“At first glance, the Governor’s 2025–26 Budget Proposal appears to refrain from making major direct program cuts to TK-12 public schools and allocates more resources toward the implementation of transitional kindergarten. It also promises to fully fund the cost-of-living adjustment (COLA) as required by law. But before we offer unqualified praise, we’ll need to evaluate the actual language contained in the education budget trailer bill to be released in February — especially since the budget summary contains provisions that seem to open the door for shortchanging Proposition 98 under certain conditions,” said CSBA CEO & Executive Director Vernon M. Billy.

“Districts and county offices of education are pushing against financial headwinds as they strive to accelerate academic performance, particularly for struggling student groups — a job that’s made harder when the state captures discretionary one-time Prop 98 dollars and allocates them as categorical funding,” Billy continued. “Greater discretionary funding by the state that can be used to close the achievement gap is essential. Schools can’t make the needed progress in this area without the flexibility to make decisions at the local level that meet the needs of their unique student populations.”

However, he also acknowledged that the state’s ongoing baseline costs are anticipated to increase in the outyears, exceeding the state’s revenue projections. This is reflective of overall concerns that the state’s year-over-year operational deficit continues to influence the state budget. The state will have a clearer picture in May, when it updates its budget figures based upon actual state income tax revenues.

Prop 98 is poised to increase to $119.2 billion in the current year and $118.9 billion in 2025–26. Over the three-year budget period spanning 2023–24, 2024–25 and 2025–26, it is estimated that the Prop 98 Guarantee will increase by $7.5 billion. Importantly, Prop 98 was suspended in the 2023–24 fiscal year by approximately $8.3 billion, which has been revised to $7.9 billion, resulting in only $98.5 billion for education. This created a “maintenance factor,” i.e. debt, that will be repaid over time. An increased repayment of $5.6 billion was made in the current year, lowering the remaining balance to $2.9 billion. There is no scheduled repayment proposed for the 2025–26 fiscal year.

In welcome news, the guarantee will again receive additional ongoing funding, i.e. rebenching, for the fourth and final time by $900 million to reflect the implementation of universal transitional kindergarten (UTK) to a total of $2.4 billion. This is a win for CSBA, as it has advocated for the continued growth in the Prop 98 Guarantee to reflect the commensurate increase in UTK enrollment.

Lastly, unlike the 2023–24 budget year, where Prop 98 was in a Test 2 year, it is anticipated that it will be in Test 1 for the 2024–25 and 2025–26 budget years. Generally considered to approximately be a 40 percent share of the state’s General Fund, with the UTK rebenching, Test 1 will increase from 39.2 percent to 39.6 percent of the General Fund.

The Prop 98 Rainy Day Fund balance is also estimated to grow from $1.1 billion to $1.5 billion. This reflects two mandatory deposits, one in 2024–25 and the other in 2025–26. Importantly, the total balance remains below the threshold that triggers a cap on school district reserves.

There are a number of significant uncertainties that will continue to influence whether the Governor’s January Budget Proposal will be realized. They include:

• What impacts the incoming federal administration will have on education programs and funding.
• The volatile nature of the state’s revenue structure, which can result in vast upswings and downswings in General Fund revenues.
• The impacts of natural disasters on state revenues and student enrollment, including the fires in Los Angeles and Ventura counties.

By May 15, Gov. Newsom will release his May Budget Revision, and negotiations between his Administration and the Legislature will be ongoing until the June 15 deadline for the Legislature to pass the budget bill. The Governor will then have until July 1 to sign.