A constitutional amendment approved by voters in November 1988 and amended by Proposition 111 in 1990. The four provisions are:
- a guarantee of minimum funding for K-12 schools and community colleges based on a specific calculation (see below)
- an allocation to K-14 education of 50% of the difference when state tax revenues exceed the Gann spending limit, with the remaining 50% rebated to taxpayers,
- annual School Accountability Report Cards (SARCs) with at least 13 specific items for each school, and
- a "prudent" state budget reserve.
With a two-thirds vote of the Legislature and signature of the governor, Proposition 98 may be suspended for one year.
The amount of the Proposition 98 guarantee is calculated each year through a complex series of tests. This gives state leaders the ability to both adjust spending downward when state revenues are low and suspend the guarantee in a given year.
In years of normal or strong state revenue growth, the K-14 guarantee is the larger of:
Test 1 - the same share of the General Fund for K-14 education as the base year, 1986-87 (adjusted for changes in the share of property taxes), or
Test 2 - the prior year's funding from state and property taxes adjusted for inflation (growth in per capita personal income) and increases in the student population (average daily attendance, or ADA).
In years of slow growth, when General Fund tax revenues grow more slowly than per capita personal income, the guarantee is:
Test 3 - the same criteria as Test 2 except inflation is defined as the growth in per capita General Fund revenues plus one-half percent.
Test 3b - same as Test 3 except education may suffer cuts no deeper than other portions of the state budget.
The difference between the amount under Test 3 and what would have been the amount under Tests 1 or 2 must be restored to education in years of stronger revenue growth.
Suspension: Proposition 98 can be suspended for a year with a two-thirds vote of the Legislature and concurrence of the governor. Under the suspension, policymakers have great discretion as to the level of funding they provide to education. Proposition 98 has been suspended two-times so far, in 2004-05 and 2010-11.
Maintenance Factor: If Test 3 is used, or if Proposition 98 is suspended, the state keeps track of the amount that would have been provided if Test 2 had been in effect. Eventually, the state must bring spending up to what it would have been if Test 2 had consistently applied. Restoration is to begin in the next year in which the percentage growth in per capita general fund revenues exceeds the percentage growth in per capita personal income. (Specifically, the minimum amount that must be restored in a given year is one-half of the difference between those two percentages times the current-year level of general fund revenues.)
Settle Up: When state leaders craft a budget for the upcoming fiscal year, they must estimate what the minimum Proposition 98 spending level will be before the fiscal year starts. If, during the course of the fiscal year, the estimate turns out to be too low, the state must later make up the shortfall. The amount of the shortfall is often referred to as the “settle up” amount.
Along with providing lawmakers the flexibility to adjust funding in lean economic times, Proposition 98 also offers the promise that, over the long term, education funding levels are supposed to be restored to what is referred to as the long-term Test 2 level.
In the 1990s when the economy was fairly stable or even growing, the Proposition 98 guarantee usually fell into test 2, meaning education received the previous year's funding plus increases for growth in attendance and per capita personal income.
Beginning in 2001-02, however, the state's General Fund experienced more volatility, first decreasing dramatically, then briefly moving upward, and then falling at an unprecedented level in 2008-09. The framers of Proposition 98 had not envisioned multi-year dynamic change—the guarantee only looks at growth from one year to the next. When the state began facing record-breaking deficits, policymakers were able to manipulate the Proposition 98 provisions in ways that resulted in education taking a larger cut in percentage terms than was true for most other segments of state government.