When Do Increases in Local Property Tax Revenues Help the State’s General Fund? 

Many Californians believe that most support for public education, including K-12 schools, comes from local property tax revenues. However, this is not the case. Proposition 98 — the state’s minimum funding guarantee for K-12 schools and community colleges — uses two revenue sources to fulfill the state’s constitutional funding requirement for K-14 education: local property tax revenues and state General Fund revenues. In most years, Prop. 98 requires the state to step in and provide General Fund dollars to K-14 education so that state and local revenues combined reach a minimum funding level. Put another way, after K-12 school districts receive local property tax revenues, the state provides the remaining amount of funding needed to fulfill the state’s minimum funding obligation under Prop. 98. This means that during most years, including 2015-16 and 2016-17, the total Prop. 98 funding guarantee is not affected by the ups and downs of local property tax revenues. As a result, annual increases in local property tax revenues typically go toward fulfilling the Prop. 98 minimum funding guarantee, thereby freeing up state General Fund dollars for other budget priorities outside of Prop. 98.

To demonstrate how local property tax revenues interact with the Prop. 98 guarantee, the chart below shows Prop. 98 spending since 2014-15. (These figures are based on revenue and economic assumptions made by Governor Brown in his proposed 2016-17 budget, released this past January.) In 2014-15, one of relatively few years when increases in local property tax revenues boosted the Prop. 98 guarantee — meaning they did not free up General Fund dollars for non-Prop. 98 spending — $49.6 billion of the $66.7 billion in Prop. 98 spending came from the state’s General Fund. In 2015-16, the state’s General Fund will provide $50.0 billion of the $69.2 billion Prop. 98 minimum funding level. In other words, even with an estimated $2.5 billion year-to-year increase in the Prop. 98 guarantee, the portion covered by the state General Fund will increase by less than half a billion dollars ($437 million). Meanwhile, the portion of Prop. 98 funding that comes from local property tax revenues is estimated to increase by more than $2.0 billion in 2015-16, freeing up this amount of General Fund dollars for other budget priorities.

LPT-and-General-Fund-and-Prop-98

Similarly, the state’s General Fund will provide $51.0 billion of the $71.6 billion Prop. 98 guarantee in 2016-17. Local property tax revenues are projected to increase by another $1.4 billion — to $20.6 billion — in 2016-17. This means that state General Fund dollars will only need to account for $1.0 billion of the $2.4 billion year-to-year increase in the Prop. 98 minimum funding level, freeing up $1.4 billion in state General Fund dollars to spend on budget priorities outside of Prop. 98. In short, anticipated increases in local property tax revenues would provide more dollars for state budget priorities over the next couple of years.

Projections by both the Department of Finance and the Legislative Analyst’s Office indicate that 2015-16 and 2016-17 will mark a return to more typical Prop. 98 years, when increases in local property tax revenues free up General Fund dollars for other public services and systems. As a result, to the extent that local property tax revenues increase over the next few years, policymakers would have additional room to make critical investments that support workers, families, and communities.

— Jonathan Kaplan