LAO 2004-05 Budget Analysis: General Government

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

K-12 Introduction

The budget proposes to suspend the Proposition 98 minimum guarantee, providing $2 billion less than would be required absent suspension. The budget also proposes to postpone until at least 2006-07 payments of $518 million and $448 million needed to meet the minimum guarantee for 2002-03 and 2003-04, respectively. Taking into account both the growth in the guarantee and monies freed up from paying off deferrals in the current year, there are adequate funds to cover growth in student attendance, cost-of-living adjustments, and other purposes. Adjusting funding for deferrals funding, schools would receive $6,941 per pupil, or 2.6 percent more than the revised estimate of per-pupil expenditures in the current year.

Overview of K-12 Education Spending

Figure 1 displays all significant funding sources for K-12 education for the budget year and the two previous years. As the figure shows, Proposition 98 funding constitutes over 70 percent of overall K-12 funding. The increase in K-12 Proposition 98 funding is supported by a forecasted $1 billion increase in local property taxes (LPT), allowing General Fund support for Proposition 98 to actually fall by $612 million. The growth in LPT results from a combination of natural growth in school LPT, a proposal to transfer additional property tax revenues from local government to school districts through the Educational Revenue Augmentation Fund (ERAF), and transfers of ERAF revenues from schools districts to local governments as part of the "triple flip" payment mechanism for the Economic Recovery Bond on the March 2, 2004 ballot.

Figure 1

K-12 Education Budget Summary

2002-03 Through 2004-05
(Dollars in Millions)

 

 

 

 

Change From 2003-04

 

Actual
2002-03

Mid-Year
Revision 2003-04

Proposed
2004-05

Amount

Percent

K-12 Proposition 98

 

 

 

 

 

State General Fund

$26,106.4

$27,844.9

$27,232.6

-$612.3

-2.2%

Local property tax revenue

12,799.9

13,663.9

14,709.4

1,045.5

7.7

  Subtotals, Proposition 98

($38,906.3)

($41,508.8)

($41,942.0)

($433.2)

(1.0%)

Other Funds

 

 

 

 

 

General Fund

 

 

 

 

 

  Teacher retirement

$901.4

$469.5

$966.4

$496.9

105.8%

  Bond payments

788.7

989.1

1,665.0

675.9

68.3

  Other programs

1,003.5

283.6

506.2

222.6

78.5

State lottery funds

806.5

793.4

793.4

    —

       —

Other state funds

99.1

90.1

85.9

 -4.2

-4.7

Federal funds

6,390.7

 7,118.8

7,159.5

40.7

0.6

Other local funds

4,918.7

4,929.6

4,940.0

10.4

0.2

    Subtotals, other funds

($14,908.5)

($14,674.1)

($16,116.4)

($1,442.3)

(9.8%)

      Totals

$53,814.8

$56,182.8

$58,058.4

$1,875.6

3.3%

K-12 Proposition 98

 

 

 

 

 

Average daily attendance (ADA)

5,905,715

5,978,127

6,039,207

61,080

1.0%

Budgeted amount per ADA

$6,588

$6,943

$6,945

$2

       —

 

Totals may not add due to rounding.

The budget proposes to increase non-Proposition 98 General Fund spending by almost $1.4 billion in 2004-05. Key changes in non-Proposition 98 General Fund spending include: 

Deferrals Distort Year-to-Year Comparisons. The growth pattern of Proposition 98 spending is distorted because numerous expenses have been deferred from one fiscal year to another from 2001-02 through 2004-05. These deferrals make cross-year comparisons difficult. Figure 2 displays the impact that the deferrals have on the growth of per-pupil spending by moving deferred funds into the years in which the expenditures occur. We refer to this deferral-adjusted funding level as "programmatic" funding because this is when programs actually used the money, and suggest the Legislature focus on changes in programmatic funding to gauge the impact that this budget has on actual school spending. Using this calculation, per pupil spending increases by $175, or 2.6 percent, over the 2003-04 revised funding level. In contrast, funding fell between 2002-03 and 2003-04 by $30 per pupil or 0.4 percent.

Figure 2

K-12 Proposition 98 Spending Per Pupil
Adjusted for Inter-Year Funding Deferrals

 

Actual
2002-03

Revised
2003-04

Proposed 2004-05

Budgeted Funding

 

 

 

Dollar per average daily attendance (ADA)

$6,588

$6,943

$6,945

Percent growth

—

5.4%

—

Programmatic Funding

 

 

 

Dollar per ADA

$6,796

$6,766

$6,941

Percent growth

—

-0.4%

2.6%

 

a  To adjust for the deferrals, we count funds toward the fiscal year in which school districts programmatically commit the resources. The deferrals mean, however, that the districts technically do not
receive the funds until the beginning of the next fiscal year.    

Major K-12 Funding Changes

Figure 3 displays the proposed major K-12 funding changes from the 2003-04 Budget Act. In the current year, the Governor's budget reflects a $261 million increase in revenue limit deferred from June to July 2003. Because revenue limits are continuously appropriated, a technical error in estimating the size of the June revenue limit payment resulted in 2002-03 appropriations being reduced by $261 million and 2003-04 appropriations increasing equivalently.

Figure 3

Major K-12 Proposition 98 Changes

(Dollars in Millions)

2003-04 Budget Act

$41,255

Additional K-12 apportionment deferred from 2002-03

261

Other changes

-8

  Total

$254

2003-04 Revised K-12 Spending

$41,509

Increases

 

Revenue Limits

 

  Cost-of-living adjustments (COLAs)

$555

  Growth

280

  Unemployment insurance

136

  Equalization

110

  Increase Public Employees’ Retirement System cost

106

    Subtotal

($1,187)

Categorical Programs

 

  Growth

$89

  COLAs

185

  Instructional materials

188

  Deferred maintenance

173

  Other increases

116

    Total, Increases

$1,938

Decreases

 

Net reduction in funds needed to pay deferred costs

-$1,036

Proposition 98 Reversion Account swap

-146

Special education federal fund offset

-74

Combined child care proposals

-69

Immediate Intervention/Underperforming Schools Program

-46

High priority grants

-28

Other decreases

-105

  Total, Decreases

-$1,505

2004-05 Proposed

$41,942

Change, 2004-05 Proposed Over 2003-04 Revised

 

Amount

$433

Percent

1%

In 2004-05, the Governor's budget proposes about $1.9 billion in new K-12 expenditures. Funds for these proposals come from three main sources:

The budget proposes to use $1.9 billion from the sources discussed above to provide growth, cost-of-living adjustments (COLAs), and other funding increases (see Figure 3). Of the increases, the budget provides roughly $1.2 billion to increase "revenue limit" funding (available for school districts and county offices of education to spend on general purposes). Specific revenue limit proposals include:

The budget provides growth and COLAs for those categorical programs with statutory requirements. The Governor's proposal excludes growth and COLAs for some categorical programs that have received growth and COLAs in the recent past. For example, programs like home-to-school transportation, year-round schools, gifted and talented education, dropout prevention, and tenth grade counseling will not receive growth or COLAs in 2004-05. The Governor also provides additional cat egorical funds to fully restore deferred maintenance to one-half of 1 percent of total expenditures ($173 million), and augment instructional materials funding by $188 million.

Proposition 98 Spending by Major Program

Figure 4 shows Proposition 98 spending for major K-12 programs. Revenue limit funding accounts for $30.3 billion. In addition, the Governor proposes to transfer $2 billion in categorical programs into revenue limits. The two largest categorical programs, special education and K-3 class size reduction, would remain separate programs. The budget proposes $2.9 billion for special education including local property tax revenues. The budget provides roughly the same $1.7 billion for K-3 class size reduction, reflecting a slight reduction because of lower K-3 enrollment.

Figure 4

Major K-12 Education Programs Funded by Proposition 98

(Dollars in Millions)

 

 

 

Change

 

Revised
2003-04a

Proposed 2004-05a

Amount

Percent

Revenue Limits

 

 

 

 

General Fund

$15,777.3

$15,970.6

$193.3

1.2%

Local property tax

13,325.3

14,328.3

1,003.1

7.5

  Subtotals

($29,102.3)

($30,298.9)

($1196.4)

(4.1%)

Categorical Programs Transferred to Revenue Limit

 

 

 

Home-to-school transportation

$519.6

$519.6

—

       —

School improvement

387.2

396.1

$8.9

2.3%

Staff development day buyout

229.7

235.7

6.0

2.6

Targeted instructional improvement grantsb

199.4

205.1

5.7

2.9

Instructional materialsc

175.0

175.0

—

       —

Supplemental grants

161.7

161.7

—

       —

Other

328.9

331.1

2.2

0.7

  Subtotals

($2,001.5 )

($2,024.4 )

($22.9)

(1.1%)

Other Categorical Programs

 

 

 

 

Special educationd

$3,018.6

$3,051.5

$32.9

1.1%

K-3 class size reduction

1,659.3

1,651.8

-7.6

-0.5

Child development

1,177.6

1,279.6

102.0

8.7

Adult education

577.8

603.1

25.3

4.4

Targeted instructional improvement grants b

538.2

553.7

15.5

2.9

Economic impact aid

498.7

547.7

49.1

9.8

Regional occupation centers and programs

370.4

391.1

20.7

5.6

Supplemental instruction programs

351.8

362.0

10.1

2.9

Deferred maintenance

77.0

250.3

173.3

225.2

Public School Accountability Act

352.4

249.2

-103.2

-29.3

Instructional materialsc

—

188.0

188.0

       —

Other programs, deferrals, and adjustments

1,782.9

490.7

-1292.2

-72.5

  Subtotals

($10,404.7)

($9,618.7)

(-$786.0)

(-7.6%)

    Totals

$41,508.8

$41,942.0

$433.2

1.0%

 

a  To adjust for the deferrals, we count funds toward the fiscal year in which school districts programmatically commit the resources. The deferrals mean, however, that the districts technically do not receive the funds until the beginning of the next fiscal year.

b  Targeted Instructional Improvement Grants provided for active court-ordered desegregation remains outside revenue limit reform.

c  The Governor proposes to fold the existing instructional materials program into revenue limits, and then create an instructional material categorical program.

d  Special education funding includes both General Fund and local property tax revenues.

Enrollment Trends

Enrollment growth significantly shapes the Legislature's annual K-12 budget and policy decisions. When enrollment grows slowly, for example, fewer resources are needed to meet statutory funding obligations for revenue limits and K-12 education categorical programs. This leaves more General Fund resources available for other budget priorities both within K-12 education and outside it. Conversely, when enrollment grows rapidly (as it did in the 1990s), the state must dedicate a larger share of the budget to education. In light of the important implications of enrollment growth, we describe below two major trends in the K-12 student population.

The enrollment numbers used in this section are from DOF's Demographic Research Unit, and reflect aggregate, statewide enrollment. While the enrollment trends described here will likely differ from those in any given school district, they reflect the overall patterns the state is likely to see in the near future.

K-12 Enrollment Growth to Slow Significantly. K-12 enrollment is projected to increase by about 1 percent in 2004-05, bringing total enrollment to about 6.3 million students. Figure 5 shows how enrollment growth has slowed since 1996-97. Over the next ten years, K-12 enrollment growth will continue to slow and actually decline beginning in 2008-09. This contrasts with growth averaging 2.2 percent annually during the 1990s.

Divergent Trends in Elementary and High School Enrollment. Figure 6 shows that the steady decline in K-12 enrollment growth masks two distinct trends in elementary (grades K-8) and high school (grades 9 through 12) enrollment. Elementary school enrollment growth has gradually slowed since 1996-97. This enrollment is expected to decline annually between 2004-05 and 2010-11. From the current year through 2010-11, K-8 enrollment is expected to decline by 56,000 pupils (1.3 percent). In contrast, high school enrollment growth is expected to accelerate in the short term, reaching a 4 percent growth rate in 2004-05. Then, growth is expected to slow sharply, becoming negative in 2011-12. Expected growth from the current year to 2011-12 is approximately 200,000 pupils (11 percent).

Budget and Policy Implications

These trends have significant budgetary and policy implications for issues such as class size reduction, teacher demand, and facilities investment. A few of the major implications include:


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