Legislative Analyst's Office

Analysis of the 2000-01 Budget Bill

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Education Overview

The Governor's budget includes a total of $35.8 billion in Proposition 98 funding for K-12 schools for 2000-01. This is an increase of $1.9 billion, or 5.7 percent, over estimated expenditures in the current year. Looking at all funding sources--state, local, and federal--proposed K-12 spending increases from an estimated $43.1 billion in 1999-00 to $45.6 billion in 2000-01 (excluding capital outlay debt service). This is an increase of $2.5 billion, or 5.8 percent. The budget includes a total of $10.1 billion in state General Fund and local property tax support for higher education. This is an increase of $864 million, or 9.3 percent, over estimated expenditures in the current year.

Figure 1 shows Proposition 98 and General Fund support for K-12 and higher education for three years.

 

Figure 1
K-12 and Higher Education Fundinga
1998-99 Through 2000-01 (Dollars in Millions)
				Change from1999-00
	Actual 1998-99	Estimated 1999-00	Proposed 2000-01
				Amount	Percent
K-12 Proposition 98	$31,652	$33,842	$35,787	$1,945	5.7%
Higher Education	$8,652	$9,272	$10,136b	$864	9.3%
a Includes spending from state General Fund support and local property taxes. Excludes Proposition 98 loan repayment under CTA v. Gould. b Excludes $75 million General Fund for capital outlay.

The Proposition 98 request for K-12 in 2000-01 represents $6,313 per student, as measured by average daily attendance (ADA). Proposed spending from all funding sources (excluding capital outlay debt service) totals more than $8,000 per ADA.

The Proposition 98 budget request for community colleges represents $4,055 per full-time-equivalent (FTE) student. The proposed General Fund budget for the California State University (CSU) represents $8,169 per FTE student, and the proposed General Fund budget for the University of California (UC) represents $17,856 per FTE student.

Historical Perspective of Funding Per Student

To place funding for K-12 and higher education into a historical perspective, we have compared funding per FTE student for the four public segments from 1978-79 through 2000-01, adjusting for the effects of inflation over this 22-year period (see Figure 2). As the figure shows, per student funding for each segment, after adjusting for the effects of inflation, is at a high for this 22-year period.

Funding Effort

Figure 3 provides another perspective on inflation-adjusted funding over time for K-12 and higher education purposes. The figure shows changes in total state, local, and federal funding for K-12 education per student and funding for each segment per 18 to 24 year old. (These numbers are expressed as a percentage of funding levels in 1978-79, so that growth trends can be compared.) The figure indicates that total state, local, and federal funding efforts for the two groups tracked fairly closely through 1993-94. Since 1993-94, however, college funding per 18 to 24 year old has outpaced funding per K-12 enrollment. Growth in funding per 18 to 24 year old reflects, in large part, the significant increase in college participation among the college-age population. Proposed state, local, and federal funding for college per 18 to 24 year old in California is 71 percent higher than it was in 1978-79, even after adjusting for the effects of inflation. Proposed state, local, and federal funding per K-12 student, which is also at a high for this 22-year period, is 41 percent higher than it was in 1978-79.

Proposition 98

The voters enacted Proposition 98 in 1988 as an amendment to the California Constitution. That act, which was later amended by Proposition 111, establishes a minimum funding level for K-12 schools and the California Community Colleges. Proposition 98 also provides support for direct educational services provided by other agencies, such as the state's schools for the deaf and the blind and the California Youth Authority. Proposition 98 funding constitutes over three-fourths of total K-12 funding.

The minimum funding levels are determined by one of three specific formulas. Figure 4 briefly explains the workings of Proposition 98, its "tests," and many other major funding provisions. The five major factors involved in the calculation of each of the Proposition 98 tests are: (1) General Fund revenues, (2) state population, (3) personal income, (4)local property taxes, and (5) K-12 ADA.

Proposition 98 Allocations

Figure 5 (see page 12) displays the budget's proposed allocations of Proposition 98 funding for K-12 schools and community colleges. The budget estimates a net increase in current-year Proposition 98 appropriations of $247 million, based on revised estimates (primarily in ADA), and newly proposed one-time spending.

The budget proposes $40.4 billion for Proposition 98 in 2000-01. This proposed appropriation total exceeds the administration's estimate of the constitutionally required minimum level by $257 million. The state has "over appropriated" the required minimum level in each of the last three fiscal years (1997-98 through 1999-00). As a consequence, the budget's proposed appropriation level (including the $257 million over appropriation) is $1.2 billion higher than would have been required under Proposition 98 if none of these over appropriations had occurred.

The shares allocated to the four components in 2000-01 remain similar to the 1999-00 revised shares. Proposition 98 funding issues are discussed in more detail in the "K-12 Education Introduction" and "California Community Colleges" sections of the Analysis.

Enrollment Growth

Figure 6 (see page 12) displays budgeted enrollment growth for K-12 and higher education. The increase in K-12 enrollment1.3 percentis considerably lower than growth during the 1990s. The K-12 enrollment is expected to grow even more slowly in coming years, as the children of the baby boomers move out of their K-12 years. In contrast, enrollment numbers for higher education are more substantial and are projected to stay that way for several years. Funding issues regarding enrollment growth are discussed in the Higher Education "Intersegmental Issues" section of this Analysis (see page E-140).

Figure 4

Proposition 98 at a Glance

Funding "Tests"

Proposition 98 mandates that a minimum amount of funding be guaranteed for K-14 school agencies equal to the greater of: A specified percent of the state's General Fund revenues (Test 1), or The amount provided in the prior year, adjusted for growth in students and inflation (Tests 2 and 3).

Test 1--Percent of General Fund Revenues Approximately 34.5 percent of General Fund plus local property taxes.

Requires that K-12 schools and the California Community Colleges (CCC) receive at least the same share of state General Fund taxes as in 1986-87. This percentage was originally calculated to be slightly greater than 40 percent. In recognition of shifts in property taxes to K-14 schools from cities, counties, and special districts, the current rate is approximately 34.5 percent.

Test 2--Adjustments Based on Statewide Income Prior-year funding adjusted by growth in per capita personal income.

Requires that K-12 schools and the CCC receive at least the same amount of combined state aid and local tax dollars as was received in the prior year, adjusted for statewide growth in average daily attendance and inflation (annual change in per capita personal income).

Test 3--Adjustment Based on Available Revenues Prior-year funding adjusted by growth in per capita General Fund.

Same as Test 2 except the inflation factor is equal to the annual change in per capita state General Fund revenues plus 0.5 percent. Test 3 is used only when it calculates a guarantee amount less than the Test 2 amount.

Other Major Funding Provisions

Suspension

Proposition 98 also includes a provision allowing the state to suspend the minimum funding level for one year through urgency legislation other than the budget bill.

Restoration ("Maintenance Factor")

Proposition 98 includes a provision to restore prior-year funding reductions (due to either suspension or the Test 3 formula). The overall dollar amount that needs to be restored is referred to as the "maintenance factor."

 

Figure 5
Proposed Proposition 98 Allocations
1999-00 and 2000-01 (Dollars in Millions)
	1999-00			2000-01 Proposed	Change From 1999-00 Revised
	Budget Act	Revised	Change
Proposition 98 "Test"	Test 2	Test 2	--	Test 2	--
K-12	$33,613	$33,842	$229	$35,787	$1,945
Community Colleges	3,874	3,887	13	4,138	251
Other agencies	85	90	5	94	4
Loan repayment	310	310	--	350	40
Totals, Proposition 98a	$37,882	$38,128	$247	$40,369	$2,241
a Totals may not add due to rounding.

 

Figure 6
Budgeted Enrollmenta
1999-00 and 2000-01
	1999-00	2000-01	Change From 1999-00
			Amount	Percent
K-12	5,598,202	5,669,005	70,803	1.3%
Community Colleges	990,703	1,020,424	29,721	3.0
University of California	164,566	170,566	6,000	3.7
California State University	279,403	291,900	12,577	4.5
a Enrollment shown in average daily attendance for K-12 and in full-time equivalent students for UC, CSU, and CCC.

Education Priorities

In the analysis and recommendations in this chapter we take broad issue with the priorities and approach to higher education and K-12 education taken by the budget. The net effect of our various recommendations result in a Proposition 98 spending total for 2000-01 that is $172 million above the Governor's proposed level. We think the circumstances of this budget justify at least this level. Given the Legislature's interest in addressing K-14 needs, the Legislature may wish to allocate even more resources to Proposition 98 programs. In that event, we suggest areas where the Legislature could spend more money effectively.

In the analysis and recommendations in this chapter we take broad issue with the priorities and approach to higher education and K-12 education taken by the budget. In the first of the cross cutting issues that follow, we conclude that the administration's relative allocation of resources between the University of California (UC) and California State University (CSU) on the one hand, and K-12 education on the other, does not match the relative needs of these distinct parts of the education spectrum. In that cross cutting issue we recommend that the Legislature redirect to K-12 education $134 million budgeted for base adjustments at UC and CSU.

With regard to K-12 education, one of the salient aspects of the Governor's 2000-01 budget is the lack of discretion given to local school districts. The budget adds to the major area of general purpose funds for K-12--"revenue limits"--only what existing law requires to cover cost-of-living adjustments (COLAs) and enrollment growth. The budget proposes spending the remainder of new funds for K-12 education on a long list of new and expanded categorical programs. As well-intentioned as these programs are, we believe most will be diminished in effectiveness because of the constraints on local discretion.

In our view, the K-12 reforms adopted in the 1999 Special Session create both the opportunity and the need for a K-12 budget that grants greater local flexibility. In particular, the accountability framework established by Chapter 3x, Statutes of 1999 (SB 1x, Alpert), and the high school exit exam established by Chapter 1x, Statutes of 1999 (SB 2x, O'Connell), logically lead to a shift in the state's budgeting and oversight emphasis--from a focus on educational inputs to attention to educational outcomes. (Please see Figure 1 for an update on the status of the special session reforms.) The accountability framework constructed by the Governor and the Legislature puts into place a means for defining and assessing desired outcomes and incentives for achieving them. To maximize the chances for improving educational results, however, the state must give local school districts and school sites more flexibility to fit budgetary resources to local circumstances and needs. The approach we take to the state's education budget in the following pages builds on this foundation.

Another significant aspect to the Governor's budget is the extent to which it proposes new funds to address K-12 purposes, but which are budgeted in non-K-12 entities (and thereby are "outside" Proposition 98). These proposals include--but are not limited to:

• $71 million for expansion and creation of teacher training programs to be administered by UC.
• $50 million for a Teachers Home-Buyers Assistance Program at the Department of Housing and Community Development.
• $25 million for a contract between the Secretary for Education and CSU to provide computer training to K-12 teachers.

Later in this chapter we address these proposals in detail and recommend transferring the funds to where they can be deployed more effectively--directly to school districts. The net effect of the above transfers, taken in combination with other recommendations that we make, would result in a Proposition 98 spending total for 2000-01 that is $172 million above the Governor's proposed level, as shown in Figure 2. (The Governor's budget overappropriates its estimate of the minimum Proposition 98 guarantee by $257 million.)

In prior analyses of the annual budget bill, we have not recommended Proposition 98 spending levels that exceeded the Governor's proposal unless our estimate of the constitutionally required minimum was higher. For 2000-01, our estimate of the constitutionally required minimum is higher than the Governor's estimate, but lower than his proposed spending total.

We think the circumstances of this budget, however, justify a different approach than in the past and, therefore, we are recommending spending above the Governor. As detailed in our The 2000-01 Budget: Perspectives and Issues, we estimate that the state will have significantly more General Fund revenues that the Legislature can reasonably commit to ongoing purposes--which could include a mix of tax relief, local government fiscal relief, and state program augmentations. Based on the Governor's statements that K-12 education is his highest priority and based on many indications of the Legislature's interest in addressing
K-12 needs, a recommended increase in Proposition 98 spending of at least $172 million is within reason.

The Legislature may wish to allocate even more resources to Proposition 98 programs and other education programs. To the extent the Legislature wishes to do this, we would suggest that it place as much emphasis as possible on the following:

• Increase General Purpose Funding. During the recession years of the early 1990s, statutory COLAs for K-12 revenue limits were not fully funded, producing a statutory "deficit" for revenue limits. This deficit is presently at 6.996 percent. We recommend in a later discussion augmenting revenue limits by almost $70 million to reduce this deficit. The Legislature could provide more funds for this purpose which would help stop the decade-long downward trend in general purpose funding as a share of Proposition 98 resources. (Every $100 million of additional funds "buys" about 0.4 percentage points of deficit reduction.)
• K-12 Equalization. This option is actually another form of general purpose funding but addresses present inequalities in the per-pupil distribution of revenue limit funding. In our later discussion on discretionary funding we recommend a $65 million augmentation for K-12 equalization. This level of funding, if followed by similar augmentations in the subsequent five years, would result in 90 percent of the K-12 system's average daily attendance receiving the same revenue limit. To the extent the Legislature provides more funds, it could shorten the time frame.
• Community Colleges Equalization. In our analysis of the community colleges we recommend a $28 million augmentation for equalization purposes, enough to make general purpose funding equal for slightly more than 50 percent of the system's full-time equivalent students (FTES). An additional $25 million, roughly, could make funding equal for 60 percent of the FTES.
• Block Grants for Disadvantaged Schools. The Governor's budget gives significant attention to the problems of recruiting and retaining qualified teachers in low-performing schools. This attention is warranted, as we detail in our discussion of teacher quality and supply. We point out in that discussion, however, that the administration's definition of "low-performing" schools is overly broad. We also point out problems related to the lack of meaningful local discretion in the operation of the proposed programs. Our analysis indicates that the state could usefully deploy more funds to address not just the problem of teacher recruitment/retention, but the larger array of problems facing disadvantaged schools--which tend to be schools serving large numbers of children in poverty. We believe the most effective way to deploy additional resources to these schools is through one or several block grants that would allow school districts broad discretion to meet their particular local needs.
• Block Grants for One-Time Purposes. The state has significantly more revenues that could be used for one-time purposes beyond those already reflected in the Governor's budget. In addition, under the rules governing Proposition 98, the Legislature could assign large amounts of additional spending for one-time purposes, count it towards the Proposition 98 requirement for 1999-00, and thereby avoid unnecessary increases in the long-term Proposition 98 "base" that might otherwise constrain future legislative options. The level of such one-time augmentations would be roughly equal to whatever amount the Legislature decides to go above the minimum guarantee for 2000-01. Again, we would emphasize the advantages of block grants for one-time funding which could allow local districts broad discretion to meet one-time needs, including, but not limited to, deferred maintenance, safety improvements, and staff development.
• Cal Grants for College Students. To the extent that the Legislature directs additional funds to higher education purposes, we recommend it direct them to the Cal Grant program. By providing more Cal Grant aid, the Legislature would target resources to students facing the greatest financial challenges and would allow them to choose among colleges and universities that best meet their educational and career objectives. This would be an effective way for the Legislature to provide additional access to higher education.

Base Budget Adjustments

We recommend a reduction of $148.8 million in General Fund support for the California State University (-$65.8 million), University of California (-$82.6 million), and Hastings College of the Law
(-$0.4 million), because the proposed 6 percent increase in base funding far exceeds a reasonable cost-of-living adjustment. We recommend that the $148.8 million be shifted to K-12 schools ($134.3 million) and community colleges ($14.5 million) in a combination of general-purpose funding (including provisions for funding equalization) and block grants for program improvements.

Annual increases in base general purpose and categorical funding generally are intended to offset the effects of inflation from one budget to the next, thereby allowing K-12 education and higher education to maintain existing program levels and quality. It is from these increases that
K-12 schools, colleges, and universities pay for salary and wage increases for staff and faculty and for increased prices of goods and services. The budget provides for these base adjustments, as well as proposed increases for added enrollments and new program initiatives in both K-12 and higher education. (We discuss proposals for enrollment growth and program initiatives elsewhere in the analysis.)

Base Increases Are Proportionately Larger for Higher Education. As Figure 1 (see next page) shows, the budget proposes to increase general purpose and categorical funding for K-12 education by $947 million, or 2.84 percent. The budget proposes to increase base general purpose and categorical funding for the California Community Colleges (CCC) by $103 million, or the same 2.84 percent. By contrast, the Governor proposes to increase base funding for California State University (CSU) by $125 million, for the University of California (UC) by $157 million, and for Hastings College of the Law (Hastings) by $798,000--increases of 6 percent each. These 6 percent increases consist of an annual 5 percent base increase the Governor proposes as part of a new partnership with CSU, UC, and Hastings, and an additional 1 percent increase for 2000-01. (Please see page E-137 of this analysis for a discussion of the Governor's proposed partnership with CSU, UC, and Hastings.)

It is not clear why the Governor has chosen to provide CSU and UC with base increases that are over twice the level provided to K-12 and CCC. This difference is difficult to reconcile for several reasons.

K-12 Schools Appear to Face Greater Challenges of Program Quality. Based on test results of their students, K-12 schools appear to face significant challenges to improve academic performance. Many students fail to obtain the necessary skills desired by employers which in part gave rise to the Legislature's decision to adopt a high school exit exam. Furthermore, many high school graduates that go on to college arrive ill-prepared for college-level work. (Approximately 70 percent of CSU freshmen and 32 percent of UC freshmen must take some form of remedial course work.) Public concern for improved program quality seems to focus more on the K-12 schools than on CSU, UC, and Hastings.

K-12 Schools Appear to Face Greater Challenges in Obtaining Quality Faculty. The K-12 schools face a difficult challenge attracting and maintaining high-quality staff and faculty. Similar concerns have not been raised concerning the quality of staff and faculty at CSU, UC, and Hastings.

K-12 Schools and Community Colleges Have Accountability Measures, While the Universities Do Not. The Governor and Legislature last year agreed on a comprehensive set of new programs to hold K-12 schools and districts accountable for their performance in educating their students. Under the Partnership for Excellence program, community colleges must develop and attain performance goals in return for obtaining some additional funding. (Please see our discussion of the Partnership Program on page E-178 of the analysis.) In contrast to these requirements, the Governor proposes to provide large base increases for CSU, UC, and Hastings in this and future budgets ". . .contingent on progress by the segment[s] to achieve certain accountability goals." These goals, however, have yet to be established. So while the state has established or is establishing rewards and sanctions for K-12 schools and community colleges for meeting or falling short of specific performance measures, the Governor proposes to provide 6 percent base increases to CSU, UC, and Hastings in 2000-01 on the prospect of establishing accountability measures in the future.

Recommend Equalizing Base Funding Increases. We recommend the Legislature provide the same base increases for K-12 schools and higher education--based on the expected 2.84 percent inflation rate. So, rather than increase the base budgets of CSU, UC, and Hastings by 6 percent, we recommend, instead, that the Legislature increase them by 2.84 percent. This would reduce the increase for CSU from $124.9 million to $59.1 million, a reduction of $65.8 million. It would reduce the increase for UC from $156.7 million to $74.2 million, a reduction of $82.6 million. The reduction for Hastings would be $378,000.

These recommended reductions would still leave UC, CSU, and Hastings with significant budget increases. The UC General Fund budget would still be increased by $245.1 million, or 9 percent over current-year expenditures. The CSU General Fund budget would still be increased by $160 million, or 7.4 percent (after adjusting for one-time expenditures in the current year).

We recommend that the $148.8 million reduction of CSU, UC, and Hastings base increases be shifted to the K-12 schools and the community colleges for general purpose funding (including provisions for greater funding for equalization). We recommend that these redirected monies be allocated in proportion to the K-12 schools' and community colleges' base budgets. This would provide additional funds totaling $134.3 million for K-12 schools and $14.5 million for community colleges. Please see pages E-71 and E-174 of our analysis for discussions of how these funds could be used.