Copyright© 1999 by School Services of California, Inc.

December 3, 1999

Ask SSC. . .

2000-01 Projected to be a Good "Test 3" Year

Q. I recently heard a representative of the Legislative Analyst's Office (LAO) talk about the State Budget and how 2000-01 will be a Proposition 98 "Test 3" year. I always thought that "Test 3" years were bad years, yet the recent LAO's forecast indicates good news for 2000-01. What am I missing?

A. What you're missing is the possibility that school funding could be pretty good even in a "Test 3" year.

In order to explain this, it is necessary to start with a clear understanding of the difference between the Proposition 98 formulas known as "Test 2" and "Test 3." Under both of these tests, the Proposition 98 minimum funding level for K-14 school agencies in one year is equal to the amount of state and local funding in the prior year, with adjustments for both statewide ADA growth and inflation. The only difference between these two tests is that:

• Under "Test 2," the adjustment for inflation is based upon the percentage change in per capita personal income. For use in 2000-01, the change in personal income is measured from the fourth quarter of 1998 to the fourth quarter of 1999.
  
• Under "Test 3," the inflation increase is based upon the percentage change in state General Fund tax revenues per capita plus an extra ½%. For use in 2000-01, this factor is based upon the change in state taxes from 1999-00 to 2000-01.

A major reason for 2000-01 being a "Test 3" year is simply the difference in when these factors are measured. The LAO reports that the fourth quarter of 1999 is a period of very strong economic activity, and the "Test 2" factor for 2000-01, which measures the percentage change in per capita personal income from the prior year, is estimated to be 4.5%. And while the LAO forecasts a huge jump in state taxes during 1999-00, it projects a slowing of tax growth in 2000-01, resulting in the "Test 3" inflation factor being projected to be 4.15% for 2000-01.

Thus, while 2000-01 is projected to be a "Test 3" year, Proposition 98 funding would still grow by an estimated 4.15% per ADA. Of course, if state tax revenues are high enough to keep us on the "Test 2" formula, Proposition 98 funding per ADA would grow instead by 4.5%, yielding about $150 million more in 2000-01.

It should be kept in mind that the LAO's forecast also included the projection that the state's reserve will be $3 billion at the end of the 2000-01 fiscal year. Unlike the recession years of the early 1990s, the state could certainly afford to provide $150 million more than the Proposition 98 minimum in 2000-01, thereby avoiding this "Test 3" scenario altogether.

-- Paul Goldfinger