LAO Analysis of the 1997-98 Budget Bill
K-12 Education, Budget Issues, Part 1-a

  1. Budget Issues
    1. K-12 Priorities
      1. Impact of Tax Cut Grows in Future Years
      2. What Is the State Role in Making Categorical Funding Decisions?
        1. Categorical Programs Correct Negative Incentives
        2. Categoricals Can Reduce the Effectiveness of Funding
        3. Criteria for Categorical Programs
        4. The Problem of Collective Bargaining
        5. The Legislature's K-12 Funding Options
      3. LAO Outlook Suggests More Proposition 98 Funds
      4. Options for 1997-98 K-12 Funds
        1. Create a Proposition 98 Reserve
        2. Provide a COLA to Categorical Programs
        3. Deny Two Proposed Augmentations
      5. Options for Prior-Year Funds
        1. Increase CSR Facility Funding
        2. Delete Proposed Augmentations
        3. Create a Reserve of Prior-Year Funds
      6. Population Estimates Differ
        1. How Should Population Be Adjusted?

Budget Issues

K­12 Education

K-12 Priorities

The budget proposes to direct all new Proposition 98 funding--and most cost-of-living adjustments (COLA) for existing categorical programs-- to support new or expanded state categorical programs. Outside of a COLA, the budget does not propose to increase local general purpose funding, which would increase the ability of school districts to meet local needs.

The 1997-98 Governor's Budget proposes to spend $28.1 billion in state and local Proposition 98 support for K-12 education. This represents an increase of $1.7 billion, or 6.5 percent, from the revised 1996-97 level. The proposed level of funding is sufficient to (1) pay for the 2.35 percent projected growth in the student population, (2) provide a 2.53 percent COLA for many programs, and (3) have $500 million remaining to support state and local initiatives to improve the K-12 system.

The Governor's budget proposes to reshape K-12 priorities in two ways:

We discuss these issues further below.

Impact of Tax Cut Grows in Future Years

The Governor's budget proposes to reduce the bank and corporation tax rate by 10 percent over two years, reducing the rate by 5 percent in 1998 and another 5 percent in 1999. In 1997-98, the tax cut would reduce General Fund revenues by $93 million, resulting in a $58 million reduction in Proposition 98 funds.

The impact of the tax cut would grow significantly in future years, however. Figure 9 displays our estimate of the impact of the Governor's proposal over a four-year period. By 2000-01, Proposition 98 funding would be about $307 million less each year than if no tax cut were made. This is about the amount needed to reduce the class size in an additional elementary grade.
Figure 9
Impact of the Proposed

Corporate Tax Reduction

1997-98 to 2000-01

(In Millions)
Reduction in
General Fund Revenues Proposition 98
1997-98 $93 $58
1998-99 336 158
1999-00 562 264
2000-01 654 307
Totals $1,645 $787

The impact on Proposition 98 of changes in the state's tax structure is only one of the fiscal issues the Legislature must address as it considers the Governor's proposal. How the forgone revenues affect the Legislature's ability to fund its priorities for other state programs is equally important. The Legislature must also consider the impact of the reduction on the long-term health of the state's economy.

What Is the State Role in Making Categorical Funding Decisions?

The Governor's budget proposes to spend $7.2 billion, or about 26 percent of K-12 Proposition 98 funds, for 51 existing categorical programs in 1997-98. In addition, the budget requests the Legislature to approve the expenditure of $500 million in Proposition 98 funds (plus $88 million in federal Goals 2000 funds) to expand 13 existing programs and create eight new programs.

In contrast, the 1997-98 budget does not propose any increases for revenue limits above the cost of a statutory COLA. While the budget reflects a $304 million increase in local general purpose funding beginning in 1996-97, this increase results from a provision in the 1996 budget trailer legislation. No new increase in general purpose funding is proposed in 1997-98. This emphasis on state categorical programs raises a fundamental issue regarding the role of the state in directing the use of Proposition 98 funds.

Categorical Programs Correct Negative Incentives

Categorical programs are designed to address situations where local school boards under-invest in specific areas. This can result from the existence of incentives that encourage local decision-makers to make a lower level of expenditures than is desired. Special education is a good example of a categorical program. The average cost of educating special education students in California is about twice the amount of a nondisabled student. This higher cost creates a dilemma for districts--providing the appropriate level of services to disabled students may mean reducing the level of service to all other students. To eliminate any potential financial incentive for schools to provide too few resources to disabled students, the state provides additional funding through the categorical Special Education program. The program is "categorical" in that districts may only spend these funds for special education services.

In other areas, unfortunately, it is harder to tell whether schools under- invest in certain types of expenditures or whether local behavior is the result of locally determined choices about how best to spend available funds. Take the example of computers. The 1997-98 budget allocates $50 million in Proposition 98 funds to match local high school computer purchases.

What is the need for the state to create a special categorical program just for computers? The argument in favor of the proposal is that California schools have fewer computers than do schools in many other states--that schools in California do not spend enough on computers. In fact, California ranks low among the 50 states in the number of computers per student.

The argument against creating this categorical program is that there is no barrier for districts to use local funds for this purpose. Many schools have well-equipped computer laboratories that were often funded through the School Improvement program or federal Title 1 program. There are also school districts that have obtained voter-approved tax increases to purchase computers and train teachers in the use of computers. As a result, we do not think the relatively low level of computers in California's classrooms is evidence of a systematic incentive that works to minimize the number of computers. Instead, we think it more likely reflects the school boards' decisions over the use of the state's per-student funding level.

Categoricals Can Reduce the Effectiveness of Funding

By expanding categorical program spending, the state substitutes its judgment of what K-12 funds should buy for the views of local school boards. By doing so, the state short-circuits the local process for determining how additional funds can best translate into improved achievement. We have the following concerns with this development:

Criteria for Categorical Programs

Based on these concerns, we think the Legislature should closely examine the rationale for new or expanded categorical program funding. We suggest the following guidelines for the creation of categorical programs:

The Problem of Collective Bargaining

Some school administrators believe that problems with local collective bargaining are the main reason to spend Proposition 98 funds in categorical programs. These observers believe that the existing local incentives have resulted in a collective bargaining process that tilts toward the teachers' union--that increases in general purpose funding results in unjustified increases in teacher compensation.

At the current time we cannot advise the Legislature of whether the collective bargaining process is "broken." Collective bargaining is a complex process. We have been unable to find any assessment of California law and practice that addresses the issue of whether the current process works to set a "fair" level of employee compensation to both teachers and districts.

From our discussions with district administrators and other school finance experts, it appears that increases in general purpose funding translate directly into increased employee compensation, at least in some districts. A few union contracts contain language identifying how new revenue limit funds must increase teacher pay. Most district contracts, however, contain a joint commitment to renegotiate compensation levels when revenue limit funding increases. These "reopener" clauses often result in a sharing of that increase with district staff.

In our survey on class size reduction, we asked how districts would have used $650 per student in unrestricted funds. One-third of districts that responded to the question indicated that much or most of the funds would have gone to employee salary increases due to collective bargaining. The other two-thirds of the districts indicated funds would have been used for school improvement activities, including class size reduction.

The fact one-third of K-12 districts would have provided employee raises is not necessarily an indication of problems with collective bargaining. It may be these raises would be entirely justified. Given the many different circumstances that districts currently face, the Legislature cannot know whether such increases would be justified in every district.

To summarize, the Legislature has two ways to distribute funds to districts: (1) through categorical programs or (2) through increased revenue limit funding. Both have potential drawbacks. Categorical funding may not meet the spending needs of districts and may result in local programs that are less effective than district-initiated programs. On the other hand, revenue limit increases will be negotiated with local unions and the Legislature cannot know whether resulting increases in employee compensation are warranted.

Despite this apparent dilemma, we think the answer is to reenforce the control of school boards over funding decisions. In the past, we have recommended structural changes to give local school districts more authority over aggregate funding decisions. Pending such changes, the Legislature should still insist that school boards make decisions regarding the best use of K-12 funds.

The Legislature's K-12 Funding Options

We recommend the Legislature develop its approach to funding K-12 education that reflects its long-term goals and the relative roles of the state and local school districts in the governance of public education.

To reenforce the importance of school boards, the Legislature needs to (1) carefully review proposals for new spending on categorical programs and (2) strongly consider increasing district general purpose funding as part of its plan for K-12 Proposition 98 funding in 1997-98. In developing the K-12 budget for 1997-98, the Legislature should ensure that both new and existing programs reflect a balance between state and local decision- making authority as well as its long-term goals for K-12 education.

Figure 10 displays our recommended guidelines for K-12 education funding priorities. The first two guidelines focus on the existing K-12 funding program. Current program costs--including funding for growth in the student population, COLAs, state-mandates and other funding commitments--should take top priority for funding. These "base" programs, however, also should be assessed and altered as needed to make sure they are as effective as possible and further the state's K-12 goals.
Figure 10
LAO Guidelines for Establishing Long-Term

K-12 Education Funding Priorities

Fund the Continuing Costs of the Current Program. The state should ensure that funding for growth, COLAs, and other financial commitments is provided.
Review and Reform Current Programs Consistent With Long-Term Goals. The Legislature should periodically review whether existing programs further the long-term goals of the state.
Balance State and Local Funding Needs. Once existing programs are adequately funded, the allocation of additional funds should reflect the shared state and local governance of the K-12 system.
  • Increase and Equalize Local Revenue Limits. The Legislature should dedicate about half of any additional funds for increasing and equalizing revenue limits.
  • Support State Improvement Efforts. The remaining funds should support state-directed uses based on a long-term plan of reform.

After meeting basic program costs, any additional Proposition 98 funds should be used to meet both state and local funding needs. As we discussed above, in California's divided system of K-12 school governance, the Legislature, Governor and local school boards all play a role in identifying and funding school priorities. Under this system, it is our view that the state should be able to determine the priorities over about half of available new K-12 funds and the remainder should be the responsibility of school boards.

Thus, under our guidelines, about half of the available funds would be used to increase and equalize district revenue limits. With the remaining new Proposition 98 funds, the state should pursue programs for which there is a strong case for state intervention. Class size reduction is a central issue for the Legislature in 1997-98. Other reforms, such as the proposal jointly made by the LAO, Department of Education and DOF to revamp the special education funding system, also merit the Legislature's consideration for funding in the budget year.

LAO Outlook Suggests More Proposition 98 Funds

Figure 11 details the Proposition 98 amounts available for 1996-97 through 1998-99 under the Governor's budget forecast of the Proposition 98 minimum funding guarantee and under the forecast developed by the Legislative Analyst's Office. (Our numbers include the impact of the tax cut in order to highlight the forecasting-related differences.)
Figure 11
LAO and Governor's Budget

Proposition 98 Forecastsa

(In Millions)
Forecast 1996-97 1997-98 1998-99
Governor's budget $29,516 $31,429 $33,310 b
LAO (with tax cut) 29,564 31,592 33,595
Difference with budget $48 $163 $285
a Assumes funding at the minimum level required under Proposition 98.
b LAO long-term extrapolation of economic and revenue projection underlying the 1997-98 Governor's Budget proposal.

For 1996-97, we estimate the revised Proposition 98 minimum guarantee at $29.6 billion, or $48 million higher than estimated by DOF. The Governor's tax proposal would not affect funding in 1996-97. In 1997-98 and 1998-99, our estimate of Proposition 98 funding is $163 million and $285 million higher, respectively. These increases result from our higher projection of General Fund revenues compared to the Governor's budget.

If the Legislature rejects the tax reduction proposal, an additional $58 million would be available in 1997-98. Combined with our higher revenue forecast, a total of $221 million in 1997-98 would be available to meet the Legislature's priorities.

Options for 1997-98 K-12 Funds

We recommend the Legislature build its 1997-98 K-12 budget using the long-term funding priorities discussed above.

Figure 12 displays the Governor's proposal and the LAO recommendations for the level of Proposition 98 funds assumed in the Governor's Budget. Our alternative proposes to fund K-12 at $184.5 million more than the Governor's Budget level. Of this amount, $163.2 million is due to our higher Proposition 98 forecast. The remaining $21.3 million represents Proposition 98 funds proposed in the budget for the community colleges that we recommend, instead, satisfy high priority K-12 activities (please see our discussion of this issue in the Higher Education chapter of this Analysis).

The amount in Figure 12 (see next page) represents the K-12 increases that are proposed after funding enrollment growth and COLAS for revenue limits and special education. Since we also make a number of recommendations later in this section to reduce funding for specific ongoing programs, we include these reductions in Figure 12.

The LAO-recommended plan has many similarities to the Governor's proposal. As Figure 12 displays, we recommend approval of all the budget's proposed COLA increases and those increases requested to keep previous state commitments. We also propose to spend $74 million that is not included in the budget to provide statutorily required COLAs for other categorical programs.

In the area of new or expanded improvement programs, our alternative uses the available funds in a somewhat different manner. Most significantly, our proposal would provide only $100 million in new class size reduction (CSR) funds, much less than the $297 million proposed in the Governor's budget. In our CSR proposal, the $100 million would add to the one-time money available for facilities in 1997-98 (please see our discussion of CSR below).

Our alternative plan includes a number of other significant departures from the budget's plan, including proposals to: (1) increase revenue limits by $149.7 million, (2) earmark $100 million to begin a ten-year plan to address the problem of inadequate ongoing district maintenance budgets, and (3) increase by $28.3 million the proposed set-aside for special education funding reform. Below, we discuss in more detail two areas in which we recommend a different amount than proposed in the Governor's budget. Other differences are discussed in separate sections later in this chapter.
Figure 12
1997-98 K-12 Proposition 98 Increases

LAO and Governor's Budget Proposals

(In Millions)


Legislative Analyst's


Fund the continuing costs of the current program
Base programs and adjustments $18,286.7 $18,286.7
Categorical program COLAs -- 73.7
Child development COLA 13.4 13.4
Class-size COLA 31.1 31.1
Pay program deficiencies and other commitments
Class-size adjustment $160.1 $160.1
Child development--minimum wage 13.1 13.1
Child development--half-year costs 10.0 10.0
Volunteer mentor 10.0 10.0
Student assessment 4.4 4.4
Other child development 3.0 3.0
Review current programs consistent with long-term goals
Child development--base adjustment -- -$43.9
Community day program -- -22.6
Increase revenue limits -- 149.7
Support state improvement efforts
Class-size reduction $296.8 $100.0
Special education reform 76.7 105.0
Deferred maintenance -- 100.0
Beginning teacher support 10.0 10.0
K-12 fiscal data 0.5 0.5
Reject other proposed augmentations
Early mental health $3.0 --
Education technology 1.0 --
Reserve -- $100.0
Totals $18,919.8 $19,104.3
General Fund sources:
Governor's proposal $18,919.8 $18,919.8
LAO additional revenue -- 163.2
Transfer from Community Colleges -- 21.3

Create a Proposition 98 Reserve

We recommend the Legislature set aside $100 million for a Proposition 98 reserve to protect against over-appropriating the minimum guarantee in the event General Fund revenues are lower than projected.

In the years after Proposition 98 was passed by the voters, the Legislature created a reserve account to protect the state in the event the projection of General Fund revenues assumed in the budget was too optimistic. During the early 1990s, a reserve was not created and, as a result, the state overappropriated the minimum funding guarantee several times.

General Fund revenues can be hard to predict. Even in relatively good times, a brief slowdown in the economy can translate into relatively large Proposition 98 consequences. In that event, a reserve would give the Legislature some measure of protection from overappropriating the minimum guarantee without reducing amounts already provided to schools. If the reserve were not needed, the funds would be available as "settle-up" funds in the following year to meet high-priority expenditures, such as deferred maintenance.

Therefore, to create a measure of protection from an unanticipated reduction in General Fund revenues, we recommend the Legislature set aside $100 million as a Proposition 98 reserve.

Provide a COLA to Categorical Programs

We recommend approval of $73.7 million to provide a COLA to most categorical programs.

The budget proposes a COLA for only two categorical programs--child development and CSR. Funding for the other 35 or so programs would continue at 1996-97 levels. Among the programs that would not receive a COLA under the budget proposal are adult education, Regional Occupational Centers and Programs, and the Economic Impact Aid Program.

These programs constitute an important part of the K-12 base program. If the budget denies a COLA to these programs, inflation will reduce the value of state funding and the programs will be forced to purchase fewer services. For the same reason the budget proposes a COLA for child development and CSR--increasing district costs for staff, utilities, and supplies due to inflation--a COLA is an appropriate way to maintain spending power.

Therefore, we recommend the Legislature appropriate $73.7 million in available funds for a 2.53 percent COLA for other categorical programs.

Deny Two Proposed Augmentations

We recommend the Legislature delete $4 million proposed in the Governor's Budget for new or expanded categorical programs.

As Figure 12 displays, we recommend approval of most increases proposed in the 1997-98 budget. A few of these proposals do not, in our view, meet the criteria discussed above for a state categorical program. Some simply lack the detail necessary for a complete evaluation of the proposals' costs and benefits. For these reasons, we recommend the Legislature deny the requests and redirect the funds to other high priority uses. We discuss the proposals in more detail below.

Early Mental Health Program Expansion ($3 Million). This program supports three-year startup grants for school-based mental health services for elementary students with moderate behavior problems. The budget currently contains $12 million for the program, which is administered by the Department of Mental Health (DMH). Even without new funding, the program will continue to expand in 1997-98, as the budget provides funding for a new set of local programs each year. A recent program evaluation revealed that program services had little impact on student achievement, which raises the issue of whether Proposition 98 funds should support the program. We have concerns, however, about the quality of the evaluation (please see our discussion of the DMH budget in the Health and Human Services chapter of this Analysis). We therefore recommend the Legislature maintain the current program funding level.

Technology Center in the San Diego County Office of Education ($1 Million). The proposal would provide partial funding for equipment and other infrastructure needs for a regional technology center. This is an example of a proposal for which state funding is neither needed nor desirable. Other county offices have technology centers that are supported locally. From the state's standpoint, it makes more sense to have these centers funded by district contributions or by user charges. By insisting on local funding for these projects, the Legislature can ensure that what the county office chooses to do will be desired and used by schools. For that reason, we recommend the Legislature deny this request.

Options for Prior-Year Funds

We recommend relatively modest changes in the budget's plan for the use of one-time Proposition 98 funds.

As we discussed above, the budget also proposes to spend a significant amount of Proposition 98 funds that are available in the current year. This includes "settle-up" monies from 1995-96 and 1996-97 as well as unspent Proposition 98 funds from previous budgets. Figure 13 displays the Governor's budget proposal and our recommendations for the use of these additional funds. Our recommendations total $43.2 million more than the Governor's Budget. This is because our LAO forecast of General Fund revenues--and Proposition 98 minimum funding level--is somewhat higher than DOF's. We have also included the impact of our recommended reductions in current-year spending for two existing programs (community day schools and child development).
Figure 13
Prior-Year Proposition 98 Increases

LAO and Governor's Budget Proposals

(In Millions)
Governor's Proposal Legislative Analyst's Proposal
Pay program deficiencies and other commitments
Revenue limit increases $304.2 $304.2
Revised attendance 264.4 264.4
Standardized account code 9.0 9.0
Assessments 6.0 6.0
Oxnard HSD extended year 3.9 3.9
Other 1.0 1.0
Review current programs consistent with long-term goals
Community Day Schools -- -$35.0
Child development -43.9
Support state improvement efforts
Facilities for class size reduction $151.0 $200.0
Deferred maintenance -- 100.0
Child care facilities 15.0 15.0
Student information system 10.0 10.0
Alternative credential program 9.0 9.0
Reject other proposed augmentations
High school technology $50.0 --
Angel Gate Academy 6.4 --
Single gender schools 5.0 --
Kern Telecommunications 2.0 --
Reserve -- 36.6
Totals $836.9 $880.1

Generally, we recommend the Legislature use the same principles discussed above to determine the expenditure of these one-time funds. We recommend approval of the increases proposed to retire funding deficiencies and other program commitments. This includes $304.2 million proposed for revenue limit increases (half for an additional COLA, half for equalization) as required by the Legislature's actions on the 1996-97 Budget Act. We also recommend the Legislature approve the proposed increase in funding due to higher-than-estimated prior-year attendance.

We also support a number of the budget's proposed new programs. We recommend approval of the $10.4 million for a student information system, which would establish the infrastructure for a statewide student data base. We also recommend approval of $9 million for an expanded alternative credential program, which supports district and university programs that train prospective teachers.

Increase CSR Facility Funding

We recommend the Legislature appropriate $200 million in one-time support for district facility costs of implementing the CSR program.

The budget proposes $151 million to provide districts additional funds for CSR-related facility needs. In 1996-97, the Legislature provided $200 million in one-time funds to help defray this expense.

Facility costs continue to be a major issue in the implementation of the CSR program. As we discuss in our review of the CSR program below, districts estimate their additional CSR facility costs to fully implement three grades of smaller class sizes at $600 million (assuming 18.8 students per classroom).

Because of the great need for additional facilities funds, we recommend the Legislature increase the amount for facilities to $200 million. This $200 million plus the additional $100 million in ongoing funds that we recommend earmarking for CSR facilities in 1997-98 would bring the total to $300 million. While this is a very large sum, even for K-12 education, it provides only about half of the amount districts will need to fully implement three grades of smaller classes.

Delete Proposed Augmentations

We recommend the Legislature deny four proposals for new or expanded programs for a savings of $63.4 million.

As Figure 13 displays, we recommend the Legislature deny four of the Governor's proposed uses of prior-year Proposition 98 funds. These requests do not meet the criteria discussed above for categorical programs. We discuss each proposal below.

High School Technology Initiative ($50 Million). This request is the first-year of funding for a planned $500 million high school technology proposal. The proposal requires districts to match state funding, bringing to $1 billion the total amount of technology purchased under the proposal. The Governor's Budget also mentions future increases in district revenue limits to pay for the maintenance of the new technology. As we discussed above, we do not believe this proposal justifies state intervention. Without a clear rationale, the Legislature should let local school boards determine the best use of funds.

Angel Gate Academy ($6.4 Million). These funds would support a five-week residential program for middle school students (grades six through eight) who are "at-risk" of becoming youthful offenders. The residential program is operated jointly with the California National Guard and has been supported with federal funds for the past three years. The proposal has a number of problems. First, the request would expand--without any clear rationale--the size of the program threefold, from 400 students to 1,440. Second, the program is very expensive ($4,400 per student for a five-week program) and only benefits students from the Los Angeles Unified School District. The budget offers no reason why the state should become involved in a purely local issue of resource allocation. The district has a variety of resources that could be used to fund this program if it is a priority. We see no appropriate state role for such a program and, therefore, recommend the Legislature deny this request.

Second-Year Funding for Single-Gender Schools ($5 Million). As part of the 1996-97 Budget Act, $5 million in one-time funds were appropriated to provide start-up funding for schools that would serve only boys or girls. This was developed as another approach to addressing the needs of "at-risk" students. According to the State Department of Education (SDE), the start-up grants have not been issued. The DOF could not provide any additional information indicating that ongoing funding would be needed to operate these academies. For this reason, we recommend the Legislature not approve this request.

Telecommunications Center in the Kern County Office of Education ($2 Million). Similar to the technology proposal for San Diego County discussed above, this proposal would provide state support for a regional telecommunications project. For the same reasons as we discussed above, we recommend the Legislature deny this proposal.

Create a Reserve of Prior-Year Funds

We recommend the Legislature establish a reserve of $36.6 million to ensure against overappropriating the Proposition 98 minimum in 1996-97.

Just as we believe the Legislature should create a $100 million reserve of Proposition 98 funds in 1997-98, we think a reserve for 1996-97 funds also is prudent. The need for the reserve will lessen as the year progresses because the Legislature will have a better idea of what final Proposition 98 funding levels will be. Even in May, however, some uncertainty will remain about the final level of funding. For that reason, we recommend the Legislature establish a reserve of $36.6 million in 1996-97 funds to protect against overappropriating in the current fiscal year.

Population Estimates Differ

We recommend the Legislature adopt legislation to change the policy of allowing revisions to population estimates used in the Proposition 98 calculations. Further recommend the Legislature require this estimate to be established in the annual budget bill.

In our companion document, The 1997-98 Budget: Perspectives and Issues (Part 2, California's Demographic Outlook), we note that our demographic projections are lower than those of the Department of Finance due to differing assumptions about migration. As stated in our K-12 Overview Section, state population is one of the five major factors involved in the calculation of each of the Proposition 98 "Tests." The population estimates used in the Proposition 98 calculation are provided by the Department of Finance.

State population plays a key role in the level of the Proposition 98 minimum guarantee. Tests 2 and 3 are based on changes in per capita personal income and General Fund revenues. As a result (assuming no other changes), as population increases the Proposition 98 guarantee decreases.

Current Policy on Population Estimates Is Inconsistent. Education Code Section 41206 directs that within nine months following the end of any fiscal year, the Superintendent of Public Instruction and the Director of Finance shall recalculate, as necessary, and jointly certify all actual data pertaining to school districts for the prior fiscal year. For example, by the end of March 1997, the final Proposition 98 factors for 1995-96 should be certified by the DOF and the SDE.

This is not a difficult task with regard to General Fund revenues, local property taxes, and K-12 ADA, where the state has actual data. The California per-capita personal income factor is also straightforward because it is set prior to the start of the fiscal year and never changed.

However, state population estimates used for per-capita General Fund revenues are problematic. When population estimates change, so does the per-capita General Fund guarantee. And, since no actual counts are available for population--except for the once-a-decade census count--Proposition 98 can change every time the DOF revises its estimates.

How Should Population Be Adjusted?

Our population estimates are lower than the DOF estimates throughout the period 1995-96 to 1997-98. We estimate that, if the Legislature used our state population estimates throughout this period, the following additional amounts would be needed to satisfy the minimum guarantee: (1) $99.4 million for 1995-96; (2) $182.8 million for 1996-97; and (3) $289.4 million for 1997-98.

As demonstrated in these amounts, allowing population estimates to change does introduce the possibility of large changes to the General Fund cost of Proposition 98. In the current case (a reduction in the population estimates), the threat is to the General Fund budget. If on the other hand, the revised estimate of population was higher than the previous estimate, the General Fund could benefit and K-14 education would be at-risk due to the lower minimum funding guarantee. Since K-14 districts would have already spent or encumbered most of the funds, however, adjusting school funding downward by any significant amount is not feasible. Thus, a floating population estimate primarily serves to increase Proposition 98 spending, thereby threatening the state General Fund.

We recommend the Legislature revise state law to permanently set the population estimate used in the Proposition 98 calculation as part of the budget process. Once the estimate has been openly reviewed in the budget process and adopted in the budget bill (like the California per capita personal income factor), it no longer would be subject to change. This would reduce the General Fund threat caused by changing estimates of population and provide the Legislature the opportunity to review the estimate as part of the budget process.

With regard to the population adjustments for 1995-96 through 1997-98, we see two options:

We recommend the latter option because it is more consistent with the long-range policy of not revising past population estimates. Since the DOF may revise its estimate of population this spring, we do not include these funds in our alternative spending plan. We will revisit this issue in the May revision.

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