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Other Budget Issues

Last Updated: 3/19/2013
Budget Issue: Funding determination process for nonclassroom-based charter schools.
Program: Charter Schools
Finding or Recommendation: Reject the Governor’s January proposal to limit the funding determination process to the first and third years of a charter school’s operation. Recommend the Legislature instead retain the funding determination process but make several modifications to it.
Further Detail


State Allows Charter Schools to Offer Nonclassroom-Based Instruction. Like school districts, charter schools may offer instruction in a classroom or nonclassroom-based setting. A school is considered classroom-based if at least 80 percent of its instructional time takes place on the school site under the supervision of certificated teachers. A nonclassroom-based school, in contrast, is one in which more than 20 percent of instructional time is offered at a location other than the school site. Nonclassroom-based schools follow rules established for independent study and provide instruction through individualized student learning plans. In 2012-13, 250 charter schools (about 25 percent of all charter schools) are nonclassroom-based.

State Law Requires Funding Determination Process for Nonclassroom-Based Charter Schools. Chapter 892, Statutes of 2001 (SB 740, O’Connell), required the State Board of Education (SBE) to establish a system for determining the appropriate funding level for nonclassroom-based charter schools. In response, SBE developed regulations specifying that nonclassroom-based schools that do not meet certain criteria would receive only a portion of the funding provided to classroom-based schools. The law was intended to prevent disproportionate levels of spending by nonclassroom-based schools on activities not related to student instruction.

SBE Regulations Set Spending Requirements for “Full” Funding. To receive the same funding as a classroom-based school, current SBE regulations require a nonclassroom-based charter school to: (1) spend at least 40 percent of its state and federal revenue on salaries and benefits for credentialed staff, (2) spend at least 80 percent of its total revenue on instruction and related services, and (3) maintain a student-teacher ratio of 25-1 (or the ratio of the largest unified school district in the county in which the charter school resides, whichever is higher). These ratios were established to mirror the spending patterns of traditional schools operating classroom-based programs. If a nonclassroom-based charter school does not meet any one of these criteria, it receives funding for only a portion of its nonclassroom-based average daily attendance (70 percent or 85 percent, depending on the extent to which the school fails to meet the criteria).

SBE May Consider Mitigating Circumstances When Making Funding Determinations. A nonclassroom-based charter school may request SBE to consider mitigating circumstances when making a funding determination. Charter schools typically apply for mitigating circumstances when they are unable to meet the threshold established for certificated staff salaries or instruction-related expenses. The SBE may accept the mitigating circumstances and provide a higher funding level than the school otherwise would receive. Common mitigating factors considered by SBE include one-time facility expenses, extraordinary special education costs, or restricted grants that cannot be spent on certificated staff or instruction and related activities.

Frequency of Funding Determination Varies by Charter School. In addition to setting funding levels for these schools, SBE determines how frequently each nonclassroom-based charter school must renew its funding determination (although all schools must have their funding determination reviewed within five years). A funding determination is generally awarded for two to four years, depending on the academic and fiscal history of the charter school. New schools typically receive two-year determinations, while established schools receive longer determinations. A charter school with above-average academic performance (receiving a decile ranking of six or higher on the state Academic Performance Index) automatically receives a funding determination that is valid for five years.

Most Schools Receive Full Funding. In recent years, most nonclassroom-based charter schools have received full funding. In 2011-12, 11 schools received 85 percent funding as a result of the funding determination process, with all other schools receiving full funding. Preliminary results from the 2012-13 determination process suggest the number of schools receiving prorated funding will increase, however, because several schools currently receiving full funding did not meet SBE spending requirements or receive approval for their mitigating circumstances.

Governor’s Proposal

Requires Funding Determination Only in First and Third Years. The Governor proposes to limit the funding determination process to a charter school’s first and third years of operation. In future years, a new determination would be required only if: (1) the school’s authorizer provides notice that the charter school must fix financial irregularities, (2) the school’s authorizer provides notice that it is considering revocation of the charter, or (3) the school’s annual audit contains a finding that would affect its apportionment of state funds. Absent these circumstances, the determination received in a school’s third year of operation would remain in effect for the lifetime of the school. The proposal also would permit charter schools to apply voluntarily for a new determination (for example, if the determination in the school’s third year was for less than 100 percent funding).


We have concerns with both the existing funding determination process and the Governor’s proposed changes. Below, we describe these concerns in more detail.

Personnel-Related Requirements Restrict Program Flexibility. Current law regarding the funding determination process indicates the Legislature’s intention that nonclassroom-based schools be “substantially dedicated” to the instructional benefit of the student. The existing teacher payroll and student-teacher ratio requirements, however, seem overly prescriptive. Nonclassroom-based charter schools often emphasize individualized learning with fewer hours spent directly interacting with a teacher. Compared with traditional schools, these programs may have a higher need for services, such as technology support and curriculum development, and a lower need for certificated staff. By setting student-teacher ratios similar to traditional schools and requiring a certain share of funding be dedicated to certificated salaries and benefits, the existing funding determination process limits the ability of nonclassroom-based schools to shift spending toward these alternative investments.

Significant Penalties for Small Changes in Spending. We also are concerned that the existing process significantly penalizes schools whose spending falls just short of the required spending thresholds. For example, a school that spends 79 percent of its budget on instruction-related expenses receives only 85 percent of its full funding level, while a school that spends 81 percent on instruction-related expenses receives full funding. This structure allows small changes in spending to trigger much larger changes in funding levels.

Unclear How Mitigating Circumstances Are to Affect Funding Determination. Current regulations allow the SBE to consider various mitigating factors. Although the regulations provide a list of possible mitigating factors, they do not include guidelines for the types of situations that would be accepted by SBE, nor do they clearly define how these mitigating circumstances are to be incorporated into the final funding decision. Our discussions with California Department of Education staff and charter school representatives suggest that this issue is one of the most ambiguous aspects of the existing funding process.

Governor’s Proposal Does Not Address Underlying Problems. The Governor’s proposal does not address these underlying problems with the funding determination process. Schools in their first and third year of operation, as well as schools requiring a determination in later years, still would need to adhere to the existing SBE funding criteria, and the existing rules would continue to restrict program flexibility and lack clarity regarding how mitigating circumstances are to affect a school’s funding determination.

Charter School Operations May Change Significantly After Three Years. We also are concerned that a charter school could change the structure of its program significantly but continue to receive funding based on the determination in its third year. Over time, the charter school’s spending levels may become increasingly disconnected from the spending levels that were the basis for the funding determination. For example, a charter school that experiences rapid enrollment growth after its third year might make significant changes in spending allocations, while its funding determination remained tied to its third year of operation.


Reject Governor’s Proposal. The Governor’s proposal would continue a process for charter schools during their initial years of operation that includes restrictions on programmatic flexibility, penalties for small changes in spending, and unclear effects of mitigating circumstances. Moreover, charter schools in operation more than three years would receive little oversight, even if the charter school changed its structure or enrollment significantly. For these reasons, we recommend rejecting the Governor’s proposal.

Refine Funding Determination Process. We recommend the Legislature continue to use a funding determination process but make several changes. Specifically, we recommend the Legislature:

  • Eliminate the requirement that at least 40 percent of state and federal revenue be spent on certificated staff salary and benefits. Also eliminate the student-teacher ratio requirement.
  • Retain the existing requirement for spending on instruction and related services.
  • Provide general guidelines for the types of mitigating circumstances that would be accepted by SBE, such as unanticipated noninstructional costs, major one-time costs for technology or infrastructure, and funds set aside to protect the school from possible midyear budget reductions. Specify how those circumstances would affect the calculations used to determine the charter school’s funding level.
  • Establish graduated funding reductions, such that a charter’s funding reduction is proportional to the extent the spending threshold is missed.
  • Retain the requirements that schools receive a new funding determination every two to five years.

Given that most aspects of the funding determination process are contained in SBE regulations, we recommend the Legislature change state law and direct SBE to adopt new conforming regulations.