Copyright© 2007 by School Services of California, Inc.

                                      Volume 20                   For Publication Date: February 16, 2007             No. 4

Ask SSC . . .

Will Lower State Taxes Cut Proposition 98 Funding in 2007-08? 

Q.        I’m very concerned about the reports that state tax collections are falling short of budget projections? Will that cut Proposition 98 funding in 2007-08? 

A.        The bottom line is, we don’t know yet. The Proposition 98 minimum funding level depends on a series of factors, including the change in statewide ADA, growth in personal income, and state tax collections. It’s not just the level of state tax collections in a given year, but rather the change in state tax collections from one year to the next that is used in two places in the Proposition 98 formulas. The “Test 3” formula comes into play when the change in state tax collections per capita is less than the change in personal income per capita—and this usually happens in times of economic weakness. On the other hand, the Maintenance Factor formula requires the restoration of any past funding shortfalls in years when the change in state tax collections per capita is greater than the change in personal income per capita. 

Since only the change from one year to the next is used in both of these calculations, weird results can occur. For example, suppose that, as current reports indicate, state tax collections for 2006-07 come in below budget estimates. Then suppose that the economy picks up and state tax collections for 2007-08 are exactly as projected by the Governor. In that case, the change from 2006-07 to 2007-08 becomes higher, and the Proposition 98 minimum funding level for 2007-08 will be up to $310 million higher than the Governor estimated as the remaining Maintenance Factor amount is restored. 

But, of course, things will look very different if 2007-08 state tax revenues are also lower than the Governor projected. We’ll just have to wait until the May Revise to see the projected changes in both 2006-07 and 2007-08 state tax revenues to get the whole picture. 

—Paul Goldfinger