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

    1. Child Development
      1. The Subsidized Child Care System
      2. Welfare Reform Adds New Federal Funds And New Rules
      3. Problems With the Current System
      4. Department Has Not Acted to Simplify Contracting And Reporting
      5. Budget Could Exacerbate Problems
      6. LAO Recommendations for a Simplified Approach
      7. SDE Should Consolidate Funding for Most Programs
      8. Trim Child Care Program Expansion
      9. Create Capacity For Data Collection
      10. Provide New Positions to Reform State Administration, Not Expand Current System
      11. Budget Excludes Legislature from Key Decisions and Oversight
    2. Special Education
      1. Background, Enrollment, and Overall Funding
      2. Need for Funding Reform Well Documented, Timing Right for Reform
      3. Funding for Reform Should Be Carried in Separate Legislation
      4. Technical Issue--Is Entitlement Amount Correct?
    3. Other Issues
      1. School Safety Initiatives Over-Budgeted
      2. Community Day Schools Still Over-Budgeted
      3. Program Should Charge for Computers
      4. Deny New Categorical Programs

Child Development

The 1997-98 Governor's Budget proposes $556 million from the General Fund for child development programs. This represents an increase of $39 million from the current-year level of funding for the program. The change is a result of (1) a $10 million increase to provide full-year funding for an expansion of child care programs started in 1996-97, (2) a $13.1 million increase to meet higher costs in child care programs due to increases in the minimum wage, (3) $13.4 million for a cost-of-living adjustment, and (4) a $3 million increase to replace one-time federal carryover funds with ongoing General Fund monies.

The budget also proposes $353 million in federal child care funds, an increase of $225.7 million from 1996-97. This large increase stems from two major changes in the federal program. First, $125.5 million in welfare-related child care funds from the Title IV-A program that used to appear in the budget of the Department of Social Services (DSS) now appear in the State Department of Education (SDE) budget. Of this amount, $75.3 million will be transferred to the DSS. Second, federal funds for child care will increase in 1997-98 by $100.2 million ($20 million of this increase are new federal funds received in 1996-97 but budgeted on a one-time basis in the budget year).

An additional $33.7 million in federal funds also are available in the current year but are not shown in the Governor's budget document. The Governor's budget also provides $1.5 million in new federal funds for state operations in 1997-98.

In response to these federal changes, the budget combines state and federal funds into one budget item and requires the department to develop new rules that will merge the contracting and management systems for federal and state-funded child care programs. Currently, SDE administers the state and federal funds under separate contracts.

The budget also proposes 22 new positions in the department for child development programs. Currently, about 89 SDE positions are devoted to child care programs. As a result, the budget proposal represents a 25 percent increase from existing levels of staff. Of the proposed new positions, 13 would be funded with federal funds and nine from the General Fund.

The Subsidized Child Care System

The SDE-subsidized child care system consists of about a dozen programs serving low-income families at little or no cost, which fall into four categories: (1) State Pre-School, which provides half-day educational programs with a school-readiness focus; (2) center-based programs, which provide a full-day program similar to State Pre-School in state-contracted child care centers; (3) Alternative Payment programs, which provide voucher-based child care; and (4) resource and referral programs, which provide information and referral services to all child care consumers.

The DSS provides child care through (1) several voucher-based programs and (2) the AFDC Income Disregard Program. These programs provide child care to welfare recipients and those transitioning off of welfare who continue to need subsidized child care. In addition, the federal Head Start program, which provides $395 million in preschool services in California, is funded and managed directly by the federal government without state involvement.

Welfare Reform Adds New Federal Funds And New Rules

Before the enactment of welfare reform, California received federal child care funds in two funding streams. First, the SDE received about $110 million in federal child care funds in the Child Care and Development Block Grant (CCDBG). Of these funds, 75 percent supported voucher-based child care, and 25 percent could be spent for a variety of purposes, including state administration, center-based care, and quality improvement activities. Second, DSS received child care funds through the federal child care entitlement to welfare recipients (Title IV-A).

Welfare reform has changed this funding system in the following ways.

Three Funding Streams. There are now three different streams of federal funds: (1) the former CCDBG funds are now known as "discretionary" funds, (2) the former Title IV-A funds are now known as "mandatory" funds, and (3) there is now a new source of funds known as "matching" funds. Together, these funds are now known as the Child Care and Development Fund (CCDF), which is capped at a certain amount each year.

More Restrictive Expenditure Time Limits. The CCDBG and Title IV-A child care rules provided states significant flexibility over when federal funds had to be spent. Under the new system, each of the three funding streams has different spending time limits and all are more restrictive than the previous system. The more restrictive expenditure time limits will require increased vigilance by the department to ensure that the state does not lose federal funds by missing expenditure deadlines.

Increased Funding for Quality Improvement Activities. Four percent of CCDF funds must be spent on quality improvement, which includes training for parents in selecting appropriate child care and training for providers in delivering higher quality child care. The state currently spends about $9 million on these activities. An additional $12 million must by spent in the budget year to meet CCDF expenditure requirements.

Expanded Reporting Requirements. Before welfare reform, the department was required to file summary reports on child care costs and number of children served with federal funds. The new law expands the kinds of data that must be collected. Instead of summary reports, the state must collect data on a child-by-child basis. Although no regulations have been issued, the federal Department of Health and Human Services has stated its intent to require data collection for only a sample of children served, rather than for all children served. This will substantially reduce the effort necessary for information collection when compared with what SDE envisioned when welfare reform was first enacted.

Problems With the Current System

For the last several years, SDE--along with other legislative and administrative staff--have been discussing ways to improve the state's child care system. California's subsidized child care programs have been beset by a number of ongoing problems. Major issues include the following:

The Subsidized Child Care Delivery System Is Unnecessarily Complex. California has about 18 different child care programs. These programs can have different funding sources, eligibility criteria, points of entry, and separate waiting lists. The uncoordinated manner in which the programs have been designed and administered impedes families' access into the system.

Child Care Providers Cannot Easily Absorb Large Funding Increases. The subsidized child care market has difficulty expanding to absorb increases in funds. For example, in 1991 the state began receiving federal funds from the CCDBG. During the first two years of the grant, the SDE accumulated $85 million in CCDBG funds that it was unable to spend. Based on legislative action, the SDE developed a plan to spend down these "carryover funds" over a three-year period. Three years have passed since that plan was originally implemented and over $40 million in federal carryover still remains to be spent. Spending new federal funds in a timely manner will become even more critical as a result of the new funding rules under welfare reform.

Administration of Child Care Contracts Is Complex and Expensive.The complexity of SDE's child care program rules creates problems for both state administrators and child care providers. This complexity permeates every aspect of the child care system. For example, different programs have different eligibility rules and different rate structures. Providers that operate under more than one program also have to negotiate separate contracts for each program. Providers must follow complex rules regarding allowable expenditures and attendance accounting, and collect detailed administrative information on these factors. This information is audited and then reviewed by state administrators. Most of the 89 child care-related positions in SDE are devoted to assisting contractors and implementing the cumbersome rules and requirements.

Programs Lack Basic Data. While contractors must file a great deal of paperwork to show they have met detailed administrative requirements, all of this effort provides little useful data for making policy decisions. For example, the state does not collect even the most basic data on key program variables, including number of children served, statewide need for services, and quality or outcomes of child care programs. Thus, the level of state funding for child care programs has never been tied to any hard data on what the state is receiving for its child care expenditures.

While these problems remain, SDE made progress this year in providing information for the budget process. In our past three budget analyses, we discussed SDE's ongoing difficulties in managing and accounting for expenditures. This year, SDE staff have been very responsive and generally have been able to provide accurate and timely budget information.

Department Has Not Acted to Simplify Contracting And Reporting

To resolve some of the problems detailed above, the Supplemental Report of the 1995-96 Budget Act required the SDE to consult with the Legislative Analyst's Office (LAO) and the Department of Finance (DOF) and develop recommendations for simplifying the contracting system for child development programs. The department released its report and recommendations in February 1996.

In response to this report, the Legislature included a requirement in an education trailer bill to the 1996-97 Budget Act directing the department to design and implement a streamlined contracting system to test on a small number of child care providers. The plan for this pilot project was due in January 1997. Implementation of the plan was to have occurred in July 1997, subject to approval by the DOF and the Legislature.

The department decided to delay for one year the development of the required plan and has formally notified the LAO and the DOF of this decision. In its letter to the two agencies, the SDE stated, "postponing implementation of a prototype contracting system for one year will allow details of federal welfare reform to be fully understood. In addition, the one-year delay would provide all state agencies the opportunity to better prepare for California's version of the Temporary Assistance for Needy Families program [welfare reform]."

Most Streamlining Issues Are Independent of Welfare Reform. The department contends that restructuring of child care administration should wait until after welfare reform is implemented. But the problems that plague the system are independent of welfare reform:

Most Child Care Dollars Are General Fund Dollars. The state spends about $500 million on center-based programs, almost all out of the General Fund. These programs' complex rules, high administrative overhead, and lack of useful data for policy formulation are almost solely the state's own doing.

Welfare Reform Changes the Rules, but Underlying Problems Remain the Same. We already have a system supported by both state and federal funding, with different rules for different programs. On an administrative level, welfare reform simply creates a new set of rules. These changes will create short-term challenges for state administrators as they come up to speed on the new rules, but are unlikely to have major program impacts.

In short, the program structure and administrative requirements of the systtenare largely under state control--and federal welfare reform will not require major changes in the system. Changing federal rules, however, provides an excellent opportunity to rethink many aspects of the existing system--a system that is in serious need of restructuring. Such a restructuring can make the state system less complex, less expensive, and easier for families to access. In the long-run, these changes also can help the state ensure that a sufficient supply of affordable child care is available to low-income families in the state.

Budget Could Exacerbate Problems

The Governor's budget attempts to address several of the issues posed by the current state system and the changing federal program. However, we believe the budget proposal could exacerbate the problems that plague the existing system.

Combining Funds Could Pose Problems in the Short-Run. The budget proposes to combine all state and federal funds for child care. This would require many child care programs to meet bothstate and federal rules at the same time. This would have the effect of making program administration more complex.

In the long-run, the budget proposal to combine state and federal rules makes sense. Merging state and federal funds as part of a single streamlined child care system would be a significant improvement for families, child care providers, and SDE. The department, however, is not prepared for such a thorough overhaul of the program at the current time.

Child Care Providers Cannot Absorb Huge Increases in Funding. The budget assumes the state-subsidized child care system can supply an extra $71 million in child care services in the budget year. This flies in the face of past experience with federal child care funds, as discussed above.

Data Collection Should Be Driven by Need for Policy-Relevant Data. The budget provides funds and positions for data collection geared to meet expected federal reporting requirements. Even if the state satisfied federal requirements, however, the data may not address the basic information the Legislature needs to make informed decisions about SDE's program.

Welfare Reform Should Not Drive Staff Increases. The budget assumes the department will need a major, permanent increase in staff to adequately meet both existing workload requirements and new workload requirements generated by welfare reform. While some short-term staff may be needed, most of the department's staffing problems result from existing program requirements.

LAO Recommendations for a Simplified Approach

The budget proposal could make a complex program even more complicated. There is, however, a way to budget new federal funds that works to simplify the system. Below, we make a series of recommendations to begin reform of the state's child care delivery system. The following principles guide our recommendations:

Simplify Child Care Administration and Contracting. Instead of combining all state and federal funds, we think the Legislature should, to the extent possible, separate programs so that they are funded by one source--either federal or state funds--rather than by both. In the short run, this reduces administrative complexity in the system by allowing individual programs to operate on one set of rules. The Legislature also should take steps to require the department specifically to develop and implement plans for further simplifying the cumbersome child care administration and contracting system. This will serve the state's long-run goals for child care far more effectively than simply providing new staff for a system that is not working.

Limit Funding Increases to What Providers Can Reasonably Absorb. As discussed above, child care providers have not been able to quickly absorb huge increases in funding. Rather than create a large carryover problem or risk losing federal funds, we recommend the Legislature limit funding increases to what the program can reasonably spend in 1997-98. Funding can be augmented in the future as the supply of child care increases.

Data Collection Should Serve Policy Improvement, Not Administrative Requirements. The state needs data to formulate future state child care policies. The Legislature should provide funds to enable the department to develop a data collection and reporting system. Of course, the state needs to comply with federal reporting requirements, but policy improvement should be the main goal of data collection.

Below we detail specific recommendations to implement these principles.

SDE Should Consolidate Funding for Most Programs

We recommend the Legislature fund (1) the School-Age Parenting and Infant Development (SAPID) and Migrant Child Care programs solely out of the General Fund and (2) the Extended Day Care (Latchkey) programs and alternative payment programs solely out of federal funds. These changes will reduce complexity in the contracting system by funding each of these programs from a single source.

The Legislature should make the following budget changes in both the current and budget years (these are accounting changes only, and will not affect funding for these programs):

Migrant Program. Replace $2.3 million in federal funds with General Fund monies.

SAPID Program. Replace $991,000 in federal funds with General Fund monies.

Latchkey Program. Replace $18.4 million in General Fund monies with federal funds.

AP Program. Fund the AP program entirely with federal funds ($48 million). This requires using $19.2 million of General Fund savings from this switch to maintain funding for the "general" child care program.

These four programs would then be funded from a single funding source, easing program administration. As a result of these actions, only one program--general child care--would still be funded from both federal and state funds. Consistent with this action, we also recommend the Legislature separately schedule federal and General Fund child care monies to provide greater control over expenditures.

Trim Child Care Program Expansion

We recommend the Legislature replace $43.9 million in General Fund child care programs in 1996-97 and 1997-98 with new, ongoing federal Child Care and Development Fund monies. This action will increase the level of child care expenditures by an amount that programs can reasonably absorb ($26.2 million).

The budget proposes $100.2 million in local assistance from new federal child care funds in 1997-98. In addition, $33.7 million in current-year federal funds are available for expenditure but not shown in the Governor's budget document. Whenever child care funds increase, the SDE must find (1) existing center-based providers who can increase the number of available slots at their facilities or create new facilities, (2) newcenter-based providers, and/or (3) alternative payment contractors who can expand their programs.

Child Care Programs Have Not Been Able to Quickly Absorb Large Increases in Funds. As discussed above, the child care market needs a few years to absorb large increases in funding. The Legislature has several options regarding these large increases in federal funds. First, all the funds could be budgeted to expand SDE child care programs. The likely outcome, however, would be substantial General Fund or federal fund carryover. We think this is the least desirable course of action because the department would be unable to use most of the additional funds. Second, the Legislature could send available federal funds to DSS for use in support of welfare reform. The need for additional funding in 1997-98 is uncertain, however, and depends on the design of the state's new welfare program and the speed at which counties can implement the program. Third, the Legislature could replace General Fund support for state child care programs with federal funds. This would free up Proposition 98 funds for other legislative K-12 priorities.

Analyst's Recommendation. We recommend the Legislature choose a combination of these options. Specifically, we recommend (1) a $26.2 million increase for the Alternative Payment and Latchkey programs, and (2) a $43.9 million reduction in General Fund support for SDE programs in both the current and budget years. This reduction in General Fund support would not affect the level of services provided, which would be supported with federal funds instead (see previous recommendation). We think this would provide SDE with an amount that can reasonably be absorbed in 1997-98 and create the greatest fiscal flexibility for the Legislature in addressing the K-12 budget priorities.

The federal fund base will increase over the next four years by a total of $82 million over the budget-year level. Thus, the Legislature will have new sources of funds to meet increasing demand for child care in the future. If the Legislature's actions on welfare reform indicate a greater budget-year need for child care funds, any portion of the federal funds used to free-up Proposition 98 funds could, instead, be transferred to DSS.

Create Capacity For Data Collection

We recommend the Legislature reject the Governor's proposal to spend $22 million in federal Child Care and Development Fund (CCDF) matching funds on a one-time basis for development of a new data collection and reporting system to meet federal reporting requirements. Instead, we recommend the Legislature provide $4.2 million for the department to develop a data collection system that meets (1) the state's need for policy-relevant data and (2) federal reporting requirements.

The Governor's budget provides $22 million to support the data collection and analysis costs of meeting potential new federal reporting requirements. Of these funds, $2 million is for consulting services to develop a Feasibility Study Report (FSR) for a data collection and analysis system, and $20 million is reserved for implementation of the FSR once it is approved. All $22 million would come from the current-year increase in federal funds. The budget also includes three positions in the department for data analysis staff.

$22 Million Is Excessive. This large sum was reserved because, at the time the budget was put together, it appeared that the federal government might require the state to collect data on every child receiving subsidized care. Without knowing what might be involved in such a massive data collection effort, the DOF reserved these funds as a contingency. The federal government has now stated its intention to require data collection for only a sample of children (likely to be a few hundred) on a monthly basis. This modest requirement may not require the development of anynew data collection system, as the DSS was required to collect data on small samples of children as part of the former Title IV-A child care programs.

State Needs Data to Drive Effective Policy. As we discussed above, the state has little systematic data on key aspects of the state-subsidized child care system. Up to this point, the state has continued to increase funds for child care programs with little or no information on what the state is getting for its money. Welfare reform creates an opportunity for the Legislature to create a data system that would allow the Legislature to make informed decisions about SDE's programs.

For these reasons, we recommend the Legislature reject the $22 million proposed in the budget for a data system. Instead, we recommend the Legislature provide $4 million for development and implementation of a data collection system and $229,000 for three two-year, limited-term positions devoted to data collection and analysis. All expenditures would be from federal CCDF funds. We recommend that the Legislature adopt the following budget bill language relating to these funds:

Of the amount provided in this item, $4,000,000 is for developing and implementing a feasibility study report (FSR) for a child care data collection system. The department shall consult with the Legislative Analyst's Office and the Department of Finance in determining data collection needs and developing the data collection system. Of the amount provided in this item, $229,000 is for three positions for data collection and analysis. These positions may only supplement and not supplant three existing positions devoted to data analysis. These positions and associated funding are provided on a two-year, limited-term basis. Continuation of the positions is contingent on implementation of a data collection system that meets the state's policy-related child care data needs.

Provide New Positions to Reform State Administration, Not Expand Current System

We recommend the Legislature (1) delete 19 positions and $2.1 million ($781,000 from the General Fund and $1.31 million in federal funds) from the Governor's budget. Instead, the Legislature should provide $970,000 in federal funds for seven two-year, limited-term positions.

The Governor's budget proposes a total of 22 new positions in the department for child care programs. This represents a 25 percent increase in the 89 positions in the department already devoted to child care. We addressed three of the new positions above. The Governor's proposal targets the remaining 19 new positions in the following fashion.

Child Development Division (CDD)--Eleven Positions. Of these positions, six would be devoted to existing contractor monitoring and assistance functions, and five are proposed to meet expected new workload due to welfare reform.

Education Finance Division (EFD)--Five Positions. Of these positions, two would be devoted to existing child care apportionment workloads, and three would be devoted to expected workload increases due to welfare reform.

Auditing and Accounting--Three Positions. Of these positions, one would be devoted to closing out the existing workload of annual audits of child care contractors, one would be devoted to expected new audit workloads due to welfare reform, and one would be devoted to expected new accounting and budgeting workloads due to welfare reform.

Proposal Overstates Need for Staff. As detailed above, the state administration system is already overly complex and cumbersome. Yet the budget proposal for the new federal funds justifies increasing the department's child development staff based on expected increases in the complexity of the child care system. Rather than require the department to fix the cumbersome state administration system, the budget funds its expansion.

Our review indicates that the proposed new positions are more than can be justified by either existing workload increases or the new workload created by the new federal funds.

Review of Contractor Business Plans Unjustified. The budget requests two staff in the EFD largely on the basis of reviewing business plans from child care contractors. There is currently no requirement for child care contractors to provide business plans to the state. We do not believe such a requirement is appropriate, as it would increase both state and local administrative costs and add little in improved accountability.

Staffing Overstates Federal Workload Increase. The budget proposal justifies many new positions on the basis of the large increase in federal funds ($195 million) and associated workload increases. In fact, federal fund expenditures by SDE will increase by only about $78 million in the budget year. The remaining funds will simply be passed through to DSS or spent by SDE on existing child care programs.

Quality Improvement Funds Will Not Increase Workload to Degree Claimed. The budget cites the large increase in federal quality improvement expenditures ($12 million) as justification for providing new staff to manage improvement contracts. But the actual increase in quality expenditures will be only about $6 million in federal funds. This is because federal rules require the state to match this $6 million in federal funds with General Fund expenditures. The budget proposes that existing state programs will provide this match, resulting in a net increase of only $6 million in quality expenditures.

Provide Modest Staff Increases. From our review, we conclude that many of the new positions requested by the department are not needed. Furthermore, our recommendations to redirect most new federal funds to existing activities will further reduce the need for new staff. But the most important reason for limiting the number of new positions is that the department needs to develop and implement plans that will simplifythe cumbersome contracting system and reduce the long-term administrative overhead of the program, both at the state and the local level. Therefore, we recommend the Legislature provide seven two-year, limited-term positions for the following purposes:

Short-Term Workload Relief. We recommend three positions in the Child Development Division (CDD), one position in the Education Finance Division (EFD), and one position in the Office of External Audits, at a cost of $432,000 in federal funds.

Reform Child Care Administration. We recommend one position in CDD and one position in EFD at a cost of $197,000, for reform of the system. We further recommend the adoption of following budget bill language:

Two positions and $197,000 are provided for the purpose of developing and implementing recommendations to reform the child care administration and contracting system to reduce costs and increase accountability. These positions shall have the responsibility to (1) identify current administrative requirements of child care programs that create local and state costs without contributing significantly to accountability for quantity and quality of service delivered by child care providers; (2) identify new administrative procedures that will decrease costs of administration and increase accountability for quantity and quality of service in child care programs; and (3) develop an implementation plan for reforming administration of child care programs to (a) reduce both state and local administrative costs, and (b) reduce the complexity of rules that providers must understand and adhere to. These positions shall not include regular program administration duties normally carried out by the Child Development Division and the Education Finance Division.

Budget Excludes Legislature from Key Decisions and Oversight

We recommend the Legislature amend several provisions in the budget bill to include appropriate legislative oversight of key changes that will be made to the state-subsidized child care system over the next year.

In the course of the Legislature's deliberations on the budget, important issues often cannot be resolved without further information and analysis. Sometimes, resolution of an issue is not feasible until well into the budget year. In these instances, the Legislature often will adopt language requiring later legislative input into the decision process.

The 1997-98 Budget Bill contains two instances where the budget requires budget-year resolution of and action on important decisions affecting state child care programs, yet excludes the Legislature from any oversight role:

Approval of a Plan for Development and Implementation of a New Data Collection and Retrieval System (Provision 10). The budget bill requires only that the DOF transfer the funds after approval of a feasibility study report.

Overall Reform of the State-Subsidized Child Care System (Provision 14). The budget bill excludes the Legislature from the development of a reform plan, and allows administrative approval and implementation of the plan without legislative review.

Normally, the Legislature should have the details of these proposals as it considers the budget. Given the complexity of the tasks, however, we think giving the department more time to complete these tasks is reasonable. Legislative oversight of these decisions, however, also is necessary. Therefore, we recommend the Legislature amend the budget bill to add notification of the Legislature 30 days before final approval of these decisions. We further recommend the Legislature add the LAO and the appropriate fiscal and policy committee representatives to the list of agencies who will provide input into the plan for reforming the child care system.

Special Education

In November 1995, the State Department of Education, the Department of Finance, and the Legislative Analyst's Office released a joint report proposing a new funding model for special education and related program reforms. The Governor's budget includes a set-aside of $76.7 million for these reforms. We recommend the Legislature enact funding-reform legislation in 1997-98.

The Governor's budget includes $2 billion in General Fund support for special education in 1997-98. This is $175.7 million, or 9.4 percent, above the revised current-year amount. The budget reflects the following General Fund increases:

$74.5 million to pay for growth in the number of special education students. In general, growth for most special education programs is based on the percentage change in K-12 average daily attendance (ADA), which is projected to increase by 2.3 percent in 1997-98.

$76.4 million for a cost-of-living adjustment (COLA) for special education programs, an increase of 2.5 percent. This is the same increase as proposed for K-12 revenue limits.

$76.7 million for a set-aside for reform legislation. We discuss this proposal in detail below.

Offsetting these proposed increases is a net reduction of $51.9 million. This net reduction results from an "entitlement increase" of $60.7 million offset by revenue increases of $112.6 million. (We discuss the entitlement issue below.) The largest revenue change is an increase in federal funds for special education of $77 million.

In summary, the Governor's budget proposal for special education provides statutory growth and COLA plus an additional $76.7 million for funding reform. The amount set aside for funding reform is about equal to the 1997-98 increase in federal funding.

Background, Enrollment, and Overall Funding

Federal law defines the disabilities that qualify a child for special education and mandates school responsibilities and parental rights. Federal law sets out three basic principles that apply to children with disabilities: (1) all children with disabilities must be provided a free, appropriate public education; (2) each child's education must be determined on an individualized basis and designed to meet his or her unique needs in the least restrictive environment; and (3) the rights of children and their families must be ensured and protected through procedural safeguards.

Consistent with these federal requirements, California's Master Plan for Special Education (MPSE) requires schools to assess each child's unique educational needs and consider a range of service delivery options for each eligible child. The MPSE, implemented statewide in 1980 with the enactment of Chapter 797, Statutes of 1980 (SB 1870, Rodda), established an area-wide approach to the delivery of special education services. The current areas are called Special Education Local Plan Areas (SELPAs).

The intent of the SELPA structure is to deliver special education services in an efficient and cost-effective manner. Differing population densities around the state have resulted in SELPAs that consist of either multiple counties, single counties, a group of school districts within a county, or single school districts. In 1995-96, there were 116 SELPAs. Of these, three were multicounty SELPAs; 33 were countywide SELPAs; 48 were multidistrict SELPAs; and 32 were single district SELPAs.

In 1995-96, approximately 594,000 pupils ages 22 and under, were enrolled in special education programs throughout the state. This is approximately 11 percent of the estimated total K-12 school enrollment for that year. The increase in special education enrollment between 1994-95 and 1995-96 was 3.8 percent. By comparison, the increase in K-12 enrollment was 2.4 percent.

The proposed 1997-98 General Fund appropriation of $2 billion does not reflect the total amount that would be spent on special education programs in the budget year. First, the Governor's budget proposal also includes $48.4 million for the state's special School for the Blind at Fremont and Schools for the Deaf at Fremont and Riverside. Second, in addition to state special education funds, federal funds and district revenue limit funds are also spent on special education programs by local districts. In 1994-95, districts and counties reported spending $3.4 billion on special education programs from all fund sources (excluding transportation costs). Based on a 1992-93 study, we estimate the state share of this amount to be approximately 70 percent, the federal share 5 percent, and the local share 25 percent.

Need for Funding Reform Well Documented, Timing Right for Reform

In November 1995, the State Department of Education, the Department of Finance, and the Legislative Analyst's Office released a joint report proposing a new funding model for special education and related program reforms. The joint report documented the major problems with the state's current special education funding formula: (1) unjustified funding variations among local education agencies (LEAs), (2) unnecessary complexity, (3) constraints on local innovation and local response to changing requirements, and (4) inappropriate fiscal incentives. The report made specific recommendations for reform.

Update on Outcome of Three-Agency Report. During the 1996-97 legislative session SB 1678 (Greene) was introduced. This legislation incorporated many of the recommendations made in the three-agency report. The bill, however, was not heard by any committee. A major issue of concern was the report's assumption that the population of disabled children is evenly distributed among school districts. Key to this assumption was the lack of research evidence showing a link between poverty and the incidence of special education pupils. The report relied on a literature review made by the U.S. Office of Education.

In October 1996, a year after the three-agency report came out, the U.S. Department of Education advised that there may in fact be such a link. As a result, the Legislature should consider these findings if a link can be demonstrated.

1997-98 Is a Good Year for Reform. We remain convinced that reform of the Special Education funding model is sorely needed. Several factors point to the 1997-98 legislative session as a desirable year to enact major reforms in special education finance:

Special Education Statutes Sunset on June 30, 1998. The sunset process is designed to allow the Legislature to periodically review the design and operation of K-12 programs. With the sunset date on the horizon, the Legislature will have to take action within the next 18 months to extend the program. We recommend that the Legislature view the extension of the program as an opportunity to incorporate reforms of the type recommended in the three-agency report.

Significant Funding Is Available for Reform in 1997-98. The Governor's budget proposes $76.7 million for reform. These funds are available as a result of an increase in federal funds to the state for special education. The primary cost of reform is in equalizing per-student funding levels, which various sources estimate will cost up to $200 million over the long-term.

Riverside Mandate Case Coming to a Close. The Commission on State Mandates (COSM) is now hearing a claim submitted by the Riverside County Superintendent of Schools to determine whether new special education costs were imposed upon school districts by federal mandate (PL 94-142) or by state choice (the MPSE) in the implementation of the federal mandate. The test claim includes 19 specific areas. A final decision by the COSM should be made early in 1997. The Legislature should review the outcome of this mandate claim as part of its discussions on reform legislation.

The three-agency report continues to generate considerable discussion on funding reforms among special and general education groups, administrators, and parents. These discussions are entering their third year. Thecombination of all of these factors point to the 1997-98 legislative session as a good opportunity for the Legislature to consider and enact major funding reform legislation.

Funding for Reform Should Be Carried in Separate Legislation

We recommend that the Legislature provide funding for special education reform in the reform legislation itself rather than in the budget bill. Accordingly, we recommend that the Legislature delete the set-aside item for special education reform from the budget bill. We further recommend that the set-aside amount for special education reform legislation be increased from $76.7 million to $105 million. (Delete Item 6110-162-0001).

The Governor's budget proposes $76.7 million for special education reform in an item in the budget bill (Item 6110-162-0001). However, budget bill language specifies that if reform legislation is not enacted by October 15, 1997 the set-aside will be used for additional growth funding for special education.

We think the budget bill item should be deleted for several reasons. First, the item's language creates a disincentive for some districts to support reform simply because they would get more funding through growth. Second, we believe that any alternative use of the set-aside amount should be decided by legislative action rather than inaction. The decision to fund additional growth should be made on its own merits rather than on lack of consensus on reform. Finally, the budget proposal already includes full statutory growth funding of $74.5 million. We do not think additional growth dollars are needed. Accordingly, we recommend that Item 6110-162-0001 be deleted.

In our K-12 Priorities section (please see above), we recommend that the Legislature increase the set-aside amount from $76.7 million to $105 million. If no reform legislation is enacted in 1997-98, this amount would be available for appropriation in the 1998-99 year for any purpose the Legislature chooses. We recommend that if no reform is enacted in 1997-98, the set-aside amount be reserved for special education reform in 1998-99.

Technical Issue--Is Entitlement Amount Correct?

The Governor's budget proposal includes $60.7 million for entitlement adjustments. Based on our preliminary discussions with the Departments of Finance (DOF) and Education (SDE), we find that this adjustment is not in accord with our understanding of legislative intent. We are continuing our discussions with DOF and SDE to get a clearer understanding of the adjustment, and will report further on this issue during budget hearings.

The education trailer bill to the 1996-97 Budget Act contains a cap on special education spending equal to the amount contained in the budget. This cap limits overall state spending for special education services. In developing the 1997-98 budget proposal, the starting point is adjustments to the 1996-97 "base." Once that is done, increases for growth and COLA are applied. There are two appropriate types of base adjustments:

First, funding for growth may need to be adjusted based on a revised estimate of overall growth in K-12 students for the base year. As noted above, the legislative appropriation for special education growth funding is based on the percentage change in K-12 ADA. If ADA is revised, revising special education growth funding to reflect this change would be consistent with the Legislature's action on the special education budget.

Second, several sources of revenue are used to offset the need for state General Fund support, including federal funds and local property taxes. If actual revenue is different than the budget estimate for 1996-97, an adjustment would likewise be regarded as within the Legislature's intent.

The proposed $60.7 million entitlement adjustment, however, is not based on these ADA and revenue adjustments. Our preliminary review finds that it is based on a number of different factors, including changes in the way LEAs claim their special education reimbursement from the state. The changes do not affect the 1996-97 General Fund appropriation.

However, it appears the budget includes these changes in the base budget for 1997-98 as an "entitlement" adjustment. If this is the case, we do not believe it is consistent with the Legislature's actions on the special education budget. By making this adjustment, the DOF is recognizing cost increases that were never authorized by the Legislature. If these adjustments permit districts to manipulate the claiming system to obtain higher funding, then including them in the base would be defeating the purpose of the funding cap. Thus, the budget proposal may be too high by $60.7 million.

As mentioned earlier, one of the major problems with the current funding mechanism is its unnecessary complexity. This prior-year entitlement adjustment is a good example of the system's complexity. We will report further to the budget subcommittees on this issue during budget hearings.

Other Issues

School Safety Initiatives Over-Budgeted

We recommend the Legislature reduce by $35 million in 1996-97 and $22.6 million in 1997-98 General Fund support for community day school programs to reflect realistic population projections for the program.

The Governor's budget proposes $52.6 million for the community day school program, which was established by the Legislature in 1995--Chapter 974, Statutes of 1995 (AB 922, Friedman). This funding level, which is the same as for 1996-97, is sufficient to serve approximately 25,000 ADA.

The community day program was established as a district alternative to county community programs for students who (1) would benefit from an alternative educational setting and (2) were expelled from school or were referred by the county probation department. Districts also have discretion to direct other high-risk pupils to these community day programs.

Under the community day school program, schools are eligible for additional funding for each student placed in an alternative program. Specifically, districts receive $750 per student if the student attends school for five hours each day and $1500 per student for those attending a six-hour daily program. District claims are capped at a maximum of 0.5 percent of total district ADA.

Community Day Schools Still Over-Budgeted

In our Analysis of the 1996-97 Budget Bill, we found that the community day program was over-budgeted for two main reasons. First, delays in start-up would prevent those districts that wanted to set up programs from reaching their maximum ADA cap in the first year of the program's existence, 1996-97. Second, not all districts would want to start commuity day schools in the first year or two of the program.

District implementation of the program appears to validate these concerns. For example:

Less than 10 Percent of Districts Expect to Start a Program in 1996-97. Based on letters of intent submitted to the State Department of Education (SDE), only 80 districts (about 8 percent) indicated they planned to set up community day schools in 1996-97. The maximum these districts could serve under their community day school cap is 7,000 ADA. This would result in program costs of $10.5 million--far below the $52.6 million included in the 1996-97 Budget Act.

Most Districts Don't Plan to Reach Program Caps in the First Few Years. Program spending could be much lower than $10.5 million in the current year, because many districts that plan to implement the program do not plan to fully implement the program in 1996-97.

District Plans for 1997-98 Suggest That the Budget Proposal Is Too High. Only eight districts have advised SDE that they plan to set up community day schools in 1997-98. We also surveyed five large districts that did not begin a program in 1996-97 and found that only two planned to begin day schools in the budget year. Similar to the schools that implemented in 1996-97, districts that were planning to begin schools in 1997-98 did not expect to reach the district caps during the first year of operation.

Reduce Community School Funding. District implementation of the community day school program has gone slowly. Budget-year district plans also suggest continued slow implementation. As a result, it seems apparent that the $52.6 million included in the 1996-97 Budget Act and 1997-98 proposed budget greatly overstate the program's need for resources. Funds not needed in this program could be redirected to support legislative priorities in other areas.

Therefore, we recommend the Legislature appropriate $30 million for the program in the budget year, for a savings of $22.6 million. We further recommend the Legislature reduce expected program expenditures in the current year by $35 million, leaving $17.6 million to satisfy district claims in 1996-97. In making these recommendations, we have tried to ensure funding is more than sufficient to meet program claims. Districts will submit preliminary 1996-97 claims this spring. We will update the fiscal committees of any changes in our estimates based on this data.

Program Should Charge for Computers

We recommend the Legislature reduce funding for the California Donated Computer program by $2.9 million and add budget bill language requiring the program to charge schools for refurbished computers.

The budget proposes $10 million in Goals 2000 funds to continue the State Department of Education's California Donated Computer (CDC) program. This program is operating in the current year with $10 million in Proposition 98 funds that were provided as part of the settlement of the CTA v. Gould lawsuit. The funds proposed in the budget would allow the program to continue in 1997-98.

The program refurbishes used computers donated by the private sector and redistributes them to schools around the state. Under the current program, schools are eligible for computers by matching the CDC computer with a similar computer donated by a parent or community member. The program typically spends between $200 and $400 to refurbish the computers.

The program seems to be working as planned except for one factor. Schools that cannot obtain a locally donated computer have no access to the CDC computers, even if the school is willing to pay the full cost of refurbishing the equipment. The CDC computers generally are relatively recent vintage and, at $400 per computer, represent a good value to schools.

Requiring that the program charge for the costs of refurbishing would have a couple of advantages. First, it would allow schools that cannot obtain locally donated computers to participate in the program. Second, it would ensure that schools have weighed the costs of additional computers and the impact of such a purchase on student achievement.

We also see the value of encouraging schools to engage parents and local businesses in helping support local computer needs. Because of these competing interests, we recommend the Legislature require all schools to pay a portion of the refurbishing costs of CDC computers. For schools that were able to obtain locally donated computers, the charge would be half the cost of the refurbishing. For schools without a local match, the charge would be the total costs of refurbishing.

This change would reduce the state funding needs of the program. Consequently, we recommend a $2.9 million reduction in the CDC program. We also recommend adoption of the following budget bill language that would require the program to charge schools for all or part of the cost of refurbishing.

The California Donated Computer program shall require schools receiving computers through the program to pay for all or part of the cost of refurbishing the computers. Schools that obtain matching donated computers from local sources shall pay half of the refurbishing cost. Schools that cannot obtain local matching computers shall pay the full cost of refurbishing.

Deny New Categorical Programs

We recommend the Legislature deny two new categorical programs for a savings of $7.1 million in federal Goals 2000 funds.

As we discussed in our K-12 Priorities section, the Legislature should closely examine the rationale for categorical programs and should only approve programs that can be justified based on certain criteria. In our review of the proposed use of federal Goals 2000 funds, we identified two programs that did not meet our criteria. We discuss these proposals below.

Student Academic Partnership Program ($5 Million). This program would pay college students to tutor elementary school students. This type of program already exists in many areas--either on a paid or unpaid basis. Some students receive college credit for tutoring. We see no need for the state to intervene. Funding for tutoring should be determined by local school boards after an assessment of existing tutoring resources and the impact of tutoring on student achievement. For this reason, we recommend the Legislature deny this request.

Family/School Partnerships Program ($2.1 Million). This proposal, similar to a request made in the 1996-97 Governor's Budget, would support a regional system of technical assistance to encourage parental involvement in schools. While the proposal is much improved from last year, it still does not address why technical assistance will solve the problem of parental involvement. As we stated in our Analysis of the 1996-97 Budget Bill, there are multiple state and federal requirements for schools to involve parents and many existing sources of technical assistance available to schools that want to increase parental involvement. The proposal does not answer the question of how further state intervention will fix the problem of inadequate parental involvement. For that reason, we recommend the Legislature reject this proposal.

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