margin, did not raise taxes or add new revenues to the budget. Rather, it amended the constitution to guarantee that a larger and more consistent fraction of the state budget be spent on education, specifically on K-12 education and community colleges (K-14 education).

Of course, that's a massive oversimplification. Here's a slightly less simple one. The portion of the budget that should go toward K-14 education under Proposition 98 is:

  • a set share of the state's General Fund (about 40%) OR at least the same amount as the previous year, adjusted for growth in student population and changes in personal income (whichever is larger), but
  • when the state's revenue growth is low or negative, education will temporarily take its “fair share” of the hit, with the understanding that the money deferred 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 amount of the Prop 98 guarantee each year is complicated, and the stakes are high. The California Department of Finance is responsible for the math. Most education-related expenses are considered part of the Proposition 98 budget, but not all of them. For example, funds for after-school programs are not counted as part of Proposition 98. 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 and formulas rather than on the real needs of students. (Kevin Gordon, a California policy consultant and expert on Prop 98, has even been heard to wonder aloud whether Prop. 98 has done more harm than good.) On the other hand, having a rule in place does support the idea that the conversation should involve real numbers.

What is the maintenance factor?

The Prop. 98 guarantee is particularly important — and challenging — when the budget is tight. California's constitution requires a balanced budget. During the Great Recession, to balance the budget the legislature diverted funds that were guaranteed to education under Prop. 98, creating a massive internal IOU. By 2011, the cumulative shortfall (or maintenance factor) between the real budget for education and the unachieved Prop 98 guarantee exceeded $12 billion — about $2,000 per student in a year when education spending per student was about $11,000.

The shortfall helped convince voters to temporarily raise taxes. Governor Jerry Brown turned to voters by putting Prop. 30 on the ballot. This measure, passed in 2012, asked for a temporary increase of about $6 billion in income and sales taxes to supplement the state's general fund. In 2018, voters extended an income tax on high earners through 2030.

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. Education funding grew significantly thereafter, but only by the minimum required by Prop 98. As many observers have pointed out, the Prop98 guarantee can serve as a floor, but also as a ceiling.

In 2022, strong growth in the state economy and the stock market lifted California tax receipts to unprecedented levels. Proposition 98 ensured that school budgets increased, too, but state leaders broke precedent by going further. The state education budget for 2022-23 exceeded the Prop. 98 minimum by about $9 billion.

Updated February 2018
March 2019
February 2020
January 2021
February 2021
September 2022

Quiz

Which statement about Proposition 13 is FALSE?

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Questions & Comments

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user avatar
Carol Kocivar July 5, 2022 at 3:07 pm
Unjust Legacy:
How Proposition 13 Has Contributed to Intergenerational, Economic, and Racial Inequities in Schools and Communities
The Opportunity Institute and Pivot Learning

Key findings from the Unjust Legacy report about the impact of Prop. 13 include:

There is a widening housing wealth gap between Black and Latino Californians and white Californians, relative to their share of the Golden State’s population.

Prop. 13 offers a large tax subsidy to older and longer-tenured homeowners, homeowners with high-value properties, and for commercial property owners. This comes at the expense of newer home owners and city services.

Prop. 13 has contributed to a limited housing supply and to more costly housing.

Reforming Prop. 13 could increase revenues for public schools.

https://theopportunityinstitute.org/unjust-legacy-webinar-prop-13
user avatar
Sonya Hendren June 29, 2020 at 7:45 pm
There is a meme going around facebook that says "Systemic Racism is: Using property taxes to determine education funding." Whenever I see a California friend share this meme, I post a comment saying "True, but not the way we do it in CA" with a link to this Ed100 lesson. CA voters are not well-educated about their school system!
user avatar
Jennifer B May 19, 2020 at 9:56 am
Proposition 98, from the 1988 Voter Guide, did not include any provision for education to take its “fair share” of the reduction when the state’s revenue growth was low. That was added by a legislatively-introduced ballot proposition two years later, “The Traffic Congestion Relief And Spending Limitation Act Of 1990.” This, known as Prop 111, drives the upcoming 20-21 minimum guarantee down from $82B (which the original Prop 98 would have stipulated) to $70B.

The Voter Guide for Proposition 111 (1990) can be reviewed directly on the UC Hastings Law Library site (https://repository.uchastings.edu/ca_ballot_props/1016/) and is summarized on Ballotpedia (https://www.ballotpedia.org/California_Proposition_111,_Gasoline_Tax_Increase_(June_1990). The focus of the proposition was, as can be imagined, gas taxes and the Gann state spending limit. The effects on education funding received little specificity in the LAO analysis available to voters.
user avatar
Jeff Camp July 15, 2019 at 1:06 am
Could 2/3 vote requirements be reduced to simple majorities? In 2019 this started looking like a possibility, if some precedents survive legal challenges. Dan Walters explains: https://calmatters.org/commentary/local-tax-conflict-heats-up/
user avatar
jacquelinebispo May 2, 2018 at 6:09 am
This is a great lesson for people to gain a better understanding of how our public education funding has been impacted by legislation and why we’ve seen such disparities amongst school communities across the state. It also helps explain why we need to keep pushing for full & adequate spending. We’ve already seen a shift since 2014, but we have to remember that we started back seven years, so we are still catching up. Progress is progress and I’ll take it.
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
jacquelinebispo May 2, 2018 at 6:02 am
Thank you, Carol. This is a great additional resource.
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.
user avatar
jacquelinebispo May 2, 2018 at 6:16 am
I do agree - effective teaching methods and program implementation are critical for student success. However, increased funding helps to acquire critical resources to make this happen, including: more teachers, counselors, social workers and family & community liaisons; updated technology, including checked out devices & wi-fi; learning expeditions; professional development and trainings for staff and families; tools to implement new programs (e.g., personalized learning initiatives, Leader-in-Me, Arts, CTE, coding, Maker Labs, STEM, literacy supports I can obviously keep going.) There is definitely a need for accountability to go along with increased funding (nod to LCAP) and to implement research-based practices for the system to progress with effectiveness.
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