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Lesson 8.3

Who Pays:
Where California's Public School Funds Come From

Actually, most of the education budget comes from…

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In every state, education funding comes from some combination of federal, state, and local sources, but the proportions vary. The federal government typically provides about 10% of funding in most states. On average among the 50 states, state funds account for somewhat less than half and local sources provide the rest. California is different.

The State Decides How Much Schools Get

Although the balance between sources in California fluctuates slightly from year to year, public education funding here depends more on state funds and less on local property taxes than is typical, for reasons that will be discussed below. This pie chart shows the main sources of general operating money for K-12 education in 2016-17.

8-3-Funds-by-Source

Thanks to some unusual provisions of California law, the state controls both the allocation of its general fund contribution to schools and local property taxes.

The "local local funds" slice, only 5% of the funding pie, is generated and controlled by local school districts. This sliver includes interest income, leases on unused properties, parcel tax proceeds, donations, and a host of other miscellaneous sources. (You can find more about your own district's sources of revenues in the District Financial Reports on the Ed-Data website.)

As a parent, school, or union leader you may find little reason to care about the components that make up the revenue mix in your district. Nonetheless, there are several things you ought to understand about the allocation system:

  • There are four major kinds of revenue sources for education.
  • Property taxes are not usually the main source of funding, despite what people think.
  • Given the current system, your district can only do things on the margin to affect how much revenue it has.
  • California is different from other states in the very small level of revenue raising power local communities have.
  • The amount per pupil your district gets may be very different from the one next door, in part because of the revenue sources outside of state control.

The rest of this lesson provides more background regarding how California ended up with its current approach to funding K-12 education.

The Courts and Voters Put the State In Charge

The source of funds for schools in California changed dramatically in the late 1970s. (Link to chart data)

Calif-k12-funds-by-source

Until the late 1970’s, schools were predominantly funded by local property taxes, and the most basic function of a school board was to set the local property tax rate. Rates varied among districts, and receipts varied according to both the tax rate and the assessed value of homes and commercial properties being taxed.

This arrangement was great for property-rich districts, but rotten for communities with low assessed values and lots of students.

This arrangement was great for property-rich districts, but rotten for communities with low assessed values and lots of students. Those communities had to set very high property tax rates in order to provide schools with as much money per student as their more fortunate counterparts. The Serrano v. Priest case successfully challenged this arrangement. Is it really fair, the case asked, that some districts can tax themselves at a lower level and still enjoy more funding per student than others? The case led to court-mandated "revenue limits" meant to, over time, equalize funding per student at the district level.

The courts, in the Serrano decision, began increasing the state’s control of public school funding. Voters continued this trend by passing Proposition 13 in 1978. Among other things, this constitutional amendment set a statewide limit on the property tax rate at 1% of assessed value, causing an immediate and dramatic drop in the amount of local property tax available to support schools. The state stepped in, using a budget surplus to protect schools from what would have otherwise been massive cuts. But in the process it also took control of the process for allocating local property taxes, effectively gaining nearly full power over how much money education would get and how the funds would be distributed out to local school districts.

Another provision of Proposition 13 insulated property owners from higher taxes by freezing assessed values, allowing them to rise at a maximum annual rate of 2% regardless of market conditions. (For more on Proposition 13, see Lesson 8.4.)

The Politics Shifted Along with Funding Control

Property taxes comprise about a third of overall tax receipts in California. The other two-thirds come from income taxes and sales taxes. In California, counties oversee the distribution of property tax funds to school districts as well as to cities, county agencies and other functions. (The Legislative Analyst Office publication Understanding California’s Property Taxes can equip you with lots more info, if you are so inclined.)

Three major revenue sources fund California government

Less than half of California property taxes are distributed to districts for the purpose of funding K-14 education.

Property-taxes-are-shared

Property taxes are local; they stay where they are earned. Some districts generate (and therefore receive) more property tax than others, and in rare cases local tax receipts are sufficient to fund a district beyond its state-guaranteed minimum level. Today, about 100 of California's nearly 1,000 districts can fund their schools above this minimum level on the basis of their local revenues, without state assistance. In California education jargon, these are known as "community funded" or "basic aid" districts. (For more on these districts, see Lesson 8.5.)

Until 2013-14, the rules apportioned funds to districts based on a system of "revenue limits." If you have a masochistic interest in the grim details of California's historical school finance laws, knock yourself out. If not, better to spend your time understanding the Local Control Funding Formula (LCFF), a simpler and fairer system established to replace the scary old plumbing of revenue limits and categorical funds. We will examine LCFF in Lesson 8.5.

California’s skimpy funding for schools today is arguably the long-term outcome of the shift from a locally-dominated funding system to a state-dominated funding system... The old system was inequitable, but it was certainly better at raising money in total.

California’s skimpy funding for schools today is arguably the long-term outcome of the shift from a locally-dominated funding system to a state-dominated one. Funding for schools in 1970 required an expression of local political will in the form of a vote of the locally elected school board or a local ballot measure. Taxpayers in each community had to reach agreement to shoulder taxes on behalf of the children in their own local school district. Though politically difficult, districts could change property tax rates in response to school needs, local changes in property values, or local tolerance for taxes.

Today, funding for schools is no longer local. Changes in school funding largely depend on statewide political support for increasing taxes. That kind of support has proven difficult to win. Developing the necessary political will to pass a revenue measure is hard in a small town; in a state as large as California it is even harder. The old system was unacceptably inequitable, but it was certainly better at raising money in total.

Over the last three decades, the rising costs of providing education have put continued pressure on the state budget to cover K-12 funding. And that has thrown school funding into the middle of the political process in Sacramento. Concerns about inadequate school funding started almost immediately after Proposition 13 was passed.

In 1984, California voters created a state lottery partly to raise money for education. It was sold to voters as a pain-free answer to the state’s education funding woes, but in truth it contributes just 1-2% of the total education budget.

In 1988, California’s voters passed Proposition 98, which put rules into the state constitution to guarantee a minimum amount of the state budget that must be committed to education. (For more on how Proposition 98 works, see Lesson 8.4.)

Dependence on Income Taxes Creates Volatility

The switch from property tax to income tax brought another challenge to California school budgeting: volatility. Property values (and therefore property tax receipts) vary relatively modestly with the economic cycle, but income tax receipts are fully exposed to the booms and busts of the stock market. The top 1% of income earners in California pay around 40% of income taxes, and their fortunes can change a lot from year to year.

Revenue-Volatility

To try to smooth out some of the effects of the high volatility in state revenues, California voters passed Proposition 2 in 2014. It requires the state to spend a minimum amount each year to pay down its debts and changed the rules for the state's rainy-day fund, the amount the state puts into its budget reserve to protect against years when revenues fall. Proposition 2 also set up a reserve system for the Proposition 98 portion of the budget, which goes to schools and community colleges, to protect them against budget volatility as well. (See Lesson 8.4 for more about Prop 98.)

More controversial than the state reserves was a law enacted in anticipation of Proposition 2. The law, passed in June of 2014, drastically limits the amount school districts can keep in reserve for their own rainy days. The LAO agreed with critics of this law, mostly school district officials, that it creates unacceptable risks for districts and issued a report calling for the Legislature to repeal it. Multiple efforts for repeal have failed.

For people interested in local school district funding, the most important thing to know is that education funding is up for debate every year as a major part of the state’s annual budget process. Schools have to wait for the dust to settle to know how much funding they’ll get.

Beginning in Lesson 8.5, this chapter explains the allocation process, including how the state decides the amount each school district will get and the ways that is changing as a result of state lawmakers’ 2013 adoption of the “Local Control Funding Formula.”

Review

About what percentage of the cost of public K-12 education in California is covered by property taxes?

Answer the question correctly and earn a ticket.
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Questions & Comments

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user avatar
cb65dy89 May 9, 2016 at 8:21 pm
this is really sad, i just can't believe that they get away with this , and the one that suffer are the children
user avatar
Mark MacVicar May 15, 2015 at 10:29 am
Wow! Not what I expected at all. In conversation, everyone blames Prop 13 for all of our school funding woes. I've never heard anyone mention Serrano v. Priest before. Now all the talk about suing the state for lack of funding makes sense.
user avatar
Brandi Galasso May 2, 2015 at 4:17 pm
Who controls the district or makes sure the money is getting to where it belongs? That matters a lot, because who knows what's happening really?
user avatar
Jeff Camp - Founder May 3, 2015 at 11:59 am
@bwonderwoman -- Governance of the system is an overarching topic of Chapter 7. Oversimplifying a bit: each district is governed by its elected school board, with oversight from its county office of education. The annual Local Control Accountability Plan (LCAP) is meant to provide transparency to parents, teachers and other constituents about the priorities and strategies of the district. There is also a big role for local journalists, community members who attend school board meetings, and for advocates.
user avatar
david_bolling_wells October 30, 2014 at 4:29 pm
Love the site. Great content and great service you provide. After CA passed the LCFF rules, I don't think you can continue to say this:
"Property taxes are local; they stay where they are earned."
user avatar
david_bolling_wells October 30, 2014 at 4:40 pm
While narrowly true, that property taxes stay with the local districts ... I think it deserves a greater debate about who is shouldering the tax burden for public education (regardless of whether the bucket is property or income). You've got a new crisis of confidence in public schools developing on the margins in wealthy areas with lots of kids (but not wealthy enough to have their property tax per pupil cover the total bill) seeing degrading schools but feeling like they pay an incredible amount of taxes. I would describe these districts and parents as historically the backbone of support for public ed ... I know this is tied up in debates about how to broaden the tax base in CA but it seems very relevant to this statement. Best.
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