upper waypoint

Why Some Bay Area Counties May Lose Millions Over an Obscure Legal Fight With the State

Save ArticleSave Article
Failed to save article

Please try again

A view of San Francisco Bay from Berkeley Hill. Five Bay Area counties — San Francisco, San Mateo, Napa, Marin and Santa Clara — stand to lose millions from their budgets this year due to an obscure legal dispute with the state, and they argue it will have a big impact on county services.  (Sean Duan/Getty Images)

Five Bay Area counties could lose a collective $180 million annually if lawmakers pass the governor’s current budget proposal. 

The money is at the center of an ongoing battle between the state and counties with some of the highest property taxes in the state. 

San Francisco, Marin, San Mateo, Napa and Santa Clara are the only five counties in California that generate more property taxes than their obligations to the Educational Revenue Augmentation Fund, which is used to meet funding mandates for public schools across the state. The leftovers are called “excess ERAF.”


For years, the state Department of Finance has said those counties are miscalculating the amount they owe to the fund by omitting kids in charter schools from their daily attendance counts. The state uses those figures to determine how much money it allocates to school districts. 

The counties thought recent lawsuits had settled the issue in their favor. However, under the governor’s current budget, charter schools would be counted for ERAF funding, which would essentially remove the excess property tax revenue that the counties use in their general funds. 

“For more than 30 years, these revenues have been directed to fund K–12 schools, but charter schools have been recently left out of the equation,” H.D. Palmer, a spokesperson for the state Department of Finance, said. “This proposal would ensure that all local educational agencies receive these funds.”

In February, Matthew Hymel, then-Marin County executive, wrote a letter to state lawmakers calling the move unconstitutional, saying it would cost the county $1.1 million per year, affecting some 65 governmental entities.

“This is the latest in a series of attempts by the State Department of Finance (DOF) to take constitutionally protected funds from local governments for State use at the expense of local health and safety programs and services,” Hymel’s statement reads.

More than $47 million is at stake in Santa Clara County, between the county and its cities. County Executive James Williams argues that the governor’s proposal goes against a 2004 constitutional amendment passed by voters that precludes state lawmakers from enacting new “ERAF shifts” to take property tax money away from local governments.

“There should be no more grab of local government money, and that’s why we’re urging the legislature to reject this,” Williams said. 

Michelle Allersma, director of budget and analysis in the San Francisco Controller’s Office, said San Francisco alone risks losing $43 million a year, which it uses to pay for basic services. It began using excess ERAF in the 2016–17 budget year.

“We’re still kind of pulling ourselves out of the kind of pandemic aftermath,” Allersma said. “We’re still working on building back our local economy, so $43 million is objectively just an incredibly large number for us to backfill.” 

Williams said the dispute goes back to 1988 when California voters passed Proposition 98, which guarantees funding for K–14 schools through a combination of money from the state’s general fund and local property taxes, creating ERAF. Property taxes fill those funding buckets first. If the counties don’t supply enough, the state’s general fund fills the rest. 

The Bay Area counties at issue have five of the six highest property taxes per resident in the state. That means their share of the buckets gets filled, and the leftover flows back into the counties to fund other services, like public health and safety. 

“The specific change that they’re proposing is to add another bucket: charter schools,” Williams said. “Today, that bucket gets filled by the state general fund. Instead, the Department of Finance wants that bucket to get filled by ERAF.” 

The Department of Finance previously tried to make that change through a directive from the state controller. That ended up with all interested parties in court. 

A 2020 report from the Legislative Analyst’s Office said the five counties were calculating their ERAF “in ways that seem contrary to state law and shift too much property tax revenue from schools to other agencies” to the tune of roughly $170 million per year. They anticipated that the amount would rise every year as property taxes increase.

At the time, the Department of Finance said ERAF funding calculations should include charter school daily attendance numbers. In response, state lawmakers compromised with the five Bay Area counties, holding them harmless for past years so long as they followed guidance from the state controller. The Legislature passed the 2020–21 budget, assuming counties would meet the higher Proposition 98 guarantee by counting charter schools.

However, the controller’s guidance (PDF), issued in February 2021, omitted charter schools from the definition of a school district in terms of ERAF funding “because they do not directly receive property tax revenue.” 

Related Stories

The California School Boards Association (CSBA) objected, arguing in a lawsuit against the state controller that the guidance was unlawful, violating the California constitution’s minimum funding guarantee because charter schools should not be excluded from daily attendance-based funding or minimum property tax funding, with local funding being “passed through” a school district to the charter school. They estimated that nearly $1 billion was lost to excess ERAF at that time. 

Three of the five counties — Marin, San Francisco and Santa Clara — intervened in the case. 

In June 2022, a judge found the controller’s guidance was within the law. The CSBA appealed, and local governments that use excess ERAF funding closely watched the case, with some even budgeting for legal bills in the case. Last July, an appellate court ruled in the controller’s and counties’ favor, essentially putting the issue to rest.

Or so they thought, until the release of the governor’s current budget proposal.

“To explicitly address charter schools and their interaction with existing ERAF distribution statutes, the Budget proposes statutory changes to clarify that charter schools are eligible to receive ERAF,” the budget states (PDF)

While the governor’s budget proposes counting charter school kids, the legislative version of the budget doesn’t. 

Even if the governor’s proposal makes it into the final budget, counties would still have another year before the change takes effect.

“The worst case scenario is that they agree on it, and it goes into effect on July 1, 2025,” Allersma said. “If it goes into effect, it would be at least out one year.”

State lawmakers are required to vote on the budget by June 15.


lower waypoint
next waypoint