Legislative Analyst's Office
February 22, 1995

K-12 Education Overview

Major Issues


The K-12 education budget reflects a General Fund increase of $927 million, due primarily to an increase in the Proposition 98 funding guarantee.

The budget proposes expenditures of $30.3 billion from all sources for K-12 education in 1995-96, including $16.2 billion from the General Fund. This is $1.3 billion, or 4.9 percent, more than estimated expenditures from all sources for the current year. Proposition 98 provides $23.4 billion, or 77 percent, of these expenditures from all sources, and $1.1 billion, or 88 percent of the increase.

Proposition 98

The Governor's proposal funds the Proposition 98 minimum guarantee in the current and budget years. It increases K-12 funding on a per-pupil basis in both years, and sets aside a total of $514 million to repay Proposition 98 loans.

Proposition 98 (as amended by Proposition 111) guarantees a minimum amount of state and local property tax funding for K-14 education support for schools, community colleges, and a few state agencies that provide direct instructional services.

Figure 1 displays the history of Proposition 98 spending. It shows the amount of Proposition 98 funding counted on the state's books in any given fiscal year budgetary allocation (solid line), and the amounts actually available for programs cash (bars). These amounts differ primarily because cash includes (1) off-budget loans that have been provided by the Legislature to avoid spending reductions in districts, and (2) repayments of those loans.

In determining the impact of the budget on schools and community colleges for example, in calculating the amount of funding per student it is the amount of cash actually available that matters, not the Proposition 98 appropriations recorded on the state's books. Accordingly, our tables generally show both (1) Proposition 98 funding as it appears on the state's books (that is, budgetary basis) and (2) adjusted cash totals reflecting actual funds available ( cash basis).

Figure 1 also shows the difference between Proposition 98 spending and the Proposition 98 restoration target. This target represents the minimum level that Proposition 98 funding would have attained, if not for funding reductions in 1990-91, 1992-93, and 1993-94 due to slow state revenue growth. In years of moderate or rapid state revenue growth, the state must at least partially restore these reductions. A proposed restoration payment in 1994-95 narrows the gap between spending and restoration target to about $1.6 billion. The gap widens to $1.9 billion in 1995-96 due to relatively slow state revenue growth.

Proposed Changes in 1994-95

The budget proposes to fully fund the Proposition 98 guarantee for 1994-95. It proposes to increase per-pupil funding for K-12 schools, fully backfill property tax shortfalls for schools and community colleges, and make a Proposition 98 loan repayment.

The budget proposes $24.9 billion in 1994-95 Proposition 98 cash spending, $9 million less than assumed in the 1994 Budget Act. Figure 2 shows that some noteworthy changes underlie this relatively small difference in cash spending. Specifically, the $9 million reduction in cash is the net result of:

While schools would have slightly less total cash than assumed in the Budget Act, per pupil spending actually increases from $4,198 to $4,231 per pupil. This is explained by reductions in enrollment estimates. On a program basis, the budget proposes to spend these additional per-pupil funds, on a one-time basis, for various categorical programs, including instructional materials, deferred maintenance, education technology, and payments related to the Long Beach Unified desegregation court case.

Proposition 98 Minimum Funding Requirement. The budget estimate of the Proposition 98 minimum funding requirement (financed from the General Fund and local property taxes) is $144 million greater than the 1994-95 Budget Act estimate. This increase is the net result of faster-than-expected growth in state tax revenues, and slower-than-anticipated growth in K-12 enrollments. A $520 million General Fund increase is proposed in order to fund the $144 million increase and fully backfill an estimated $376 million shortfall in local property tax revenue for schools and community colleges.

Loan Repayment. In accordance with existing statute, the budget sets aside $135 million from the 1994-95 minimum funding requirement as a partial repayment of off-budget loans made to K-14 programs in 1992-93 and 1993-94. Existing law Ch 66/93 (SB 399, Hart) requires K-14 programs to partially repay these loans if the Proposition 98 minimum spending requirement exceeds a specified base amount. The base amount is defined as the amount required to fund the prior-year level of cash spending for K-14 programs, plus enrollment growth for schools and community colleges.

Figure 3 more specifically defines this base amount, and shows the calculation of the proposed current- and budget-year loan repayments. For instance, in the current year, the minimum funding requirement exceeds the base by $270 million. Consistent with Chapter 66, the budget sets aside half of this amount $135 million from the minimum spending requirement. While this amount counts as 1994-95 Proposition 98 spending for budgetary purposes, and for purposes of calculating the budget-year minimum spending requirement, it is not actually available for spending in K-14 programs in 1994-95.

Community College Fee Revenue. The budget estimate of community college fee revenue is $18 million less than the Budget Act estimate. The budget does not propose to backfill this shortfall in 1994-95.

Proposal for 1995-96

The budget proposes to fully fund the Proposition 98 guarantee for 1995-96. It proposes to give a partial cost-of-living adjustment (COLA) (2.2 percent) for school and community college general-purpose spending, and make a Proposition 98 loan repayment.

The budget proposes to provide $25.9 billion in Proposition 98 funding on a cash basis in 1995-96. This is an increase of $1 billion above cash funding proposed for 1994-95. Figure 2 shows that this increase is allocated to:

Figure 2 shows that this increase in Proposition 98 cash funding is the net effect of three changes: increases of $1.2 billion in the Proposition 98 minimum funding requirement and $18 million in community college fee revenues, offset by a $244 million increase in loan repayments.

Proposition 98 Minimum Funding Requirement. The budget estimate of the Proposition 98 minimum funding requirement is $26 billion, a $1.2 billion increase above the estimated current-year level. This consists of a General Fund increase of $968 million and growth of $259 million in local property tax revenue. The estimated guarantee is based on assumptions that the Legislature (1) funds the 1994-95 Proposition 98 guarantee at the level estimated in the budget, and (2) adopts the administration's proposed 1995-96 tax reduction.

Loan Repayment. Consistent with existing law, the budget proposes a loan payment of $379 million, $244 million more than the proposed 1994-95 payment. While the $379 million counts as Proposition 98 spending for budgetary purposes, it is not actually available for spending in K-12 programs in 1995-96.

Community College Fee Revenue. The budget estimate of community college fee revenue is $196 million, $18 million above the revised estimate for 1994-95. This results from a budget proposal to increase community college fees by $2 per unit.

Major K-12 Spending Changes

Figure 4 displays the major changes resulting in the net increase of $904 million in Proposition 98 cash spending for K-12 education. The figure shows that the major changes fall into three main categories: (1) inflation and statutory growth adjustments, (2) other cost and revenue changes, and (3) program proposals.

California Teachers Association (CTA) v. Gould: Potential Major General Fund Budget Effects

The budget estimates of the Proposition 98 minimum funding requirement and proposals for Proposition 98 cash spending assume that the state will win its appeal of a superior court judgment in the CTA v. Gould lawsuit. That judgment would: (1) nullify requirements that the schools and community colleges repay the state for the 1992-93 and 1993-94 Proposition 98 loans and (2) require the loan funds to be counted in the funding base that is used to calculate the Proposition 98 mini mum funding guarantee. The effect of the judgment has been delayed pending a decision on the state's appeal. The State Department of Education (SDE) advises that a decision is not likely before early 1996. If the state is unsuccessful in its appeal, it faces a $3 billion General Fund budget threat:

The amount that the state would actually provide to K-14 programs on a cash basis, however, could increase by $1.7 billion over current assumptions the $1.2 million increase in Proposition 98 spending on a budgetary basis plus $514 million no longer retained by the state as loan repayments.

Summary of K-12 Spending from All Sources

The budget proposes expenditures of $30.3 billion from all sources for K-12 education in 1995-96, including $16.2 billion from the General Fund. Figure 5 shows that K-12 expenditures from all sources have increased by $8.1 billion since 1987-88, representing an average annual increase of 4.5 percent. After adjustment for inflation, spending increased at an average annual rate of 1.4 percent. The share of General Fund spending allocated to K-12 education has varied in the range of 35 to 40 percent over the eight-year period shown in Figure 5. Much of the variability in the period 1990-91 through 1995-96 is explained by funding shifts such as changes in the share of local property tax revenues allocated to schools and realignment of fiscal responsibilities between the state and counties.

Figure 5 shows the amount of K-12 education funding from state, local, and federal sources as reflected in the Governor's Budget. For the period 1990-91 through 1995-96, however, this is not an accurate picture of the actual funding available to K-12 programs. This is because of funding shifts, off-budget loans, and loan repayments that change the actual amounts available in a given fiscal year. In our earlier discussion of Proposition 98, we provide a detailed description of these funding shifts and loans, and discuss year-to-year changes in the amounts actually available for spending in Proposition 98 programs.

Spending by Major Programs

Figure 6 shows funding for K-12 programs from all sources since 1993-94. The budget proposes local assistance expenditures of $28.6 billion for the SDE from state, federal, and local sources. This is an increase of $1.2 billion, or 4.5 percent, from estimated 1994-95 expenditures.

The budget also proposes General Fund increases of $53 million, or 7.5 percent, for debt service on school construction bonds. The sharp increase in support for the Secretary of Child Development and Education reflects a proposed expenditure of $5 million to implement the Volunteer Mentor Program authorized by Ch 901/92 (SB 1114, Leonard). These funds would support a program to match children with academic mentors. The sharp reduction in the school facilities aid program occurs because the budget allocates funds through this program in 1994-95 on a one-time basis to (1) repair school facilities that were damaged in the Northridge earthquake, and (2) fund K-12 deferred maintenance needs.

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