LB 2828.85 .C2 P7 1993 IGSL U CB Proposition 174 (Voucher Initiative) Financial Analysis Directors James W. Guthrie University of California at Berkeley Michael W. Kirst Stanford University Gerald C. Hayward Sacramento/ University of California Julia E. Koppich, Deputy Director University of California at Berkeley Proposition 174 (Voucher Initiative) Financial Analysis INSTITUTE OF GOVERNMENTAL STUDIES I IBQARY v.7”:- (J, 5‘ r1 :4 '7 M/ w L u‘ :v 3\ UNIVERSITY OF CALIFORNIA TABLE OF CONTENTS Summary Conclusions ............................................................................................................ 3 Introduction ................................................................................................................................ 4 A Primer on School Finance..................; ................................................................................ 5 Voucher Financing ................................................................................................................... 7 Will The Voucher Plan Cost or Save Money ....................................................................... 8 Proposition 174 Costs Worksheet #1 .................................................................................... 1 1 Proposition 174 Costs Worksheet #2 .................................................................................... 1 2 What Happens in a Local School District if Proposition 174 is Enacted? ...................... 13 Financial Interactions with Proposition 98 ........................................................................... 15 Financial Consequences for Individual Schools ................................................................ 18 Tradeoffs Involved in State Intervention ............................................................................... 17 Glossary of California School Finance Terminology ......................................................... 18 Financial Analysis of Proposition 174 Page 2 Summary Conclusions - Fiscal consequences of Proposition 174 are characterized by uncertainty. Financial projections are heavily dependent upon assumptions regarding the number of students who redeem vouchers and a variety of decisions which must be made by the legislature and the governor. - Proposition 174 exposes the' state to $1.35 billion in potential added costs. These costs are attributable to the possible need to pay for all currently enrolled private school students. - ln orderforthe state to realize savings from Proposition 174, (1) approximately 1 million students would have to transfer from public schools to “scholarship” schools, and (2) policymakers would need to choose not to reinvest the “savings” in education. . If “savings” from Proposition 174 are not reinvested in education, then per pupil revenues for public school students would drop and the value of the voucher would decline. - Substantial annual taxpayer savings could result if “savings" from Proposition 174 were not reinvested in schools or not transferred to other government-funded services. - Proposition 174 saves public costs of school construction, depending upon how many current and future public school students utilize “scholarship” schools. ~ Per pupil revenue differences among public school districts will increase proportionate to the number of public school student transfers to “scholarship” schools. . Proposition 174 dilutes the public school minimum per pupil revenue guarantee voted by the electorate in 1989. (This is the Proposition 98 guarantee.) Financial Analysis of Proposition 174 Page 3 Introduction On November 2, 1993, Californians will face their most important education decision since the state’s formation. Ballot Proposition 174, if enacted, will amend the state constitution and establish ”scholarships” redeemable by parents for their children’s kindergarten through twelfth grade schooling. If this ballot measure passes, public schools will continue to exist, as will today’s many kinds of private schools. However, alongside of these two conventional schooling alternatives will be a third choice, "Scholarship Redeeming Schools.” These new schools will be paid for, or at least financially subsidized, by public funds. However, these scholarship schools may well have privately selected governing boards. They may be religiously oriented. Does this make them public or private schools? We do not know the answer to this question. Ultimately such a determination may be a matter for the courts, the legislature, or simply a matter of no consequence. There are many additional unknowns regarding the operation of the proposed voucher plan and its possible effects, both good and bad. However, in this paper we make an effort to reduce some of the uncertainty on at least one dimension, by addressing questions about public costs and possible public cost savings. Our principal question here is, ”W hat are the financial consequences of the proposed voucher plan?” We divide this concern into several subquestions: 0 Will the voucher plan save or cost money for the state of California? 0 How will the voucher plan interact with the complicated public school financing provisions of the currently controlling constitutional provision, Proposition 98,1 and will any of these interactions reduce (1) the dollar value of the voucher or (2) total funding conventionally available to public schools? 0 What will be the financial consequences for local public school districts? 0 What will be the financial effect on an individual public school if a student leaves to attend a ”scholarship redeeming school?" 0 What are the possible interactions of the voucher plan with issues of public school per pupil revenue disparity raised in the California Supreme Court’s 1976 decision in Serrano v. Priest? 1 Enacted as a ballot initiative in 1989. Financial Analysis of Proposition 174 Page 4 A Primer on California School Finance Before addressing the questions PACE attempts to answer in this paper, the reader needs a ba51c understanding of the manner in which California now finances its public and private schools. California Public School Finance Two significant decisions, one by the judiciary and one by the electorate, have provided California with what, for all practical purposes, is a state system of public school finance. In the 1976 court case, Serrano v. Priest, the California Supreme Court decreed that there could be no significant link between the local property wealth of a school district and its per pupil expenditures. This decision, coupled with the 1978 enactment of Proposition 13, the constitution-amending property tax limitation, guided the formation of a public school funding system in which the legislature and governor, through the state budget, annually determine local district per pupil revenue levels. The per pupil revenue amount allowed by law for a specific school district is a function of that district’s historic spending level. In effect, whatever per pupil revenue amount a school district was raising in 1976 was the level at which it was legislatively “frozen” in order to comply with the Serrano decision. Districts in which the ”base revenue limit” was below the state average have been permitted to increase their per pupil amounts at a faster rate than districts with revenues above the state average. The general effect has been to compress per pupil revenues in California into a far narrower range than in most other states. In fact, approximately 95% of California’s school children are within a relatively narrow per pupil revenue range of about $300. Local property tax proceeds contribute to a Specific district’ 5 per pupil revenue ceiling. However, if they are insufficient to reach the state specified overall per pupil revenue minimum, then state general funds are allocated to the local district to make up the difference. State lottery revenues are a portion of this state aid. Federal financing, and selected state special funds, are provided to local school school districts for the education of children with expensive special needs.2 These funds are provided in addition to local property tax revenues and state funding. Local school district governing boards, except in the instance of a few unusually property wealthy school districts, have little say in determining their per pupil revenues. In effect, they have no property taxing authority. This is a far different system than most states in which local school district governing boards determine per pupil revenues by establishing property tax rates. 2 These are known as "categorical aids" because a local school district can only spend the revenues for the purposes categorized by the higher level of government in granting the special revenues. Financial Analysis of Proposition 174 Page 5 California Private School Finance It is difficult to provide a comprehensive description of private school finance in California because there is no private school “system.” Most private and parochial schools operate independently. Even religiously affiliated schools are generally only loosely aligned with each other. Despite sharing a common denomination or ideology, they generally are responsible for generating their own resources school- by-school. Regardless of such complexity, the principal avenue through which private schools generate resources is through the imposition of user fees, tuition. This ranges from a small amount, say $1,000 in some schools, to an annual fee of $10,000 or more in some elite schools. In addition, most private schools charge separately for transportation, after school childcare, books, food, recreational activities, science laboratory supplies, and similar items. Also, private schools typically engage in a variety of fund raising efforts through activities such as bake sales, car washes, and second hand clothing stores. Please see attached ”School Choice Fact Sheet” for relevant school finance information. Financial Analysis of Proposition 174 Page 6 Voucher Financing Proposition 174 specifies that the average amount of the voucher, to be established specifically by the legislature, cannot be less than one-half the amount currently spent on public school students. In today’s terms, the per pupil value of the voucher would approximate $2,500.3 The legislature has the discretion to adjust this average amount by grade level. Thus, for example, vouchers for high schools could be higher than for elementary grades. Keep in mind that the legislature may increase the value of the voucher; the amount is not fixed, and, in fact, may vary from year to year. For example, if state elected officials decided to spend more than $5,000 per public school pupil, then the per pupil value of the ”scholarship” would increase by half the elevated amount. The amount the legislature and governor might decide to spend on public school students is itself subject to a constitutional provision, Proposition 98.4 The voucher initiative also specifies that the amount of an annual “scholarship” in excess of what is paid for tuition can be “credited” to a student’s account, established by the state. The excess, the difference between tuition and the voucher amount, can be used subsequently to pay for secondary school or college tuition. The legislature also has the discretion to pay for transportation in keeping with rules it devises. The voucher initiative makes no provision for additional public funds to flow to private schools exclusively for school construction or facilities leases. However, there is nothing which prohibits a private school from utilizing all or part of the $2,500 ”scholarship” to construct or lease facilities. 3 State agencies disagree regarding current public school per pupil revenues. However, estimates range only from $5,000 to $5,200 per pupil. Differences result principally from using Average Daily Attendance (ADA) or Average Daily Membership (ADM) as a divisor, once having summed spending components. This analysis utilizes the $5,000 per public school pupil figure because we believe it to be the most accurate computation of the voucher amount according to Proposition 174 provisions. (The proposition speaks of enrollment, not ADA.) Remember, however, that Proposition 174 authorizes state government to increase the amount of the voucher. $2,500 is only a minimum. 4Enacted by ballot initiative in 1989, Proposition 98 specifies the minimum which must be spent on public school students. However, under certain interpretations of the voucher initiative, Proposition 98 formula elements might be altered and the result would be a reduced spending on both public and private school students. We explain these complicated Proposition 98 interactions in a subsequent section of this paper. Financial Analysis of Proposition 174 Page 7 Will the Voucher Plan Cost or Save Money? A prominent question in the discussion surrounding Proposition 174 is, “Will the voucher plan cost or save money for California?” The answer is ”Yes.” In large measure, it depends heavily upon the assumptions that are made about (1) "consumer” behavior, in other words, how many students will choose ”scholarship” schools, (2) implementing steps to be taken by the legislature, and (3) state government’s priorities, in other words, whether or not to return ”savings” to taxpayers or reinvest them in government services. Let us examine first the more straightforward question of capital outlay, funding for school facilities construction. Then we will address the more complicated issue of operating costs, the funding of recurring day-to—day school activities. Capital Outlay Costs California currently has no state financing provisions for public or private school construction. Over the past fifteen years, state financial contributions to school construction have resulted from the sale of voter approved, state backed bonds. The supply of these funds is now exhausted and no statewide ballot measures to sell more bonds are scheduled to come before the public in the immediate future. In addition, the state currently is bonded to capacity. The current state school aid building program is due to expire and no replacement mechanism is yet in place. By a complicated set of procedures, local school districts can seek voter approval for constructing new buildings. Also, local school boards can impose fees on home construction, proceeds of which can be used to construct school buildings. However, California’s depressed economy has dampened new home construction, and builder fees are not currently a major source of school construction revenue. Despite such complexity and uncertainty, the voucher plan, if enacted, almost assuredly saves California school construction money. Currently, the state faces an approximate $10 billion classroom construction backlog. This has been triggered by massive public school enrollment increases that have occurred over the past decade. California's school systems simply do not now have adequate room to accommodate the large influx of new students. If enrollments continue to increase, as projected currently, then the cost of facilities might be higher yet. Consequently, the voucher plan is likely to reduce the state’s and local school districts’ construction expense exposure. Private providers, voucher-redeeming schools, will simply have to obtain facilities from among the existing building stocks or otherwise arrange for facilities to be built. As mentioned above, they could cover or defray these costs from the per pupil $2,500 vouchers. However under such a scenario, the public almost assuredly saves money that otherwise would have to be generated to construct public schools. The difficulty is that there is virtually no way to estimate how much. The amount of cost savings is extremely difficult to project because of all the uncertainties. The number of student transfers to private schools, the locations of expanded or new private schools, and the existing capacity of public schools all impact the amount of cost savings which may be realized. Financial Analysis of Proposition 174 Page 8 Operating Costs The answer to whether or not the voucher plan saves or costs California state government money depends crucially upon the assumptions made about parent responses to the availability of school choice and state government’ 5 implementing decisions. PACE’s assumptions for purposes of analysis are as follows: . Initial dollar value of individual vouchers will average $2,500. (The legislature will not opt fora higher voucher amount or separately to fund added services (e.g., transport) or construction costs for scholarship redeeming schools.) - Virtually all eligible private school students will choose eventually to attend scholarship redeeming schools. - Administrative costs of a voucher plan, relative to the approximate $26 billion total amount now spent by the state on public education services, will be minimal. - Total enrollments (for the total of public and private school students) will grow an average of four percent a year.. . Inflation will increase at three percent a year. . State overall economic conditions will not change dramatically. Principal variables which will establish the range of possible voucher plan financial costs or savings to the state are: - Proportions of public and private school students choosing to attend scholarship redeeming schools. - State government decisions regarding public school per pupil base revenues State Exposure to Added Costs: Absorbing Existing Private School EnroIIees Assume, for analytic purposes only, that no currently enrolled public school students choose to transfer to scholarship redeeming schools. Under this scenario, the state would be exposed to a range of added costs for whatever proportion of currently enrolled private school students chooses to transfer to scholarship redeeming schools. This portion of the analysis focuses on the prospect of added costs to the state. A subsequent section will examine prospective ”savings” to the state from public school transfers. Financial Analysis of Proposition 174 Page 9 California private schools currently enroll slightly more than a half million students (540,000)5. The bulk of these, approximately 80 percent, are not eligible under the voucher plan for a state—financed “scholarship” until 1995. Thus, they pose no immediate financial burden to the state if the voucher plan is enacted in November. However, approximately 124,000 of today’s private school students would be immediately eligible for state-financed ”scholarships,” or would be eligible as soon as the legislature forges an implementation plan. (These are students who enrolled in private schools after October 1991.) Their schooling currently is paid for privately. Thus, to give these students a voucher would be an added expense to the state. How much? Assume that there are 120,00 immediate voucher eligible students. If all of them chose to enter ”scholarship” schools, an unlikely scenario, then the added cost to the state would be $310 million. More realistically, if 100,000 (81 percent) of them chose to attend a scholarship redeeming school, added state costs would be $250 million. By 1995, all remaining private school students become eligible for ”scholarships.” This is an additional 416,000 enrollees. If all of them chose to redeem vouchers, the state’s added cost exposure would be $1.04 billion. If, more realistically, we assume 80 percent (332,000) of these choose scholarship redeeming schools, then the potential added costs to the state, at $2,500 each, is $830 million. Adding $830 million to the $250 million (for 80% of private, immediately eligible school students), places the state’s prospective expense exposure at $1.08 billion. A reader should keep in mind, however, that Proposition 174 is effectively an entitlement plan whereby all current and future private school students are eligible for public subsidy. Should all 540,000 current private school students eventually take advantage of this entitlement, the state's potential cost exposure in current dollars is $ 1.35 billion. Obviously, if lower percentages transfer, the state’s prospective exposure is lower. 5This figure is the State Department of Education's estimate of the number of students currently enrolled in private schools which exceed the Proposition 174 limit of at least 25 enrollees. Financial Analysis of Proposition 174 Page 10 Proposition 174 Costs Worksheet # 1 Private and Parochial School Estimated State Absorption Costs Total California Private and Parochial School Enrollments 540,000 Students immediately eligible for ”Scholarships" 124,000 PACE assumed number of students who will transfer 100,000 State annual voucher costs per transferee $2,500 Total estimated state costs for immediately eligible transfers $250,000,000 Private and parochial school enrollees eligible in 1995 416,000 PACE assumed number of 1995 transfer students 332,000 State annual voucher costs per transferee $2,500 Total estimated state costs for 1995 eligible transfers $830,000,000 Total estimated state costs for immediate and 1996 transfers $1.08 billion Prospective State Savings: Public School Transfers to Scholarship Schools There is a potential savings to the state for every public school student who transfers to a scholarship redeeming school. Assuming that the voucher is $2,500 per pupil, the state will save the difference between this amount and what it will constitutionally be required to allocate for each public school pupil. PACE estimates the potential computational saving as $1,250 per transfer from public schools. This ”saving” is computed in the following manner. For each public school pupil transferring to a ”scholarship” school, the state assumes the specified $2,500 costs of the voucher. Thereafter, there is not an automatic $2,500 savings from the remainder of the Proposition 174 specified computation of $5,000 per public school pupil. Why not? Because $400 of the $2,500 amount is contributed by the federal government and is not available as a savings to the state. An additional $450 is state categorical aid which is not distributed on a per capita pupil basis to school districts. Rather, it is distributed in keeping with the characteristics of specified categories of students, such as those who are handicapped. (Proposition 174 leaves to the legislature’s discretion whether or not these state funds for special purposes will be added to the value of the voucher.) Another $400 is generated by local school districts themselves through foundation grants, parents’ contributions, and the Financial Analysis of Proposition 174 Page 11 What Happens in a Local School District if Proposition 174 is Enacted? Determining prospective savings or added costs to the state treasury does not adequately explain revenue dynamics in a local school district. This is because what a California public school district receives and is permitted to spend per pupil is a function of a crazy quilt pattern of intertwined statutes and constitutional provisions which are difficult to disentangle. This section attempts to dissect these interrelated features and arrive at a conclusion regarding the possible effects of Proposition 174 upon local school district financing. As a consequence of the previously-mentioned Serrano decision, Proposition 13, and state school financing statutes, the average California public school pupil has a state- specified revenue limit of $3,2006. Local school districts, on average, are restricted and cannot spend more per pupil in local property tax monies and state equalization aid than this amount.7 Thus, if (1) local property tax proceeds continue to flow to school districts as is now the case, and (2) a local public school district has fewer students because of transfers out to scholarship redeeming schools, then local property tax proceeds continue to be available in the school district to subsidize a larger and larger portion of the revenue limit amount for each remaining public school student. If public school transfers increase, assessed value of property escalates, or if both occur, then locally generated property tax revenues become an increasing proportion of state basic aid. Under these scenarios, and assuming the legislature does not elevate the ”base revenue limit" per public school pupil, then the state begins to save additional money because the state’s required "match” declines as the local share increases. The following hypothetical example illustrates the dynamic by which local property tax proceeds can come to cover a growing amount of the costs of public schooling. Imagine an average spending ($3,200 per pupil base revenue limit amount) public school district of 10,000 enrolled pupils. Funds from its revenue limit calculations would total $32 million. Approximately 40 percent of this total ($12.8 million) would be derived from taxes on local property. The remaining $19.2 million would be a subsidy of state funds. This equals a state equalization aid subsidy of $1920 per local student. If this district lost half its pupils (5,000) to scholarship redeeming schools, its total revenue limit calculation would now be $16 million (5,000 multiplied by $3200). However, it would continue to collect $12.8 million in locally generated property 6 This is less than the $5.000 per pupil used as a base for calculating Proposition 174 vouchers because the latter amount contains federal funds, state categorical aid funds, child care monies and a host of other revenues that Proposition 174 specifies are to be calculated in the voucher base. 7 Specified funds can be spent on top of this "Base Revenue Limit". These include monies for handicapped children, federal aid, etc. Financial Analysis of Proposition 174 Page 13 rental or sale of property. These funds do not automatically revert to the state as savmgs. One way of examining potential savings is to look at the current breakdown of funds. This analysis is one of several possible scenarios. The result of this analysis is that there is a potential state “savings” of $1,250 for each public school student transferring to "scholarship” schools. The ultimate disposition of such “savings" is left to the discretion of the legislature and governor. Proposition 174 Cost Worksheet #2 Estimating State Government “Savings” From Public School Transfers to ”Scholarship” Schools Total current spending from Proposition 174 specified sources $26 billion Current number of public school enrollees 5.2 million Total spending per public school enrollee $5,000 Proposition 174 voucher value (1994) $2,500 (Specified as half per public school pupil spending amount) Net computational savings per transferring public pupil $1,250 ($5,000 minus $2,500 voucher: $2,500 minus $400 in local school district contributions (e.g., foundation grants and parents contributions), minus $450 in state categorical aid, minus $400 in federal funds, equals a state potential savings remainder of $1,250 ) Number of public school transfers needed for state to save $1.08 billion. (($1.08 billion divided by $1,250.) 864,000 Percent of current public school enrollees (864,000 divided by 5.2 million) 16.6% Financial Analysis of Proposition 174 Page 12 taxes. The total state subsidy to the district would now be only $3.2 million. This equates to a state subsidy of $640 per student, or $1280 less than what the district received in per pupil state aid prior to the student transfers. Public School Revenues Could Become Uneven If a school district had high local property wealth (assessed valuation per pupil substantially in excess of the state average), and if a high number of its students transferred to scholarship redeeming schools, property tax revenues would soon cover or exceed the state specified ”base revenue limit” for each student. At this point, under current law, the district’s revenue limit ceases to be controlled by state statutes. The district, in other words, begins to control its own per pupil spending destiny. It could continue to rely upon its local property taxes and begin to spend more money per pupil than the base revenue limit specified. Under the above scenario, if large numbers of districts became basic aid districts, California would revert to a pre-Serrano condition in which local property wealth was a major determinant of the amount per pupil a school district had available to spend. This link between local property wealth and available per pupil revenue was declared unconstitutional by the California Supreme Court in 1976. Since that time, California has been obligated to ensure that 95 percent of public school pupils fall within a relatively narrow revenue band.8 8 This initial trial court decision in Serrano v. Priest decreed that property related revenue differences could not exceed $100 per pupil. Subsequent legal decisions have interpreted this amount to be subject to inflation. Hence, it is assumed that a per pupil revenue distribution of $300 would probably be found constitutional today. Ninety five percent of California's public school pupils now fall within this revenue constraint. Financial Analysis of Proposition 174 Page 14