The 2017-18 Budget

Update on COLA for K-14 Education Programs

The federal government recently released updated information that affects the cost-of-living adjustment (COLA) that the state provides to certain school and community college programs. Below, we provide background on the COLA, share the recent data, and examine its budget effects.

Background

Statutory COLA Determined by Price Index for State and Local Governments. State law specifies that certain school and community college programs are to receive an annual COLA. The statutory COLA rate is tied to a national price index developed by the Bureau of Economic Analysis (a division of the U.S. Department of Commerce). This index is designed to reflect the cost of goods and services purchased by state and local governments across the country. State law bases the rate on the average value of this index over the 12 month period ending in March of the prior year with the 12 month period ending in March of the current year. In 2017-18, for example, the two periods being compared run from April 2015 through March 2016 and from April 2016 through March 2017. The Bureau of Economic Analysis releases new data for the index in late April each year. The state, in turn, uses the late April data to finalize the COLA rate for the budget year.

Recent Data

New Data Show Statutory COLA Is Higher Than January Estimate. On April 28, 2017, the Bureau of Economic Analysis released its updated data for the index. Using the data, the K-14 COLA for 2017-18 is 1.56 percent. This compares with the 1.48 percent COLA assumed in the January budget. The new rate is above the COLA for the past few years (0.85 percent in 2014-15, 1.02 percent in 2015-16, and 0.0 percent in 2016-17) but below the 20-year historical average of about 3 percent.

New COLA Affects Local Control Funding Formula (LCFF) Targets. When the state adopted LCFF, it created target per-pupil funding rates and specified that those target rates were to be adjusted annually for COLA. Recognizing a higher COLA increases the cost of LCFF at full implementation. Relative to the Governor’s budget, we estimate the cost of LCFF at full implementation has increased by approximately $45 million. Assuming the state continues to allocate $744 million for LCFF in 2017-18, we estimate the formula would be 95.6 percent funded, a slight decrease from the January estimate of 95.7 percent funded. Given the higher COLA, we estimate keeping the formula at 95.7 percent funded now would cost about $790 million.

New COLA Affects Costs of Certain School and Community College Programs. As shown in the figure below, the Governor’s budget included a COLA for several school and community college programs. For schools, the largest of these programs is special education whereas for community colleges, the largest is apportionments. (Community college apportionment funding is general purpose and distributed based on student attendance.) In January, the administration estimated that the total cost of providing a 1.48 percent COLA for these programs would be $156 million. Based on the new COLA of 1.56 percent, we now estimate that the cost has increased to $165 million. Holding other factors constant (including estimates of the Proposition 98 minimum guarantee), the higher COLA cost reduces the Proposition 98 funding available for other programs by $8.5 million.