California’s Grim Financial Forecast and What It Means for K-12 Funding in the State

Contributing Writer
California's Tough Budget Picture for K-12 Education, EdWeek Market Brief

Bolstered by strong tax revenues, governors across the country — from Kentucky to Minnesota — are aiming to increase education funding during ongoing legislative sessions. 

One notable exception: California Gov. Gavin Newsom. 

With a projected shortfall of $22.5 billion, California is dealing with a gloomy fiscal forecast as tax revenue from the state’s key economic drivers — tech and media companies and once-soaring property values — has declined. 

And that means education funding could potentially take a hit for the first time in a decade. 

Newsom’s proposed 2023-24 budget provides $108.8 billion for the state’s funding formula —Proposition 98 — that allocates how much of California’s general fund goes to K-12. It’s a decrease of $1.5 billion compared to the state’s 2022-23 budget, according to an overview from the California Department of Education

That figure, however, is not finalized. 

The governor’s second budget proposal, known as the May revision, is set to be released in the middle of that month, and will be based on updated revenue figures. The final say in approving the budget belongs to the state legislature.

Some highlights from Newsom’s proposed budget: 

  • An 8.1 percent cost-of-living adjustment, the highest in decades (it’s also the biggest single dollar item in Newsom’s education budget);
  • $12.5 billion for learning recovery from COVID setbacks;
  • $4.7 billion for mental health support;
  • $690 million to expand “transitional kindergarten”;
  • $300 million in funding for the state’s highest-need schools to establish a so-called “equity multiplier”; and
  • $250 million in one-time funding for literacy programs.

Jonathan Kaplan, a senior policy analyst at the California Budget and Policy Center, a nonpartisan research nonprofit, called Newson’s budget proposal a “relatively best-case scenario,” given the turbulent economic environment. 

The state’s initial budget, he said, has “very little in the way of reductions for K-12 schools.” 

“This proposal largely protects funding for K-12,” Kaplan said.

The proposed budget does have some cuts and funding delays to help make up for a drop in Prop 98 funding.

Those measures include delaying $550 million for kindergarten facilities, reducing by $1.2 billion a one-time block grant dedicated for arts, and instructional materials. The governor is also using other available one-time funding for K-12 programs. 

California’s economy had been booming up until not long ago, as the state was reveling in a record budget surplus. That’s now turned into a massive deficit. 

Newsom’s economic analysts are not projecting a recession in the near future, but they noted the potential for one based on inflation and rising interest rates. 

 “There is concern that the governor’s January estimate was too optimistic,” said Patti Herrera, vice president of public education consulting and advocacy firm School Services of California.

“If the governor overestimated revenue, and in May it comes back lower than the January estimates, we might see a different education budget.” 

Pessimistic Forecast

That concern hasn’t yet turned to “panic,” she said, because the state has an $8 billion education rainy day fund it can tap before having to make big cuts to K-12 programs and services. 

California continually updates its Prop 98 revenue until the following May after the close of each fiscal year. If the updates show revised estimates, the state has to adjust — either making a new payment or reducing spending — its minimum guarantee to the funding formula. 

When Newsom, a Democrat, rolled out his latest budget proposal in January, he also updated Prop 98 revenue from the 2022-23 fiscal year. He’s now estimating that it will fall $3.5 billion short of the $110.4 billion approved by the state legislature last year. 

California’s Legislative Analyst Office predicts that the state’s Prop 98 guarantee is likely to “decline further” than the $1.5 billion and $3.5 billion that Newsom has projected. 

“Under our best estimates of general fund revenue, the guarantee would be roughly $2 billion below the Governor’s budget level in each year,” the LAO wrote in an overview of the governor’s education spending plan.

The LAO report also noted that higher-than-expected local property tax revenue in May could partially offset the Prop 98 drop. 

According to the report, “property tax revenues are likely to be at least several hundred million dollars higher than the estimates in the Governor’s budget over the three-year period, and could be up to $1 billion higher.” 

Photo: California Gov. Gavin Newsom takes questions from kindergarten students during his visit to the Ethel I. Baker Elementary School in Sacramento, Calif., on Oct. 7, 2019. (Rich Pedroncelli/AP)

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