Full Implementation of the LCFF Could Bring California’s Per Pupil Spending Closer to the Rest of the US

August 5, 2013

Last week the Legislative Analyst’s Office (LAO) published an overview of the Local Control Funding Formula (LCFF), the fundamental restructuring of California’s K-12 education finance system. The report discusses the LCFF, details how it will provide additional dollars to disadvantaged students, and estimates how much it will cost to implement. In addition to establishing equity as a key principle for how the state funds schools, the LCFF sets a funding goal that could boost California’s per pupil spending closer — if not equal — to that of the rest of the US once the formula is fully implemented.

California should aspire to a better per student spending ranking than the bottom 10, where the state has ranked for the past several years. As we’ve blogged about, California spends $2,500 less per student than the rest of the nation. To reach the same level of per student spending as the rest of the US, California would have needed to spend $15.3 billion more in 2012-13 than it did. While such a boost in funding might seem out of reach, it is actually a smaller increase than what the LAO estimates is needed to fully implement the LCFF. Specifically, for the LCFF to be fully implemented by 2020-21 — the goal established by the Governor and the Legislature — the LAO estimates that school funding would need to reach a level that is equal to an $18 billion increase in 2013-14 (above 2012-13 funding), not accounting for required cost-of-living adjustments. So even though the LCFF is not expected to be fully implemented for several years, policymakers should be commended for establishing a goal that calls for substantially increased state support for schools and could bring state spending per student closer to the level of the rest of the nation.

Reaching this goal, however, depends on a serious long-term approach to increasing state revenue. For instance, such an approach would need to account for the fact that the tax increases from Proposition 30 will expire in 2018. And in a broader sense, a plan for significantly increasing revenues could be part of an ambitious, long-range vision for California. Whether the state will have sufficient revenues to fully implement the LCFF by 2020-21 is unclear. What is clear is that delaying LCFF implementation would perpetuate both California’s low ranking relative to other states and current funding inequities.

— Jonathan Kaplan

State Revenues Continue to Bear the Mark of the Great Recession

July 18, 2013

The budget signed by Governor Brown last month assumes that state revenues will total $137.0 billion in 2013-14. This consists of $97.1 billion in General Fund revenues — the primary source of funding for state services — and $39.9 billion in special fund revenues — proceeds of taxes, licenses, and fees that are designated by law for specific purposes.

These estimates are remarkable for a couple of reasons. First, revenues as a percentage of the California economy in 2013-14 are projected to be roughly equal to the 40-year average, which is 7.5 percent. In other words, as a share of the state’s $1.8 trillion economy — as measured by state personal income — revenues in 2013-14 are expected to come in right around the historical trend line going back to 1974-75. This is notable because California voters approved two tax measures last November — Propositions 30 and 39 that are projected to boost state revenues by about $7 billion in 2013-14. The fact that revenues are expected to be near the historical average in 2013-14 even with the new revenues approved by voters — rather than significantly above that average — highlights the deep hole that the Great Recession and years of tax cuts created in the state’s tax system, which Propositions 30 and 39 helped to fill.

The 2013-14 revenue estimates are also remarkable for a second reason: Total projected revenues — $137.0 billion — are more than $20 billion below the level they likely would have reached if the Great Recession had not occurred, as we explained in a blog post earlier this year. In other words, if California’s economy hadn’t hit a steep downward slide in 2008 and instead had increased to $2.2 trillion by 2013 (as state analysts expected back in 2007), total state revenues likely would exceed $160 billion in 2013-14, based on revenues comprising 7.5 percent of the state’s economy. Instead, California’s smaller-than-expected $1.8 trillion economy is projected to generate less than $140 billion to support state services during the current fiscal year. This $20 billion-plus revenue gap represents dollars that are not available to support state investments in education, child care for working families, transportation, and other public systems and services that promote economic growth and broadly shared prosperity.

Of course, it’s possible that revenues will surpass the level assumed in the 2013-14 budget. For one thing, lawmakers adopted the Governor’s relatively conservative General Fund revenue projection for 2013-14, which was $2.7 billion below the Legislative Analyst’s forecast. For another thing, the state finished 2012-13 — which ended on June 30 — with General Fund revenues running just over $2 billion (2.1 percent) ahead of the Governor’s May Revision forecast. Yet, even if total state revenues in 2013-14 come in a few billion dollars higher than anticipated, that larger amount would still be close to the historical average as a share of California’s economy (7.5 percent) and would remain far below the level that revenues likely would have reached but for the Great Recession.

— Scott Graves

Phasing Out Enterprise Zones as We Know Them

July 9, 2013

The CBP has been following and informing the debate over California’s controversial Enterprise Zone (EZ) Program for several years, and has published a number of reports and blog posts that highlight the escalating costs and serious shortcomings of the EZ Program as well as opportunities for reform. This past Wednesday, AB 93 and SB 90 — budget trailer bills that phase out the EZ Program and replace it with a new package of economic development incentives — were transmitted to Governor Brown and await his signature. [Update: On Thursday, July 11, the Governor signed AB 93 and SB 90.] As a result, our analysis of the 2013-14 budget agreement has been updated with a detailed review of the changes to EZs and the state’s tax system.

Specifically, the budget agreement:

  • Retains current EZ designations but modifies them to more effectively target the most economically distressed areas of the state. Current EZ designations will remain intact for the 40 existing EZs, plus two recently expired zones — Antelope Valley and Watsonville — but incentives will also be available for use in census tracts throughout the state that rank in the top 25 percent in both unemployment and poverty rate. Further, census tracts with low unemployment and low poverty rates will be removed from the existing EZs, ensuring that the hiring tax credit truly is targeted to businesses located in the state’s most economically distressed areas. Lastly, the seven existing Local Area Military Base Recovery Areas (LAMBRAs) will be preserved and eligible for incentives as well.
  • Alters key elements of the EZ hiring credit to create and retain jobs for disadvantaged individuals. The budget agreement makes major changes to the hiring tax credit to improve performance. These changes include:
    • Requiring businesses to create new jobs — not just make new hires — as a condition of claiming hiring credits.
    • Discontinuing retroactive vouchering, whereby credits are awarded for hires made in past years.
    • Maintaining the credit for a particular employee at a constant level over a five-year period, instead of having the credit decrease over time. This change removes the incentive and reward for employers that “churn” their workforces.
    • Ensuring that companies that take the hiring credit pay employees a living wage. Specifically, the budget agreement increases the amount of qualified wages from up to 150 percent of minimum wage — currently $12 per hour — to between 150 percent and 350 percent of minimum wage. This currently is between $12 and $28 per hour. The credit is only available for qualified wages paid to employees who work an average of at least 35 hours per week. In five pilot areas that would be designated by the Governor’s Office of Business and Economic Development (GO-Biz), qualified wages will be set between $10 an hour and 350 percent of minimum wage to reflect working conditions in areas with average wages less than the statewide average.
    • Targeting the hiring tax credit to five categories of individuals, which is much narrower than the 10 groups included in current eligibility requirements. The targeted groups will include individuals who have been previously unemployed for six months, recipients of the Earned Income Tax Credit, recipients of CalWORKs or General Assistance, unemployed veterans, and ex-offenders.
  • Creates a manufacturing equipment sales and use tax (SUT) exemption. The SUT exemption will eliminate the California portion of sales and use tax for basic manufacturing and research and development (R&D) purchases for use within manufacturing and biotech industries. This exemption will be available statewide — rather than just within certain geographic areas. The maximum amount of purchases eligible for the SUT exemption statewide is not to exceed $200 million annually.
  • Establishes a business incentive fund to retain and attract businesses to California. The budget agreement establishes a new fund that will be administered by GO-Biz for the purpose of negotiating business tax credits in exchange for investments and employment expansion in California. The budget agreement also creates the California Competes Tax Credit Committee — consisting of representatives from the Treasurer’s Office, Department of Finance, and GO-Biz, and an appointee from both the Senate and Assembly — which will provide final approval for GO-Biz’s allocation of tax incentives. The fund will be limited to $30 million in 2013-14, increasing to $200 million annually in 2015-16 through 2018-19.

The budget agreement includes a number of provisions intended to ensure that the new economic development package is effective, transparent, and available to small businesses. First, the hiring tax credit, the SUT exemption, and the GO-Biz fund require annual evaluations to ensure that program administrators, policymakers, and the public are able to track program usage, and they each contain provisions that require businesses to return money to the state if certain terms are not met. Second, the budget agreement creates clear benchmarks to ensure that small businesses — defined as having less than $2 million in gross receipts in the previous year — benefit from the economic development package. Specifically, 25 percent of the hiring tax credit will be reserved for small businesses, and industry restrictions on the hiring tax credit will be lifted for small businesses as well. In addition, 25 percent of the funds allocated to GO-Biz will also be reserved for small businesses. Lastly, the budget agreement includes sunset dates for the programs, a provision that does not exist within the current EZ Program.

— Kristin Schumacher

The CBP Examines the 2013-14 Budget

June 28, 2013

Yesterday Governor Jerry Brown signed the 2013-14 budget bill and related legislation. The CBP has released its initial analysis of the 2013-14 budget, examining key provisions and their implications. Check back to California Budget Bites and the CBP’s website in the coming days and weeks for additional analysis and commentary on the 2013-14 budget agreement.

— Steven Bliss

Statement From Chris Hoene on the 2013-14 Budget Agreement: A New Chapter for Our State, With More Work to Be Done

June 27, 2013

The CBP has released the following statement from Executive Director Chris Hoene in response to Governor Jerry Brown’s signing of the 2013-14 budget this morning:

“The 2013-14 state budget signed by Governor Brown today signals a new chapter for California. Thanks to the additional revenues approved by voters last November, this budget lays the foundation for our state to begin reinvesting in education, job training, child care, and other public services and systems that are essential to strong communities and widely shared economic opportunity. Also, the Governor and legislators have taken major steps forward by expanding Medi-Cal eligibility to over a million low-income Californians and by fundamentally restructuring K-12 school finance in order to provide additional dollars to educate disadvantaged students.”

Tomorrow the CBP will publish its analysis of the 2013-14 budget and related legislation, highlighting key provisions and their implications. This report will be available on the CBP’s website.