Legislative Analyst’s Office predicts further budget downturn for Proposition 98 Guarantee

Gov. Gavin Newsom’s January Budget Proposal estimates that the Proposition 98 Guarantee will drop by $1.5 billion for the 2023–24 fiscal year. The state’s nonpartisan Legislative Analyst’s Office (LAO) thinks that figure is a bit optimistic and estimates the guarantee will end up about $2 billion below the 2022–23 allocation.

“Despite the lower estimates of the guarantee, the Governor’s budget has about $5.2 billion available for new K‑12 spending. This funding is due to lower baseline costs for the Local Control Funding Formula and the expiration of various one‑time grants funded in the June 2022 budget,” according to the report, The 2023–24 Budget: Proposition 98 Overview and K-12 Spending Plan.

Prop 98 Guarantee

The Newsom Administration currently estimates that the minimum Prop 98 Guarantee will be $108.8 billion, which includes $690 million ongoing to support the implementation of universal transitional kindergarten.

“Under the Administration’s estimates, the Proposition 98 Guarantee would increase by an average of 3.9 percent per year from 2023–24 through 2026–27. By 2026–27, the guarantee would grow to $122.2 billion, an increase of $13.4 billion over the 2023–24 level. Of this increase, $9.9 billion (74 percent) is attributable to growth in the General Fund portion of the guarantee and $3.5 billion (26 percent) is attributable to growth in local property tax revenue,” according to the report.

With about $5.2 billion available in new Prop 98 spending, the Governor’s proposal has four basic components:

  • New ongoing increases for LCFF totaling $5.3 billion
  • Other ongoing spending proposals totaling $746 million
    • includes $300 million the new LCFF Equity Multiplier, which would be allocated for school sites with especially high shares of students who qualify for free and reduced-price meals under the federal nutrition program
  • New one‑time spending proposals totaling $376 million
  • Proposed reduction of $1.2 billion to the Arts, Music, and Instructional Materials Discretionary Block Grant

With the LCFF cost-of-living adjustment (COLA) for 2023–24 estimated at $8.13 percent, the Governor’s budget proposes to use $1.4 billion in one‑time funds to cover these costs. The report notes that the economic forecast predicts that COLA for future years will be much lower, with the statutory COLA rate for 2024–25 estimated at 3.54 percent.

LAO analysis and recommendations      

The LAO predicts that the statutory COLA for 2023–24 will rise to 8.4 percent by May, when Gov. Newsom presents his Budget Revision. “Covering this higher rate would increase ongoing costs for LCFF and other K‑12 programs by approximately $220 million (relative to the Governor’s budget). The state will be able to finalize its calculation of the statutory rate on April 27 when the federal government releases the final quarter of data used to calculate the 2023–24 COLA,” according to the report.

The LAO cautions against using one-time funds to cover ongoing Prop 98 costs, as in the current plan. The analyst said that Prop 98 Guarantee would need to grow by at least $1.4 billion in 2024–25 to cover the portion of LCFF paid with one‑time funds in 2023–24. The office is also concerned that the growth in the guaranteed might not be enough to support a full COLA in the following year.

Potential solutions for consideration offered by the LAO for the 2023–24 budget include:

  • Eliminating one-time funds and restoring funding to the Arts, Music, and Instructional Materials Discretionary Block Grant
  • Maintaining the current proposed COLA rate, even if the rate is higher by May
  • Delaying the Equity Multiplier proposal
  • Considering reductions to the Expanded Learning Opportunities Program, options include:
    • No longer assuming 100 percent participation. Assuming 90 percent participation would reduce costs by about $400 million
    • Reducing district allocation to account for other funding streams, namely the After School Education and Safety program and 21st Century Community Learning Centers
  • Reductions to State Preschool Program, including:
    • Eliminating funding for unused slots
    • Ensuring total budgeted amounts are aligned with costs of providers