LAO 2004-05 Budget Analysis: General Government

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004


The Governor's budget includes a total of $56.4 billion in operational funding from state, local, and federal sources for K-12 schools for 2004-05. This is an increase of $1.2 billion, or 2.2 percent, from estimated appropriations in the current year. The budget suspends the Proposition 98 minimum guarantee by $2 billion, providing less funding for K-14 education than otherwise would be required. The budget also includes a total of $32.2 billion in state, local, and federal sources for higher education. This is an increase of $803 million, or 2.6 percent, from 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 $88 billion in 2004-05 from all sources (not including capital outlay-related spending). 

Figure 1

K-12 and Higher Education Funding

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





Change From


Actual 2002‑03

Estimated 2003‑04

Proposed 2004‑05









Higher educationb













a  Includes state, local, and federal funds. Excludes debt service for general obligation bonds.

b  Includes state, federal, 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 2004-05 represents $6,941 per student, as measured by average daily attendance (ADA). Proposed spending from all funding sources (excluding state capital outlay and debt service) totals about $9,338 per ADA.

The Proposition 98 budget request for California Community Colleges (CCC) represents about $4,100 per full-time equivalent (FTE) student. When all state and local sources (including student fees) are included, CCC will receive about $4,550 for each FTE student. This compares to proposed total funding (state funds and student fees) of $19,880 for each FTE student at the University of California (UC), and $10,500 for each FTE student at the California State University (CSU).

Historical Perspective on Funding Per Student

To place funding for K-12 and higher education in a historical perspective, we have compared state and local funding per FTE student in the four public segments from 1988-89 through 2004-05, adjusting for the effects of inflation over this period (see Figure 2). As the figure shows, per-student funding for K-12 schools remains near the high point for the period. Per-student funding for higher education has recently declined somewhat due to the state's fiscal problems. 

Proposition 98

California voters enacted Proposition 98 in 1988 as an amendment to the State Constitution. This measure, 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 70 percent of total K-12 funding and about two-thirds of total CCC 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).

·   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 34.7 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 34.7 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 they 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


Through urgency legislation other than the budget bill, the Legislature may suspend the minimum guarantee, providing K-14 education any funding level consistent with Legislative priorities. The difference between the guaranteed amount and the level provided is added to the “maintenance factor,” discussed below.

Restoration (Maintenance Factor)

Following a suspension or Test 3 year, the Legislature must increase funding over time until the base is fully restored. The overall dollar amount that needs to be restored is referred to as the maintenance factor. A portion of the maintenance factor is required to be restored in years the General Fund grows faster than personal income.

Proposition 98 Allocations

Figure 4 displays the budget's proposed allocations of Proposition 98 funding for K-12 schools and CCC. The budget proposes $46.7 billion for Proposition 98 in 2004-05, which is $2 billion less than if the Governor had not suspended the minimum guarantee. The General Fund costs of Proposition 98 fall $444 million from the current-year level. The budget also proposes to provide less than the minimum guarantee in 2002-03 and 2003-04 by a combined $966 million, deferring these settle-up costs until at least 2006-07. Proposition 98 funding issues are discussed in more detail in the "Proposition 98 Budget Priorities" section of this chapter.

Figure 4

Governor's Proposed Proposition 98 Funding

(Dollars in Millions)




Change From 2003‑04 Revised


Budget Act


2004‑05 Proposed



K-12 Proposition 98






State General Fund






Local property tax revenue












CCC Proposition 98






State General Fund






Local property tax revenue












Total Proposition 98c






State General Fund






Local property tax revenue













a  These dollar amounts reflect appropriations made to date, or proposed by the Governor in the current year. In order to meet the minimum guarantee in 2002‑03 and 2003‑04, the Legislature would need to appropriate an additional $518 million and $448 million, respectively.

b  Subtotals may not add due to rounding.

c  Total Proposition 98 also includes between $93 million and $95 million in funding that goes to other state agencies for educational purposes.

Enrollment Funding

The Governor's budget makes changes to enrollment funding levels for K-12 and higher education. The budget funds a 1 percent increase in K-12 enrollment, which 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. Community college enrollment is funded for 3 percent growth in 2004-05, which is somewhat higher than the rate of expected population growth. This is because the Governor's budget anticipates that 10 percent of UC and CSU's freshman enrollment would be diverted to CCC through a new program. Consistent with legislative intent expressed in the 2003-04 budget package, the Governor's budget includes no new funding for enrollment growth at UC and CSU. However, as we discuss later, UC and CSU have unused base enrollment funding they could use to admit more students in 2004-05.

Setting Education Priorities for 2004-05

In this chapter, we evaluate the proposed budget for K-12 and higher education, including proposed funding increases and reductions, proposed consolidations and realignments, fund shifts and fee increases, and projected enrollment levels. The difficult fiscal environment that the state faces in 2004-05 provides the Legislature with the opportunity to reassess the effectiveness of current education policies and finance mechanisms. In both K-12 and higher education, we provide the Legislature with alternative approaches to achieve significant budgetary savings.

K-12 Priorities. The overriding issue for the Legislature in crafting the 2004-05 budget for K-12 education and CCC (both funded largely through Proposition 98 funds) is whether to suspend the Proposition 98 minimum guarantee, and if so, by what amount. How the Legislature addresses these proposals will shape K-14 budgets for several years. The proposed suspension allows the Legislature the flexibility to trade off Proposition 98 and non-Proposition 98 priorities. We recommend the Legislature approve a Proposition 98 suspension, and determine the appropriate Proposition 98 funding level by balancing K-14 programs and other budget priorities. We raise concerns with the level of deferrals and the growing balance on the education "credit card," which will require the state to provide an additional $3.8 billion to schools and community colleges in the future. The Governor proposes transferring $2 billion in categorical program funding into revenue limits (general purpose spending) to provide districts greater flexibility in exchange for greater local accountability. We are generally supportive of the concept, but suggest some significant modifications to the proposal.

Higher Education Priorities. In higher education, the Governor proposes to achieve General Fund savings by raising student fees at all three segments, by making various programmatic reductions at UC and CSU, and by modifying certain financial aid policies. We believe that the combined effect of several of the Governor's proposals would unnecessarily reduce access to higher education. Most notably, we are concerned that the Governor seeks to impose new limitations on critical financial aid programs at the same time that he proposes substantial fee increases for students at all three segments.

In the "Intersegmental" sections of this chapter, we offer alternative budget approaches in the areas of K-14 outreach, enrollment funding, student fees, and financial aid. While our recommendations would achieve a level of General Fund savings that is similar to the Governor's, we believe our proposal would better preserve student access to higher education.

Return to Education Table of Contents, 2004-05 Budget Analysis