The 2018-19 Budget

Charter School Facility Grant Program

The Governor’s budget augments ongoing funding for the Charter School Facility Grant Program by $28 million (25 percent). The Governor also proposes making several notable changes to the program in trailer bill language. This post provides background about this program, describes the Governor’s proposed changes, and offers associated recommendations.

Background

Charter School Facility Funding Has an Ad Hoc Past. The 1992 legislation authorizing the creation of charter schools in California contained no provisions relating to facilities. Since that time, state policies relating to charter school facilities have developed in an ad hoc way (see Figure 1). Currently, about half of charter schools occupy facilities provided by their authorizing district. In these cases, charter schools pay nominal or below market cost for the use of the facilities. Most other charter schools occupy privately-leased facilities. Some of these charter schools pay the full cost of their leases, doing so out of their operating budgets. Beginning in 2001, the state began subsidizing a portion of lease costs for charter schools that met certain criteria (as described in the next paragraph). In these cases, charter schools pay only the unsubsidized portion of their lease costs, also doing so out of their operating budgets. (A relatively small share of charter schools have constructed their own facilities.)

Charter School Facility Grant Program (CSFGP) Helps Certain Charter Schools Cover Lease Costs. To receive CSFGP funding, a charter school either must have at least 55 percent of its students qualifying for Free or Reduced Price Meals (FRPM) or be located in an elementary school attendance area with at least 55 percent FRPM students. From 2001‑02 through 2016‑17, eligible schools received funding equal to the lesser of (1) $750 per pupil or (2) 75 percent of eligible facility expenditures. Eligible facility expenditures include lease costs (accounting for more than 90 percent of eligible expenditures) as well as various other costs ranging from maintenance to building improvements, such as new HVAC equipment.

CSFGP Funding Has Been Driven by Budget Agreements. Figure 2 traces the funding and programmatic changes made over the years to CSFGP. As part of an initial 2001‑02 budget agreement, the state provided $10 million for the program. The state continued to provide the program with about $10 million annually through 2006‑07 before augmenting funding to $18 million in 2007‑08. During this period, the program was oversubscribed and CSFGP awards were routinely prorated. As a result of a 2008‑09 budget agreement, funding for the program increased substantially over the next five years, reaching $92 million in annual funding in 2012‑13. During this period, the program moved from significantly oversubscribed to undersubscribed. By 2016‑17, program funding had increased to $112 million, with the program still undersubscribed—serving as the impetus for key CSFGP changes the state made last year.

2017‑18 Changes Result in CSFGP Moving From Undersubscribed to Significantly Oversubscribed. As part of the 2017‑18 May Revision, the administration proposed increasing the maximum per-student CSFGP award from $750 to $1,117 and providing annual cost-of-living adjustments (COLA) to this rate in future years. The May Revision, however, did not augment total program funding—instead leaving it at the prior-year level of $112 million. The Legislature ultimately adopted the Governor’s proposal as part of its final 2017‑18 budget package. Due in part to these changes, the California School Finance Authority (which oversees CSFGP) estimates the program is about $25 million short of fully funded in 2017‑18. Under current law, CSFGP awards continue to be prorated downward when the program is oversubscribed. Based upon the California School Finance Authority’s latest projections, each grant recipient’s award in 2017‑18 is expected to be prorated downward by about 20 percent.

Under Current Law, Automatic Backfill for Prorated Awards. Prior to 2010‑11, CSFGP provided reimbursements for prior-year costs. Starting in 2010‑11, the state transitioned CSFGP from operating on a reimbursement basis to providing grants for current-year costs. To facilitate this transition, legislation passed as part of the 2010‑11 budget package—Chapter 724 of 2010, (AB 1610, Committee on Budget)—required new appropriations for CFSGP to first pay any unpaid prior-year claims before providing new awards. The 2010‑11 appropriation was intended to cover claims for both 2009‑10 (under the old reimbursement system) and 2010‑11 (under the new grant system), but it was insufficient to fully fund both sets of claims. Consequently, the 2010‑11 appropriation fully funded all 2009‑10 claims but prorated awards for 2010‑11. The 2011‑12 appropriation then fully funded these prorated prior-year awards before providing new current-year awards. Although the transition to a grant-based program was completed in 2012‑13, this requirement that new appropriations first pay any prior-year prorated awards remains in state law.

Existing Regulations Address Potential Conflicts of Interest. Some charter schools have complicated management structures in which governance and management for their leased facilities overlap. For example, a community philanthropist might serve both on a charter school’s governing board and as the school’s landlord. Such individuals potentially could benefit from overcharging the school on rent and thereby receiving an inflated award from CSFGP. To address such conflicts of interest, existing regulations (1) require schools to disclose such conflicts when applying to CFSGP, (2) prohibit any individuals with a financial interest in the school’s leased facility from participating in the school’s facility decisions, and (3) require an independent appraisal confirming rents are at or below market rates. Although these regulations appear reasonable, in practice they are rarely applied as charter schools rarely report conflicts of interest. Current law does not explicitly allow the California School Finance Authority to order independent appraisals except when applicants self-disclose potential conflicts of interest.

Governor’s Proposals

Increases CSFGP Funding. The Governor proposes to augment CSFGP from $112 million in 2017‑18 to $140 million in 2018‑19—an increase of $28 million (25 percent). The augmentation is intended to fully fund projected 2018‑19 awards without any pro-rata reduction.

Four Notable Program Changes. In the trailer bill, the Governor proposes making various changes to the program and applying the changes beginning retroactively with the 2017‑18 award cycle. Specifically, the Governor proposes the following modifications to the program:

• Eliminates Automatic Backfill for Prorated Awards. The Governor proposes deleting existing statutory language requiring any new appropriations for CSFGP to first fully pay any prorated prior-year awards.

• Prioritizes Funding Lease Costs Over Other Facility Costs. Currently, when CSFGP is oversubscribed, the same proration factor is applied to all awards regardless of whether they are for leasing or other facility costs. The Governor proposes fully funding lease costs before funding costs for maintenance and building improvements.

• Places Cap on Growth in Lease Costs. For purposes of determining each applicant’s award amount, the Governor proposes capping growth in lease costs at the K-12 COLA. For example, if a charter school claimed $400,000 in rent when applying for its CSFGP grant last year and the K-12 COLA is 1 percent, that school could not claim lease costs of more than $404,000 when applying for a CSFGP grant this year. This cap would not apply to other facility costs.

• Requires Initial Independent Appraisal. For all charter schools that are new to CSFGP, regardless of whether they have potential conflicts of interest, the Governor proposes to require their initial leases be independently appraised either at or below market rates.

Assessment and Recommendations

Summary of Recommendations. Figure 3 lists all of the Governor’s CSFGP proposals and summarizes our corresponding recommendations. We discuss each of these recommendations in more detail below.

Recommend Setting 2018‑19 Funding Level at One of Two Levels—Both Designed to Avoid Pro-Rata Reductions. Late in last year’s budget cycle, the maximum per-student grant amount was increased substantially. Though we believe the rationale for the rate increase was sound (as the rate had not been increased since the program’s inception 16 years earlier), the Legislature at the time might not have been aware of the full fiscal effect of enacting the rate increase. Based upon the latest data, charter schools will experience a significant pro-rata reduction in their grant amounts in 2017‑18, and fully funding CSFGP in 2018‑19 will require a significant budget augmentation. Given these developments, we recommend the Legislature take one of two approaches in setting the 2018‑19 CSFGP funding level. Both approaches are designed to avoid pro-rata reductions, as such reductions make budget planning more difficult for charter schools.

• Provide $162 Million to Fund Program Consistent With Last Year’s Increase in the Maximum Per-Student Grant Amount. If the Legislature desires to maintain the maximum per-student grant amount adopted last year, we estimate CSFGP would need a $50 million augmentation in 2018‑19. Our cost estimate is notably higher than the administration’s proposed $28 million augmentation, which we think underestimates growth in lease costs and student attendance. (Even if the Legislature were to adopt the Governor’s proposal to cap growth in lease costs in 2018‑19 at the K-12 COLA rate, we estimate the program would need an augmentation of $45 million.)

• Provide $120 Million to Fund Program at Its Historical Maximum Per-Student Grant Amount. Alternatively, were the Legislature to be concerned with the significant cost increase in the program, it could rescind its decision last year to increase the maximum award amount and reinstate the historical cap of $750 per student. Under this approach, we estimate CSFGP would need an $8 million augmentation in 2018‑19—notably less than the augmentation required under the first approach.

Recommend Removing Automatic Backfill. The automatic backfill was intended to help transition from a prior-year reimbursement to a current-year grant program, and this transition was completed in 2012‑13. Since that time, the automatic backfill has lost its original policy rationale. Importantly, the Legislature does not automatically backfill shortfalls in other K-12 categorical programs. It does sometimes provide discretionary backfills on a case-by-case basis and could use this approach were it interested in covering a future shortfall in CSFGP.

Recommend Rejecting Proposal to Prioritize Lease Costs. We believe the Governor’s desire to focus CSFGP awards on lease costs rather than other facilities costs is reasonable. We see no reason charter schools in privately-leased facilities should not pay costs such as routine maintenance using general purpose funding, just as other public schools do. Though we appreciate the rationale for the proposal in concept, we think implementing it in practice would be difficult. This is because the California School Finance Authority likely could not fully disentangle lease and other facilities costs, as many lease agreements include provisions for landlord-provided maintenance and building improvements. In addition, the Governor’s proposal only applies when CSFGP is oversubscribed, but the two CSFGP funding options we lay out above are intended to prevent the program from being oversubscribed. For all these reasons, we recommend the Legislature reject this proposal.

Recommend Rejecting Proposed Cap on Growth in Lease Costs. The administration has not provided a compelling rationale for the proposed limit on lease cost growth. Existing CSFGP rules already ensure participating charter schools pay at least 25 percent of their facilities cost—presumably a strong incentive to keep costs low. Moreover, adding a cap on lease costs would have the presumably unintended consequence of giving similar applicants different award amounts. Whereas most new CSFGP applicants would receive awards covering 75 percent of their lease costs, most longstanding CSFGP recipients would receive awards covering notably less than 75 percent of their lease costs due to the growth cap. (Though the current 25 percent local share seems a strong incentive to keep lease costs low, the Legislature could increase this local share of cost if it desired an even stronger cost-containment incentive.)

Recommend Rejecting New Blanket Appraisal Policy and Instead Strengthening Current Restrictions on Conflicts of Interest. Though existing regulations place restrictions on schools with potential conflicts of interest, the regulations rely on self-disclosure and are thus relatively easy to evade. Nonetheless, we believe requiring all new charter school participants to seek an independent appraisal of lease costs is unwarranted and places an undue administration burden on some charter schools with clearly no potential conflict of interest. Consequently, we recommend rejecting the administration’s proposed blanket policy to require an independent appraisal of all new CSFGP participants and instead adopting language allowing the California School Finance Authority to require an independent appraisal of any applicant credibly suspected of a conflict of interest.

Recommend Revisiting State’s Broader Approach to Funding Charter School Facilities. The state’s approach to funding charter school facilities developed in an ad hoc way over the last 25 years, such that the state lacks a single, coherent vision for how to support these facilities. Under the state’s current mosaic of policies and practices, charter schools face facility costs ranging from almost nothing to the full cost of a market-based lease. Moreover, even very similar charter schools can be treated very differently. Furthermore, differences in treatment could be resulting in some charter schools having substantially less available for their core instructional program compared to similar charter schools. Given such differences do not appear justified, we recommend the Legislature undertake a comprehensive review of the state’s charter school facility funding approach. The ultimate intent of the review would be to adopt a more rational and equitable facility funding approach.