Revamping California's education finance system: education leaders need to understand how the state got into this budget mess in order to craft long-term solutions that provide school districts with greater stability

Leadership, March-April, 2003 by Brett McFadden

When the stock market and dot-com bubble burst, PIT revenues took a sudden dive. Data from the Department of Finance indicates that PIT revenues dropped from their highest levels in 1999-00 by 26 percent in 2001-02 (Governor's Budget, 2003, p. 54). Figures for 2002-03 show further decay of PIT revenues for the foreseeable future.

Impact on revenues and the budget

When high income earners sneezed, the rest of the state caught the flu. By 2000-01, California's budget was overly reliant on stock options and capital gains revenues. In 1995-96, stock options and capital gains represented 5.6 percent of the state's General Fund. By 2000-01, that figure had climbed to almost 25 percent (May Revise, 2002).

The dot-com and high-tech craze of the 1990s could be characterized as California's "second gold rush." Its spiraling demise is matched only by its skyrocketing ascent. But when the rug was pulled out from underneath, the state's fiscal condition came tumbling down. In just three years, we went from surpluses to deficits.

As a result, California is likely to face continued revenue volatility and budget deficits for the foreseeable future, absent any economic and/or structural changes. For 2003-04, projections are that the Legislature and governor will have to address a combined budget shortfall ranging from $25 to $37 billion.

Once again, California leads the nation. Only this time it is with the recognition of having the worst state budget deficit in the history of our country. Unfortunately; projections are that income levels will continue to concentrate, thereby extending the likelihood that significant income fluctuations will continue to be part of California's budget landscape.

Impact on K-12 education

The impact this has had on K-12 education policy is clear. In an era of increased accountability and high-stakes testing, large budget fluctuations make it increasingly difficult to develop sustainable policies and programs at the local level.

Schools are not like other sectors of the economy or policy spectrum. They do not have the luxury to stop production or shift priorities mid-stream. The nature of our business demands stable and reliable revenue sources shielded from economic cycles. But as the K-12 system has become a virtual prisoner to Sacramento's budgetary oversight, the school system's fiscal woes have increased and our ability to address them have declined in similar fashion.

This past year has been a prime example of that condition. In the past 15 months, the K-12 education community has sustained more than $3 billion in cuts and funding deferrals (Education Coalition, 2002). If that wasn't bad enough, some political pundits project that education could sustain more than $8 billion in total cuts and deferrals by the time California's budget condition begins to improve.

I dare anyone to try to comply with the myriad federal and state education laws, provide COLA increases to all of their bar gaining units and show steady growth on an Academic Performance Index under such conditions. We don't expect our local businesses to thrive under similar restraints and criteria. How Call we have such expectations of our schools?