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

  1. Revenue Limits
    1. Three-agency Report on Revenue Limit Process--Update
    2. Using the COLA to Equalize
      1. Background
      2. Problems With the State's Current Approach To COLA and Equalization
      3. More Efficient COLA Would Equalize Revenue Limits
    3. Provision of "Basic Aid" Hinders Equalization Efforts
    4. Charter School Liability and Accountability Need Clarification
  2. Reforming Categorical Programs
    1. Problems With the Current Structure
      1. Mega-Item Provides Inappropriate Flexibility
      2. Problems With the Overall System
    2. Consolidate and Simplify Categorical Programs
      1. A School Improvement Block Grant
      2. Staff Development Block Grant
      3. Compensatory Education Block Grants
      4. Compensatory Education Block Grant--Part A
      5. Compensatory Program Block Grant -- Part B
      6. A Program of Evaluation
  3. Addressing the K-12 School Maintenance Problem
      1. Background
      2. Reported Deferred Maintenance Backlogs Are Huge
      3. State's Current Approach to Maintenance and Deferrals
      4. Problems With the State's Current Approach
      5. New State-Local Approach Needed
      6. State's Commitment
      7. District Commitment
      8. Conclusion

Revenue Limits

School district revenue limits provide general purpose support for schools. Revenue limits were established in Chapter 1406, Statutes of 1972 (SB 90, Dills) as part of the state's response to the Serrano v. Priest state Supreme Court decision of 1971. The revenue limit was calculated to be equal to the per student amount of general purpose state aid and local property taxes that a district received in 1972-73. The limits do not include state categorical funds (such as state aid for special education or class size reduction), lottery revenue, or any federal aid to local school districts. Currently, approximately 72 percent of school support is provided through the revenue limit mechanism.

In practice, there are at least five different revenue limits. Each of these is defined in Figure 26 (see next page). In this section, we review the state's system of revenue limits used to provide general purpose funding to K-12 districts, and make several recommendations that would speed up the equalization of amounts provided to districts.

Three-agency Report on Revenue Limit Process--Update

As directed by the Legislature, the Department of Education, the Department of Finance and the Legislative Analyst's Office are currently working on a joint report on the revenue limit apportionment process.

Last year in our Analysis of the 1996-97 Budget Bill, we commented on a number of complexities with the state's revenue limit system. As Figure 26 illustrates, the revenue limit system is complex, making it difficult to understand and cumbersome for state and local agencies to use.

Based on this analysis, the Legislature adopted language in the Supplemental Report of the 1996 Budget Act directing the State Department of Education (SDE), the Department of Finance (DOF), and the Legislative Analyst's Office (LAO) to jointly review the revenue limit apportionment process and make recommendations to simplify the process. The stated
Figure 26
Revenue Limits--General Definitions
Statutory Base Revenue Limit
The revenue limit defined in statute before any adjustments. Based on 1972-73 actual funding plus COLAs, and equalization and other adjustments that have been provided subsequently.
Equalization Base Revenue Limit
Equal to the statutory base revenue limit less additional funds for longer school day, longer school year, and minimum teacher salaries. Used for revenue limit equalization, this limit divides districts into six categories based on type (elementary, high school, and unified) and average daily attendance (small and large).
Blended Revenue Limit
Equal to the district's statutory base revenue limit times the ADA enrolled in 1982-83 and 105 percent of the statewide average statutory base revenue limit times any growth ̣̣tADA since 1982-83. Applicable only for about 161 districts that have revenue limits in excess of 105 percent of the state average.
Deficited Base Revenue Limit
Equal to about 90 percent of a district's statutory or blended revenue limit. The deficit factor reflects the experience of the early 1990s, when revenue limit entitlements were inflated by statutory COLAs each year, but were not fully funded in the annual budget acts. All school districts are affected by this adjustment.
Adjusted Funded Base Revenue Limit
Equal to the deficited base revenue limit less recaptured savings in the Public Employees' Retirement System (PERS) costs. With the exception of San Francisco Unified School District, which is not part of PERS, every school district has a unique PERS adjustment.

intent of the review is to (1) make the process more understandable and (2) reduce unnecessary workload at the state and local levels.

LAO Proposals. The three-agency report is not due to the Legislature until May 1, 1997. We have made a number of suggestions to the DOF and the SDE including:

Our discussions with the SDE and DOF are ongoing.

Using the COLA to Equalize

We recommend that the Legislature adopt legislation to replace the current uniform revenue limit COLA with a new formula that equalizes revenue limits over time. We recommend making this change effective in 1998-99 rather than in the budget year to allow districts to adjust to the change. We further recommend increasing revenue limits by $149.7 million above the Governor's proposed levels and using a new formula to distribute this additional amount.

In each of the past three years the Legislature provided significant amounts of funding to partially equalize revenue limits. Below, we provide some background on the state's COLA and equalization policy. We then analyze problems with the current approach and recommend an alternative COLA and equalization methodology.


The Legislature has, since the first Supreme Court Serrano decision in 1971, periodically enacted legislation to equalize revenue limits among the state's school districts. Chapter 894, Statutes of 1977 (AB 65, Greene) established a school finance funding mechanism that provided school districts with different COLA amounts depending upon their per-pupil revenue limits. In general, a district with a revenue limit above the statewide average would receive a smaller COLA than a district with a revenue limit below the statewide average. Under this system, per-pupil funding levels would be drawn to the statewide average (squeezed) over time. Thus, funding disparities stemming from differences in district wealth gradually would be reduced.

Current revenue limit COLA and equalization policy is based on Chapter 498, Statutes of 1983 (SB 813, Hart). Senate Bill 813 eliminated the "squeeze" formula, and instead provides that all districts of the same type (elementary, high school, and unified) receive the same fixed dollar amount as a COLA. In 1995-96, for example, all elementary school districts received a COLA of $82 per ADA, high school districts received $100 per ADA, and unified districts received $86 per ADA. This approach does nothing to reduce the dollar differentials among districts and only slightly reduces the percentage differentials.

Since the enactment of SB 813, the Legislature has provided periodic "leveling up" funds for revenue limit equalization. That is, funds are provided periodically to increase the revenue limits of below-average districts to the state average. In calculating equalization adjustments, districts are divided into six categories by type (elementary, high school and unified) and ADA (small and large). The amount of equalization aid a district qualifies for depends on the amount necessary to bring its revenue limit to the average revenue limit in its category.

Problems With the State's Current Approach To COLA and Equalization

Our analysis finds two major problems with the state's current approach: (1) the COLA does very little to help provide equalization, and (2) the equalization leveling up mechanism is costly and inefficient (in fact, by its design, it probably will never fully equalize revenue limits among the districts).

Current COLA Does Little for Equalization. The current uniform fixed-dollar COLA is described as a "percentage equalizing" COLA. Figure 27 illustrates the operation of this COLA over time using two hypothetical districts--A and B. Our illustration assumes District A's revenue limit is at the state average.

Figure 27 shows that the dollar difference between the two districts does not change over time. The dollar difference was $300 in year one and remains at $300 in year ten. Because the total revenue limit increases over time, the percentage difference between the two gets smaller over time. In year one, District B's $300 advantage is 9 percent higher than District A's ($3,800 compared to $3,500). By year ten dollar the $300 advantage is only 6 percent higher than District A's ($5,004 compared to $4,704). However, no progress has been made to reduce the dollar differences in revenue limits between these two districts.

Equalization--Costly and Inefficient. Current law uses a "leveling-up" approach to equalize revenue limits. "Leveling up" assumes that districts with high revenue limits are funded at an appropriate level (and low revenue limit districts are underfunded). While the goal is to bring districts up to the average in their category, in fact what happens is that the districts are being increased toward the highest revenue limit in their class. Each "round" of funding increases the "average," necessitating a new round of equalization.

The dollar differences in revenue limits get smaller and smaller but never go to zero. To fully equalize all districts under the leveling-up approach, the Legislature would have to provide sufficient funds--estimated by the SDE to be $11.1 billion--to bring each district to the highest revenue limit in its category.

More Efficient COLA Would Equalize Revenue Limits

Figure 28 (see next page) illustrates how an AB 65-type COLA would affect revenue limits over time. The figure shows that the dollar difference between the two districts gets smaller over time. This closure is the result of providing a sliding scale COLA to districts whose revenue limits are not at the state average. COLAs are granted in relationship to the distance the district's revenue limit is from the statewide average. The farther below the average, the greater the COLA and, conversely, the farther above the average the smaller the COLA.

This type of adjustment can guarantee a COLA to every school district. The important point, however, is that no matter what parameters are chosen, an AB-65-type COLA eventually does reach a point at which revenue limits are equal.

Accordingly, we recommend that the Legislature enact legislation to adopt an AB 65-type COLA for revenue limits. Because districts are already in the process of developing budget plans for 1997-98 based on current law, we recommend distributing the budget-year COLAs based on current law.

In our discussion of K-12 Priorities, we recommend increasing revenue limits $149.7 million above the Governor's proposed levels. We recommend that this additional $149.7 million be distributed using an AB 65-type formula. Starting in 1998-99, all revenue limit COLAs would be distributed by this new formula.

Provision of "Basic Aid" Hinders Equalization Efforts

We recommend that the Legislature enact legislation to phase out, over a three-year period, "basic aid" provided to high property-wealth school districts, because (1) providing basic aid is contrary to the state's policy of eliminating wealth-related disparities in education spending and (2) the provision of such aid is not necessary in order to comply with the requirements of the State Constitution.

In 1976, we first recommended that the Legislature eliminate basic aid payments. Our recommendation built on the Los Angeles County Superior Court's 1974 Serrano decision holding that the state's then-existing school finance system was unconstitutional primarily because the amount of educational spending was largely determined by the assessed value of property within each district. The State Constitution's requirement that the state provide at least $120 per pupil--so-called "basic aid payments"-- contributed somewhat to the wealth-related disparities.

Background. As we discussed above, general purpose aid is allocated to school districts through a "revenue limit" system. These funds are provided through a combination of local property taxes (together with other specified revenues) and state aid. For most school districts, the amount of local property taxes received in a year is not sufficient to fund revenue limits. Thus, the state provides these districts with sufficient funds to make up the difference between the revenue limit and the amount of property taxes received by the district.

For 56 school districts, however, the amount of local property taxes received exceeds the revenue limit guarantee. For these districts (referred to as "basic aid districts"), the state does not recapture any of the excess amount--estimated by the Department of Education to be $70 million in 1995-96. On the contrary, the state adds to the excess by providing these districts with additional funding--estimated by the Department of Education to be $11.2 million in 1995-96--in the form of state basic aid.

Basic Aid Exacerbates Wealth-Related Disparities. School districts whose income from local property taxes exceeds the revenue limit guarantee clearly receive large amounts of revenue from local sources. The provision of state basic aid on top of this exacerbates the wealth-relateddisparities in educational spending per pupil and is thus contrary to the Legislature's efforts to equalize revenue limit funding.

Basic Aid Not Constitutionally Required. The provision of basic aid derives from a common assumption that Article IX, Section 6 of the California Constitution requires that each school district receive general-purpose apportionment aid from the state of at least $120 per ADA. Legislative Counsel has opined, however, that the constitutional requirement can be satisfied by the provision of at least $120 per pupil in state aid of any type, including aid provided under categorical programs that flow through the State School Fund. If a district did not receive the minimum from the combined sources, only then would the state be obligated to provide the difference.

Phase-Out of Basic Aid. We find no analytical basis to continue basic aid payments. In the past we recommended eliminating basic aid payments in the budget year. However, we realize that school districts are already developing their budgets for 1997-98. We also realize that eliminating basic aid over a longer period would allow districts more time to adjust their budgets. Accordingly, we recommend that the Legislature enact legislation effective in 1998-99 to phase out the $120 basic aid payments at the rate of $40 per ADA over the following three years.

Charter School Liability and Accountability Need Clarification

We recommend that the Legislature adopt budget bill language directing the State Department of Education to adopt a policy on fiscal accountability and liability of charter schools selected for its "Charter School Direct Funding Pilot Project" prior to starting the pilot.

Chapter 781, Statutes of 1992 (SB 1448, Hart) provides opportunities for teachers, parents, pupils, and community members to establish and maintain "charter" schools that operate independently from the existing school district structure. Since the passage of the law, over 100 charters have been issued by school boards and county offices of education around the state.

Chapter 781 provides for direct funding of charter schools by the Superintendent of Public Instruction. Currently, the State Department of Education (SDE) identifies most fund sources for a charter school separately and passes the funds to the charter through the sponsoring school district. However, starting in July 1997, the SDE plans to begin a pilot project to provide funds directly to the charter school without passing the funds through the sponsoring school district. The SDE plans to include up to seven schools in this pilot project.

We are concerned that providing funds more directly to charter schools and bypassing the fiscal controls of the county and/or the sponsoring school districts could potentially put the sponsoring school districts, the county office of education, or the state, at financial risk in the event a charter school fails or creates a liability that exceeds the school's capacity to pay. Among the questions we have on accountability and liability are:

The SDE convened a working group on the pilot project last fall. One of the areas that this group is working on is the accountability and liability issues. The SDE's broadly based working group is well equipped to address the many facets of these issues.

However, we believe that the SDE should insure that these issues are clarified prior to implementing its pilot project. Accordingly, we recommend that the Legislature adopt budget bill language directing the SDE to provide the Director of Finance and the Legislature with a resolution of these issues prior to implementing the pilot. We recommend adoption of the following budget bill language:

The State Department of Education (SDE) shall not begin the charter school direct funding pilot project until the Director of Finance has approved the SDE's policy for fiscal accountability and liability of charter schools selected for the pilot. The Director of Finance shall notify the Legislature's policy and budget committee chairs and the Chairperson of the Joint Legislative Budget Committee, not less than 30 days prior to the effective date of this approval of the policy.

Reforming Categorical Programs

We recommend the Legislature simplify and consolidate 21 K-12 categorical programs into four categorical block grants in order to increase local flexibility and eliminate negative incentives created by the programs. We further recommend the Legislature make these same changes in statute so that school districts can begin long-term planning based on this new program structure.

Just as new categorical programs should meet a rigorous test for approval, existing programs should be reviewed periodically to ensure the need for state intervention still exists and that the programs are designed to allow school districts to make the most effective use of the funds as possible. In this section, we review the system of K-12 categorical programs and suggest reforms to make these programs more flexible for districts and increase local accountability for results.

Problems With the Current Structure

Mega-Item Provides Inappropriate Flexibility

Currently, most categorical funds are appropriated through the categorical "mega-item," which provides $2.5 billion in General Fund support for 37 individual programs in 1996-97. The budget proposes $2.4 billion for these programs in 1997-98. The Legislature originally created the mega-item to minimize the Governor's ability to make specific categorical program reductions though the use of line-item vetoes. In addition, the mega-item allows districts to move up to 15 percent of funds from one program to another as a way to help districts to reallocate funding in order to meet district categorical program needs.

In our Analysis of the 1995-96 Budget Bill, we discussed the results of a district survey we conducted on the value of the mega-item to school districts. The results of the survey are displayed in Figure 29. The overall results of the survey established that the mega-item provided the wrong type of local flexibility. Rather than permit districts to meet high-priority categorical program funding needs, districts used the flexibility to increase their overall financial flexibility at the expense of categorical programs. Based on these results, we concluded that the mega-item failed to further the Legislature's policy goals in establishing the categorical programs.
Figure 29
School District Survey on the

Use of Categorical Mega-Item Flexibility


About one-third of surveyed districts used the mega-item flexibility. Large districts were more likely to use the flexibility provisions than smaller districts.
Mega-item flexibility helped districts reduce "encroachment." Four out of five districts that used the funding flexibility reported they transferred money between programs to reduce district general fund support of categorical programs.
Many surveyed districts wanted more flexibility than the mega-item affords. Smaller districts especially found the 15 percent limit too small.
School improvement funds were often reduced and home-to-school transportation funding increased. Districts most often reduced funding for school improvement and staff development programs in order to shift funds to reduce general fund support for transportation.

Problems With the Overall System

We have also reviewed the functioning of the overall system of K-12 categorical programs. In our report Reform of Categorical Education Programs (April 1993), we reviewed problems in the design and operation of categorical programs. Figure 30 (see next page) displays our findings. In short, we concluded there is little evidence that categorical programs successfully meet their intended goals. Categorical programs also emphasize administrative and fiscal requirements rather than program goals. As a result, we concluded the existing system of categorical programs in K-12 education was not as effective as possible in meeting the needs of students or schools.
Figure 30
Problems With California's System

Of Categorical Education Programs

No conclusive evidence on the success of categorical programs. Most programs are never evaluated. Categorical programs that have been evaluated reveal a mixed record of success.
State rules restrict needed local flexibility. Complex and detailed program requirements in some programs reduce the flexibility needed by schools to maximize the impact of funds on improving student achievement.
A fragmentation of local programs. Without a local strategy for integrating categorical programs with the basic educational program, process requirements of the categorical programs shape local responses rather than the needs of students.
Funding formulas create negative incentives. Some categorical programs create financial incentives that encourage schools to act in ways that are not in the best interests of students.
Blurred accountability for meeting student needs. Creating separate programs for specific student needs creates confusion about who is responsible for improving student achievement.

Consolidate and Simplify Categorical Programs

To increase local flexibility and eliminate negative incentives created by the current system of categorical programs, we recommend the Legislature consolidate 21 existing programs into four categorical block grants. The remaining programs would continue to be budgeted either separately or in a smaller mega-item. The four largest programs remaining in the mega-item would be Home-to-School Transportation (477.9 million), Year-Round Schools ($62.8 million), Child Nutrition ($58.2 million), and Gifted and Talented Education ($50.7 million). We also recommend the Legislature appropriate $10 million in federal funds to begin a program of evaluating K-12 categorical programs. Figure 31 illustrates the components of our recommended changes, which are discussed in more detail below.
Figure 31
LAO Recommended

K-12 Categorical Block Grants

School Improvement Block Grant. This block grant would consolidate $675 million in funding currently provided through nine programs. Funding would be provided to school sites and would be available to meet a range of school improvement needs.
Staff Development Block Grant. The funding from two existing programs would comprise this $91 million block grant, which would support staff development needs at each site, with a priority for new teacher support services.
Compensatory Education Block Grant--Part A. Four programs would be consolidated to provide $941 million for school district compensatory programs. Included in this block grant is funding currently provided through the Economic Impact Aid program and the Court-Ordered and Voluntary Desegregation programs.
Compensatory Education Block Grant--Part B. Six programs currently supporting alternative education settings would be consolidated into a $158 million block grant. Funds could only be used to support programs lasting at least five hours each day.
K-12 Evaluation. This program would supply $10 million each year to support rigorous evaluation of K-12 programs, replacing the defunct "sunset" process that previously provided the Legislature with information on the effectiveness of education programs.

Before describing the individual block grants in more detail, we first discuss three issues affecting all the categoricals: standards, program rules, and per student funding allocations.

Block Grants Based on State Standards. We recommend creating a categorical accountability system that uses three common educational indicators to measure the success of local programs. Most importantly, the accountability system should measure whether students are making adequate academic progress. While we would prefer a uniform state standard, there are no existing state standards of academic achievement. The Commission on Academic Content and Performance standards is currently working to develop such standards. Until these standards are in place, our recommended accountability system would use existing local standards of adequate student progress.

The accountability system also would include two measures of student attendance. Student attendance rates, routinely collected by all schools, would measure the success of schools in working with parents to ensure students attend school. Student dropout rates, also currently collected by districts, indicate a school's effort in keeping all students involved in learning.

Using these three indicators, schools and districts would be required to assess their success in meeting the standards for each program's targeted group of students. For instance, the school improvement and staff development block grants--which would target school-wide concerns--would require schools to assess how well all students at the school were meeting these three goals. The school improvement plan would focus on improving the school's program for those students who did not meet the standards. Similarly, the compensatory education block grant--which would target the needs of low-performing and limited English students--would require districts to measure how well these students are progressing towards meeting the standards.

Old Program Rules Would Not Apply. Our proposed block grants would contain a minimum of state rules or directives. Schools would be required to spend block grant funds for the purpose specified -- no funds could be transferred by districts to other categorical programs or purposes. Except in limited instances, the state would not define the appropriate uses of the funds or program models eligible for funding.

Per-Student Funding Allocations. Block grant funds would be distributed on a per-student basis in our proposal. Current funding allocations by district would not be affected, however. To equalize district funding levels, we recommend using cost-of-living adjustments to provide a larger COLA to lower-funded districts. This would even-out per-student funding levels over time.

A School Improvement Block Grant

We recommend the Legislature consolidate nine separate categorical programs into one school improvement block grant that would provide $676 million in funding to school sites.

Figure 32 displays nine programs that provide funding to (1) meet specific school site needs or (2) support improved curriculum and instruction. We recommend the Legislature consolidate these programs into a single grant. This would place about $676 million in General Fund support for school improvement activities at the school level--about $315 million more than is currently made available under the School Improvement Program (SIP). The block grant would have the following features:

Figure 32
Programs Under the Proposed

School Improvement Block Grant

(In Millions)
Program 1997-98

Proposed Budget

School Improvement program $ 360.4
Instructional materials 157.1
Categorical block grant 67.8
Educational technology 35.6
Class size reduction (high school) 32.3
Tenth grade counseling 13.3
Demonstration programs in intensive instruction 5.4
Agricultural vocational equipment 3.6
School-based management 0.9
Totals $676.4

Staff Development Block Grant

We recommend the Legislature create a Staff Development Block Grant by consolidating two existing categorical programs in order to provide $91 million in flexible funds at school sites to meet staff training needs.

Currently, the Mentor Teacher Program and the School Development Plans and Resources Program (also known as the SB 1882 Staff Development Program) provide resources to schools and districts for staff development and new teacher assistance. We think these funds would be more effectively used if the site level determined the highest priority uses of staff development funds. By consolidating these two programs, the Legislature would make $91 million available to schools each year, or about $7,500 for a typical elementary school.

Planning for staff development would be part of the three-year school site plan required under the school improvement block grant and would support training and mentor teachers needed to improve teacher skills and, ultimately, student achievement.

Priority for New-Teacher Assistance. We recommend the block grant establish a priority for staff development assistance for beginning teachers. Evaluations of the Beginning Teacher Support and Assessment program showed that program services substantially increased teacher retention and teaching skills. Therefore, we suggest the Legislature establish a priority for new teacher assistance services similar to those found in BTSA.

Compensatory Education Block Grants

We recommend the Legislature merge all existing categorical programs for disadvantaged and high-risk youth into a single block grant with two parts: Part A would provide up to $941 million in compensatory funding that currently flows through four programs. Part B would provide $150 million in funding for alternative programs for those at-risk students who benefit from a different educational setting.

There are ten existing programs for students who need additional services to be successful in school. These students include low-performing students, limited-English-proficient students, and students who may be more successful in an alternative education setting. There are two groups of programs. One group provides funding for supplemental services that are usually provided as part of, or in addition to, the regular classroom program. The second group provides support for alternative education settings some students require. Given these two groups, our proposed block grant also would have two parts.

Compensatory Education Block Grant--Part A

The Legislature currently funds four programs that provide supplemental services to assist low-performing and limited-English-proficient students. Figure 33 describes these four programs. In total, the 1997-98 budget proposes $941 million for these programs. Of these programs, two--the Economic Impact Aid (EIA) program and the Miller-Unruh program--support local programs focused solely on improving student achievement.
Figure 33
Programs Under the Proposed

Compensatory Education Block Grant--Part A

(In Millions)
Program Description Proposed 1997-98




Reimburses 13 districts for court-ordered activities to integrate students and provide supplemental services to groups historically disadvantaged by segregation. $448.4


Reimburses 52 districts for carrying out voluntary plans to integrate students and provide supplemental services to students. 97.1a

impact aid

Provides formula grants to districts for compensatory education and supplemental services for limited-English-proficient pupils. 366.3

Reading Program

Provides grants to districts to improve reading for economically disadvantaged students in early grades. 29.1
Totals $940.9
aThe Governor's budget proposes to change the way the Voluntary Desegregation Program is budgeted in 1997-98. Program funding levels would not change.

The court-ordered and voluntary desegregation programs have two goals--assisting low-performing students and encouraging racial integration of schools. As a result, district desegregation programs spend up to 25 percent of state funding for busing and the remainder on compensatory activities such as smaller class sizes, magnet programs and other supplemental services.

The compensatory services funded through the EIA and Miller-Unruh programs have the same general goals as the compensatory activities funded through the desegregation programs--increasing student achievement. The existing system of programs has created a number of problems, however, including overlapping program missions, a lack of outcome measures that indicate student progress, rigid state funding rules for reimbursement, and a negative incentive for schools to end court-ordered programs due to fears of a loss of state funding.

Governor Proposes to Eliminate Voluntary Desegregation. The Governor's budget proposes to eliminate the voluntary desegregation program by merging it into two existing compensatory education categorical programs: court-ordered desegregation and Economic Impact Aid. Specifically, the budget proposes shifting the $97.1 million in voluntary desegregation funds as follows:

We see two issues with this proposal. First, the 44 districts with voluntary desegregation programs would experience significant near-term funding reductions. This is because the EIA allocation formula automatically reduces district allocations by up to 15 percent a year whenever a district's actual funding exceeds its formula-based allocation. As a result, by adding voluntary desegregation funding to a district's EIA allocation in 1997-98, districts would begin experiencing reductions in EIA funding in 1998-99.

Second, as discussed above, many desegregation programs involve busing students to achieve a better racial balance. State law, however, requires districts to spend EIA funds to serve limited-English or low-performing students. Thus, busing costs may not qualify as an appropriate expenditure under EIA. In addition, we question whether the Legislature should open the door to allow districts to spend EIA funds for transportation. This is because EIA is designed to provide supplemental education services, not administrative services such as transportation.

Create a New Compensatory Block Grant. We do agree with the basic idea of program consolidation behind the Governor's proposal. However, we believe that the Legislature should go further with this idea, and combine all categorical programs into a block grant that would provide extra help to disadvantaged pupils. With the exception of desegregation-related busing, all four programs have similar goals. Combining them would allow districts more flexibility to use the money as part of an overall strategy to improve the educational outcomes of disadvantaged students.

We think a block grant would have several benefits:

For these reasons, we recommend the Legislature combine the four existing programs into a Compensatory Education Block Grant--Part A. Our block grant would contain the following features:

Add Budget Bill Language. The elimination of separate desegregation funding programs could raise legal questions about the state's obligation to fund court-ordered desegregation costs. To make clear that the state is continuing to provide funding for local desegregation programs, we recommend the addition of budget bill language declaring that the block grant contains such funding and that, if additional funds are needed, resources should be redirected by districts from funds provided by the state in the block grant or in the Home-to-School Transportation program. The language would read as follows:

The Legislature declares that funds previously provided under the Court-Ordered Desegregation and Voluntary Desegregation Programs are included in this item and Item 6110-111-0001 and shall continue to be spent for that purpose as necessary. If additional funds are needed for district desegregation efforts, districts may redirect other funds received through this item to support additional compensatory costs or through item 6110-111-0001 to pay for additional busing costs.

Compensatory Program Block Grant -- Part B

We recommend merging six programs currently providing $150 million for alternative K-12 programs for disruptive and other at-risk students into a block grant that would provide districts greater flexibility in meeting student needs.

In addition to the compensatory programs discussed above, the Legislature currently funds six state categorical programs that are designed to provide support for schools that serve as alternatives to regular district-run high schools. These programs are summarized in Figure 34. These programs are different than the general compensatory programs recommended for Part A of the compensatory block grant in that they are designed for a more specific profile of student--the student who most likely is low-performing but also has additional risk factors, including a history of poor attendance or behavioral problems, and who would benefit from a different educational setting.

The existence of these multiple programs creates a number of significant problems for schools. First, most of the programs mandate a specific model of service delivery, which restricts the ability of schools to provide services in a way that best meets student needs. Second, schools have no direct control over the County Community Schools Program. This separation creates a barrier to the kind of coordination that is needed to ensure that a student (1) continues to attend school and (2) has an appropriate educational program.

In addition, since schools cannot access these funds, services provided to students through the county program are "free" to districts. This creates a financial incentive for districts to use the county programs rather than create district programs that may better meet student needs. Finally, there is no system of outcome measures that promotes accountability for program results in this area.
Figure 34
Programs Under the Proposed

Compensatory Education Block Grant--Part B

(In Millions)
Program Purpose 1997-98 Proposed Funding
Community Day Schools District alternative schools for pupils that are expelled from regular programs or are in need of a separate program. $52.6
County Community Schools County office of education alternative schools for students that are expelled, on probation, or referred for other reasons by districts. 44.6

High Schools

District alternative high schools for students in grades 10-12 who have poor performance, poor attendance, or behavioral problems. 21.4


Funding to certain districts for specific models of alternative programs serving those at-risk of dropping out. 17.3


Funding to districts for combined academic/

vocational programs for students at-risk of dropping out.



District alternative programs for students in grades 7-9 who have truancy or discipline problems. 6.5
Totals $150.4

An Alternative Program Block Grant. Because of these problems with the current system, we recommend the Legislature create a Compensatory Program Block Grant--Part B that would provide funding to districts for alternative education settings as follows:

A Program of Evaluation

We recommend the Legislature appropriate $10 million in federal Goals 2000 funds for an ongoing program of evaluation of state categorical programs and other critical areas of K-12 education.

As we discussed above, there is very little good information on the effectiveness of education services. We believe that well-conceived evaluations are essential to further improvements in school performance. Good data on the effectiveness of educational programs would be very valuable to both state and local decision makers.

The Legislature, in making policy and budget decisions, needs good information on the impact of state programs on student achievement. Until recently, the state "sunset" process required SDE to issue periodic program evaluations of the major state categorical programs. These reports rarely provided an assessment of the impact of services on student achievement, however. The sunset process has been discontinued due to funding reductions that occurred during the early 1990s.

Local educators have a need for good data on how different program models meet the needs of different types of students. For educators, evaluations can answer the question of what is the most effective way to address student needs. Assessing the effect of different program models can give educators better insight into how best to serve their students.

This is clearly an appropriate state role. Schools are unlikely to support these types of evaluations, for two reasons. First, most districts cannot afford the cost of these evaluations. Second, the benefits of evaluations are available to all schools, not just those who pay the costs. As a result, the state can generate important data on program effectiveness at a relatively low cost to districts.

Good evaluations are costly and take a number of years to bear fruit. The payoff to students--in terms of more effective programs--and decision-makers is great, however. In 1992, the National Academy of Science concluded: "[W]ithout high-quality and credible evaluations, school districts will never be able to choose wisely among available innovations . . . . The committee is convinced that widespread school reform will require partnerships between researchers and practioners".

For these reasons, we recommend the Legislature appropriate $10 million in federal Goals 2000 funds to begin an ongoing program of evaluations. The program would support high quality evaluations and would be guided by a representative group of legislators, the SDE and other state agency staff, local school representatives and academic experts.

Addressing the K-12 School

Maintenance Problem

The current system of funding K-12 ongoing maintenance and deferred maintenance creates counterproductive fiscal incentives that encourage K-12 districts to defer maintenance. California school districts report maintenance deferrals totaling $2.6 billion. We recommend specific steps the Legislature should take to eliminate the existing maintenance backlog and provide for ongoing maintenance to avoid future deferrals.


One of the most common complaints about the state's education system--from parents and school employees alike--is the physical disrepair of school facilities. Stories abound regarding unpainted buildings, leaky roofs, broken heaters, and failing plumbing. These situations are representative of serious maintenance problems in California schools-- both in inadequate ongoing funding and in huge deferred maintenance backlogs. There is a growing body of educational research that suggests there is a positive relationship between student achievement and the condition of the facility in which they are schooled.

In this section, we estimate the magnitude of these maintenance problems, describe existing state funding for deferred maintenance, and analyze problems with the state's current approach. We then offer our recommendation for a long-term plan to adequately fund routine facility maintenance and to eliminate current backlogs. First we define the key maintenance terms used in this section.

Maintenance Definitions. Many terms are used to describe maintenance needs. A State Department of Education (SDE) publication issued in 1986 defines the terms we use in this report. For our purposes the following two definitions are most useful:

If repairs to key building and infrastructure components are constantly deferred, facilities can eventually require more expensive investments, such as emergency repairs (when systems break down), capital improvements (such as major rehabilitation), or replacement. Generally, deferral of maintenance projects reduces the useful life of facilities and thus increases future capital outlay needs. As a result, while deferring annual maintenance needs can save districts money in the short run, it results in substantial additional costs in the long run.

Reported Deferred Maintenance Backlogs Are Huge

Inadequate ongoing maintenance has long been a problem for K-12 school districts resulting in huge backlogs of deferred maintenance. In 1979 the SDE estimated that the deferred backlog among K-12 school districts was approximately $900 million, or $1.7 billion in today's dollars. By 1995-96 the backlog totaled $2.6 billion, which even after adjusting for inflation, is a 53 percent increase over 1979. The reliability of this $2.6 billion estimate is questionable. For example, the report includes no data from 137 districts, including such large districts as San Jose and San Francisco. In addition, our discussions with districts indicate that there is little consistency in the way districts report the deferred maintenance figure. For several reasons, the actual amount may be seriously over- or under-estimated. There is no alternative source, however, against which to compare the school district reports.

State's Current Approach to Maintenance and Deferrals

The state has provided funding for deferred maintenance in different ways:

Deferred Maintenance Program. The state created a School Deferred Maintenance program with the passage of Chapter 282, Statutes of 1979 (AB 8, Greene). The AB 8 program focused on working down the deferred maintenance backlog by providing state funds for deferred maintenance that districts had to match with local funds. The initial state match was dollar-for-dollar, with a maximum match of 0.5 percent of the school district's general fund budget. Assembly Bill 8 funded this program from construction loan payments received from school districts in excess of the amount required for debt service payments under the State School Building Aid Program. This basic approach to the problem has not changed since 1979. The budget includes $35.5 million for the deferred maintenance program in 1997-98.

One-Time Block Grants. The state has also provided additional funds for deferred maintenance on an ad hoc basis. For example, last year the Legislature provided $50 million specifically for deferred maintenance projects from Proposition 98 "settle-up" funds. In addition, the Legislature from time-to-time has provided one-time block grant funds to school districts that also could be used for deferred maintenance (or any other one-time purpose). Last year the Legislature provided $387 million in such grants directly to school sites and an additional $200 million to school districts.

Modernization Program. The state is also funding deferred maintenance to some extent with debt financing through the Lease-Purchase Modernization Program. Oftentimes, deferred maintenance projects are completed as part of an overall school modernization project. Since 1986, the state has provided almost $2 billion in general obligation bond funds to upgrade schools that are at least 30 years old. For modernization projects, districts are eligible to receive funds up to 25 percent of the replacement value of a school building and have considerable flexibility in spending these monies to upgrade schools--including addressing deferred maintenance needs such as replacing electrical and mechanical systems. The most recent bond measure (Proposition 203) also allows up to $40 million of bond proceeds to be used for roof replacement projects.

Problems With the State's Current Approach

The state's current approach treats the symptom--maintenance deferrals--rather than the cause of the problem: the underfunding of ongoing maintenance. Most importantly, the state's current approach treats deferred maintenance as an ongoing "program." The existence of deferred maintenance, however, really represents a maintenance program failure. A deferred maintenance project is one that should have been addressed in a prior year under a properly functioning ongoing maintenance program.

The primary reason for the failure of K-12 school districts' ongoing maintenance programs is simple--ongoing maintenance has been underfunded. Both the state and the local school districts have contributed to the underfunding. At the local level, many California school districts have given maintenance programs a low priority in the annual budget process. At the state level, the current School Deferred Maintenance Program and state funding for school modernization may actually create a fiscal incentive to defer projects rather than deal with them in a more timely manner. Below, we discuss these problems in detail.

Local School District Funding: Maintenance Has Been a Low Priority.School facilities represent a multibillion dollar taxpayer investment entrusted to the management of local governing boards and school managers. Local boards and managers, however, face demands and needs on several fronts for funds. The growing backlog of maintenance deferrals is one clear indication that ongoing maintenance has been given a lower priority in the local district budgeting process.

Two different reports identify the approximate level of ongoing maintenance support that provides sufficient funds to avoid maintenance deferrals. In a 1986 report, the SDE states that ongoing maintenance budgets set at approximately 2.9 percent of the current replacement cost of the buildings should be adequate to avoid deferrals. A report issued by the Building Research Board in 1990 entitled Committing to the Cost of Ownership recommends a budget allocation in the range of 2 percent to 4 percent of the current replacement value of those facilities.

Based on these reports and discussions with other experts, we recommend that local school districts budget ongoing maintenance at 3 percent of current replacement value. The SDE does not collect school expenditure data on building maintenance. As a result, we were unable to determine the current level of maintenance spending by districts. Anecdotal information suggests districts spend less than 2 percent of current replacement value on ongoing and deferred maintenance.

State Fiscal Incentive to Defer Makes Bad Situation Worse. The state's current method of funding deferred maintenance actually provides an incentive for school districts to defer projects. This is because the state has addressed the maintenance problem by adding state funds for deferred maintenance or providing modernization bonds rather than developing incentives for school districts to increase ongoing maintenance to avoid deferrals. Districts must set financial priorities in the face of many competing needs. If the state supplies funding for deferred maintenance--but none for ongoing maintenance--it is clearly in the district's short-term interest to delay certain maintenance projects and have the state contrib- ute to the cost of the project later as part of the state's deferred maintenance program or a modernization project.

The current arrangement is making a bad situation worse. While deferred maintenance was a problem in 1979, the size of the backlog increased by more than 50 percent by 1995-96. This has resulted in steadily deteriorating school buildings--a source of concern to parents and teachers. To the state, the backlog of maintenance projects signals a growing demand for future modernization funds for projects that are unnecessarily expensive because of inadequate ongoing maintenance.

New State-Local Approach Needed

We recommend that the Legislature adopt a ten-year plan to (1) create an incentive to local school districts to allocate sufficient funds within their operating budgets to support an adequate level of annual ongoing maintenance and (2) provide sufficient funds from state and local district resources to eliminate deferred maintenance backlogs. To accomplish this plan, we recommend a state commitment of $2 billion in new funds over a ten-year period funded by (1) an annual baseline budget increase of $100 million and (2) an additional $1 billion over the next ten years from Proposition 98 settle-up funds.

The state and the local school districts need to refocus their approach to addressing the maintenance needs of K-12 school districts. We recommend a two-part approach to eliminate the backlog of projects and to fund ongoing maintenance at an adequate level.

Figure 35 summarizes the components of our proposal. Below we discuss the elements of the plan in more detail.
Figure 35
LAO Ten-Year Maintenance Plan
State's Commitment
$2 billion in new funds over ten-year period for deferred maintenance:
  • Provide $100 Million Annually in Base Budget. Starting in 1997-98, and annually thereafter for ten years, the K-12 budget will include $100 million in support for deferred maintenance.
  • Provide $1 Billion Over Ten-Year Period From Proposition 98 Settle-Up Funds. Provide an additional $1 billion over the next ten years from Proposition 98 settle-up funds.
  • Distribution of Funds on an Average Daily Attendance (ADA) Basis. The entire $2 billion commitment will be distributed on a per- ADA basis.
  • State Program Limited to Ten Years. No state funds would be available for deferred maintenance after the end of the ten-year period.
  • Districts Reaching Goal Prior to End of Program. If a district eliminates all of its deferred maintenance backlog prior to the end of the program and provides the state's required ongoing maintenance level, it will continue to be eligible to receive state funds.
  • Current Program Funds Continue But Under New Program. Funding from the state's current deferred maintenance program will be allocated on a per ADA basis through the new program. No local match would be required.
Districts' Commitment
  • Increase Ongoing Maintenance Budget. Local school districts must increase funding for ongoing maintenance budget by 1999-2000 to at least 3 percent of the current replacement cost of their facilities.
  • Certification by Local School District Governing Board. Each local school district governing board must certify, on an annual basis, that the district is spending the required ongoing maintenance amount as set forth in this plan. The level of districts' maintenance spending would be subject to audit verification.
  • Current Backlog. Districts assume responsibility for funding any deferred backlog beyond the state's commitment of $2 billion.

State's Commitment

$2 Billion in New Funds. The state would provide $2 billion in new funds over a ten-year period for deferred maintenance from the following sources:

In our K-12 Priorities section (please see above), we include in our alternative budget plan funding needed to carry out the first year of this deferred maintenance plan.

Distribution of Funds on an Average Daily Attendance (ADA) Basis.We recommend the distribution of funds on an ADA basis rather than in relationship to current deferred backlogs. School districts have made varying efforts to manage their maintenance workloads. Distributing new monies in relationship to the current backlog would reward districts that may not have been fiscally diligent. We believe a distribution based on ADA is neutral with regard to past efforts of districts.

State Program Limited to Ten Years. The magnitude of the backlog problem necessitates an extended period for recovery. However, we recommend that the program be limited to a specific time period to avoid any appearance of accepting deferred maintenance as an ongoing program. In addition, the time limit sends a clear message to schools that any remaining deferred maintenance is their responsibility.

Districts Reaching Goal Prior to End of Program. Our rationale for continuing funds to districts that have eliminated their backlogs is the same as that for basing the distribution of funding on an ADA basis. We should not penalize districts that have made the financial effort in the past to adequately maintain their facilities.

Current Program Funds Merged Into New Program. Funding from the state's current deferred maintenance program will be allocated on a per ADA basis through the new program and no local matching funds will be required. These monies are in addition to the $2 billion in new state funds. For 1997-98, the Governor's budget includes approximately $35.5 million that will be available from excess loan repayments made in the current year. The excess bond repayments are declining each year as more districts retire their loans under the State School Building Aid Program. It is our understanding that these payments will phase out within the next ten years.

District Commitment

Participation in the ten-year plan requires a local school district to increase funding for ongoing maintenance over a three-year period to 3 percent of the current replacement cost of its facilities. Local school districts also assume responsibility to fund any deferred maintenance that is above the $2 billion state commitment. The following are the specific requirements we would recommend:

Phase-In Increase in Ongoing Maintenance. We recommend the following phase-in to an appropriate sustainable level of ongoing maintenance:

Certification by Local Governing Boards. We recommend that local district governing boards certify, on an annual basis, that the district is providing the required ongoing maintenance amount as set forth in this plan. By 1999-2000, the local board must certify that the district is spending at the required 3 percent level. This certification requirement should increase public awareness and discussion of the adequacy of ongoing maintenance levels.

Current Backlog. Since the $2 billion state program will probably not fully eliminate the current backlog, local school districts must assume responsibility for funding any deferred backlog beyond the state's commitment. Some districts may thus have to spend local district funds to fully eliminate their current deferred backlog. In creating this new program, however, it is our goal that local school districts would address their most critical deferrals with the new state funds. Sources for additional funding include the district's operating budget and/or local bond issues.


A long-run strategy to address maintenance failures within local school districts is essential to protect the taxpayers' multibillion dollar investment in school facilities. We believe our proposal provides a combined state-local approach that resolves the maintenance and deferrals issue in an effective and efficient manner. Unless the state and the local school districts act now to (1) increase school districts' ongoing maintenance spending to adequate levels and (2) hold school district governing boards accountable for addressing maintenance needs, maintenance will continue to be deferred. If deferrals are allowed to continue, the state and local school districts will face future additional costs of renovating and replacing prematurely worn out facilities.

Return to 1997-98 Budget Analysis Table of Contents
Return to LAO Home Page