School Funding — Educational Revenue Augmentation Fund

SCHOOL FUNDING — EDUCATIONAL REVENUE AUGMENTATION FUND

CSBA v. Betty Yee – California Court of Appeal for the Third District (Case No. C096838)

MEMBER(S) INVOLVED: 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 state’s 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. School districts and COEs throughout the state have lost out on Proposition 98 funding as a result of miscalculation of “excess ERAF” in five counties, resulting in nearly $1 billion in lost Prop 98 funding and potential future losses.

SUMMARY OF THE CASE:

On July 15, 2021, CSBA’s 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 (the primary funding source for most California schools) beginning with the 2019–20 budget year. The suit aimed to capture nearly $1 billion in Prop 98 funding that was lost due to improper calculation of property taxes owed to school districts from five Bay Area counties. Three of the five counties intervened in the case.

The ERAF 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. In connection with the writ, CSBA filed a letter with the Department of Finance (DOF) and the Joint Legislative Budget Committee on May 27, 2021, formally objecting to the DOF’s certification of Prop 98 for the 2019–20 budget year. The DOF rejected CSBA’s objection on June 30, 2021.

There are five counties in California that generate “excess ERAF” because the property tax calculations done in each of those counties results in more revenues being deposited into ERAF than schools would otherwise receive. Any excess ERAF is first allocated to fund some special education programs in the county and the rest is shifted by the County Auditor back to the county, cities and special districts.

According to a March 2020 report by the Legislative Analyst’s Office (LAO), sometime before the 2019–20 fiscal year, the counties of Marin, Napa, Santa Clara and San Mateo and the city and county of San Francisco began excluding charter school average daily attendance (ADA) in their ERAF calculations. This decision generated additional excess ERAF and reduced the amount of property taxes allocated to school districts and community college districts in those counties, with the funds redirected back to counties, cities and special districts. Because of the counties’ calculations, for 2019–20, schools received approximately $283 million less than they should have; for 2020–21, they received $298 million less; and for 2021–22, they received $315.9 million less. This will continue to result in an ongoing loss if not corrected.

In response to the LAO report, the Legislature reached a compromise with the five counties during the 2020–21 budget process. In return for holding the counties harmless for their miscalculation of ERAF in prior years, Senate Bill 98 required the State Controller to issue a guidance regarding the calculation of ERAF and provided that the State Controller could take legal action against the counties if they did not follow the guidance. The 2020–21 State Budget was adopted assuming the issue would be corrected, and the state originally calculated a higher Prop 98 Guarantee.

Contrary to this compromise, the State Controller’s guidance, issued on Feb. 16, 2021, erroneously directed counties to continue excluding charter school ADA from the ERAF calculation. The State Controller’s rationale for the guidance was that the applicable Revenue and Taxation Code sections relating to the ERAF refer only to school districts and not to charter schools. However, charter school ADA is not excluded from Prop 98 or property tax revenue for any other purpose. While school districts receive property taxes directly, a charter school’s share of property taxes is first received by the school district and then “passed through” to the charter school in amounts usually proportionate to its share of students in the district. The guidance issued by the State Controller was clearly contrary to the Legislature’s intent and in conflict with the 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.

CSBA asked 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 Feb. 16, 2021, guidance is unlawful and violates the California Constitution’s minimum funding guarantee. CSBA also requested the court issue a permanent injunction enjoining the State Controller from enforcing the Feb. 16, 2021, guidance from the 2019–20 fiscal year forward. In October, three of the five counties — Marin, San Francisco and Santa Clara — intervened in the case. Defendant/Respondents Betty Yee and the State of California filed an answer to the petition on Dec. 20, 2021. The answer denied any wrongdoing and states that the Controller acted in good faith and within the discretionary authority of her official functions by issuing the guidance. The parties filed their briefs thereafter.

CURRENT STATUS AND/OR OUTCOME:

On June 8, 2022, Sacramento County Superior Court Judge Stacy Boulware Eurie denied CSBA’s Writ of Mandate and Complaint for Declaratory and Injunctive Relief.

On Aug. 18, 2022, CSBA filed a Notice of Appeal to the Third District Court of Appeal. After briefing and oral argument, on July 31, 2023, the Court of Appeal issued a decision denying CSBA’s appeal. The decision, which is an unpublished decision with no precedential effect, found that the plain language of the Revenue and Taxation Code provisions “do not specifically mention charter schools in discussing the calculation or allocation of excess ERAF.” The court was not persuaded by the ELA’s argument that Education Code provisions that deem a charter school a “school district” for Proposition 98 should apply to the ERAF analysis. Specifically, the court stated that the Legislature determined that charter schools would receive property tax funding in a “different way,” through in lieu property taxes from school districts instead of directly. As a result, the court held that the Legislative intent was to treat ERAF and charter schools differently than it treats school districts.

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