Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

Basic Aid Districts

Reduction to Basic Aid Payments

We recommend the Legislature approve the Governor's proposal to reduce basic aid payments by $15.3 million in 2002-03 and eliminate them entirely in 2003-04 for a savings of $17.8 million.

The Governor's budget proposes to eliminate basic aid payments over the two-year period from 2002-03 to 2003-04. In 2002-03, the budget would reduce basic aid payments by $15.3 million or 86 percent. In 2003-04, the proposed budget would end all basic aid payments, saving $17.8 million. According to the Department of Finance (DOF), this reduction is consistent with the Governor's proposal to reduce district revenue limit payments by 2.15 percent and is designed to help the state reduce expenditures to stay within the minimum Proposition 98 funding guarantee.

The California Constitution requires the state to apportion at least $120 per student (or for really small districts, a total of $2,400). For most districts, state funding for each district's general purpose grant (known as a revenue limit) far exceeds the Constitutional minimum. For a small number of districts, the revenue limit funding entitlement is met entirely with local property tax funds. However, the state provides funds above the level of the district revenue limit as means of meeting the $120 per student minimum. These additional funds are known as basic aid. In 2001-02, 82 districts received basic aid. There are two types of basic aid districts:

• "Excess" Tax districts. These districts receive more local property taxes than is needed to fully fund district revenue limits. In 2001-02, there were 60 excess tax districts.
• "Not Quite" Excess Tax Districts. These districts receive slightly less in property tax revenues than is needed to fully fund district revenue limits. In 2001-02, 22 districts received state general purpose funding of $120 per student—a portion of which came in the form of revenue limit payments and the remainder as basic aid.

The budget proposal assumes that any type of state aid—including categorical funding—satisfies the constitutional requirement for $120 in state funds. Only if a district did not receive the minimum from the combined sources of categorical and revenue limit funds would the state be obligated to supply the difference. According to DOF, no districts receive less than the required amount when all state funding sources are considered.

We recommended eliminating basic aid payments in our Analysis of the 1997-98 Budget Bill because the funds exacerbate wealth-related disparities in general purpose funding. Consequently, this proposal would save Proposition 98 funds and contribute to the Legislature's long-term effort to equalize district revenue limits. For these reasons, we recommend approval.

Funding Reductions to Excess-Tax Basic Aid Districts

We recommend the Legislature revise the Governor's budget proposal to recapture $150 million in excess tax revenues from basic aid districts and, instead, cap excess taxes at the levels received in 2000-01.

The Governor's budget proposes to reduce the General Fund cost of Proposition 98 in 2003-04 by recapturing $150 million in property tax revenues from excess tax K-12 school districts. As discussed above, if local property tax receipts exceed the amount needed to fund school district revenue limits, districts are permitted to keep the excess revenues to spend as they wish.

Recapture of Excess Taxes. The Governor's budget projects that excess tax districts will receive $161 million in excess revenues in 2003-04. Of that amount, the budget would recapture $150 million, or 93 percent, by redirecting the tax receipts to other school districts, county offices of education, and community colleges. This recapture of excess taxes would reduce funding available to the 60 excess tax school districts by $150 million.

State Should Cap Excess Tax Revenues. The 60 districts' excess tax averaged about $1,200 per student in 2001-02, although the amount ranged from $1.60 per student to about $13,000 per student. When added to the district revenue limit, general purpose funding in the highest funded district was almost $20,000 per student compared to the statewide average revenue limit of about $4,650 in 2001-02. 

Excess taxes also appear to be increasing rapidly. Figure 1 shows the recent increase in the excess property tax, and the DOF projected increases. The total amount of excess taxes increased by 56 percent in 2001-02, reaching $148 million. The rapid increase resulted primarily from escalating property values and high turnover rates of property in certain parts of the state. The budget projects growth in 2002-03 and 2003-04 of about 4 percent in each year. Given the continuing increases in property values and high turnover rates, we anticipate excess tax collections will be higher than reflected in the budget.

Excess taxes exacerbate the problem of unequal general purpose funding levels among districts. While relatively few in number, districts receiving large amounts of excess taxes are able to afford programs and services for their students that are out of reach for other districts. From our perspective, there are few policy reasons that justify allowing such large amount of revenues to benefit these districts.

Recapturing 93 percent of all projected excess taxes, however, would create severe disruption in districts with large amounts of excess tax receipts. Reducing funding levels for many of the excess tax districts by the amounts proposed would result in far greater reductions than those imposed on all other districts. As noted above, the average excess tax district receives $1,200 per student in additional general purpose funds. If 93 percent of this funding were recaptured (as proposed by the Governor), it would represent an $1,100, or about 20 percent, reduction in general purpose funding for these districts. For a few districts, the proposal represents more than a 50 percent reduction in general purpose funding.

Because of the disparate impact these reductions would visit on these districts, we do not recommend approval of the proposal as outlined in the Governor's budget. We agree, though, that it is appropriate to reduce the amount of excess taxes that the 60 districts would be permitted to keep as general purpose funding.

Therefore, we recommend the Legislature place a cap on the amount of excess taxes districts can keep as general purpose funds in 2003-04. Tax receipts above that level would be redistributed to other K-12 agencies and community colleges within the same county, as proposed in the budget. We suggest the Legislature set the cap at the amount of excess taxes distributed to districts in 2000-01. This would result in a savings of about $65 million in 2003-04. (The savings could be larger if the growth in excess taxes is greater than projected by DOF.)

Recapturing these amounts probably would not significantly harm districts. The level of excess taxes depends on a number of factors, including growth in total property taxes, student enrollment, and revenue limits. Because of these variables, districts are unable to depend on large increases in excess taxes as part of the budget planning process. For this reason, we believe it is unlikely that the rapid increase in 2001-02 property tax revenues has been fully incorporated into base districts budgets in 2002-03. In this event, districts could use savings from 2001-02 and 2002-03 to offset reductions resulting from the cap in 2003-04 and future years.

In summary, we think the concept of limiting districts that receive significant amounts of excess taxes has value. Limits, however, should be imposed in a way that does not unduly punish districts for the fact that, in the past, the state allowed excess tax districts to keep the additional revenues. If the DOF estimates are correct, our recommendation will require the Legislature to make $85 million in reductions elsewhere in the state budget.