Revenue limits have been the integral feature of school finance in California since the early 1970s. Most practitioners and policy analysts are well aware of how revenue limits are calculated each year by bringing forward the base revenue limit of the prior year and adding an inflation increase.

Frequently, we get questions about why there are variances in revenue limits. Common questions include, "Why is my district’s revenue limit below the statewide average?" or, "Why is this other district’s revenue limit so much higher than mine?"

The following history of revenue limits was written in response to these questions, and this history focuses on how revenue limits have been used to equalize school funding. This history starts with the 1972-73 revenues that formed the basis for the initial revenue limit calculation, and explains how a differential inflation increase (also known as the "squeeze factor") and massive amounts of equalization aid have resulted in substantial equalization over time. Also, this material highlights the major transition points when the calculation of revenue limits involved factors other than just the annual cost-of-living adjustment (COLA) – that is, times when the base revenue limits for some districts grew much faster than others, resulting in the revenue limits for some districts leapfrogging over others.

SB 90 – The Beginning of Revenue Limits

Revenue limits were established by SB 90 (Chapter 1406/1972), largely in response to the initial 1971 State Supreme Court ruling in the Serrano vs. Priest equalization lawsuit.

Since their inception in 1973-74, revenue limits have had two components:

1. The major component is the base revenue limit – a basic education amount per unit of average daily attendance (ADA); and
2. The other component consists of a number of revenue limit adjustments that recognize specific needs, such as adjustments for unemployment insurance, necessary small schools, and summer school funding.

The original 1973-74 base revenue limit was set equal to: (1) a district’s total 1972-73 general purpose revenues – that is, unrestricted state aid and local property taxes – divided by the district’s 1972-73 ADA, plus (2) an adjustment for inflation. Because of huge differences in the assessed value behind each pupil, as well as differences in property tax rates, initial base revenue limits per ADA varied enormously. In fact, the highest funded districts generated three or four times as much per pupil as the lowest funded districts.

SB 90 sought to equalize these differences over time, primarily through a differential inflation increase that provided a larger dollar increase for low-revenue districts than for high-revenue districts. Additionally, in the early years of the SB 90 formulas, the lowest revenue districts were allowed increases of up to 15% per year. Through these formulas, low-revenue districts had their base revenue limits "leveled up" toward the statewide average and high-revenue districts were "leveled down" since they received a COLA significantly less than the real inflation increase. The "leveling down" of high-revenue districts toward the statewide average became known as the "squeeze formula" since it restricted (squeezed) the growth rate of high-revenue districts.

However, in the early years of revenue limits, there was also a statutory provision that allowed districts to increase their revenue limit income through a voted override. A number of school districts – primarily those adversely affected by the squeeze formula – were able to get these voted revenue limit increases approved, a process that required only a majority vote of the electorate in the years before Proposition 13.

The 1974 Serrano Decision

The Serrano case was heard at the Superior Court level in a trial that began in December 1972 – just weeks after SB 90 was enacted. In his 1974 decision, Judge Jefferson ruled that, while SB 90 was a step in the right direction, it did not equalize education funding either sufficiently or fast enough. As part of his decision, Judge Jefferson established the guideline that the state’s school finance system should reduce "wealth-related disparities" [that is, differences in funding due to differences in taxable wealth] to "amounts considerably less than $100 per pupil."

Proposition 13

After the State Supreme Court upheld in 1976 the lower-court decision in Serrano, the state enacted a very comprehensive package of equalization formulas in 1977. But literally weeks before these new formulas were to take effect for the 1978-79 school year, Proposition 13 was enacted in June 1978.

In recognition of the huge cut in statewide property taxes required by Proposition 13, the state imposed funding cuts on all local governments, including school agencies. In 1978-79, the initial year after the passage of Proposition 13, school funding was cut by amounts ranging from 9% for low-funded agencies to 15% for the highest funded agencies. However, the state cushioned these cuts by allowing school agencies to continue to get credit for two prior funding sources that were discontinued.

Prior to Proposition 13, school districts were allowed to levy what were known as permissive override taxes – additional property tax levies for a select number of purposes authorized by state law that required only governing board permission to implement. Under the post-Proposition 13 formulas, districts that had levied permissive overrides in 1977-78, such as for child development, community services, or for certain state school loan repayments, were allowed to permanently fold the dollar amount from the permissive tax collections into their base revenue limit as an amount per ADA.

Additionally, in the wake of Proposition 13, the state discontinued most summer school programs and dramatically curtailed adult education programs. But school districts were allowed to calculate the revenue loss from these discontinued programs and add that as well, as an amount per ADA, to their base revenue limit. Since this additional funding was for ADA that was no longer served, it became known as funding for "phantom ADA."

As a result of the 9-15% cut, along with the add-ons for permissive override taxes and phantom ADA, base revenue limits were radically changed in the wake of Proposition 13. Two districts that previously had identical revenue limits per ADA in 1977-78 could have wound up with very different base revenue limits starting in 1978-79. Proposition 13 thus precipitated the first "discontinuity" in the history of revenue limits.

As noted above, the Serrano court not only found differences in K-12 funding to be objectionable, but also differences in property tax rates. Clearly, Proposition 13 instantly equalized total property tax rates statewide.

Squeeze Formula Continued through 1981-82

From 1979-80 through 1981-82, the state continued to equalize the post-Proposition 13 revenue limits through the squeeze formula. In fact, the squeeze formula was modified in these years to provide even more rapid revenue limit equalization.

There was no revenue limit squeeze factor operative in 1982-83, since there was no inflation increase in that recession year. In lieu of a COLA, the 1982-83 State Budget provided school districts with a flat inflation adjustment of $11.90 per ADA (an inflation increase of less than 7/10 of 1%). But as an added protection, school districts also received a "100% guarantee" in that year.

Under this 100% guarantee, school districts with declining enrollment in 1982-83 continued to receive the same total revenue limit dollars as they had in the prior year. This type of a minimum guarantee was not unique to 1982-83. The state provided a 102% guarantee – that is a guarantee of at least a 2% increase in total revenue limit – in each year from 1979-80 through 1981-82. Clearly, this was of tremendous benefit to the many districts with declining enrollment at that time.

Two events of significance happened in 1983. First, the Serrano case was back in court, but this time the court ruled that the state was in compliance with the Serrano standard. Key to this 1983 decision was Superior Court Judge Lester Olsen’s ruling that the previously established Serrano compliance standard of a $100 range must be adjusted for inflation. As a result of this decision, 93.2% of the statewide total ADA were in school districts that had revenue limits within the allowable range in 1982-83. Judge Olsen then concluded that having only 6.8% of pupils outside this range was not a significant disparity.

The second major event in 1983 was the enactment of SB 813 (Chapter 498/1983), the landmark school finance and school reform bill. The following features of SB 813 are relevant to the history of revenue limits:

• SB 813 folded the benefit that a district received from the 100% minimum revenue guarantee in 1982-83 into its base revenue limit in 1983-84. As noted above, the 100% minimum revenue guarantee in 1982-83, along with the 102% guarantee in prior years, protected the total revenue limit for declining enrollment districts. As a result of this provision of SB 813, districts that had been declining in 1982-83 – or, for that matter, had been declining consistently from 1979-80 through 1982-83 – received additional funds that were folded into the revenue limit as an amount per ADA, while growing districts received no comparable adjustment. The folding in of the extra revenues from the minimum guarantee resulted in the second major discontinuity in revenue limits.

• In the wake of Judge Olsen’s decision in the Serrano case, which ruled that the state was in compliance with the Serrano mandate, SB 813 ended the revenue-limit squeeze factor. Beginning in 1983-84, all districts of the same type – elementary, high school, or unified – received the same dollar inflation increase.

High-revenue districts still feel some squeeze, however, since the dollar amount of the annual inflation increase is equal to the annual COLA percentage times the prior year statewide average base revenue limit for each type of district. And, for a high-revenue district, this dollar amount is a smaller percentage increase than for a district at the average. Another way of looking at this is that a high-revenue-limit district will receive the same inflation increase as a district at the average, and so will maintain its dollar differential above the average. But the purchasing power of that differential will diminish over time due to the impact of inflation.

• SB 813 also implemented the longer day, longer year, and minimum teacher salary reform programs. All three of these programs were operated on an incentive basis. Participating districts received funding as a total dollar amount in one year, and then that amount was folded into the district’s base revenue limit per ADA in the subsequent years to provide an ongoing revenue stream. Virtually all districts fully participated in the longer day and longer year programs, and so received comparable base revenue limit add-ons per ADA for these two programs. But the minimum teacher salary program was quite different, with some districts receiving very high add-ons per ADA, and other districts choosing not to participate in the program. This is another reason why the base revenue limit for some districts is higher than others.

• Finally, SB 813 implemented for the first time full revenue limit equalization, where districts with below-average base revenue limits in 1983-84 had their revenue limits raised to the statewide average in 1984-85.

Although the state was found to be in compliance with Serrano in 1983, the state continued to recognize the importance of equalization by providing partial equalization aid in 1985-86 and 1986-87 and again in 1989-90. In each of these three years, the state appropriated a specific dollar amount for equalization that was less than the cost of raising all low-funded districts to the average. In these years, equalization aid was prorated, and all below-average districts received the same proportion of the distance to the average. In 1985-86, for example, a district that was $50 per ADA below the average would have received only about 20% of that amount, or about $10. Similarly, about 20% of equalization aid entitlements were funded in 1986-87 and about 54% of equalization aid entitlements were funded in 1989-90.

A more recent series of equalization efforts began in 1995-96. In that year, the state again provided equalization aid to bring all below-average districts to the statewide average. And, in 1996-97, the state funded three "rounds" of equalization aid for low-revenue limit districts. Under this process that was unique to 1996-97, the state brought all low-revenue limit districts up to the statewide average in the first round of equalization aid, recomputed the statewide average, provided a second round of equalization aid using this recomputed average, and repeated this process yet a third time.

By the time the three rounds of equalization aid were completed, 97.9% of the pupils in the state were within the allowable Serrano range – the original $100 standard, adjusted for inflation, or $324 in 1997-98. Furthermore, over 90% of the pupils in the state were in school districts that were only minimally below the statewide average. The lowest funded elementary districts were only about $40 per ADA below the average, and the lowest funded high school and unified districts were no more than $20 per ADA below the average. While fewer than 10% of the ADA were in above-average districts, these districts ranged from just $1 above the average to as much as several hundred dollars (or more) above the average.

A funny thing happens when the state provides equalization aid to raise all low-revenue districts up to the statewide average. Those low-revenue districts wind up below the statewide average the very next year!

This seeming contradiction can be explained by the following example. For simplicity, consider that the universe of school districts in California consisted of only three school districts of the same size, one with a base revenue limit of $1,700 per ADA, one at $2,000 per ADA, and one at $2,300 per ADA. In this case, the statewide average would be $2,000 per ADA. By providing equalization aid – that is by allocating an additional $300 per ADA to the low-revenue district to bring it up to the statewide average, two districts are now at $2,000 – the former statewide average. Clearly, the statewide average can no longer be $2,000 – it must be higher than that.

In fact, the statewide average has grown by the average amount of equalization aid – $100 per ADA in this example, and so the new statewide average is $2,100 per ADA. As indicated, since the average increased, the district that was brought up to the average before is now again below the average, and so is the district that was previously at the average.

Because of the way equalization aid has been calculated that is, based upon the recomputed average each year, allocating equalization aid has been likened to a dog chasing its tail. The state will never fully equalize revenue limits until all low-revenue districts have been leveled up to that of the very highest revenue limit district in the state – a process that will take an infinite time.

Another point to be made about equalization concerns the SB 813 reform add-ons to the revenue limit for the longer day, longer year, and minimum teacher salary programs. Since not all districts participated in the longer day and longer year program, and many districts did not participate in the minimum teacher salary program, the state felt it was inappropriate to level low-revenue districts up to the statewide average base revenue limit including those add-ons. After all, if a low-revenue district did not participate in these programs, but received equalization aid up to the statewide average – which would include the average funding for these reform programs – it would receive a windfall through equalization aid it did not deserve.

For this reason, whenever the state has calculated equalization aid since SB 813, it compares a district’s base revenue limit after subtracting these reform add-ons to the comparable statewide average. But while this process has eliminated the possibility for a district getting a windfall for these reform programs, it also means that equalization does not result in equal revenue limits. Two districts of the same size and type, but which have historically different add-ons per ADA for the longer day, longer year, and minimum teacher salary programs, would have been leveled up to the same statewide average through the equalization process. But when the reform add-ons are added back on top of this average, the districts will still have different revenue limits.

One final point to make about equalization is that the state has recognized not only separate statewide averages for the three types of districts – elementary, high school, and unified – but has also recognized different averages for large and small districts. The dividing line between large and small districts is 100 ADA for elementary districts, 300 ADA for high school districts, and 1,500 ADA for unified districts.

SB 727 – Rebenching to Offset Loss of Excused Absences

Effective 1998-99, average daily attendance counts no longer include excused absences. In recognition of this change, SB 727 (Chapter 855/1997) increased base revenue limits to offset the exclusion of excused absences. In simplest terms, each school district’s base revenue limit was increased by the ratio of its 1996-97 ADA including excused absences to 1996-97 ADA excluding excused absences. For example, consider a district that had 1,000 ADA in 1996-97 and which had an excused absence rate of 5%, so that 50 ADA were from excused absences. This district’s ratio would be 1,000/950 – making the change revenue neutral – since the new base revenue limit times 950 ADA yields the same amount as the former rate times 1,000 ADA.

In future years, a district would not lose any money if it maintained the same excused absence rate as it had in 1996-97. And, most importantly, if a school district were able to reduce its excused absence rate by increasing actual attendance, it would generate more funding.

Clearly, the SB 727 adjustments to base revenue limits represent another discontinuity. Two districts that had the same base revenue limit before this adjustment, but very different excused absence rates in 1996-97, wound up with very different base revenue limits. And as a result, the tight grouping of base revenue limits that was achieved in the mid-90s through successive rounds of equalization was blown up by the application of adjustment factors ranging from below 3% to more than 7%.

Additionally, the SB 727 adjustments had a dramatic change in which districts were above or below the statewide average. Many districts that were previously slightly below the statewide average base revenue limit, but which had high excused absence rates, now have above-average base revenue limits, and vice versa.

Thus, solely because of its 1996-97 excused absence rate, many districts that previously were deemed to have low funding – and which received equalization aid time after time in the past – are now shown as having above-average funding. Conversely, a district that had a base revenue limit slightly above the average in the past, but which had a low excused absence rate in 1996-97, will now find itself below the statewide average. In fact, the percentage of ADA in the state in school districts with below-average base revenue limits dropped from 90% in 1997-98 to only about 66% in 1998-99.

The following table shows how six unified districts that had essentially equal base revenue limits before SB 727 now have widely varying base revenue limits.

In the wake of SB 727, if equalization aid is allocated in the future to districts with below-average revenue limits, it will benefit a whole new set of school districts – generally those that had a low percentage of excused absences in 1996-97. On the other hand, as noted above, many school districts that were historically below average and received equalization aid in the past would not benefit from future equalization aid.

School District Reorganization

Another reason why a school district’s revenue limit may be above average is school district reorganization. Under current law, when school districts merge, the base revenue limit of the newly reorganized district is equal to the sum of: (1) the weighted average of the base revenue limits of the component districts; and, (2) an add-on based upon the differential in average costs for salaries and benefits of the component districts. The weighted average calculation is revenue neutral and does not yield any new money. But the add-ons for salary and benefit differentials do represent new money and could result in the base revenue limit of a newly reorganized district exceeding the statewide average – even if all of the component districts had base revenue limits below the average. Note that this add-on for salary and benefit differentials cannot exceed 10% of the weighted average base revenue limit.

In the late 1980s, a number of districts took advantage of what was a loophole in state law to wind up with extremely high base revenue limits as a result of reorganization. At that time, a very small district with an extremely high base revenue limit was allowed to "annex" a much larger neighboring district, with the revenue limit of the combined district raised to the high level of the tiny district. As a result of this process, a handful of sizable districts now have extremely high base revenue limits. This process was discontinued after 1989, as a result of a change in law.

No discussion of school district equalization would be complete without an explanation of basic aid. Under the state constitution, each school district must receive minimum state funding of $120 per ADA or $2,400 per school district, whichever is greater. This constitutionally guaranteed minimum amount of state aid is called "basic aid." Some school districts receive sufficient property tax revenue that, when combined with basic aid, actually exceeds their computed revenue limit, and these districts are called "basic aid districts."

The following points should be made about basic aid districts:

• While there were 53 basic aid districts in 1998-99, together they comprised less than 2% of the statewide ADA – a smaller percentage than the Serrano court deemed to be not significant. Most of these are very small districts.

• Basic aid districts receive only property taxes from the secured roll and unsecured roll. They do not receive any property taxes from the supplemental secured roll, nor do they receive any of the property taxes shifted from local governments (known as Education Revenue Augmentation Fund, or ERAF revenues).

• While the perception is that basic aid districts all have very high funding levels, this is not the case. One district received less than $8 per ADA extra from being basic aid in 1998-99, while a number of others received only about 1% extra. Some districts with below-average funding are basic aid, with their low revenue limits fully paid for by property taxes.
• The extra property taxes retained by basic aid districts – that is, the amount in excess of their computed revenue limit--does not count towards the Proposition 98 funding. If these property taxes were redistributed to other districts, two things would happen. First, the educational programs in the affected districts would suffer significant cuts. Second, under current law, these property taxes would merely offset state aid under the Proposition 98 formulas, resulting in no additional funding for other districts.

Clearly, some of the changes to revenue limits were dis-equalizing. This paper discussed the changes made in 1978-79 in the wake of Proposition 13, the fold-in of the minimum guarantee in 1983-84, the differences in longer day/year and minimum teachers’ salary add-ons in the mid-1980s, and the adjustment to offset the loss of excused absences, which became effective in 1998-99. But there were several other adjustments that also had a differential impact: (1) the ability to fund transportation encroachment by pulling dollars out of a district’s base revenue limit (1981-82); (2) the fold-in of funding for the small district transportation allowance (1988-99) and for Urban Aid and Meade Aid (1989-90); and (3) the ability to fold some or all of a district’s Supplemental Grant into the base revenue limit (1995-96).

Overall, however, the state has certainly come a long way in terms of equalizing revenue limit from the early 1970s. Whereas some school districts had three times the funding per ADA of others before revenue limits, the "squeeze formula" and more recent equalization efforts have resulted in the vast majority of school districts being within 3% of each other today.

Of course, some districts still receive more than others do. And it is true that a handful of districts receive $500 or more per ADA in revenue limit funding in excess of their peers. But the percentage of statewide ADA in districts that have such a large financial advantage is miniscule – only about 1% of statewide ADA.

Perhaps even more important than further efforts to equalize funding is to increase the adequacy of funding for all districts. In that way, instead of envying the handful of California districts with the highest funding levels, we will be ranked with the many states in the country where typical funding levels are even higher.

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