The Proposition 98 Minimum Guarantee, CSBA lawsuit and funding opportunities

csba at issue

By Rob Manwaring

The budget adopted this summer for California schools may seem unremarkable compared to previous years, primarily reflecting a status quo with a minimal cost-of-living adjustment (COLA) of 1.07 percent. However, the negotiations surrounding the constitutional minimum guarantee for schools, known as Proposition 98, were anything but mundane. They included the Newsom Administration’s unconstitutional proposal, closed-door negotiations, the largest suspension of the Prop 98 Guarantee in history, the draining of the state’s rainy-day fund for schools, the creation of $8.3 billion in future obligations to schools, and an unconstitutional maneuver that may permanently change the Proposition 98 calculation, followed by a CSBA lawsuit.

Prop 98 basics

Prop 98, approved in 1988 and amended in 1990, ensures a minimum funding amount for preK-12 schools and community colleges calculated annually by one of three main formulas (referred to as “Tests”). Test 1 allocates about 40 percent of General Fund revenues plus local property tax revenues to schools. Tests 2 and 3 adjust prior-year school funding based on state economic growth, either through personal income (Test 2) or state revenues (Test 3).

The suspension of the guarantee

The state can suspend this guarantee with a two-thirds legislative vote, allowing it to set funding levels as the Legislature sees fit. However, this suspension creates a future obligation — known as a “maintenance factor” — which requires future repayment of a similar amount. The repayment amount each year is based on General Fund revenue growth and other factors.

The 2024 budget proposal

Gov. Gavin Newsom’s January Budget Proposal for 2024–25 introduced a controversial budget maneuver aimed at exempting certain school spending from Prop 98 constitutional formulas. This proposal emerged after the state delayed the final deadlines for income and corporate tax payments for the 2022 fiscal year from April to October. As a result, the budget had to rely on revenue projections rather than actual data.

The state’s revenues significantly underperformed, leading to a reduction in the Prop 98 Guarantee of $8.8 billion in 2022–23, well after the fiscal year had closed out. The Administration’s proposal sought to exclude the spending above the guarantee from constitutional formulas for the next year. Because the Test 2 and Test 3 formulas adjust the prior-year for growth in the economy, lowering the prior-year spending level by $8.8 billion then lowers the amount calculated through these two formulas.

Organizations including CSBA and Children Now voiced strong concerns regarding this proposal, arguing that a state law cannot unilaterally change the meaning of a constitutional requirement.

A compromise package was negotiated in lieu of the proposed unconstitutional maneuver. This compromise included several key elements:

Maintaining approximately the same funding levels for schools in 2023–24, a small COLA just over 1 percent and some minor adjustments for 2024–25.
Suspending the minimum guarantee for 2023–24 by $8.3 billion and withdrawing a similar amount from the state’s rainy-day fund to sustain school spending.

This negotiated package was seen as a preferable alternative to the original budget maneuver, as it adhered to constitutional requirements and allowed for future payments to schools to offset the suspension.

The last-minute legal maneuver

In the closing days of June, the Legislature released a 248-page technical bill, commonly referred to as a budget trailer bill (Senate Bill 153). Buried in this bill was a new provision that effectively resurrected a similar proposal to the unconstitutional budget maneuver. The only difference is that the new provision would apply to future budgets instead of the 2024–25 budget.

Specifically, if the April 15 tax deadline is delayed by two weeks or more, the Department of Finance (DOF) would be obligated to exclude any prior-year school spending above the guarantee from the amount used in the Prop 98 formulas for the subsequent year. Had this requirement been in place at the start of 2024, it would have compelled the DOF to exclude $8.8 billion in education spending from the calculation, lowering school funding in future years.

CSBA contends that this last-minute law change was unconstitutional, and the association’s Education Legal Alliance filed a lawsuit earlier this fall against the director of the DOF to protect Prop 98. This lawsuit aims to preserve the integrity of the minimum guarantee in future years, potentially safeguarding billions in future educational funding requirements.

Looking ahead: Education funding projections look positive

The $8.3 billion suspension of Prop 98 created a similar-sized maintenance factor that will have to be repaid as General Fund revenues grow. These payments will be in addition to the amounts allocated under the three main Prop 98 formulas. Since the budget’s adoption in June, state revenues have consistently exceeded monthly expectations, with an additional $7.3 billion available beyond initial projections.

Recent revenue improvements will likely result in a higher funding level for schools for the current year. Because much of this higher funding will be repayments of the maintenance factor, these payments only happen one time. Thus, based on currently available data, schools can expect as much as $5 billion or more in one-time funding allocated in the next budget cycle, alongside any potential increases in the minimum guarantee for the 2025–26 fiscal year.

Proposition 98 in an era of declining enrollment

Over the next decade, the state expects TK-12 enrollment to fall around 660,000 students (an 11 percent decline), which will create significant challenges for local educational agencies. The decrease in students translates into a decline in funding from the state’s main funding sources including the Local Control Funding Formula (LCFF), special education and other attendance-based programs. At the state level, however, the reduced funding for districts will “free up” moneys to support new spending. For example, the costs of LCFF is projected to fall by around $11.5 billion because of fewer students over the next decade. Because the Prop 98 Minimum Guarantee is expected to continue growing over this period, the reduced spending creates what Children Now has labeled a “declining enrollment dividend.”

The state will have to reinvest that dividend in new preK-12 and community college spending to continue to meet the minimum guarantee. How the state reinvests this funding creates a unique opportunity to transform our schools, and ideally close chronic student performance gaps. For example, the state could reinvest this dividend into the LCFF by both building the base funding and strengthening the equity component. This opportunity to reinvest in our schools only happens if the integrity of the Proposition 98 Guarantee is maintained. Thus, it is crucial for stakeholders to remain vigilant and engaged, ensuring that the constitutional funding mechanisms that support California’s educational system are upheld and strengthened.

A former education sector senior policy analyst, Rob Manwaring is now a fiscal and policy consultant. He is widely respected in the state for the innovative reform ideas that he has proposed at the state level.

Back to Issue