Who will be our Country’s next President is not the only issue on the ballot November 3. If you’ve voted in California before, are in the middle of studying your ballot, don’t mute your TV commercials during election season, or read text messages that you receive from campaign volunteers, you know that California has a robust ballot proposition system. On November 3, California voters will have the opportunity to vote on Proposition 15 (“Prop 15”), also known as The California Schools and Local Communities Funding Act of 2020.
This blog post will provide an overview of Prop 15, including the positions taken by the proponents and opponents of the initiative, and discuss how passage of the Prop 15 may impact your agency’s operations.
What is Proposition 15?
If passed, Prop 15 will increase funding to K-12 public schools, including charter schools and county offices of education, community colleges, cities, counties, and special districts by assessing property taxes on commercial and industrial real property based on the current market price of the property. Currently, the state assesses property taxes based on the purchase price of the property. Prop 15 exempts from its provisions residential properties, agricultural land, and owners of commercial and industrial properties with combined value of $3 million or less. If voters approve Prop 15, it will be the most significant shift in how California assesses property taxes since voters approved Proposition 13 in 1978, essentially lifting Prop 13 restrictions on many commercial and industrial real properties throughout the State.
Property taxes currently raise around $65 billion each year for California cities, counties, schools and colleges, and special districts. Approximately 60 percent of these funds go to cities, counties, and special districts, with the other 40 percent allocated to schools and community colleges. The State also assesses “personal” property taxes on business equipment such as machinery, computers, and furniture.
The Legislative Analyst’s Office projects that Prop 15 will raise an additional $6.5 to $11.5 billion in new funding for local governments and public educational institutions. If passed by voters, 60 percent of the funds would remain local, meaning that counties would collect and distribute the tax revenue among the county, city governments, and special districts. The remaining 40% will go into a statewide “Local School and Community College Property Tax Fund” (the “Fund”) and be appropriated pursuant to provisions in the Education Code.
Of the 40 percent of funds earmarked for K-12 educational entities and community colleges, 11 percent of the Fund would be distributed to community college districts in proportion to the number of full-time equivalent students, i.e., the Student Centered Funding Formula. The remaining 89 percent of these funds would be allocated to K-12 districts, charter schools, and offices of education, with funds to schools distributed according to the Local Control Funding Formula (“LCFF”). Prop 15 funds will supplement and not replace other educational funding sources. “Basic-aid districts,” – i.e., property-wealthy districts that do not receive money from the LCFF because the district raises more revenue from property taxes – will not receive funding pursuant to the LCFF, but will receive $100 dollars per unit of average daily attendance. The additional funds that basic-aid districts will not receive will be distributed to high-needs districts pursuant to the LCFF. Finally, Prop 15 provides that no college or school will receive less than $100 per unit of average daily attendance or enrolled full-time equivalent student, respectively.
As with many California ballot initiatives, both Prop 15’s proponents and opponents have spent tens of millions of dollars to garner support for their positions. In an all-too-rare occurrence, public sector management and labor largely seem to be on the same team rallying support for this initiative. The California Association of Nonprofits also supports the initiative.
Opponents include chambers of commerce, taxpayers associations, and several business associations.
Proponents contend that Prop 15’s additional tax revenues will bring critically needed funds to local governments and public educational institutions, and by extension communities, by allowing such agencies to addresses staffing shortages and invest in infrastructure that will allow them to address current crises, such as homelessness and other public health crises, as well as prepare for future crises, including but not limited to earthquakes and pandemics. Opponents, on the other hand, argue that that commercial and industrial property owners will pass on the cost of increased taxes to the businesses and individuals who rent such property.
If passed, counties will not begin to assess Prop 15 property taxes against qualifying commercial and industrial property owners until the 2022-2023 fiscal year.
How will my agency be able to use Prop 15 funds?
While schools, colleges, and local agencies may not see an immediate impact on their tax revenue, anticipated revenue from Prop 15 may allow agencies to better plan for and address current and expected budget shortfalls. Additionally, Prop 15 does not limit how agencies may use tax revenues beyond limits already contained in other applicable laws. Therefore, it appears that local governments and public educational institutions will be able to use additional tax revenues to do such things as decreasing class sizes (e.g., by hiring more teachers), hiring more school counselors and librarians, improving distance education delivery methods, and investing in essential services and workers to help better prepare for future crises including pandemics, wildfires, and earthquakes, among other things.
So, is there a catch?
A broad coalition of public agencies and labor organizations support Prop 15, including but not limited to, the California Federation of Teachers, California Teachers Association, SEIU California, Association of California School Administrators, Community College League of California, more than eighty school and community college districts, boards of education, city councils and boards of supervisors, and almost 100 local labor associations. The California Association of Nonprofits and more than 100 non-profit organizations also support the proposition.
However, it is likely that not all communities will necessarily experience a positive benefit from increased commercial and industrial tax revenue. The California Attorney General notes that some local governments in rural areas may end up losing money because of lower taxes on personal business property. This decrease in personal business property revenue would particularly hit counties with few qualifying commercial or industrial properties harder.
Additionally, it is unknown how Prop 15 will impact businesses, including non-profit educational intuitions and other non-profit organizations. Prop 15 defines “commercial and industrial property” as “real property that is used as commercial or industrial property, or is vacant land not zoned for residential use and not used for commercial agricultural production.” Although not clear, it is likely that property owned by private schools or rented by private schools will be considered commercial property for purposes Prop 15.
For those private schools that own property, they will likely see an increase in property taxes unless the property is assessed at a fair market value of three million dollars or less. Additionally, if at least 50 percent of the real property is occupied by a “small business,” the state will not begin assessing Prop 15 taxes against the small business until the 2025-26 fiscal year. Prop 15 defines a small business as an independently owned and operated business with fewer than 50 full-time equivalent employees that owns real property located in California.
For those private schools that rent their property, opponents of Prop 15 also argue that commercial and industrial property owners will pass the cost of additional taxes onto tenants, including small businesses. Supporters respond that because Prop 15 reduces taxes on personal business property, including complete exemptions on such taxes for small businesses and exemptions of up to $500,000 for other businesses, any net increase to rent will be offset by these tax breaks. Therefore, even if private schools’ rents increase, Prop 15’s tax breaks for personal business property could offset any such increases.
Liebert Cassidy Whitmore does not take positions on political candidates or ballot measures. This blog post was authored to educate readers on an initiative that could have a tangible impact on LCW’s clients. This author encourages readers to study their ballot and make a plan to vote on or before November 3.