Illustration of a diverse group of people dressed in blue
SCHOOL FUNDING — EDUCATION REVENUE AUGMENTATION FUND (ERAF)
CSBA v. Betty Yee – California Superior Court, County of Sacramento (Case No. A157026)

MEMBER(S) INVOLVED: Filed on behalf of all California school districts and county offices of education

IMPORTANCE OF STATEWIDE ISSUE:

The Educational Revenue Augmentation Fund (“ERAF”) was created by the Legislature in 1992 to relieve pressure on the General Fund while meeting the constitutional minimum funding guarantee for K-14 education. The ERAF statute redirects a portion of property taxes statewide from cities, counties and special districts to local school districts and community college districts, reducing the demands on the state’s General Fund. The current exclusion of charter school average daily attendance (“ADA”) from ERAF calculations in five counties (Marin, Napa, San Francisco, San Mateo, and Santa Clara) will result in an estimated statewide loss of nearly $1 billion dollars to Proposition 98 funding (the primary funding source for most California schools) over a three-year period and the ongoing miscalculation following erroneous guidance from the State Controller Betty Yee (“SCO”) will result in untold future losses for California schools.
SUMMARY OF THE CASE:
A report from the state Legislative Analyst’s Office (“LAO”) issued in March 2020 identified a number of ways in which the five counties were calculating their property tax allocations to increase their excess ERAF so as to benefit the counties, cities, and special districts rather than school districts and community college districts. One such way concerns the exclusion of charter school ADA from the calculations.

Under ERAF, a portion of statewide property tax revenue from cities, counties, and special districts is redirected to schools and community colleges. The use of ERAF benefits the state by lowering the amount of state General Fund money that must be provided to school districts and community college districts as part of the Prop 98 guarantee. When local ERAF revenue is more than enough to offset General Fund moneys it creates “excess ERAF.” Some of the excess ERAF goes to specific special education programs, with the remainder being then allocated back to the counties, cities, and special districts.

When the LAO report was issued, the Department of Finance (“DOF”) became concerned because the amount of excess ERAF reported by the five counties was increasing rapidly. At that time, the LAO estimated it was costing the state millions to back-fill that lower property tax allocation to schools. As part of the 2020–21 May Revision, DOF prepared trailer bill language giving itself the authority to ensure the calculation was done properly and allowing it to impose civil fines on counties that did not comply. The counties lobbied against the bill, arguing that the existing statutes were unclear, that the SCO had never identified a problem with the calculations, and that DOF was trying to usurp the role of the SCO.

Eventually a compromise was reached, and the trailer bill language was amended in June 2020 to require the SCO to issue guidance telling counties how to calculate their excess ERAF. The trailer bill deemed the ERAF calculations for fiscal years prior to and including 2018–19 as final, even if they had excluded charter school ADA, but Prop 98 calculations for 2019–20 and beyond remained subject to final validation. However, when the SCO issued its guidance in February 2021, despite protests from DOF, the counties were allowed to continue excluding charter school ADA from the excess ERAF calculations. As a result, the 2021–22 May Revision included “property tax decreases of $283 million in 2019–20, $298 million in 2020–21, and $315.9 million in 2020–21, related to recent State Controller’s Office guidance on counties’ calculation of local excess Educational Revenue Augmentation Fund.” The SCO’s stated rationale for the guidance is that the applicable Revenue and Tax Code provisions concerning property tax allocations, which pre-date charter schools, speak only of “school districts” and do not expressly include charter schools.

The guidance issued by the SCO was clearly contrary to the Legislature’s intent and in conflict with DOF’s three-year budget projections, which had included the property taxes generated by the ADA from all schools — including charter schools — in the five counties.

On May 27, 2021, CSBA and the ELA filed a letter with DOF and the Joint Legislative Budget Committee formally objecting to DOF’s certification of Prop 98 for the 2019–20 budget year. Following guidance from the SCO, DOF rejected CSBA’s objection on June 30, 2021.

CURRENT STATUS AND/OR OUTCOME:

On July 15, 2021, CSBA and the ELA filed a Writ of Mandate and Complaint for Declaratory and Injunctive Relief against State Controller Betty Yee regarding the ERAF and calculation of Prop 98 beginning with the 2019–20 budget year.

The writ asks the court to issue a declaratory judgment finding that the State Controller must issue guidance to county auditors requiring that they include charter school ADA in their ERAF and excess ERAF calculations, and finding that the State Controller’s February 16, 2021, guidance is unlawful and violates the California Constitution’s minimum funding guarantee. CSBA is requesting the court issue a permanent injunction enjoining the State Controller from enforcing the February 16, 2021 guidance from the 2019–20 fiscal year and forward, and asking the court to issue a Writ of Mandate requiring the State Controller to issue a revised guidance that requires county auditors to include charter school ADA in their ERAF and excess ERAF calculations and order counties to comply with the revised guidance.

The counties are intervening in the case based on their stake in the outcome.

“Due to erroneous and misguided direction from the State Controller, it’s not just schools in the involved counties that suffer. Not including charter school ADA in the ERAF calculation clearly violated the spirit of the hold harmless agreement and the vision in 2020–21 budget projections that included ERAF property taxes with charter school ADA.”

Dr. Susan Heredia,
CSBA President,
Natomas USD

“Due to erroneous and misguided direction from the State Controller, it’s not just schools in the involved counties that suffer. Not including charter school ADA in the ERAF calculation clearly violated the spirit of the hold harmless agreement and the vision in 2020–21 budget projections that included ERAF property taxes with charter school ADA.”

Dr. Susan Heredia,
CSBA President,
Natomas USD