LEGISLATURE
State budget negotiations result in proposed changes to Prop 98 funding maneuver
Governor pulls back from reclassifying Prop 98 funds in response to CSBA advocacy
On May 28, Gov. Gavin Newsom’s Administration revealed elements of proposed changes to his Proposition 98 “funding maneuver” in response to vigorous CSBA advocacy that began with the release of the January Budget Proposal and intensified after the May Revise, gaining crucial support from a California Teachers Association (CTA) ad campaign. CSBA continues to review these revisions and await official bill language before offering final judgment but the adjustments — particularly upholding CSBA’s request to not reclassify Prop 98 moneys as non-Prop 98 dollars — is a significant step in the right direction and reflects CSBA’s continued advocacy to protect Prop 98.
The May Revise
During the Governor’s May Revise presentation, a reporter asked about the Prop 98 funding maneuver and the Governor doubled down on his commitment to the proposal. He also noted that its impact would increase by $800 million $8.8 billion. Committing to the approach, he stated that he wanted to maintain public education funding and avert more layoffs.
For a review of how the budget situation developed, visit blog.csba.org/may-revise-announcement
CSBA acted immediately, raising the issue in its advocacy, and urging school board members across the state to push back. Urging the Governor and Legislature to reject the proposal, school district and county board members responded to CSBA’s call to action, generating more than 25,000 emails to the Governor and key members of the Legislature in fewer than 10 days.
Governor responds to advocacy

In response to CSBA’s longstanding objections and advocacy, as well as subsequent advocacy and a media campaign launched by the California Teachers Association, changes were announced by the state’s Department of Finance. Most welcome was the change by the Governor to no longer reclassify the 2022–23 shortfall in public education funding as non-98 funds. Using a mix of deferrals, changes in the application of the Prop 98 Reserve and the suspension of Prop 98 in the current 2023–24 budget year, the Newsom Administration proposed to maintain the funding guarantee over the three-year budget period spanning from 2022–23 to 2024–25.

What do the proposed changes entail?

The key takeaway is that the changes would:

  • Maintain funding for public schools at current levels
  • Help avoid mid-year and out-year cuts
  • Protect the integrity of Prop 98 by not reclassifying $6.2 billion in Prop 98 funding as non-Prop 98 funding
  • Suspend Prop 98 in the current fiscal year
  • Create $5.5 billion in maintenance factor (debt), which will be required to be repaid to Prop 98 in future years
  • Utilize three year-over-year deferrals and exhaust the Prop 98 Reserve

By honoring CSBA’s request to not reclassify Prop 98 funding in the 2022–23 fiscal year, Prop 98 shifts into Test 2 in the current 2023–24 fiscal year. Under the State Constitution, the Prop 98 funding guarantee is guided by three tests. Each test considers specific economic and state revenue factors. As described by the Legislature’s non-partisan Legislative Analyst, “Test 1 links school funding to a minimum share of General Fund revenue, whereas Test 2 and Test 3 build upon the amount of funding provided the previous year.” Typically, Test 2 increases Prop 98 funding because it is based off the minimum funding guarantee in the prior fiscal year.

Since Test 2 triggers higher Prop 98 funding, it creates a larger gap between what the state can afford to spend on Prop 98 and what the Prop 98 Guarantee demands. To help bridge this gap, the changes include deferrals and withdrawing the entirety of the $8.4 billion Prop 98 Reserve. Using these two tools, however, is not enough to reduce the difference between the guarantee and what the state can afford. To make up the remaining amount, the state would need to suspend Prop 98 by approximately $5.5 billion.

Below is a chart outlining how the proposed changes would work.

Budget year
2022-23
2023-24
2024-25
Operative Test
Test 1
Test 2: Establishes a guarantee $4.2 billion higher.
Test 1
Minimum guarantee
$103.7 billion
$105.8 billion
$110.6 billion
Prop 98
Recognizes $6.2 of the $8.8 billion shortfall in education funding as Prop 98 funding.
  • Suspends the Guarantee by $5.5 billion — creating a lowered guarantee of $101.3 from $105.8 billion.
  • Suspension is reflective of $4.2 billion increase in the guarantee and $1.3 billion in Maintenance Factor repayment.
  • $5.5 billion suspension would be repaid over future years depending on state economic growth and general fund revenues.
Maintenance Factor repayment of $1.3 billion increases the guarantee by $1.5 billion.
Reserve
  • No deposits or withdrawals into the reserve.
  • Local reserve cap is in place.
  • Withdraws the entirety of the Prop 98 reserve = $8.4 billion.
  • $2.6 billion of the reserve would be used to immediately pay off 2022–23 $26 billion deferral.
  • Local reserve cap is in place.
  • No deposits or withdrawals into the reserve.
  • Local reserve cap is lifted.
Deferrals
  • Defers $2.6 billion of the remaining $8.8 billion shortfall to 2023–24.
  • $2.6 billion reflects unallocated Prop 98 funding in the 2022–23 fiscal year.
  • Repays the 2022–23 $2.6 deferral using Prop 98 reserves.
  • Defers $1.3 billion to 2024–25.
Defers $2.4 billion to 2025–26 (June to July deferral)
Prop 98 suspension as part of the deal
Importantly, an option of last resort — the suspension of Prop 98 — is an approach CSBA does not take lightly. This serious action has only occurred twice before (2004–05 and 2010–12). Suspension of Prop 98 can only be enacted one year at a time by a two-thirds vote of the Legislature and creates a “maintenance factor.” The maintenance factor is debt owed to Prop 98 over an extended period during which repayment is constitutionally required. It creates a clear financial incentive for the state to repay money owed to Prop 98, removing much of the uncertainty over future education funding created by the Governor’s initial Prop 98 maneuver. This ensures that Prop 98’s minimum funding guarantee is truly a guarantee and will always be funded.
Legislature has yet to get on board
At the time of this writing, the Legislature has yet to agree to the proposed deal and announced that it would not be reflected in its initial budget bill. This means negotiations will continue and that any agreement would likely appear in the K-12 education budget trailer bill. The Legislature is scheduled to go on their 30-day summer recess on July 3 and trailer bills can be acted upon before or after their return.

What’s next?

The Legislature has until June 15 to pass a balanced budget and the Governor has until June 30 to sign the budget. As negotiations continue, CSBA will continue to keep its membership informed of developments and opportunities for advocacy.
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