Flexibility and Categorical Reform

To give school districts and community colleges options for responding to the sizeable cuts included in his budget plan, the Governor has proposed to permanently suspend most requirements related to how schools and colleges use state funding. Although we believe additional flexibility would help districts and community colleges in accommodating cuts, we have concerns with the Governor’s approach of disregarding—rather than reforming—the state’s categorical system. Specifically, we think his proposal leaves many components of a complicated and irrational system in place, while removing incentives designed to ensure schools and colleges provide effective instructional programs for all students.

We recommend the Legislature adopt a more strategic approach that simplifies the existing system and provides schools and colleges with additional flexibility over how they use their funding, while still emphasizing important education priorities. Below, we assess the Governor’s flexibility proposals and then lay out our recommended alternatives, beginning with K–12 education and finishing with community colleges.

Governor’s Flexibility Proposals Miss Opportunity for Substantive Reform

Figure 11 describes each of the Governor’s flexibility proposals. As noted, all of the proposals apply to K–12 school districts, with two applying to CCCs. Four of the proposals—allowing smaller reserves for economic uncertainties, allowing access to categorical fund balances, reducing required routine maintenance deposits, and waiving the local deferred maintenance match—are changes the state has allowed on a short–term basis in prior years when fiscal times were tight. The Governor adds a new short–term option that would allow districts to reduce the minimum school year from 180 to 175 days. The Governor’s proposal would remove these five restrictions for the near term, with existing requirements resuming in 2010–11. In addition, the Governor proposes to permanently remove restrictions on districts contracting out for noninstructional services. The most significant proposed change—suspending most K–14 categorical program requirements—also would be on an ongoing basis. Although we recommend adopting several of the Governor’s short–term flexibility proposals as well as his contracting out proposal (which could help districts lower some of their costs), we have serious concerns with his one–time suspension of emergency reserve requirements and his ongoing categorical flexibility proposal.

Several of Governor’s Short–Term Flexibility Proposals Make Sense in Current Budget Climate. We believe three of the Governor’s proposals—accessing categorical balances, shortening the school year, and eliminating the local deferred maintenance match—would offer additional flexibility in 2009–10 without undermining important education priorities over the long run. Depending on the magnitude of cuts included in the final budget package, we also believe lowering routine maintenance requirements in 2009–10 could be warranted, as discussed in the “Balancing the 2009–10 Budget” section of this report. In a climate of multibillion dollar cuts, we believe these flexibility options would free up certain resources to help districts preserve those services they consider most effective in producing positive student outcomes. We believe this flexibility should be granted only through the budget year to avoid negative outcomes. For example, the state’s maintenance requirements stem from long experience with school districts that failed to regularly maintain their own facilities. Thus, while maintenance might be deemed a lower priority during a tight fiscal year, we believe the state should re–instate a maintenance requirement next year.

Lowering Emergency Reserve Requirement Does Not Provide Any Additional Flexibility, Weakens State Oversight. We recommend the Legislature reject the Governor’s proposal to lower the amount school districts must set aside in their reserves for economic uncertainty. Districts already are able to access these reserves whenever needed, so reducing the requirement does not actually provide them any additional flexibility or discretionary funding compared to current law. We also believe it is important to maintain the current “warning system” that alerts the state and local community when districts may be entering fiscal distress. Given the significant midyear cuts under consideration for 2008–09, many districts likely will be accessing these reserves in the near term. All the Governor’s proposed change would do is delay the point at which the state and local communities are alerted that a district is getting closer to fiscal insolvency. Because the courts have ruled that the state has ultimate fiscal responsibility for educating a district’s students, the state needs an early warning system to know when and how aggressively to intervene in struggling districts.

Categorical Proposal Leaves Complicated and Irrational System in Place, Layers on Additional Complications. Although the Governor’s proposal to suspend virtually all categorical requirements would obviously offer districts and colleges greater flexibility, we believe it has several major problems. Most importantly, it does not formally consolidate or eliminate any program. Leaving program requirements “on the books” sends a confusing message about the state’s intentions. Is the state telling districts and colleges these program activities are still important priorities? If that is the case, why allow them to ignore the program requirements? Alternatively, if the programs are not important, why not eliminate them? Appropriating and tracking funding levels for individual programs that have no requirements also renders the annual state budget act unnecessarily complicated and misleading. In addition, the Governor’s proposal raises funding distribution questions. Given the proposal would not change the existing funding distributions, some districts and colleges would continue to get additional streams of funding for activities they no longer are required to conduct. In contrast, others who were not participating in certain categorical programs would miss out on what has essentially become a new source of general purpose funding.

Administration Overestimates Power of Existing Accountability System. Presumably, the Legislature established existing categorical programs because it felt particular activities were important enough that school districts and community colleges should be financially encouraged to undertake them. The Governor asserts that because schools and colleges are now outcome–oriented, these categorical programs are no longer necessary. That is, he believes sufficient accountability now exists for districts and colleges to conduct all of the activities needed to produce positive student outcomes. According to this argument, all spending decisions can therefore be made at local level. While we agree that stronger accountability systems could allow for increased local fiscal flexibility, we are concerned the Governor is overestimating the power of the existing accountability system. The existing K–12 accountability framework is neither nuanced enough to help districts clearly determine how they need to improve nor to help the state clearly identify which school districts need intervention. Furthermore, we are not convinced the sanctions included in the current K–12 intervention system are strong enough to force struggling districts to significantly change their practices. Similarly, while the state requires community colleges to report on student outcomes (such as through the annual Accountability Reporting for the Community Colleges), no consequences are in place for underachieving college districts. Until such time that state and local systems are strong enough to fully hold college districts and community colleges accountable for improving outcomes for all students, we believe the state needs to continue having some explicit requirements to be sure they address certain important education priorities.

Undertake Substantive K–12 Categorical Reform

While we have serious concerns with the Governor’s categorical approach, we do believe major changes should be made to the state’s K–12 categorical system. Our office, as well as numerous education policy researchers (including the recent collection of Getting Down to Facts authors and the Governor’s Commission on Education Excellence), have long argued the state’s existing system of categorical programs is convoluted, irrational, and overly prescriptive. While the rationale for reform exists in any fiscal environment, the current fiscal climate lends a greater sense of urgency to revisiting the state’s education funding system by offering the possibility of stretching limited dollars further. As in prior years, we continue to recommend the Legislature consolidate most of the state’s existing K–12 categorical programs into large block grants.

Consolidate Most K–12 Categorical Programs Into Thematic Block Grants. Specifically, we recommend the state consolidate 42 existing K–12 categorical programs into three large block grants focused on instructional support, at–risk students, and special education students. The programs we target for consolidation represent roughly two–thirds of all state categorical funding for K–12 education. Coupled with the consolidation, we recommend removing the majority of the associated programmatic restrictions but establishing a broad requirement that districts spend a dedicated stream of funding on high priority students and activities. (The programs excluded from our block grants typically have a specific policy rationale for continuing to exist as stand–alone programs. For example, they fund a regional rather than local activity, such as the K–12 High Speed Network and California School Information Services, or they serve special populations, such as adult education, child development, and foster youth programs.) We describe the three block grants in more detail below.

Create Instructional Support Block Grant. As shown in Figure 12, we recommend consolidating 22 programs and $4.2 billion into a new Instructional Support block grant. Under current law, these programs provide funding for a collection of narrowly defined student services or activities. These include reducing class size; transporting students; training teachers; and supporting enrichment activities like libraries, art, music, and physical education. In contrast, the new block grant would allow districts to choose from a broad menu of these support activities and prioritize among them to construct the instructional program that best meets student needs in their community.

Create Opportunity to Learn Block Grant. As shown in Figure 13, we recommend consolidating 12 programs and $3.2 billion into a new OTL block grant. Most of the programs we include in this block grant are targeted for economically disadvantaged students, English learners, and students in need of academic remediation. Under the block grant, districts would be required to spend funds on supplemental services to improve the academic achievement of these three groups of students. Furthermore, “first call” on the OTL funds would be to meet requirements related to the Valenzuela v. O’Connell et al settlement (to provide counseling and remedial instruction to students who fail or are likely to fail the high school exit exam) and for addressing state mandates related to providing supplemental instruction and maintaining school safety plans. Beyond these broad requirements, districts would have flexibility in determining the mix and characteristics of additional classroom services, remedial services, and support activities they wish to provide for the targeted groups of students.

Create Special Education Block Grant. As shown in Figure 14, we recommend merging base special education apportionment funding (commonly called AB 602 funding) with three apportionment “add–ons” and four stand–alone special education programs. (The add ons—distributed as part of a district’s base apportionment—are intended to account for certain higher costs students.) These eight programs, associated with $3.1 billion in total funding, currently distribute funds to most Special Education Local Plan Areas (SELPAs) and/or support core special education activities. Under the block grant approach, districts and SELPAs still would be required to meet federal mandates, but they would have more flexibility in how they went about fulfilling these requirements. In addition, by consolidating funding sources, the Legislature could clarify actual funding levels and set the stage for future equalization efforts.

Hold Districts Harmless During Transition, Then Distribute Funding on Per Pupil Basis. For 2009–10, our proposal would not alter the distribution of funding currently provided by the individual programs being merged. Thus, districts would continue to receive the same amount as if the programs had not been consolidated. Moving forward, we recommend allocating the block grants on a per pupil basis, using 2009–10 as the “base year” for determining each district’s per pupil funding rate. (As discussed below, we recommend using slightly different student counts for calculating each grant’s per pupil rate.) In 2010–11, all districts would be held harmless at their 2009–10 per pupil levels, but a district’s overall grant would increase or decrease depending on whether its student population grows or declines.

Use Most Relevant Student Counts to Determine Each Grant’s Per Pupil Rate. Because each of our block grants is targeted at a different student population, we recommend the Legislature use different “student counts” when determining per pupil rates and future funding distributions. For example, because the Instructional Support block grant is designed to support all students, we recommend basing funding on the district’s total enrollment. For the OTL block grant, we recommend basing funding on a district’s English learner and economically disadvantaged student population (as measured by Title I), with additional funding for districts with especially high concentrations of these students. (This is how funding allocations for the Economic Impact Aid program currently are determined.) For the special education block grant, we recommend distributing funding using the existing base program’s per pupil formula.

Equalize Per Pupil Amounts in the Future. Because the distribution of existing categorical programs is not uniform across every district, dividing current funding levels by a district’s student count likely will result in large discrepancies in per pupil rates across districts. We therefore recommend that the Legislature use future increases in Proposition 98 funding to help equalize the per pupil rates for each grant. Once per student rates are more comparable across districts, the Legislature could use future funding increases to adjust per pupil rates for changes in the cost of living.

Maintain Some State Regulations. Even as the Legislature eliminates most specific programmatic funding streams and spending requirements, we recommend it maintain, monitor, and enforce some key compliance regulations. For example, the state should continue to require that districts provide every student with standards–aligned instructional materials (although, as discussed in our May 2007 report, Reforming California’s Instructional Material Adoption Process, we believe the state should extend the length of time districts can use an existing set of materials). Similarly, the state likely would want to continue requiring that districts offer a support program for new teachers, though a block grant approach would allow districts a greater degree of discretion as to how to structure these programs. The state must also continue to ensure districts meet certain legal requirements, including federal mandates and obligations resulting from the Williams v. California and Valenzuela v. O’Connell et al court settlements. While certain requirements will continue, block grants provide districts broader discretion as to how to best meet these regulations.

Categorical Reform Would Change the Role of CDE, Open Door for Broad Governance Reforms. While we recommend maintaining some essential state requirements, our proposed reforms would dramatically reduce—compared to the current system—administrative and compliance–related activities. Currently, CDE must implement complicated funding distribution formulas and enforce countless program requirements. Greatly reducing the number of formulas and program requirements would free up significant CDE resources. A slimmed down CDE administering the remaining programs and providing technical assistance to local agencies is consistent with governance reform proposals made by the LAO K–12 Master Plan: Starting the Process (1999), the Legislature’s California Master Plan for Education (2002), and the Governor’s Committee on Education Excellence’s technical report (2007). Even though complete implementation of the governance reform proposals laid out in these documents is not achievable by July 1, 2009, the state could take significant steps this year to streamline CDE operations with the goal of aligning categorical workload with administrative support.

Undertake Substantive Community College Categorical Reform

Consistent with his proposal for K–12 education, the Governor proposes to give CCC the authority to use categorical funding for general purposes. (The Governor’s proposals to ease certain state requirements for K–12 education—such as reducing districts’ minimum reserve levels—do not apply to the CCC system, as statute does not currently prescribe such limits for community colleges.) Similar to our K–12 recommendations, we recommend an alternative approach for community colleges that creates block grants around thematic areas. While there are considerably fewer CCC categorical programs than K–12 programs (with less overlap in targeting certain groups of students), opportunities still exist to consolidate related programs in ways that maximize flexibility for community college districts.

Consolidate CCC Categorical Programs. Specifically, we recommend two CCC block grants—one centered around student success and one around faculty support. Figure 15 summarizes the programs included in each recommended block grant. As the figure shows, our block grants would consolidate eight programs and $257 million in associated funding. These block grants would include more than one–third of all CCC categorical programs and funding. To ensure continued investment by districts in two groups of students, we exclude from block grants the CCC system’s lone program for economically disadvantaged students (EOPS), as well as its program for disabled students. Because the remaining 11 existing categorical programs serve various unrelated and specialized purposes (such as foster–parent training, scheduled maintenance, and economic development), we recommend that they, too, remain separate.

Create Student Success Grant. As shown in Figure 15, we recommend consolidating four programs and $196 million into a new Student Success block grant. By combining funding for these programs into one block grant, community college districts would be able to allocate student service funding in a way that best meets the needs of their students. With this funding, community college districts, for example, could provide services such as assessment, orientation, counseling (academic and financial aid), tutoring, and other activities designed to improve student completion. As with our K–12 proposal, we recommend that districts retain the same amount of categorical funding in 2009–10 that they would have received absent a consolidation. After this transition period, we recommend the funds provided under this block grant be allocated to districts primarily on a per–student basis (with some allowance made for districts with high percentages of financial aid recipients).

Create Faculty Support Grant. Also shown in Figure 15, we recommend consolidating four programs and $61 million into a new Faculty Support block grant. This block grant is designed to improve faculty performance as well as recruit and retain part–time faculty. With this funding, community college districts, for example, could undertake professional development activities for instructors or offer faculty–leave time to develop new curricula. Under the block grant approach, community college districts would have flexibility to allocate faculty resources to meet local campus needs. Similar to our recommendation for the Student Success block grant, we recommend that the funds provided under this block grant be allocated to all districts on a per–student basis following a one–year hold harmless transition period.

Block Grants Can Help Legislature And Districts Address Budget Cuts

One of the additional benefits of creating block grants is that budget and policy makers can more easily prioritize among thematic areas. This can be useful if additional budget cuts must be made in 2009–10. At the state level, prioritizing among a few thematic areas is a much more straightforward endeavor than having to compare the merits of dozens of individual categorical programs. As discussed in the “Balancing the 2009–10 Budget” section, our recommended approach would place a higher priority on maintaining K–12 revenue limits, CCC apportionments, special education, and funding for disadvantaged students as compared to instructional and faculty support. Similarly, at the local level, having flexibility to operate within the parameters of large thematic block grants can help districts and colleges retain those specific activities they deem highest priority.