LAO Analysis of the 1995-96 Budget Bill
K-12 Education Overview

Major Issues
Overview
- Proposition 98
- Governor's Budget Proposals for 1995-96 and 1996-97
Spending by Major Programs

Major Issues

Revenue Issues Dictate Budget Choices. The Legislature will face very different choices regarding Proposition 98 funding for schools depending on actual General Fund revenue growth and the Legislature's action on the Governor's proposed tax reduction. With the level of resources proposed in the budget, the Legislature must decide which programs must be cut due to the decline in the inflation-adjusted value of state and local funding. At the other end of the spectrum, using LAO revenue projections and assuming the tax cut is not enacted, the Legislature must decide how to spend a significant amount of additional resources--up to $856 million in 1996-97. (See page E-17.)
How Should the State Spend Any New Funds in K-12? Because of budget problems in recent years, the state has focused little attention on the issue of the best use of additional resources in K-12 education. As the resource picture improves, however, we see the need for a long-term plan, one that addresses how additional funding would meet the needs of the K-12 system and support the long-term goals of the state in improving public schools. We offer a long-term plan for the Legislature's consideration that emphasizes maintaining "base" levels of program spending and using additional funds to support (1) increased local revenue limits, (2) reducing class sizes beginning in grades K-3, and (3) supporting critical reform efforts. (See page E-20.)
K-12 Priorities for 1996-97. Our recommendations for Proposition 98 spending in the budget year are based on the level of General Fund revenues projected by (1) the Governor's Budget, (2) the LAO forecast assuming enactment of the tax cut, and (3) the LAO forecast assuming no tax cut. Our recommendations are as follows:
Governor's Budget Revenues. We recommend the Legislature partially restore the existing "mega-item block grant," which the budget proposes to discontinue. We accomplish this restoration by redirecting funds proposed for new or expanded categorical programs and with savings we identify in other existing programs. (See page E-26.)
LAO Revenue Projections. With the additional funds available under the LAO projections, we recommend full restoration of the mega-item block grant and cost-of-living-adjustments to selected other categorical programs. With the remaining funds, we recommend the Legislature develop its spending priorities based on our long-term plan. (See page E-32.)
School Safety Programs Overbudgeted. The Governor's Budget proposes an increase of $70 million in support of new school safety legislation. Our analysis indicates that the budget overestimates the additional cost of this new legislation. We are also concerned that, by fully funding these new programs, the budget sends the wrong signals to districts. We recommend the Legislature approve $30 million for community day schools and $10 million for county office population growth. (See page E-42.)

Child Development Fiscal Woes Continue. The state Department of Education (SDE) continues to be unable to provide accurate fiscal information for federal funds and General Fund carryover. The department also used the fiscal flexibility provided by its carryover authority to circumvent the Legislature's intent. We recommend the Legislature eliminate the SDE's statutory carryover authority. We also recommend requiring the SDE to contract for outside help to put the department's records in order and institute sound financial tracking procedures (See page E-71.)

Overview

The budget includes an increase in K-12 Proposition 98 funding of $831 million in the budget year. On an average daily attendance (ADA) basis, this is an increase of $44 per ADA, or 1 percent, more than the revised estimate of per ADA expenditures in the current year. The budget also includes a revision to current-year K-12 Proposition 98 funding, proposing an additional $509 million above the level provided in the 1995 Budget Act enacted in August.

Figure 1 (see next page) shows that the budget proposes expenditures of $32.1 billion from all sources for K-12 education in 1996-97. This is an increase of $922 million, or 3 percent, more than estimated expenditures from all sources for the current year. K-12 Proposition 98 funding, which constitutes over three-fourths of overall K-12 funding, is projected to increase by $831 million, or by 3.5 percent, in comparison to the 1995-96 revised amount. However, student attendance is projected to increase by 2.3 percent, resulting in an estimated increase of only $44 per ADA, or 1 percent more than the 1995-96 per ADA amount.

The budget also includes a revision to current-year K-12 Proposition 98 funding, proposing an additional $509 million more than provided in the 1995 Budget Act. This represents a 2.2 percent increase in Proposition 98 expenditures, bringing the total per ADA increase for K-12 schools in 1995-96 to $184, or 4.3 percent.

Figure 1 includes funding related to the settlement of the CTA v. Gouldlawsuit, which contests the legality of $1.8 billion in Proposition 98 loans made in the 1992 Budget Act and the 1993 Budget Act. While a final settlement has not yet been reached, the proposed budget includes the major elements of the tentative agreement. First, the budget appropriates $150 million for loan repayments in 1996-97-- $100 million from within the Proposition 98 guarantee and $50 million above the level of the minimum guarantee. Second, the budget assumes spending of $377 million in Proposition 98 funds (primarily for revenue limits) in both 1995-96 and 1996-97. Under current law, these funds are not appropriated until the Director of the Department of Finance certifies a settlement agreement in this case. Below we discuss the CTA v. Gould case in greater detail.

Figure 1
K-12 Education Budget Summary
1994-95 Through 1996-97
(Funding in Millions)

Actual
1994-95 Estimated 1995-96^a Proposed
1996-97^a Change From
1995-96

Amount Percent

K-12 Proposition 98

State (General Fund)

Cash $13,896 $15,276 $16,005 $729 4.8%

Loan repayment 50 100 150 50 50.0

Local property tax revenue 8,481 8,586 8,638 51 0.6

Subtotals, Proposition 98 ($22,427) ($23,962) ($24,793) ($831) (3.5%)

Other Funds

General Fund

Teachers retirement $753 $775 $802 $27 3.5%

Bond payments 702 730 748 19 2.5

Other programs 143 134 128 -7 -4.9

State Lottery funds 643 638 638 -- --

Other state funds 53 47 51 4 8.3

Federal funds 2,523 2,573 2,582 8 0.3

Other local 2,248 2,271 2,311 40 1.8

Totals $29,493 $31,131 $32,053 $922 3.0%

K-12 Proposition 98

Average Daily Attendance (ADA) 5,185,271 5,303,143 5,423,585 120,442 2.3%

Amount per ADA $4,316 $4,500 $4,544 $44 1.0%

^a Includes $377 million set aside until the Director of the Department of Finance certifies a settlement agreement in the CTA v. Gould case.

Figure 1 K-12 Education Budget Summary 1994-95 Through 1996-97 (Funding in Millions)
	Actual 1994-95	Estimated 1995-96^a	Proposed 1996-97^a	Change From 1995-96
				Amount	Percent
K-12 Proposition 98
State (General Fund)
Cash	$13,896	$15,276	$16,005	$729	4.8%
Loan repayment	50	100	150	50	50.0
Local property tax revenue	8,481	8,586	8,638	51	0.6
Subtotals, Proposition 98	($22,427)	($23,962)	($24,793)	($831)	(3.5%)
Other Funds
General Fund
Teachers retirement	$753	$775	$802	$27	3.5%
Bond payments	702	730	748	19	2.5
Other programs	143	134	128	-7	-4.9
State Lottery funds	643	638	638	--	--
Other state funds	53	47	51	4	8.3
Federal funds	2,523	2,573	2,582	8	0.3
Other local	2,248	2,271	2,311	40	1.8
Totals	$29,493	$31,131	$32,053	$922	3.0%
K-12 Proposition 98
Average Daily Attendance (ADA)	5,185,271	5,303,143	5,423,585	120,442	2.3%
Amount per ADA	$4,316	$4,500	$4,544	$44	1.0%

^a Includes $377 million set aside until the Director of the Department of Finance certifies a settlement agreement in the CTA v. Gould case.

Proposition 98

Proposition 98, enacted in 1988 as a voter-approved amendment to the California Constitution (later amended by Proposition 111 in 1990), establishes a minimum funding level for K-12 schools and the California Community Colleges. Proposition 98 also provides support for direct educational services provided by other agencies, such as the state's special education schools and the California Youth Authority.

The minimum funding levels are determined by one of four specified formulas. Figure 2 (see next page) briefly explains each of the Proposition 98 "Tests" and some of its other major funding provisions. The formula used in any particular year depends on the relative level of growth in General Fund revenues. For example, generally in periods of strong revenue growth, a "Test 1" formula applies. Moderate growth requires using "Test 2." Low General Fund growth calls for using "Test 3" or "Test 3B." How the tests apply, however, depends on a variety of economic and fiscal circumstances.

Figure 3 (see page 9) shows the changes in the key Proposition 98 variables for the current and budget years. When the 1995-96 budget was enacted, the relevant Proposition 98 input factors resulted in a Test 3 funding level. Since that time the General Fund and ADA have grown beyond last summer's expectations. As shown in Figure 3, when the 1995 Budget Act was adopted, General Fund revenues were expected to increase by 4 percent in 1995-96. The revised estimate shows an increase of 6.2 percent. The ADA was projected to increase by 1.5 percent in the 1995 Budget Act but is now projected to increase by 2.3 percent. The combination of these factors moves the Proposition 98 calculation from Test 3 to Test 2. The net funding effect is an increase of $509 million in the current year.

Figure 2
Proposition 98 at a Glance

Funding "Tests"

Proposition 98 (1988), as amended by Proposition 111 (1990), mandates that a minimum amount of funding be guaranteed for K-12 schools, community colleges, and other specified agencies, according to one of four "tests."

Test 1--Percent of General Fund Revenues

Used in periods of strong revenue growth.
Requires that K-12 schools and the California Community Colleges receive at least the same share of state General Fund taxes 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 34.5 percent.

Test 2--Maintenance of Prior-Year Service Levels

Used in years of moderate revenue growth.
Requires that K-12 schools and the California Community Colleges receive at least the same amount of combined state aid and local tax dollars as was 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

Used in years of low revenue growth.
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--if that inflation factor is lower than the "Test 2" inflation factor.

Test 3B--"Equal Pain, Equal Gain"

Used during "lean" Test 3 years.
The change in K-14 funding per pupil must be not less than the change in
non-Proposition 98 funding per person.

Other Major Funding Provisions

Suspension

Proposition 98 also includes a provision allowing the state to suspend the minimum funding level for one year through urgency legislation other than the Budget Bill.

Restoration ("Maintenance Factor")

Proposition 98 includes a provision to restore prior-year funding reductions (due to either suspension or the "Test 3" formulas) in years of moderate or strong General Fund tax revenue growth. The overall dollar amount that needs to be restored is referred to as the "maintenance factor."

Figure 2 Proposition 98 at a Glance

Funding "Tests"
Proposition 98 (1988), as amended by Proposition 111 (1990), mandates that a minimum amount of funding be guaranteed for K-12 schools, community colleges, and other specified agencies, according to one of four "tests."
Test 1--Percent of General Fund Revenues
Used in periods of strong revenue growth. Requires that K-12 schools and the California Community Colleges receive at least the same share of state General Fund taxes 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 34.5 percent.
Test 2--Maintenance of Prior-Year Service Levels
Used in years of moderate revenue growth. Requires that K-12 schools and the California Community Colleges receive at least the same amount of combined state aid and local tax dollars as was 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
Used in years of low revenue growth. 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--if that inflation factor is lower than the "Test 2" inflation factor.
Test 3B--"Equal Pain, Equal Gain"
Used during "lean" Test 3 years. The change in K-14 funding per pupil must be not less than the change in non-Proposition 98 funding per person.
Other Major Funding Provisions
Suspension
Proposition 98 also includes a provision allowing the state to suspend the minimum funding level for one year through urgency legislation other than the Budget Bill.
Restoration ("Maintenance Factor")
Proposition 98 includes a provision to restore prior-year funding reductions (due to either suspension or the "Test 3" formulas) in years of moderate or strong General Fund tax revenue growth. The overall dollar amount that needs to be restored is referred to as the "maintenance factor."

Figure 3
Proposition 98 Funding Factors
1995-96 and 1996-97^a

1995-96

Budget Act Revised Change 1996-97
Proposed Change From 1995-96 Revised

Funding Factor Changes

General Fund revenue 4.0% 6.2% 2.2% 2.3% -3.9%

Population 1.7 1.7 -- 1.8 0.1

Per-capita income 3.4 3.4 -- 5.0 1.7

Local property taxes^b 1.2 1.2 -- 0.6 -0.6

K-12 average daily attendance 1.5 2.3 0.8 2.3 --

"Test" Application Test 3 Test 2 -- Test 3 --

^a Detail may not add to totals due to rounding.

^b Property taxes declined in both 1994-95 and 1995-96 by approximately $100 million, keeping the rate of change between the years relatively the same. The General Fund was increased to offset these declines.

Figure 3 Proposition 98 Funding Factors 1995-96 and 1996-97^a
	1995-96
	Budget Act	Revised	Change	1996-97 Proposed	Change From 1995-96 Revised

Funding Factor Changes
General Fund revenue	4.0%	6.2%	2.2%	2.3%	-3.9%
Population	1.7	1.7	--	1.8	0.1
Per-capita income	3.4	3.4	--	5.0	1.7
Local property taxes^b	1.2	1.2	--	0.6	-0.6
K-12 average daily attendance	1.5	2.3	0.8	2.3	--
"Test" Application	Test 3	Test 2	--	Test 3	--

^a Detail may not add to totals due to rounding.
^b Property taxes declined in both 1994-95 and 1995-96 by approximately $100 million, keeping the rate of change between the years relatively the same. The General Fund was increased to offset these declines.

Slower Growth and Tax Reduction Dampen Proposition 98 in Budget Year.As shown in Figure 3, the budget assumes a much lower estimate of General Fund revenue growth for 1996-97--2.3 percent. This estimate reflects both the Governor's Budget expectation of moderate underlying General Fund revenue growth and the budget's proposal to reduce taxes by 15 percent, phased-in over the next three years. The budget projects growth in student attendance to once again increase by 2.3 percent in 1996-97. These factors result in a Test 3 calculation in the budget year and an increase in the minimum guarantee of $831 million for K-12 education. This amount is sufficient to pay for the growth in the student population and provide an overall increase per ADA of $44, or 1 percent, above the current-year revised amount.

Proposition 98 Split Among K-12, Community Colleges and Other Agencies.Figure 4 (see next page) displays the allocation of Proposition 98 funding by segment. The overall increase for Proposition 98 in the current year is $573 million. As Figure 4 shows, K-12 education's share of this amount is $509 million with the Community College allocation of $64 million accounting for the balance. Other agencies' funding is unchanged from the amount included in the 1995 Budget Act.

Figure 4
Proposition 98 Proposed Allocations
1995-96 and 1996-97^a
(Dollars in Millions)

1995-96

Budget Act Revised Change 1996-97
Proposed Change From 1995-96 Revised

Total Proposition 98 $26,202 $26,776 $573 $27,702 $926

K-12 Education

Amount $23,453 $23,962 $509 $24,793 $831

Share 89.5% 89.5% -- 89.5% --

Community Colleges

Amount $2,658 $2,721 $64 $2,817 $96

Share 10.1% 10.2% -- 10.2% --

Other Agencies

Amount $92 $92 -- $92 --

Share 0.4% 0.3% -- 0.3% --

^a Totals may not add due to rounding. Changes of less than $1 million are not shown.

Figure 4 Proposition 98 Proposed Allocations 1995-96 and 1996-97^a (Dollars in Millions)
	1995-96
	Budget Act	Revised	Change	1996-97 Proposed	Change From 1995-96 Revised

Total Proposition 98	$26,202	$26,776	$573	$27,702	$926
K-12 Education
Amount	$23,453	$23,962	$509	$24,793	$831
Share	89.5%	89.5%	--	89.5%	--
Community Colleges
Amount	$2,658	$2,721	$64	$2,817	$96
Share	10.1%	10.2%	--	10.2%	--
Other Agencies
Amount	$92	$92	--	$92	--
Share	0.4%	0.3%	--	0.3%	--

^a Totals may not add due to rounding. Changes of less than $1 million are not shown.

The budget proposes $27.7 billion for Proposition 98 in 1996-97. The shares allocated to the three components remain unchanged from the 1995-96 revised shares. Community College Proposition 98 funding issues are discussed in the Higher Education section of the Analysis(please see Section F).

Governor's Budget Proposals for 1995-96 and 1996-97

1995-96 Budget Proposals

The Governor's Budget proposes to spend most of the $509 million in additional current-year funds for one-time expenditures. Figure 5 highlights each of the major changes. A projected increase in ADA brings an added cost of $114 million, accounting for most of the $139 million in ongoing baseline budget changes in the current year. New programs totaling $315 million are proposed for the following on a one-time basis:

$100 million for reading and math improvement in elementary grades.
$100 million for education technology.
$100 million block grant that would be allocated on a per pupil basis allocation for one-time costs such as deferred maintenance, instructional technology, and educational technology.
$10 million for pilot projects to assist schools and public libraries to work together.
$5 million to create 20 single-gender academies for students who have a high probability of doing poorly or dropping out of school.

In addition, the mid-year budget revisions include additional one-time expenditure increases of $41 million for deferred maintenance and $14 million for mandated costs for teacher evaluators. We discuss these proposals later in this Analysis.

Figure 5
Governor's Budget Proposals^a
1995-96 Proposition 98
(In Millions)

1995-96 (budgeted)

$23,453.0

Baseline Adjustments

District and county revenue limits $114.3

Equalization and deficit adjustments 17.2

Deficiency for special education 5.7

Other adjustments 1.9

Subtotal

$139.1

One-Time Expenditures

Deferred maintenance $40.8

Mandate claims for teacher evaluators 14.1

Subtotal

$54.9

New Programs

Block grant for one-time uses $100.0

Reading and math task force 100.0

Educational technology 100.0

School-public library joint use pilot projects 10.0

Single gender school pilot projects 5.0

Pupil residency verification 0.1

Subtotal

$315.1

1995-96 (revised)

$23,962.2

Change from 1995-96 (budgeted)

$509.1

^a Detail may not add to totals due to rounding.

Figure 5 Governor's Budget Proposals^a 1995-96 Proposition 98 (In Millions)
1995-96 (budgeted)		$23,453.0
Baseline Adjustments
District and county revenue limits	$114.3
Equalization and deficit adjustments	17.2
Deficiency for special education	5.7
Other adjustments	1.9
Subtotal		$139.1
One-Time Expenditures
Deferred maintenance	$40.8
Mandate claims for teacher evaluators	14.1
Subtotal		$54.9
New Programs
Block grant for one-time uses	$100.0
Reading and math task force	100.0
Educational technology	100.0
School-public library joint use pilot projects	10.0
Single gender school pilot projects	5.0
Pupil residency verification	0.1
Subtotal		$315.1
1995-96 (revised)		$23,962.2

Change from 1995-96 (budgeted)		$509.1

^a Detail may not add to totals due to rounding.

1996-97 Budget Proposals

The budget year increase of $831 million is a net increase--red- uctions in some areas of the budget are proposed to provide other areas with growth and cost-of-living adjustment (COLA) increases. Figure 6 highlights each of the major changes proposed for K-12 Proposition 98 in the budget year. The budget proposes to provide enrollment growth ($453 million) and COLAs ($714 million) for revenue limits, special education, and summer school. In addition, a COLA is proposed for child development programs ($15.7 million). The total cost of these enrollment and inflation adjustments is approximately $1.2 billion.

The budget proposes to offset this increase by deleting $512 million: (1) $376 million in proposed one-time 1995-96 expenditures and (2) $136 million provided in the current year for growth and a COLA for programs funded through the categorical program mega-item.

The budget proposes to provide an additional $161 million for the following categories (1) $59 million for program expansions, (2) $51 million for new programs and (3) $50 million in additional Proposition 98 loan repayment. The detail of these changes are shown in Figure 6.

Spending by Major Programs

Figure 7 (see page 14) shows Proposition 98 spending for the major K-12 programs. Revenue limit funding accounts for $18.8 billion in 1996-97, or three-fourths of overall Proposition 98 expenditures. The General Fund supports about 55 percent of revenue limit funding, and local property taxes provide the remaining 45 percent.

Except for revenue limits, the largest K-12 education program is special education. Funding for special education is anticipated to reach $2.1 billion in the budget year, an increase of $161 million from the 1995-96 revised level of funding.

As Figure 7 shows, funding for categorical programs would not change significantly under the budget proposal. The amount proposed for the categorical program mega-item in 1996-97 does not change from the current-year amount. However, the budget proposes to eliminate the $136 million block grant appropriated in the current year to provide growth and a COLA for mega-item programs. Figure 7 shows the major mega-item categorical programs.

Figure 6
Governor's Budget Proposals^a
1996-97 Proposition 98
(In Millions)

1995-96 (revised)

$23,962.2

Enrollment Increases

District and county revenue limits $382.4

Special education 66.5

Summer school 2.4

Other adjustment (special education) 1.9

Subtotal

$453.3

Cost-of-Living Increases

Revenue limits $615.5

Special education 93.2

Child development 15.7

Summer school 4.9

Subtotal

$729.3

Funding Reductions

One-time reductions -$376.4

Mega-item -135.7

Subtotal

-$512.1

Program Expansions

Child development $20.0

Healthy Start 10.0

School safety 10.0

Student assessment program 6.2

Voluntary desegregation 4.6

Elementary/middle grade alliances 3.6

Partnership academies 3.1

Beginning teacher staff development 1.5

Subtotal

$58.9

New Programs

Community day schools $45.8

Standard account code 4.0

Governor's diploma 1.0

Parent involvement 0.6

Subtotal

$51.4

Proposition 98 Loan Repayment

$50.0

1996-97 (proposed)

$24,792.9

Change from 1995-96 (revised)

$830.8

^a Detail may not add to totals due to rounding.

Figure 6 Governor's Budget Proposals^a 1996-97 Proposition 98 (In Millions)
1995-96 (revised)		$23,962.2
Enrollment Increases
District and county revenue limits	$382.4
Special education	66.5
Summer school	2.4
Other adjustment (special education)	1.9
Subtotal		$453.3
Cost-of-Living Increases
Revenue limits	$615.5
Special education	93.2
Child development	15.7
Summer school	4.9
Subtotal		$729.3
Funding Reductions
One-time reductions	-$376.4
Mega-item	-135.7
Subtotal		-$512.1
Program Expansions
Child development	$20.0
Healthy Start	10.0
School safety	10.0
Student assessment program	6.2
Voluntary desegregation	4.6
Elementary/middle grade alliances	3.6
Partnership academies	3.1
Beginning teacher staff development	1.5
Subtotal		$58.9
New Programs
Community day schools	$45.8
Standard account code	4.0
Governor's diploma	1.0
Parent involvement	0.6
Subtotal		$51.4

Proposition 98 Loan Repayment		$50.0
1996-97 (proposed)		$24,792.9

Change from 1995-96 (revised)		$830.8

^a Detail may not add to totals due to rounding.

Figure 7
Major K-12 Education Programs
Funded by Proposition 98
1995-96 and 1996-97^a
(In Millions)

Estimated
1995-96^b Proposed
1996-97^b Change From
1995-96

Amount Percent

Revenue Limits

Schools and counties $9,088 $10,044 $956 10.5%

CTA v. Gould deferral 347 347 -- --

Property tax revenue 8,369 8,421 52 0.6

Subtotals, revenue limits ($17,805) ($18,812) ($1,008) (5.7%)

Special Education

State General Fund $1,727 $1,888 $162 9.4%

Property tax revenue 212 212 -- --

Subtotals, special education ($1,939) ($2,100) ($161) (8.3%)

Mega-Item--Categorical Programs

Desegregation $502 $502 -- --

Home to school transportation 340 340 -- --

Economic impact aid 331 331 -- --

School improvement 320 320 -- --

Instructional materials 133 133 -- --

Other programs 404 404 -- --

Mega-item block grant 136 -- -$136 -100.0%

Subtotals, Mega Item ($2,165) ($2,029) (-$136) (-6.3%)

Other Programs

Child development $471 $507 $36 7.6%

Adult education 427 427 -- --

ROC/P 250 250 -- --

Summer school 143 150 7 5.1

Mandates 128 121 -7 -5.7

Deferred maintenance 90 41 -49 -54.4

Healthy Start 39 49 10 25.6

Student assessment program 33 39 6 19.0

Other programs 53 60 7 13.9

One-time expenditures 320 -- -320 -100.0

New programs -- 56 56 --

Subtotals, other programs ($1,954) ($1,701) (-$253) (-12.9%)

Proposition 98 loan repayment $100 $150 $50 50.0%

Totals $23,962 $24,793 $831 3.5%

^a Detail may not add to totals due to rounding.

^b Includes $377 million set-aside until the Director of the Department of Finance certifies a settlement agreement in the CTA v. Gould case. This amount includes $347 million in revenue limit funding, and $30 million for the following programs: California Assessment Program ($15 million), Healthy Start ($10 million), and Volunteer Mentor Program ($5 million).

Figure 7 Major K-12 Education Programs Funded by Proposition 98 1995-96 and 1996-97^a (In Millions)
	Estimated 1995-96^b	Proposed 1996-97^b	Change From 1995-96
			Amount	Percent

Revenue Limits
Schools and counties	$9,088	$10,044	$956	10.5%
CTA v. Gould deferral	347	347	--	--
Property tax revenue	8,369	8,421	52	0.6
Subtotals, revenue limits	($17,805)	($18,812)	($1,008)	(5.7%)
Special Education
State General Fund	$1,727	$1,888	$162	9.4%
Property tax revenue	212	212	--	--
Subtotals, special education	($1,939)	($2,100)	($161)	(8.3%)
Mega-Item--Categorical Programs
Desegregation	$502	$502	--	--
Home to school transportation	340	340	--	--
Economic impact aid	331	331	--	--
School improvement	320	320	--	--
Instructional materials	133	133	--	--
Other programs	404	404	--	--
Mega-item block grant	136	--	-$136	-100.0%
Subtotals, Mega Item	($2,165)	($2,029)	(-$136)	(-6.3%)
Other Programs
Child development	$471	$507	$36	7.6%
Adult education	427	427	--	--
ROC/P	250	250	--	--
Summer school	143	150	7	5.1
Mandates	128	121	-7	-5.7
Deferred maintenance	90	41	-49	-54.4
Healthy Start	39	49	10	25.6
Student assessment program	33	39	6	19.0
Other programs	53	60	7	13.9
One-time expenditures	320	--	-320	-100.0
New programs	--	56	56	--
Subtotals, other programs	($1,954)	($1,701)	(-$253)	(-12.9%)
Proposition 98 loan repayment	$100	$150	$50	50.0%
Totals	$23,962	$24,793	$831	3.5%
^a Detail may not add to totals due to rounding.
^b Includes $377 million set-aside until the Director of the Department of Finance certifies a settlement agreement in the CTA v. Gould case. This amount includes $347 million in revenue limit funding, and $30 million for the following programs: California Assessment Program ($15 million), Healthy Start ($10 million), and Volunteer Mentor Program ($5 million).

CTA v. Gould Settlement Is Not Finalized

The amounts contained in Figure 7 for 1995-96 and 1996-97 include allocations related to the CTA v. Gouldlawsuit, which contests the legality of $1.8 billion in Proposition 98 loans made in the 1992 Budget Act and the 1993 Budget Act. Because the parties are still negotiating a final settlement, the Departments of Finance and Education could not supply information on the progress and details of the settlement talks. However, the proposed budget includes the elements of the tentative settlement discussed last July.

First, the budget appropriates $150 million for loan repayments in 1996-97. Of this amount, $100 million is from within the Proposition 98 guarantee. The budget further proposes to appropriate $50 million in General Fund support above the Proposition 98 minimum guarantee for the loan repayment. This proposal is consistent with the tentative agreement reached in July 1995.

According to this agreement, the $1.8 billion in Proposition 98 loans would be repaid over an eight-year period with $825 million being repaid withinthe Proposition 98 minimum guarantee and $935 million being repaid abovethe minimum guarantee with state General Fund appropriations, as follows:

Proposition 98 Funds.The tentative agreement calls for repayments with Proposition 98 funds of $50 million in 1994-95, $100 million per year for the next four years and $125 million per year for the final three years.
Non-Proposition 98 General Funds.The tentative settlement requires $50 million in 1996-97, $100 million in 1997-98, $150 million in 1998-99, $185 million in 1999-00, and $225 million in each of the last two years. These funds are provided above the minimum Proposition 98 funding level.

The budget also includes the $50 million General Fund repayment in the "base" for Proposition 98 in future years. This means that this additional amount will be included in future growth and COLAs to Proposition 98. If this is part of the settlement agreement, we estimate that including these payments in the Proposition 98 base will add approximately $10 million to the overall state cost from 1997-98 through 1999-2000.

Finally, in accord with the July 1995 agreement, the budget assumes that $377 million in Proposition 98 funds are spent in both 1995-96 and 1996-97. Under current law, these funds are not appropriated until the Director of the Department of Finance certifies a settlement agreement in this case. As shown in Figure 7 these funds are primarily for school district and county office revenue limits. If the lawsuit is settled, the $377 million from the current year will be distributed to schools in August 1996. If there is no agreement during the spring of 1996, the Legislature's budget decisions would become substantially more complicated, as follows:

The Revenue Limit Proposal for 1996-97 Assumed in the Budget Would Need to Be Recalculated.If the lawsuit is not settled, the revenue limit funds that are subject to the settlement would not be distributed. This would reduce district revenue limits for both 1995-96 and 1996-97.
The $377 Million in Both the Current and Budget Year Would Become Available.Under Proposition 98, these funds must be spent for K-14 education to meet the minimum funding guarantee.
The Legislature Would Be Faced With the Issue of How to Retire the $1.8 Billion in Proposition 98 Loans.Prior to the tentative settlement, the state planned to fully repay the loans with Proposition 98 funds.

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LAO Analysis of the 1995-96 Budget BillK-12 Education Overview

LAO Analysis of the 1995-96 Budget Bill
K-12 Education Overview