LAO Analysis of the 2002-03 Budget: Education, Overview

The Governor's budget includes a total of $52.1 billion in operational funding from state, local, and federal sources for K-12 schools for 2002-03. This is an increase of $988 million, or 2 percent, over estimated expenditures in the current year. The budget also includes a total of $11.6 billion in state General Fund and local property tax support for higher education. This is an increase of $297 million, or 2.6 percent, over estimated expenditures in the current year.

Figure 1 shows support for K-12 and higher education for three years. It shows that spending on education will reach almost $64 billion in 2002-03 from all sources (not including capital-related spending).

Figure 1 K-12 and Higher Education Funding
2000-01 Through 2002-03 (Dollars in Millions)
	Actual 2000-01	Estimated 2001-02	Proposed 2002-03	Change From 2001-02
				Amount	Percent
K-12^a	$47,847	$51,137	$52,125	$988	2.0%
Higher Education^b	$10,491	$11,299	$11,596	$297	2.6%
^a Includes state, local, and federal funds. Excludes Proposition 98 loan repayment under CTA v. Gould and debt service for general obligation bonds.
^b Includes state and local funds. Excludes direct capital outlay spending and debt service for general obligation bonds.

Funding Per Student

The Proposition 98 request for K-12 in 2002-03 represents $7,058 per student, as measured by average daily attendance (ADA). Proposed spending from all funding sources (excluding capital outlay and debt service) totals about $9,000 per ADA.

The Proposition 98 budget request for California Community Colleges (CCC) represents $4,389 per full-time-equivalent (FTE) student. This compares to proposed General Fund spending for each California State University FTE student of $8,746 and $18,223 for each University of California FTE student.

Historical Perspective of Funding Per Student

To place funding for K-12 and higher education into an historical perspective, we have compared state and local funding per FTE student in the four public segments from 1978-79 through 2002-03, adjusting for the effects of inflation over this 24-year period (see Figure 2). As the figure shows, per-student funding for each segment is at or near highs for this period.

Proposition 98

California 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 CCC. 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 3 briefly explains the workings of Proposition 98, its "tests," and 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.

Figure 3

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 tax revenues 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 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.

· Test 3B Supplement. Statute requires that, in Test 3 years, K-14 Proposition 98 funding per student grow at least as fast as per capita General Fund spending on non-Proposition 98 programs. This can require that a supplemental amount be added to the minimum guarantee.

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.

Proposition 98 Allocations

Figure 4 displays the budget's proposed allocations of Proposition 98 funding for K-12 schools and CCC. The budget proposes $46 billion for Proposition 98 in 2002-03. This proposed appropriation is equal to the constitutionally required minimum level. This proposal is a departure from the last five fiscal years (1997-98 through 2001-02), in which the state "overappropriated" the required minimum level. Proposition 98 funding issues are discussed in more detail in the "K-14 Education Priorities—Proposition 98" and "California Community Colleges" sections of this chapter.

Figure 4 Proposed Proposition 98 Allocations^a
2001-02 and 2002-03 (In Millions)
	2001-02	2002-03 Proposed	Change from 2001-02
	2001-02	2002-03 Proposed	Amount	Percent
Allocations
K-12	$39,986	$41,209	$1,223	3.0%
Community Colleges	4,548	4,684	136	3.0
Other agencies	93	91	-2	-2.2
Loan repayment^b	350	—	-350	-100.0
Proposition 98 Totals^c	$44,977	$45,983	$1,006	2.2%
^a General Fund and local property tax revenue.
^b In 2002-03, $350 million that had been allocated to a loan payment relating to the CTA v. Gould lawsuit will be available for reallocation to other K-14 education purposes.
^c Totals may not add due to rounding.

Enrollment Growth

Figure 5 displays budgeted enrollment growth for K-12 and higher education. The increase in K-12 enrollment—1.07 percent—is considerably lower than annual 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 growth numbers for higher education are more substantial and are projected to stay that way for several years.

Figure 5 Budgeted Enrollment^a
2001-02 and 2002-03
	2001-02	Projected 2002-03	Change From 2001-02
	2001-02	Projected 2002-03	Amount	Percent
K-12	5,776,829	5,838,438	61,609	1.07%
Community Colleges	1,062,142	1,094,006	31,864	3.0
University of California	177,666	184,766	7,100	4.0
California State University	300,739	312,769	12,030	4.0
^a Enrollment shown in average daily attendance for K-12 and in full-time equivalent students for UC, CSU, and CCC.

Setting Education Priorities for 2002-03

In this chapter, we evaluate the proposed budgets for K-12 and higher education, including proposed funding for existing programs as well as new initiatives. We identify several programs that, under close scrutiny, appear to be less meritorious than other possible uses to which the state could put such resources. By doing so, we are able to provide the Legislature with budgetary "room" to meet its education and other priorities.

Evaluating Education in a Broad Context. In establishing its education priorities, we recommend the Legislature evaluate budget options in a broad context, endeavoring to direct resources to programs that it believes offer the highest returns on its investments in education. The Legislature need not feel bound by how the Governor's budget proposes to allocate resources within each segment of education or how it proposes to allocate resources among the segments. We suggest the Legislature consider budget options with the following thought in mind: How can the state best improve educational outcomes with the next dollar it spends?

Maintaining Budget Flexibility. The Governor's proposed education budget represents but one basket of possibilities. Aside from the primary constraint of Proposition 98, there is flexibility for the Legislature to adjust funding for K-14 education. (Please see the discussion of K-14 education priorities in the "Crosscutting Issues" part of this chapter for a detailed discussion of the current Proposition 98 situation and the strategic dilemma it poses for the Legislature.)

For over a decade, state law has specified that K-12 districts and CCC receive the same percentage of Proposition 98 funds that they received in 1989-90 (89.17 percent and 10.93 percent, respectively). In every budget act since adopting this provision, the Legislature has allocated funding differently than described in this statute. (Of Proposition 98 funds provided to CCC and K-12 schools, CCC's share has ranged from 9.45 percent to 11.85 percent. The Governor's budget proposes a CCC share of 10.21 percent.) Rather than rely on a fixed percentage, we recommend the Legislature annually adjust the funding share to express its budget priorities in light of current circumstances.

By considering education in a broad context, and by maintaining the budgetary authority and flexibility provided it by the Constitution, the Legislature can focus education resources on programs it determines will most benefit California.

Legislative Analyst's Office