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key takeaway

Despite California’s commitment to funding education through Proposition 98, increased child poverty and budget shortfalls pose substantial challenges.

All California students deserve the opportunity to learn and achieve their goals. Recognizing the critical role schools play in supporting student success, California voters adopted Proposition 98 (Prop. 98), which established an annual minimum funding guarantee for public K-12 schools and community colleges. 

When students and their families struggle to make ends meet, their educational success is put at risk. The poverty rate for children in California more than doubled from 2021 to 2022, suggesting that more support is needed to help families meet their basic needs. 

Helping Californians meet those needs while adequately funding K-14 education is challenging when the state experiences a budget shortfall that results from revenues falling far short of projections — as is the case this year. Understanding Prop. 98 and its interaction with the state budget is essential to assess policymakers’ options for addressing the challenges this year’s state budget presents.

What is Proposition 98?

Prop. 98 is a constitutional amendment adopted by California voters in 1988 that establishes an annual minimum funding level for K-14 education each fiscal year — the Prop. 98 guarantee. Prop. 98 funding comes from a combination of state General Fund revenue and local property taxes. Prop. 98 spending supports K-12 schools (including transitional kindergarten), community colleges, county offices of education, the state preschool program, and state agencies that provide direct K-14 instructional programs. While Prop. 98 establishes a required minimum funding level for programs falling under the guarantee as a whole, it does not protect individual programs from reduction or elimination.

How is the Prop. 98 minimum funding guarantee calculated?

Each year’s Prop. 98 guarantee is calculated based on a percentage of state General Fund revenues or the prior year guarantee adjusted for K-12 attendance and an inflation measure.1The inflation measure is either the percentage change in state per capita personal income for the preceding year or the annual change in per capita state General Fund revenues plus 0.5 percent. Since some of this information is not available until after the end of the state’s fiscal year, the Legislature funds Prop. 98 at the time of the annual Budget Act based on estimates of the Prop. 98 minimum funding level. 

Once the final Prop. 98 guarantee is determined, the process of reconciling the actual and estimated guarantee is known as “settle up.” If the final Prop. 98 guarantee turns out to be higher than initially estimated, the Legislature must provide additional funding to make up the difference. On the other hand, if the Prop. 98 spending requirement is below the funding level assumed in a budget act, the Legislature has the option to amend the Budget Act to reduce funding to the lower revised minimum Prop. 98 guarantee.2The Legislature also can suspend Prop. 98 for a single year by a two-thirds vote of each house.

To the extent that the Legislature provides funding above the Prop. 98 minimum guarantee, it can increase the following year’s Prop. 98 minimum funding level and state spending required to fulfill the Prop. 98 obligation in future years. In other words, deciding to provide funding above the Prop. 98 minimum guarantee for one budget year can increase the minimum funding level for the subsequent year’s budget and beyond.

What is the Prop. 98 reserve?

California voters approved a constitutional amendment in 2014 that established the Public School System Stabilization Account (the PSSSA) – the Prop. 98 reserve. Constitutional formulas require the state to make deposits into, and withdrawals from, the Prop. 98 reserve. When the state faces a budget problem, discretionary withdrawals from the Prop. 98 reserve may also be made if the governor declares a budget emergency and the Legislature passes a bill to withdraw funds, which can only be used to support K-14 education.

Why is California facing a budget shortfall? And how large is it?

California faces a budget shortfall, also known as a “budget problem,” of tens of billions of dollars. The shortfall is based on estimates of revenues and spending across three fiscal years: 2022-23, 2023-24, and 2024-25 (the fiscal year that begins on July 1, 2024). This three-year period is known as the “budget window.” The main reason for the budget problem is that state revenue collections have fallen short of projections. A large portion of the problem is related to state revenues for the 2022 tax year, which are estimated to be about $25 billion lower than what policymakers expected when they adopted the budget for the current fiscal year last summer.

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The extent of the 2022 revenue shortfall only became clear in late 2023 due to the extension of tax filing deadlines for 2022 taxes to November 2023. Because of this delay, state leaders had to finalize the 2023-24 budget last June with much less complete revenue information than usual, and they enacted a budget assuming significantly more revenue for the 2022 tax year than actually materialized.

How does California’s budget problem affect the Prop. 98 guarantee?

Revenue collections falling short of projections not only creates a budget problem for the state, it also means the Prop. 98 minimum funding guarantee for K-14 education is significantly lower than the level assumed in last year’s enacted budget. Based on revenue estimates in the governor’s January 2024 budget proposal, the Prop. 98 minimum funding guarantee dropped by $14.3 billion across the three-year budget window (2022-23 to 2024-25) compared to assumptions made last June.3The amount of state funding required to fulfill the Prop. 98 guarantee across the three-year budget window dropped by $15.2 billion below the Prop. 98 funding level assumed last June. The difference between the state’s funding requirement and the $14.3 billion total decline in the Prop. 98 guarantee reflects estimates in the governor’s January 2024 budget proposal that include a $900 million increase in local property tax revenue, which offsets the $15.2 billion reduction in the state’s portion of the Prop. 98 funding obligation.

Reconciling Prop. 98 spending with revised estimates of the Prop. 98 guarantee can be challenging when the minimum funding guarantee falls — and it is especially difficult if the revised guarantee falls significantly. The current challenge of managing such a large decline in the Prop. 98 minimum funding guarantee is further complicated because the majority of the drop — $9.1 billion — is attributed to the 2022-23 fiscal year, which ended on June 30, 2023. 

The Legislature can address the challenge by amending last year’s Budget Act to reduce Prop. 98 funding to the lower revised minimum Prop. 98 guarantee. But, because the state has already allocated 2022-23 dollars to K-14 education, reducing K-14 education funding would be logistically difficult and would significantly impact K-12 schools’ and community colleges’ budgets. On the other hand, maintaining 2022-23 Prop. 98 spending above the minimum funding requirement could boost the state’s funding obligation to meet the Prop. 98 guarantee in 2023-24 and 2024-25.

How does the governor propose to address the budget problem and protect students and educators?

To help address the state budget shortfall, the governor’s January budget proposal assumes a reduction in state funding to the lower revised estimates of the Prop. 98 guarantee over the three-year budget window (2022-23 to 2024-25). To reduce Prop. 98 spending, the governor proposes a combination of spending reductions and discretionary withdrawals from the Prop. 98 reserve. 

A significant part of the governor’s plan is an $8 billion reduction in Prop. 98 spending attributable to 2022-23, which would help reduce state General Fund spending to the lower revised Prop. 98 minimum funding level. However, the governor’s proposal would not take away the $8 billion from K-12 schools and community colleges — dollars they received for 2022-23 that have largely been spent. Instead, the governor proposes a complex accounting maneuver that would shift the $8 billion in K-14 education costs — on paper — from 2022-23 to later fiscal years.

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Specifically, $8 billion in 2022-23 costs would be spread across five state budgets from 2025-26 to 2029-30 ($1.6 billion per year). Moreover, these delayed expenses would be paid for using non-Prop. 98 funds. In other words, $8 billion in General Fund dollars from the non-Prop. 98 side of the state budget — funds that could otherwise support health, safety net, housing, and other critical services — would be spent on K-14 education but would not count as Prop. 98 spending nor boost the Prop. 98 minimum funding guarantee (the implications of this are discussed below).

In addition, to help pay for existing K-14 education program costs in 2023-24 and 2024-25, the governor proposes making $5.7 billion in discretionary withdrawals from the Prop. 98 reserve. These one-time reserve funds would help support K-14 education in 2023-24 and 2024-25 at the same time that the state reduces General Fund spending required to meet the Prop. 98 minimum funding obligation.

How could the governor’s proposal affect non-Prop. 98 spending?

The governor’s proposal would use non-Prop. 98 resources to make a total of $8 billion in payments to K-14 education starting in 2025-26, but the proposal fails to propose additional revenue or other non-spending cuts to make these payments. Because no additional alternatives are part of the plan, the proposal would create pressure to reduce spending for state budget priorities outside of K-14 education starting in 2025-26.

Shifting Prop. 98 costs to the non-Prop 98 side of the budget creates significant risks to state spending that supports California’s children and families. By creating a future obligation for K-14 education without additional resources to pay for it, the governor’s plan could force reductions in spending for programs such as child care, student aid, and social safety net services that many Californians depend on for support to make ends meet.

How can state leaders address the decline in the Prop. 98 guarantee?

Policymakers have options to address the large decline in the Prop. 98 minimum funding guarantee that include the following:

Bottom line: Policymakers can address the decline in the Prop. 98 guarantee without creating pressure to reduce spending for priorities outside of K-14 education. The decline in the state’s Prop. 98 minimum funding guarantee due to state revenues falling short of expectations creates significant challenges for state leaders this year. However, policymakers have options for addressing these challenges, including raising revenues from wealthy corporations and high-income individuals who have ample resources to contribute.

Policymakers can also choose to withdraw more from the state’s Prop. 98 reserve to support K-14 education spending. Relying on Prop. 98 reserve funds alone may not be sufficient to cover all K-14 education expenses for which the state has made commitments. However, policymakers should look to raising revenue and other options to address the decline in the Prop. 98 guarantee that do not harm K-12 schools and community colleges or create pressure to reduce spending for state budget priorities outside of K-14 education.

  • 1
    The inflation measure is either the percentage change in state per capita personal income for the preceding year or the annual change in per capita state General Fund revenues plus 0.5 percent.
  • 2
    The Legislature also can suspend Prop. 98 for a single year by a two-thirds vote of each house.
  • 3
    The amount of state funding required to fulfill the Prop. 98 guarantee across the three-year budget window dropped by $15.2 billion below the Prop. 98 funding level assumed last June. The difference between the state’s funding requirement and the $14.3 billion total decline in the Prop. 98 guarantee reflects estimates in the governor’s January 2024 budget proposal that include a $900 million increase in local property tax revenue, which offsets the $15.2 billion reduction in the state’s portion of the Prop. 98 funding obligation.

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key takeaway

California voters will decide on March 5th, 2024, whether to pass Proposition 1, a two-part initiative aiming to improve access to behavioral health services. This includes funding for treatment facilities, housing support, and changes to the Mental Health Services Act.

Millions of Californians who cope with behavioral health conditions — mental illness or substance use disorders — rely on services and supports that are primarily provided by California’s 58 counties. Improving California’s behavioral health system is critical to ensure access to these services for all Californians, regardless of race, age, gender identity, sexual orientation, or county of residence.

In recent years, state policymakers have launched various initiatives to transform California’s behavioral health system with the goal of improving access for Californians. The most recent of these initiatives is Prop. 1. Last year, state policymakers passed, with strong support from Governor Gavin Newsom, Senate Bill 326 and Assembly Bill 531. Together, these bills placed Prop. 1 on the March 2024 ballot.

On March 5, 2024, California voters will vote on Prop. 1, a two-part measure that would 1) amend California’s Mental Health Services Act and 2) create a $6.38 billion general obligation bond. The bond would fund:

  • Behavioral health treatment and residential facilities,
  • Supportive housing for veterans and individuals at risk of or experiencing homelessness with behavioral health challenges.

This initiative presents beneficial aspects as well as potentially adverse consequences for Californians. This Q&A provides a high-level overview of Prop. 1, including how Californians with behavioral health conditions might be impacted by its passage as well as implications for the state budget.

Key Terms

Why Does Prop. 1 Matter for Californians?

Prop. 1 would impact how many Californians access mental health services and substance use disorder treatment in their communities. It would restructure a key funding source for county behavioral health services in ways that would increase housing supports but might adversely impact counties’ ability to provide behavioral health services.

The Mental Health Services Act (MHSA), which Prop. 1 would amend, accounts for about one-third of funding for county behavioral health services. The MHSA is essential in supporting services for Californians across different ages, addressing a spectrum of mild to severe behavioral health conditions.

Prop. 1 would also authorize a statewide bond to create mental health and substance use treatment beds, and housing with supportive services for unhoused Californians with behavioral health challenges. Increased supportive housing and access to treatment facilities is crucial for Californians. Capital funds accessed through the bond portion of Prop. 1 will slightly impact the state’s ability to make budgetary decisions year-to-year. However, the capacity of the state to issue future voter-approved bonds will decrease because California has a limited ability to finance bond measures.

Changes to the MHSA will impact a system that currently supports all Californians with behavioral health conditions. In contrast, the bond focuses on individuals with behavioral conditions who are at risk of or experiencing homelessness, which is a smaller portion of the unhoused population.

As thousands of Californians across the state experience the devastating effects of homelessness and barriers to behavioral health care, policymakers are asking Californians to consider if redirecting MHSA funds and authorizing a new general obligation bond is the right approach to addressing the state’s behavioral health and homelessness crises.

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What Problem Is Prop. 1 Trying to Address?

Prop. 1 aims to support Californians who are most affected by severe behavioral health conditions (mental illness and substance use disorders) and homelessness. This initiative is designed to create designated funding for mental health services and housing or treatment units for people with behavioral health conditions who are or at risk of experiencing homelessness.

In early 2023, over 181,000 Californians were counted as experiencing homelessness — the traumatic effects of which can seriously harm individuals’ well-being. Research suggests the trauma of experiencing homelessness can cause people to develop mental health problems and worsen existing behavioral health challenges and coping behaviors like substance use.

There are data challenges in quantifying exactly how many unhoused Californians have a mental health condition or substance use disorder. The 2023 homelessness point-in-time count showed 25% of the 181,399 people experiencing homelessness in California had a severe mental illness and 24% had a substance use disorder. However, while there is likely overlap between these individuals, the full extent is not reported.

Access to mental health care and substance use disorder treatment can be challenging for Californians who are unhoused. A recent statewide study found that nearly 4 in 5 unhoused Californians surveyed reported experiencing a serious mental health condition at some point in life, and those with current mental health conditions reported limited access to treatment. Additionally, 1 in 5 unhoused Californians who reported regular substance use and wanted treatment were not able to receive it.

These challenges are compounded by California’s shortage of adult psychiatric and community residential beds, which prevents Californians with serious behavioral health conditions from accessing critical behavioral health services.

What Is the Mental Health Services Act?

In 2004, California voters approved the Mental Health Services Act (Prop. 63), which created a 1% surtax on personal incomes above $1 million to provide increased funding for mental health services. Its passage signified a commitment to improving mental health outcomes for Californians, with a focus on prevention, early intervention, and community-based care. This tax supports about one-third of the state’s public mental health system.

The Mental Health Services Act has five main goals:

How Are Mental Health Services Act Funds Used Today?

The majority of MHSA funding (95%) goes directly to counties, which have some flexibility in how to use these funds.

Under current law, a small percentage of MHSA dollars (5%) is reserved for state-level administration.

How Would Prop. 1 Change Mental Health Services Act Spending?

Prop. 1 proposes significant revisions to the Mental Health Services Act (MHSA). These include:

  • Changing its name to the Behavioral Health Services Act (BHSA),
  • Expanding its scope to encompass treatment for substance use disorders.

Additionally, it would modify how MHSA funds are allocated, and introduce changes related to oversight, accountability, and the community planning process. This overview will focus on outlining the new funding structure under Prop. 1.

Under Prop. 1, counties would continue to receive the bulk of BHSA funds (90%). However, the allocation across different spending categories would change, without an increase in revenues. Counties would allocate their BHSA funds as follows:

Prop. 1 could provide some exemptions for counties with a population of less than 200,000. In addition, during the first two years of implementation, counties might have the flexibility to transfer up to 14% of their funding between these categories, with a limit of 7% per category. However, this flexibility is still pending state approval and has not been confirmed.

Another notable change is that Prop. 1 would shift a small percentage of dollars from counties to the state (from about 5% of total MHSA funding to about 10%). This would result in about $140 million annually redirected to the state budget. However, this amount could be higher or lower depending on the total amount of revenue collected from the tax.

Prop. 1 would also revise the allocation of state-level funds:

  • At least 3% to the Department of Health Care Access and Information to implement a statewide behavioral health workforce initiative.
  • At least 4% to the California Department of Public Health for population-based mental health and substance use disorder prevention programs. A minimum of 51% of these funds must be used for programs serving Californians who are 25 years or younger.

It’s worth noting that Prop. 1 would not change the tax on people with incomes over $1 million per year. This means counties would be expected to expand their scope of services without an increase in revenue. In fact, county leaders have repeatedly raised concerns about the disruption that Prop. 1 could cause. Specifically, the MHSA restructuring could result in significantly less funding for core services, which could lead to counties:

  • Canceling contracts with community-based organizations. 
  • Closing programs that are currently serving Californians.
  • Reducing county staffing.

If passed, the exact impact of Prop. 1 will vary by county and depend on how much revenue is collected in any given year. It’s important to keep in mind that the MHSA funds services for Californians of all ages for a range of conditions — mild to moderate to severe. The restructuring of MHSA funding would target a subset of this population. Therefore, programs and services for prevention and early intervention in some counties, for instance, could experience disruptions due to the new prioritization of funding.

What Can We Expect from the Behavioral Health Infrastructure Bond?

The Behavioral Health Infrastructure Bond would create a $6.38 billion general obligation bond for:

  • Infrastructure development of treatment and residential care facilities,
  • Supportive housing units for veterans and other Californians with serious mental health conditions and substance use disorders.

These funds are estimated to create up to 4,350 housing units, with 2,350 set aside for veterans, and 6,800 mental health and substance use treatment places for an approximate total of 11,150 new behavioral health and supportive housing units statewide. An estimated 26,700 outpatient treatment slots will also be created that may serve thousands of Californians annually.

Projects funded by the Behavioral Health Infrastructure Bond will be eligible for local streamlined review processes if they meet select criteria. The bond funds will be allocated as follows:

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What Would the Infrastructure Bond Mean for the State Budget?

Under Prop. 1, the state would issue up to $6.38 billion in general obligation (GO) bonds, with the funds going toward:

  • Grants or loans for vital treatment and residential care facilities,
  • Supportive housing units.

California voters have a record of funding large infrastructure projects through bonds as it does allow the state to access impactful funding amounts that are designed to serve public interests at large over many years.

In issuing bonds, the state must repay the bond debt service (which is the principal bond amount plus interest) through General Fund dollars. The most recent cost estimate assumes a 30-year debt service resulting in projected payments of roughly $310 million per year. Under this estimate, it would cost the state approximately $9.3 billion to repay the total bond debt, not including the cost of inflation. California currently spends roughly 2.5% of the state budget on repaying various bond obligations voters have decided on in the past.

While there are ways to equitably reform the state budget’s revenue streams, policymakers must balance the yearly limited discretionary flexible dollars in the General Fund. GO bonds in essence prioritize increased debt-service payments to be drawn from the General Fund over potential ongoing or one-time funding. Repaying the bond portion of Prop. 1 is a trade-off that will slightly reduce the flexible dollars left for other vital public services that may already serve Californians with behavioral health conditions and those at risk of or experiencing homelessness. It also challenges the state’s capacity to fund future voter-approved bonds since California has limitations on financing bond measures.

Another consideration is the ongoing operating costs that will be needed to adequately sustain the facilities produced through Prop. 1. As explained above, the MHSA restructuring does designate 30% to housing interventions which includes rental and operating subsidies. The funds can presumably help sustain facilities that are projected to be secured through the bond funding. However, it is uncertain whether these funds and those from other sources will be sufficient and accessed efficiently to ensure adequate upkeep, staffing, and proper care for the Californians receiving housing and services through these projects.

The infrastructure projects funded under the bond would build on existing state programs that received one-time funding through previous budget allocations or voter-approved bonds which are close to being depleted.

How Might Californians Be Impacted by Prop. 1?

The proposal presents various promising aspects. First of all, the expansion of services to substance use disorder treatment is positive. This broadened scope recognizes that mental health challenges and substance use disorders sometimes occur together. In fact, more than 1 in 4 adults living with a serious mental illness also have a substance use disorder. This underscores the importance of providing treatment for both conditions.

Another positive aspect of this proposal is the prioritization of treatment facilities and supportive housing infrastructure for Californians at risk of or experiencing homelessness with behavioral health conditions. Due to racism, ableism, and other forms of discrimination, some Californians are more likely to experience the devastating effects of homelessness at some point in their lifetime. This disparity is particularly stark for Black, Indigenous and Pacific Islander Californians, adults without children, older adults, and transgender and other LGBTQ+ individuals.

Notably, the new investments and prioritization of funds under Prop. 1 target a small but important share of the unhoused population. The majority of unhoused Californians face short-term homelessness (61%), for which deeply affordable permanent housing is needed. For those who are chronically homeless (39%) and may have behavioral health challenges, the increased supportive housing units are crucial if they are appropriately sustained with wraparound supportive services.

One concern about Prop. 1 is the restructuring of funding under the Mental Health Services Act (MHSA). While the exact consequences of this change are not entirely clear for each county, it could have adverse effects. The MHSA has been instrumental in providing innovative, community-based services for historically underserved communities, including people of color and LGBTQ+ communities. Given that county leaders have expressed that this initiative could result in less funding for core services, Prop. 1 could negatively impact services for Californians of color and LGBTQ+ communities that are currently supported by MHSA funding.

A key flaw of this initiative is that it expands the scope of the MHSA and prioritizes funding for people who are or at risk of experiencing homelessness without increasing the tax or providing new revenue to support existing county behavioral health programs. This approach is concerning, as it redirects funds originally allocated for a specific purpose to address a different need.

What Are Supporters and Opponents Saying?

supporters

Supporters claim that Prop. 1 would prioritize existing funds and generate new funds for Californians with the most severe behavioral health needs and those living in encampments. Other supporters assert that the proposition is a beneficial component in advancing the variety of interventions needed to address California’s housing and homelessness challenges. Supporters of Prop. 1 include California Big City Mayors as well as some behavioral health and housing advocates.

opponents

Opponents, including disability rights advocates and peer support advocates, argue that Prop. 1 represents a significant regression in the treatment of mental illness and substance use disorders, likening its impact to a 50-year setback. This perspective stems from allowing funding to be used for involuntary or forced treatment facilities. Opponents also claim that Prop. 1 could result in reduced mental health services for Black, Indigenous, and other people of color and LGBTQ+ Californians.

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