CSBA files objection to Proposition 98 certification due to miscalculation of ERAF

CSBA filed a letter with the Department of Finance and the Joint Legislative Budget Committee on May 27, 2021, formally objecting to DOF’s certification of Proposition 98 for the 2019–20 budget year. CSBA’s objection is based on the ground that the certification underestimates the constitutionally required funding level for K-14 education because it incorporates improperly undercalculated property tax revenues owed to school districts in the Educational Revenue Augmentation Fund (ERAF). As a result of the miscalculation, the Proposition 98 minimum guarantee has been undercalculated by approximately $283 million in 2019–20, $298 million in 2020–21 and $315.9 million in 2021–22. CSBA’s objection addresses the miscalculation for the 2019–20 budget year.

The ERAF was implemented by statute in 1992 to shift from the state’s General Fund to local property taxpayers some of the obligation to meet the constitutional minimum funding guarantee in Proposition 98 for K-14 education. By creating ERAF, the Legislature redirected approximately one-fifth of property taxes statewide from cities, counties and special districts to school districts and community college districts. By dedicating these local property tax dollars to schools, the state has been able to reduce pressure on the state General Fund.

Critically, when the Proposition 98 guarantee is in a Test 1 year and ERAF is undercalculated, the Proposition 98 minimum guarantee is reduced on a dollar-for-dollar basis because it decreases the amount of property taxes allocated to school districts and community college districts, which along with the state’s General Fund allocation, set the constitutional guarantee. For example, during Test 1 years, which the state is currently in and has been in eight out of the last ten years, school districts receive a set percentage of General Fund revenues (38 percent) plus local allocated property tax revenues. As a result, any reduction in property taxes directed to ERAF has a dollar-for-dollar impact on the Proposition 98 guarantee. But when ERAF was created, the guarantee was in a Test 2 year, which allowed the state General Fund to benefit from the additional property tax allocations to schools.  Regardless of which test applies, however, under-allocating the minimum guarantee will permanently decrease the guarantee in all the years to follow.

Excess ERAF

Five counties in California have “excess ERAF” because the 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, sometime before the 2019–20 fiscal year, the counties of Marin, Napa, Santa Clara, San Mateo and the City and County of San Francisco began excluding charter school average daily attendance in their ERAF calculations, thus increasing excess ERAF, which reduced the amount of property taxes allocated to school districts and community college districts in their counties.

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, the counties would include charter school ADA in their ERAF calculations beginning with the 2019–20 fiscal year. The compromise set forth in 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.

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 Codes relating to ERAF refer only to school districts and not to charter schools. However, charter school ADA is not excluded from Proposition 98 or property tax revenue for any other purpose. Unlike school districts that 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.

Importantly, the Legislature and Governor assumed that the State Controller’s guidance would require the five counties to include charter school ADA in their ERAF calculations and built those increased amounts into the budget. As a result of the Controller’s guidance, however, the 2021 budget now has to revise those assumptions.  Accordingly, the K-12 budget summary for the 2021 May Revision explains a projected reduction in the minimum guarantee: “These funding levels include property tax decreases of $283 million in 2019–20, $298 million in 2020–21, and $315.9 million in [2021–22], related to recent State Controller’s guidance on counties’ calculation of local excess Educational Revenue Augmentation Fund.”

The guidance issued by the State Controller was clearly in contravention of 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. Clearly, the 2020–21 budget projections had included ERAF property taxes with charter school ADA in exchange for holding the five counties harmless for their years of improperly redirecting ERAF funds from K-14 districts to the county, to the cities and special districts in the county. Why else would the Legislature have expressly included a hold harmless provision for prior year undercalculations, and provided for a method of enforcement against these five counties by the State Controller if it intended the Controller’s guidance would only maintain the status quo?

In addition to objecting to the 2019–20 Proposition 98 funding certification, CSBA and its Education Legal Alliance is considering a legal challenge to the guidance issued by the State Controller. CSBA’s legal and legislative advocacy departments are also working together, along with the Education Coalition, a statewide coalition comprised of nine education associations, to craft a legislative solution that would fulfill the Legislature’s intent and correct the State Controller’s erroneous guidance.