In 1996-97, California will spend $34 billion to educate and provide school-based services to about 5.5 million children in kindergarten through 12th grade.
California is in the bottom 10 states for per-pupil spending -- but some states that spend more post no better results.
The way the State pays for schools has been shaped by court decisions and voter-approved initiatives during the past 25 years: Serrano focused on equalizing some types of funding, Proposition 13 shifted power to the State and Proposition 98 narrowed policy makers' options.
Nationally, past lawsuits focused on equalizing dollars; the new trend addresses the adequacy of educational efforts and equity of opportunity for all students.


California once had a widely recognized superior education system. By many measures, that is no longer the case. Defenders of the State's education efforts point out that the pressures faced in California are tremendous: rapidly expanding school-age population, dramatic increase in children who -- for a variety of social and economic reasons -- are not school-ready when they get to the classroom, and the growing burden of meeting the needs of students with disabilities or language barriers.

Many critics of California's education system, however, point to declining or stubbornly static test scores, increasing school-site crime and the lack of job- or college-readiness by graduates -- all despite larger and larger infusions of funding -- as proof that schools are failing. They argue that even when taken into account, the challenges schools face are not an excuse that should justify continuing failure.

Both defenders and critics believe that something must be done -- but there is little agreement on what that magic "something" is. The debate often turns to money: At one extreme, there is the simple demand for more money. After all, New Jersey -- another densely populated, urbanized state -- spends more than twice as much as California does per student on education. At the other extreme, there is a fervent belief that more money is not necessary. If the stranglehold of education bureaucrats and labor unions could be broken, public schools could perform as inexpensively as many private and parochial schools do, this argument runs.

There is a growing middle ground of believers between those who think more money is the only solution and those who believe any more money would be wasted. This middle ground revolves around how money is spent and how schools are deflected from their main mission by the way money is allocated. From this middle ground, advocates for change skirt the issue of whether there is enough money in the system and focus instead on ways to spend money more effectively and on means of aligning the allocation system to match education goals.

In its study, the Little Hoover Commission has been following the middle ground logic, examining the way the allocation system drives school decisions and diverts resources to non-educational activities. This examination began with an exploration -- detailed in this background -- of the State's present status on financing education, historical events that have shaped State actions and current national trends.

Current Spending

In the 1996-97 fiscal year, California will spend about $34 billion to educate and serve about 5.5 million children in grades kindergarten through 12th.(1) Not all of those funds will be spent on activities that most citizens think of when they drive by their local schools. Included in the State's education budget are dollars for adult education, nutrition, pre-school programs and child care, among other non-classroom activities. Experts estimate that the cost of educating children, shorn of the extra but important social services schools provide, is about $26 billion.

By far the majority of the funding, almost $20 billion, comes directly from the State. The lion's share is from the General Fund, $19.3 billion, with the proceeds from the California Lottery ($580 million) and miscellaneous state funds making up the rest. As the graph at the right indicates, local property taxes come in at a distant second with almost $9 billion, followed by the federal government at almost $3 billion and miscellaneous local sources for the remainder.(2)

The total amount dedicated to K-12 education in California has steadily, albeit slowly, climbed. A decade ago, California spent $16 billion.(3) While today's $34 billion represents an increase of 113 percent, the amount has not climbed fast enough to cope with several factors, including:

  • Student population growth. In 1986-87, the State had 4.5 million students(4) compared to 5.5 million today, a 22 percent increase in demand for services solely from population growth.

  • Inflation. The rising cost of living has eaten away at increased spending. Between the 1986-87 school year and the 1996-97 school year, the cumulative increase in the California Consumer Price Index was 39 percent -- a notable impact on schools' purchasing power.

  • Increased service requirements. The education program does not remain static. In many cases, state expenditures have been increased to meet mandates regarding the education of special needs children, as well as to provide programs to better prepare children who are at risk for doing poorly in school and to address other social needs. For instance, spending on Special Education has roughly doubled in the past 10 years, increasing both the levels of service and the number of children involved.

    The interplay of these three factors is significant. For instance, it can be argued that per-pupil spending has increased, more than compensating for the effects of population growth. But inflation has turned the added funding into a phantom increase. In 1987-88, state funding per student (as defined by Proposition 98, which will be discussed later) was $3,621. By 1996-97, the amount rose to $4,820. But when adjusted by the Consumer Price Index, the value was $3,435 -- meaning that schools could purchase less per student despite increases in funding.(5)

    Similarly, the increased mandates for service have soaked up a disproportionate share of new funds that have been dedicated to education. A study by the Economic Policy Institute of nine school districts in the nation, including Los Angeles Unified School District, found that between 1967 and 1991 expenditures on the regular education program dropped from 80 percent of education funding to 59 percent. Of the added funding allocated to education in 1991, only 26 percent went to the regular education program. Spending increased greatly for special education, counseling, food service and programs for dropout prevention, bilingual education and job training.(6)

    One way that people rate California's educational efforts is by comparing the state to others in the nation. In 1964, California ranked fifth in the amount spent per student each day -- the Average Daily Attendance (ADA) -- when all state, federal and local funds were considered. For the rest of that decade, the State ranked in the top 10, although the trend was downwards as student numbers soared. The '70s found the State flirting with, but always staying above, the national average, even as the effects of court decisions on the funding system (which will be described in the next section) began to be felt. In the '80s, the State hovered around the national average despite the huge impact of initiatives on traditional education spending patterns (also described in the next section). The deepest plunge occurred after 1988 -- a time when the school-age population surged and the economy plunged into recession. Between 1964 and 1995, California dropped from fifth in the nation to 41st in terms of per-pupil education spending.(7)

    Looking at the figures behind the rankings makes the differences across the nation even more stark. In 1995-96, California spent $4,977 -- $1,121 less than the national average of $6,098 and about half of the approximately $10,000 spent by top-ranked states like New Jersey, New York and Alaska.(8) In 1995 when the State ranked 40th, EdSource (a nonprofit education think tank) estimated it would cost $5.7 billion to bring the State up to the average amount of spending and $28.4 billion to match first-place New Jersey.(9)

    Another way to judge California's education funding is to determine how much the State spends as a percentage of per-capita personal income. If people are willing to tax themselves at a certain proportion of their personal income to pay for education, then when their income expands, their investment in schools should rise proportionately.

    As the chart on the next page indicates, that has not been the case in either California or the nation in the past 25 years. In 1972, education spending in both the State and the country was more than 5 percent of per capita personal income. The percentage declined sharply to 4.1 percent for the nation and 3.5 percent for the State in the late '70s and early '80s before leveling off at 4.2 percent and 3.6 percent in the '90s.

    Since each 1 percent of California's personal income equals about $8.5 billion, school finances would be $17 billion richer if California were still spending on education at the 5.6 percent rate followed in 1972. That translates into about $3,000 more per student than California spends today.(10)

    California compares poorly to other states in this statistical match-up as well. The State ranks 43rd among all states on education spending as a percentage of per capita personal income.(11) In 1995, only 11 states had a higher per capita income than California but only three states spent less on education.(12)

    Critics of such statistical comparisons are quick to point out that merely comparing state spending patterns tells nothing about the educational results. New York, which spends almost double California, has test scores that are comparable. New Jersey, which spends about as much as New York, has superior test scores to both California and New York but litigation over the adequacy of education there continues to result in court rulings that push New Jersey's spending higher and higher.

    Looking at New York and New Jersey, states that are comparable to California in population density and diversity, the moral may be that California is doing a very efficient, cost-effective job of achieving mediocre test scores. Or more to the point, big spenders do not necessarily get good results (New York) -- but sometimes they do (New Jersey).

    By itself, such data is hardly definitive enough to be used to shape the public policy that governs the investment of billions of dollars in education. Even if matching the national average, the top-ranked state or past percentages of per capita income would guarantee educational success, other factors come into play when making budget allocations. In California, decisions on education spending have been driven and molded far less by educational needs and goals than by a series of court and voter decisions.

    Historical Perspective

    The history of California's educational spending has swung back and forth between state and local domination of funding, according to an associate professor at the University of Southern California.(13) For the first six decades after a school governance and financing act was established -- from 1851 until 1910 -- districts were required to raise one-third of the financing for schools from local sources. The State covered its two-thirds share with state property taxes and other resources.

    In 1910 in response to the growing recognition that the state property tax was inequitable, voters adopted a constitutional amendment that in essence gave local governments the property taxing authority and reserved for the State other types of taxes, including inheritance, bank and corporation taxes. Although part of the amendment gave schools and the state university first priority for state appropriations, the practical effect was to greatly increase the local share of funding to support schools.(14)

    When the increasing weight of local property taxes proved too burdensome, further constitutional amendments and statutory changes came in 1933, doubling state support for schools and lowering local property taxes. The sales tax was introduced at this time to help the State pay its new, larger share of schooling costs.(15)

    After the Depression and World War II, local taxpayers once again felt that their share of paying for education was too great. Constitutional amendments in 1946 and 1952 raised the mandatory minimum state aid for schools, and a statute in 1947 established a minimum level of support for all schools to be funded by a combination of a state grant and local funds. But local property taxes continued to provide the bulk of education funding.(16)

    By the 1970s, property values in California were booming and the costs of education were rising, putting great pressure on local property taxes. The two-fold result would play out in two arenas: the courts and the ballot box. Education advocates, impatient with large disparities in funding for schools, took the State's financing scheme to court. And taxpayers, watching their tax bills climb ever higher as property values soared on paper but not in their pockets, approved an initiative that cut the ground out from under local financing of schools.

    During this time, schools were heavily dependent on local property taxes. Elected school board trustees would fashion a budget to meet state mandates and local preferences for education, determine what state funding would be coming their way and then set a property tax rate that would raise the remaining needed funds locally. Districts with valuable property -- expensive homes or costly commercial and industrial holdings -- could set low tax rates and enjoy increasing prosperity as property values rose. Districts with less desirable property struggled to levy large enough tax rates to generate funding in the face of stagnate values.

    The State provided some additional money to so-called "low-wealth" districts. But the disparity in districts' ability to spend was still staggering. In the 1970-71 fiscal year, the tax rates in the State's 1,100 districts ranged from 39 cents per $100 of assessed valuation to $7.83. The difference in expenditures per Average Daily Attendance ranged from $420 to $3,447.(17)

    The dramatic differences in money-raising capacity prompted the filing of Serrano vs. Priest, a lawsuit that argued children in districts with low property values were not being treated equitably. In August 1971, the California Supreme Court ruled that the State's school finance system created disparities in spending that violated constitutional requirements for equal protection of all citizens.

    Comparison of School Spending, 1968-69
    School District Assessed Value Per Pupil Tax Rate Expenditure Per Pupil
    Alameda Co.

    Emery Unified

    Newark Unified







    Fresno Co.

    Coalinga Unified

    Clovis Unified







    Kern Co.

    Rio Bravo Elemen.

    Lamont Elemen.







    Los Angeles Co.

    Beverly Hills Unified

    Baldwin Park Unified







    Source: School Finance: A Policy Perspective(18)

    Disparities in the ability of districts throughout the state to raise funds were difficult to overlook -- especially when they occurred in neighboring communities. These examples were cited in an August 1971 Supreme Court ruling that found the school financing system unconstitutional.

    Serrano vs. Priest was sent back to Superior Court for factual determination. Not awaiting the outcome, the Legislature began to adjust the system. But their initial efforts were found insufficient when the state Supreme Court in 1976 ruled the system unconstitutional in a decision that is often referred to as Serrano II. The court wrote:

    Substantial disparities in expenditures per pupil among school districts cause and perpetuate substantial disparities in the quality and extent of availability of educational opportunities. For this reason the school financing system before the court fails to provide equality of treatment to all the pupils in the state. Although an equal expenditure level per pupil in every district is not educationally sound or desirable because of differing educational needs, equality of educational opportunity requires that all school districts possess an equal ability in terms of revenue to provide students with substantially equal opportunities for learning. The system before the court fails in this respect, for it gives high-wealth districts a substantial advantage in obtaining higher quality staff, program expansion and variety, beneficial teacher-pupil ratios and class sizes, modern equipment and materials, and high-quality buildings.(19)

    Serrano II required that the wealth-created differences in districts' abilities to raise general funds be narrowed to "insignificant differences, which means amounts considerably less than $100 per pupil" within six years.(20) (A later decision allowed this amount to increase by an inflationary factor that today sets the allowable range at about $300 per pupil.) The court recognized that differences in district spending because of special needs (disabled or poor students, for instance) and special costs (transportation, desegregation, weather-related utility costs) would not need to be equalized.

    The Legislature's response was a system that set revenue limits for each school district based on historical spending and then applied differential cost-of-living adjustments. Low-wealth districts would move slowly toward the state average because they would receive larger cost-of-living increases than high-wealth districts. High-wealth districts would be limited in their ability to raise extra revenue.

    This complicated and incremental approach avoided the simplistic solution of dividing the pot of property taxes equally among all students statewide. Such an approach -- while appealingly straightforward -- would have required big-spending districts to cut back, lowering academic efforts in half of the districts to raise them in the other half. It also would have met with taxpayer resistence since local districts would have been loathe to raise tax rates only to see the funding go elsewhere.

    In addition, many who understood the dynamics of population and property values recognized that the impact would hit minority and low-income students, despite Serrano's intent of helping this population. While the court decision and popular belief envisions low-wealth districts containing impoverished students, often high-wealth districts -- those with lots of commercial and industrial development -- are home to substantial numbers of low-income residents. Five large metropolitan areas -- Los Angeles, San Francisco, San Diego, Long Beach and Oakland -- have assessed valuations at or above the state average and have the largest concentration of poor students. Conversely, the majority of the highest spending districts in the state were not home to wealthy families, as also envisioned by Serrano, but were sparsely populated rural districts with high operating costs.(21)

    Subsequent Serrano decisions continued to prod the State to reform the system. Today more than 97 percent of the State's students attend school in districts that fall within the acceptable band of per-pupil revenue. In 1989, the Serrano case was declared closed. The State, however, continues to provide funding to low-wealth districts in an on-going effort to bring them up to state averages (in 1996-97, the cost was $147 million).

    Despite the institutional absolution provided by the end of Serrano, the question of equity remains open for many. These include the lay public, who see some schools spending more than others and are either unaware or unimpressed by the justification of extra funding for special needs or special costs. And they include professional evaluators, like Education Week, which recently handed California a grade of D for equity (tying the state with Rhode Island and Texas for dead last among all states). Education Week noted that the disparity between California districts at the 5th and 95th percentile in spending per pupil in 1992 -- even after all of Serrano's equity demands -- was $3,230.(22)

    While Serrano started the State down a path of apparent reform, Proposition 13 had a more immediate and dramatic impact on education funding. The Legislature had been on the verge of implementing a complicated series of equalization formulas to address Serrano's dictates more quickly than the variable cost-of-living increases would when voters approved the property-tax-cutting initiative Proposition 13 in June 1978. Property tax rates were instantly equalized at 1 percent of assessed value and enshrined in the State's Constitution. Growth from this revenue source was suppressed, with property value increases limited to 2 percent annually unless the property changed hands. Overnight, the State went from having diverse tax rates set and collected locally to essentially a single statewide system. And the decision of how to allocate property taxes between local governments and schools became a discretionary decision for state lawmakers -- who soon learned that shifting more property taxes to schools meant less reliance on the State's general funds for education.

    Proposition 13 shifted the responsibility for education spending from local government units to the State. (The consequences of the shift from local to state funding will be examined in Finding 4.) Prior to Proposition 13, school districts received a set amount of state aid and then raised property taxes to meet the rest of their needs -- this was true both pre- and post-Serrano. Now, without the ability to raise property tax rates, districts instead must depend on the State to provide the difference between property taxes generated and the revenue needed to run the schools.

    In a post-Proposition 13 world, most of the growth in education spending came from the State rather than from a shared partnership of state and local sources. But Proposition 13 and other initiatives and court decisions regarding tax levies did as much to tie the hands of state policy makers as it did local school districts. Now tax increases, special fees and other financing mechanisms required a two-thirds majority vote, whether in the district or in the Legislature -- a difficult hurdle that kept school finances in check.

    In 1988, voters again substantially affected the school financing structure by passing Proposition 98. This initiative guaranteed schools about 40 percent of the state General Fund. It also required that the schools get at least the amount budgeted in the prior year, plus an adjustment that acknowledged the impact of student population growth and inflation. Another requirement guaranteed that most funding above the Gann limit for state spending -- an initiative approved by voters in 1979 -- would be used for schools rather than returned to taxpayers. (The Gann limit is not addressed here; voter-approved modifications of the limit's formulas have effectively placed the ceiling high enough so that school spending is not affected.)

    Many advocates would argue that Proposition 98 has protected school finances during the State's recent recession -- and there is little doubt that the State's revenue windfall from the robust economy in mid-1997 would not be dedicated almost entirely to schools if it were not for Proposition 98. But others see the proposition as an unwieldy tool that has not stopped policy makers from manipulating school funding. Many feel it also has acted as a ceiling for spending rather than the intended floor.(23) Since increases in state spending for education in one year are built into the base for the next year (unless carefully constructed), Proposition 98 can act as a disincentive for policy makers to expand education programs.

    Certainly much of the complexity, as well as court action, that has plagued school financing in the past few years has stemmed from the twists and turns policy makers have used to avoid suspending Proposition 98. Few would argue that the formula contortions were focused on educational needs.

    Thus, the education financing structure in California has evolved in the past three decades under the force of a set of major decisions: the 1970s adjusted for Serrano, the 1980s struggled with the impact of Proposition 13 and the 1990s coped with Proposition 98 in the throes of recession.(24) California has not been alone in seeing its education finance system change. Many other states have struggled with similar issues.

    National Context

    Education spending reform across the nation has often been the result of court pressure. That pressure has largely focused on equity of dollars. Even when attention has shifted to the quality of education, the yardstick has been money and the measurement has been comparative resources.

    In the past two decades, more than 60 suits have been filed in 41 different states.(25) According to the Education Commission of the States, funding systems have been ruled unconstitutional in 15 states and have been upheld in 17 states. In many other states, litigation is still pending or has been dismissed without a conclusion being reached.(26)

    Authorities generally recognize three "waves" of litigation that have spurred reform of education spending.(27) The first wave focused on the U.S. Constitution's equal protection clause and held the potential for resolving the issue of equitable funding on a nationwide basis. Leading the way was California's Serrano case -- but the U.S. Supreme Court's Rodriguez decision effectively halted this wave at a national level in 1973, finding that education is not a federal constitutionally protected right that must be provided equally to all citizens.

    The stage was set for a second wave of litigation -- a state-by-state approach that would rely on the education clauses in state constitutions. The results were spotty since constitutional language varies from state to state. Between 1973 and 1989, just as many state courts upheld financing systems as invalidated them.(28)

    Most of the equity decisions rested on findings that per-pupil spending should be equalized but did nothing to address the uniformity of buildings, textbooks, computers, teacher competence and other factors that impact educational opportunity. At least one study found that higher spending districts have smaller classes, higher paid and more experienced teachers and higher instructional expenditures -- all factors that are believed to be important in achieving high student performance.(29) But higher spending is no guarantee that a quality education will be offered. By focusing on equity -- fairness in amounts of money distributed -- prior lawsuits did little to ensure that all children received adequate opportunities to learn. (The issue of shifting accountability from equity of dollars to equity of opportunity will be explored more thoroughly in Finding 3.)

    The third wave of litigation built on the dissatisfaction that people were beginning to feel with the results of successful equity litigation. Some researchers have found that despite court-ordered equity measures, per-pupil spending gaps persist in many states.(30) There has even been dispute about whether education spending increases when courts intervene: Some researchers have shown that California's education spending was actually depressed by the results of Serrano, while other researchers have demonstrated increased overall spending in states like Kentucky.(31) A study at the University of California, Davis, suggests that when the response to litigation is reform that centralizes spending at the state level, overall funding declines over time. When responsive reform is centered on the state merely supplying extra funding to low-spending districts, then aggregate education funding increases over time.(32)

    Beginning in 1989 with a Kentucky case, attention focused on adequacy rather than equity, targeting the education clauses in state constitutions. A keynote decision was Rose vs. Council for Better Education, where the Kentucky Supreme Court ruled that even the state's most affluent school districts were inadequately funded in comparison to what the court called acceptable national standards. Citing test scores below surrounding states' scores and a 21 percent dropout rate for ninth graders, the Kentucky court ruled the entire school system unconstitutional. The Legislature was forced to adopt a new education system and increase funding substantially.

    Another example of adequacy litigation is in New Jersey. That state's 1970s lawsuits focused on equity, with Robinson vs. Cahill finding that the state's constitution did require equity in educational efforts. The 1990 decision in Abbot vs. Burke relied on a clause in Robinson that said an educational system should produce educational outcomes sufficient to allow students to compete in the labor market. In declaring New Jersey's financing system unconstitutional for the 28 poorest school districts, Abbot found that students in these districts achieved poorly and did not meet the need for well-schooled and skilled workers in the labor market.(33)

    Other adequacy cases have not been successful, however. In New Hampshire, the state Supreme Court ruled in 1993 that the state must provide children with an adequate education, leaving the definition of adequate to a lower court. Three years later, the lower court ruled that while large disparities in funding exists, the plaintiffs did not prove that the state was providing students with an inadequate education. (In fact, one politician noted that the state's students are in the top third of SAT scores nationwide.) The judge in the case said it was the court's job to determine constitutionality but the Governor, Legislature and citizens' job to make any needed reforms in education.(34)

    The Illinois Supreme Court reached a similar decision in that state in 1996 after six years of lawsuits focused on the state's constitutional wording that calls for "an efficient system of high-quality public education."(35)

    California is not likely to ever see a Kentucky-style lawsuit, with the question of the adequacy of the State's educational program compared to a constitutional standard. The State's Constitution does not require that an adequate -- or any other specified quality -- education be provided to students, only that a system of common schools be operated.

    Many have pointed out that the question of adequacy is trickier than the pursuit of equity (which has proven thorny enough). As complicated as achieving equitablespending has been, the road to an adequate education is uncharted. There is no set standard for what constitutes adequacy, just as there is no agreement on what children should learn and how they should be tested to prove they have learned it. Adequacy -- both of funding and educational opportunity -- will be examined in Finding 5.

    While the examples of education finance reform discussed above were the result of court action, litigation is not the only route for change -- although it is by far the most common since a court decision creates an unavoidable mandate for action, while legislative action requires political consensus that a problem exists and that a solution should be provided. By one count, 21 states have achieved legislative reform without a court order in the 25 years since Serrano. But at least three of those states -- Tennessee, Missouri and Arizona -- still were not immune from suits and court rulings of unconstitutionality after their reform efforts were found wanting.(36)


    Education is a big investment for government, outranking in cost and size most of the services that government is expected to provide its citizens. In 1996, spending on public education across the nation reached about $256.3 billion. In 1994, the average state spent 31.5 percent of its resources on elementary and secondary education.(37)

    In California, the system for financing education has been built much like the Winchester House -- with endless add-ons, modifications and whims shaped by court dictates, initiative mandates and statutory compromises. The goals of equity of opportunity and adequacy of educational outcome have been acknowledged but rarely directly or effectively addressed by such hit-and-miss reforms.

    California is not alone in struggling with education financing. The State has been a leader in some reform areas: in equity litigation with the groundbreaking Serrano suit and in altering the link between property taxes and school funding with Proposition 13. In others, it has lagged behind, lacking a consensus on what constitutes an adequate education, such as developed by Kentucky, and lacking standards and testing that could link outcomes with investment, as pioneered by states like Texas.

    People who want the education system to work better face a tough battle. The system is being pressured to produce better results, use limited dollars efficiently and ensure equal access to opportunity. The Education Commission of the States has pointed out that education financing structures do not support those goals:

  • Finance focuses on equity and adequacy, but not necessarily on quality or higher student performance.

  • Finance uses formulas, mandates and reimbursement programs, but rarely incentives and rewards for school improvement.

  • Finance focuses on districts, rather than schools -- and schools are where learning occurs.

  • Finance decisions are made by fiscal committees and budget officers, who rarely collaborate with education committees and educators.(38)
  • The Education Commission of the States suggests there are four policy questions that should drive decisions about education financing. The first two questions have always dominated discussions and reform efforts: 1) What taxes should be used to pay for schools and 2) how should money be distributed in equitable and adequate ways? But the second two may be far more important in terms of redirecting the education system through the use of financing tools: 3) How should resources be invested to improve student and system performance and 4) what are the costs of reforming education and schools?(39)

    With reading scores for elementary school students ranking at the bottom of the nation, California policy makers have good reason to address these four questions. Faced with a convoluted, difficult-to-understand financing mechanism, policy makers may wish to pursue other choices that will shift education discussions from process and paperwork to achievements and outcomes. The following five findings and associated recommendations are designed to encourage both discussion and action.

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