Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

K-14 Education Priorities Proposition 98

A crucial issue for the Legislature in crafting budgets not only for K-12 education and the community colleges, but for virtually all other state programs, is posed by a potential General Fund increase needed for Proposition 98 of about $825 million. Below we discuss ways for the Legislature to act strategically in response to this challenge, in order to minimize impacts on non-Proposition 98 programs yet still meet important K-14 education priorities.

The overriding issue for the Legislature in crafting budgets for K-12 education and the community colleges (both funded largely through Proposition 98 funds) for the 2002-03 fiscal year is the minimum funding requirement set by Proposition 98. Indeed, the amount of General Fund money that will be needed to meet this constitutionally required minimum poses a major challenge for meeting the rest of the state's budgetary needs, as discussed in detail below.

In recent fiscal years, the amount of the minimum funding requirement has not been a crucial issue because General Fund revenues were relatively high. Each year from 1997-98 through 2001-02 the Legislature "overappropriated" the minimum requirement. These decisions reflected both the relative abundance of state revenues and the high priority accorded K-14 education funding by the Governor and the Legislature. Given the difficult fiscal situation the state now faces, the Proposition 98 minimum guarantee takes on new significance.

The Governor's budget estimates that the minimum guarantee for 2002-03 will be $46 billion, with an estimated $14.6 billion provided by local property tax revenues and the remaining $31.4 billion provided by the General Fund. The budget proposes K-14 education spending on Proposition 98 programs exactly equal to the estimated guarantee. The administration's estimate of the General Fund amount needed to meet the guarantee is driven by three key factors: its estimate of property tax revenues ($14.6 billion), its estimate of K-12 average daily attendance (ADA) growth (1.07 percent), and its estimate of growth in California per capita personal income (negative 3 percent). Our estimates depart from the administration's estimates on two factors—property tax revenues and per capita personal income—as discussed below.

Property Tax Revenues. Our estimate of the property tax revenues that will be allocated to school districts, county offices of education, and community college districts is $110 million less than the administration's estimate. This difference does not affect the overall amount guaranteed for K-14 education programs, but would affect the amount of General Fund money needed to supplement property tax revenues in order to meet a given guarantee level. Thus, our estimate implies that the Legislature will need to "find" $110 million from the General Fund to make up for a shortfall in property tax revenues.

Per Capita Personal Income. This factor affects the overall guarantee level (which is a combination of property tax revenues and General Fund revenues). Existing law specifies the use of an index of California personal income published annually by the federal government for this Proposition 98 factor. (The index will estimate the change in personal income between the fourth calendar quarter of 2000 and the fourth calendar quarter of 2001.) The index will be published in April or May and will effectively determine the Proposition 98 guarantee for 2002-03. The budget assumes that the federal index will reflect a 3 percent decline in California per capita personal income. Our best estimate is that the decline will be 1.5 percent. If our estimate is correct, the guarantee will be $715 mil lion higher than the budgeted amount, with the entire amount due from the General Fund. Thus, combined with our property tax revenue estimate discussed above, we think the budget could understate General Fund needs for meeting the Proposition 98 guarantee by a total of $825 million.

Thinking and Acting Strategically About Proposition 98

Achieving Additional Current-Year Savings

We believe the Legislature should not only begin now to think strategically about the challenges posed by an increased General Fund demand from Proposition 98, but also should act while there is still time on options for securing one-time General Fund savings from current-year Proposition 98 appropriations. These options exist because—even with the current-year reductions made in the third extraordinary session—the current-year appropriation level for Proposition 98 programs remains well above the minimum funding requirement for 2001-02. Moreover, as we explain further below, these options can be exercised with minimal impacts on educational services to California's public school and community college students.

In our December report, Addressing the State's Fiscal Problem, we identified numerous options for current-year Proposition 98 reductions. The Legislature adopted many of those options in the third extraordinary session, but several remain viable for purposes of additional General Fund savings, as listed in Figure 1, for a potential savings of $161 million. The Legislature must act quickly to achieve these available savings. First, it must act before appropriations become encumbered. Second, the Legislature must enact urgency legislation that is signed by the Governor by June 30, 2002. After that date the existing level of appropriations would "lock in" for Proposition 98 guarantee purposes and no longer would be subject to reduction.

The Legislature also can secure additional one-time savings for the General Fund by substituting Proposition 98 Reversion Account funds for General Fund monies currently appropriated for certain programs, in the process keeping those programs funded at their current levels. Unspent balances from prior Proposition 98 appropriations flow into the reversion account each year as an inevitable consequence of implementation delays in new programs or overestimates in program caseloads. Under the terms of Proposition 98, these balances must eventually be reappropriated from the account and spent on K-14 education programs. The budget estimates that the reversion account currently has $535 million of resources available for expenditure and proposes spending that entire amount in 2002-03, as shown in Figure 2.

Our review of these spending proposals indicates that, although most of the proposals have merit, the Legislature could defer approval of all the reversion account proposals and instead use the money as substitute funding in the current year for an equal amount of programs funded by 2001-02 Proposition 98 appropriations. (This would not have any effects on current-year Proposition 98 programs. This would involve only a "swap" in the way a few programs are funded.) This strategy would create an additional $535 million of one-time General Fund savings in the current year.

By late April/early May the Legislature will have certain knowledge as to how much more General Fund support must be provided for the 2002-03 guarantee. To the extent the Legislature taps these reversion funds for current-year savings, it could use at least some of the growth in the guarantee to restore the most meritorious of the Governor's reversion account proposals. To carry out this strategy, the Legislature must enact urgency legislation before the end of June, for the same reasons discussed above regarding current-year Proposition 98 reductions.

Budget-Year Savings Options

The Legislature can help mitigate the pressures placed on the rest of the state budget by an increased guarantee by "moving" certain expenditures for educational purposes into the guarantee. For example, as we discuss in detail under the "Teacher Support and Development" section later in this chapter, funds budgeted for teacher professional development institutes in the University of California (UC) could instead be allocated to school districts. The districts, in turn, could choose to contract with UC for services or use other teacher training providers. This redirection makes sense on policy grounds, but also would convert non-Proposition 98 funds into Proposition 98 funds and help meet the requirements of an increased guarantee at no additional General Fund cost. Similar options exist with child care programs. We discuss these options in more detail in our companion document, Options for Addressing the State's Fiscal Problem.

Meeting Additional K-14 Spending Needs

A significant increase in the 2002-03 guarantee would make it easier for the Legislature to address at least some K-14 spending priorities that are not funded in the Governor's budget. For example, the Legislature could more easily restore funding for two legislative priorities that increase general purpose funding for school districts: (1) revenue limit equalization and (2) reducing the "Public Employees' Retirement System offset" to revenue limits. We detail these latter possibilities elsewhere in this chapter under a discussion of discretionary funds.

Another development that may make it easier for the Legislature to address competing program needs involves K-14 statutory cost-of-living adjustment (COLA). Based on data available after the release of the Governor's budget, we estimate that the COLA could be about 1.8 percent rather than the budgeted 2.15 percent. (A final estimate will be available in the spring based on the release of a federal price index.) If the final estimate were 1.8 percent, for example, budgeted funds for COLA purposes could be reduced by about $135 million for K-12 and about $15 million for community colleges. This would make available $150 million for other K-14 priorities.