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Governor's budget raises Proposition 98 but proposes $1.6 billion settle‑up delay; LAO flags revenue risk
Summary
The governor's January budget projects a higher Proposition 98 guarantee and funds a mix of ongoing and one‑time K–12 priorities, but proposes a $1.6 billion delay of a settle‑up payment to manage revenue uncertainty—an approach the Legislative Analyst's Office warned could be risky given current stock‑market‑driven volatility.
The governor's January budget increases the projected Proposition 98 guarantee and includes new K–12 proposals while proposing to delay a $1.6 billion settle‑up payment into a later budget year.
Department of Finance analyst Alex Schope told the Assembly Budget Subcommittee on Education Finance that "the governor's budget forecast that the Proposition 98 guarantee amount for 25‑26 will be $118,900,000,000.0," and that the governor proposes $2.5 billion in ongoing LCFF increases, $1.8 billion ongoing to support transitional kindergarten expansion and lower adult‑to‑student ratios, and a $1.8 billion one‑time student support and professional development block grant.
The Legislative Analyst's Office (LAO) urged caution. LAO analyst Ken Capone told the committee that a large share of the projected revenue gains is tied to capital gains and the stock market, and warned of unusually high sensitivity in 2024‑25: "to the extent there are revenue changes in 2024‑25, that falls almost entirely on schools and community colleges ... in 2024‑25 the Proposition 98 guarantee would change about $0.95 for each dollar of higher or lower revenue." The LAO described three alternatives to the governor's proposed delay: (1) deposit the $1.6 billion into the Proposition 98 Reserve (the state’s K–14 “rainy day” account), (2) appropriate the funds now but delay cash outlays until final revenue certification, or (3) suspend the guarantee (which would require a two‑thirds vote and create maintenance‑factor obligations).
Why it matters: The committee's choices will determine whether the state locks in the higher K–12 spending level this year or holds funds back as a hedge against revenue swings. The LAO said that the reserve deposit would be the least disruptive to local planning, while the governor's delay would ease short‑term non‑education budget pressure but raise costs in a later year.
Key numbers and mechanics - Governor’s projected Proposition 98 guarantee (25‑26): $118.9 billion (DOF) - Increase over the enacted 3‑year window: roughly $7.5 billion (LAO) split across 24‑25 and 25‑26 - Ongoing LCFF increase proposed: $2.5 billion (approx., to reflect a 2.43% COLA and enrollment growth adjustments) - Ongoing for TK expansion and lower adult‑to‑student ratios: $1.8 billion - One‑time student support/professional development block grant: $1.8 billion - Proposed proactive delay (settle‑up) into a future budget year: $1.6 billion (administration estimate)
The LAO emphasized how volatile the current revenue outlook is: personal income tax withholding and corporate receipts have grown strongly, but the gains appear linked to a strong stock market, and a rapid reversal would move Proposition 98 funding sharply. The LAO noted that in 25‑26 the guarantee would be somewhat less sensitive (about $0.40 per $1 of revenue change) than in 24‑25.
Reserve and alternatives The DOF and LAO both discussed using the Proposition 98 Reserve (often called the Public School System Stabilization Account) as a way to manage volatility. The LAO characterized the reserve deposit as the most compelling alternative because it sets aside money without immediately creating an ongoing commitment that districts must budget for.
Reporting and next steps Committee members asked DOF and LAO staff about legal authority and technical mechanics of any settle‑up decision and about lead time for districts. The LAO recommended preserving structural features (a balance of ongoing versus one‑time funding and a mix of flexible and targeted dollars) while the committee considers whether to: accept the administration's proposal, deposit the funds to the reserve, appropriate now but delay cash, or pursue other options. The committee held the item open for further hearings and possible May revision changes.
Provenance: This article summarizes the Department of Finance and Legislative Analyst Office presentations and the committee's follow‑up questions during the Proposition 98 overview portion of the hearing.
