Major Issues

The budget contains a number of major issues that raise the question of the role of the state in the design and operation of the K-12 system. There is no context, however, for determining whether these proposals reenforce the appropriate division of state and local responsibilities.

The state should develop a long-term framework that identifies the proper roles the state and local districts play in the areas of governance, finance, and standards. This framework would guide the Legislature in evaluating significant K-12 policy and budget proposals (see page E-17).

Legislature Faces Three Key Decisions in Developing Its 1998-99 K-12 Expenditure Plan

Level of the Guarantee. Our estimate of the 1998-99 minimum guarantee for K-12 education is $176 million less than the budget's. We have developed an alternative budget that differs significantly from the Governor's proposed plan (see page E-27).

Cost-of-Living Adjustment (COLA). The budget proposes a 2.22 percent COLA instead of the 4 percent COLA called for in statute. We recommend the lower amount as it more accurately reflects inflation that has occurred over the past year (see page E-30).

Longer School Year. This one proposal accounts for $350 million in new funds in the budget year. We recommend the Legislature reject the Governor's proposal because more days of the same type of instruction have not been found to improve student achievement (see page E-38).

Statewide Assessment Is Behind Schedule

The statewide test of applied academic skills will not be ready by spring 1999, as planned. We recommend the Legislature (1) delete $30.2 million proposed for the development and administration of this test and (2) allow test development to begin along with development of performance standards (see page E-49).

Budget Increases Proposition 98 Child Care Support of CalWORKs Program

The budget proposes to spend $88.5 million in Proposition 98 funds for child care services exclusively for CalWORKs recipients. The Legislature will want to review this proposal as it evaluates its priorities for the use of Proposition 98 and General Fund monies.

The budget also poses several implementation issues due to its proposal to divide administration of CalWORKs child care between the State Department of Education and county welfare departments. We recommend the Legislature take several actions to address these issues (see page E-58).

Overview

Figure 1 (see next page) shows the budget from all fund sources for K-12 education for the budget year and the two previous years. Proposition 98 funding constitutes about three-fourths of overall K-12 funding. In 1998-99, Proposition 98 funding is projected to increase by $222 per student to $5,635. This is a 4.1 percent increase from the revised 1997-98 per-student amount. (Our estimate reflects recent legislative changes that significantly revise the way average daily attendance [ADA] is counted. These changes are discussed in detail later in this Analysis.)

The budget also proposes to spend $472 million from prior-year Proposition 98 funds in 1998-99. As a result of increases in the minimum amounts guaranteed to schools in 1996-97 and 1997-98 (due primarily to higher tax revenues and increased ADA), the state owes schools $427 million more for those years (referred to as "settle-up" funds). An additional $46 million results primarily from unspent prior-year Proposition 98 funding.

Figure 1 also shows that the budget includes expenditures of $3.4 billion in federal funds in 1998-99. This is $88 million, or 2.6 percent, more than estimated federal expenditures in the current year. This change results primarily from a $68 million increase in special education funding.

School Districts by Type and Enrollment. A total of 5.5 million pupils attended school in California's 999 school districts in 1996-97. Figure 2 (see page 7) provides enrollment data by size of school district. Enrollment levels vary significantly among school districts. For example, the state's largest school district, Los Angeles Unified, enrolled 667,305 students in 1996-97, which is more than the combined enrollment of over 650 of the state's smallest school districts.

Figure 1
K-12 Education Budget Summary
1996-97 Through 1998-99 (Funding in Millions)
	Actual 1996-97	Estimated 1997-98	Proposed 1998-99	Change From 1997-98
				Amount	Percent
K-12 Proposition 98
State (General Fund)
Cash	$18,268.6	$20,194.4	$21,546.0	$1,351.6	6.7%
Loan repayment	150.0	200.0	250.0	50.0	25.0
Local property tax revenue	8,523.8	8,880.6	9,241.0	360.4	4.1
Subtotals, Proposition 98	($26,942.4)	($29,275.0)	($31,037.0)	($1,762.0)	(6.0%)
Other Funds
General Fund
Teachers retirement	$809.4	$876.9	$645.5	-$231.3	-26.4%
Bond payments	761.0	787.9	849.8	61.9	7.9
Other programsa	-95.6	393.5	231.1	-162.4	-41.3
State Lottery funds	585.3	656.5	755.1	98.6	15.0
Other state funds	51.2	66.6	59.1	-7.4	-11.2
Federal funds	2,760.6	3,350.3	3,438.0	87.6	2.6
Other local	2,590.0	2,584.2	2,587.2	3.0	0.1
Totals	$34,404.3	$37,991.0	$39,602.8	$1,611.9	4.2%
K-12 Proposition 98
Average Daily Attendance (ADA)b	5,238,926	5,370,279	5,462,947	92,668	1.7%
Amount per ADA (excluding loan)	$5,114	$5,414	$5,635	$221	4.1%
aIncludes unspent Proposition 98 funds and past-year "settle-up" funds.
bADA adjusted to exclude excused absences for all years.

Proposition 98

The minimum funding levels are determined by one of three specified formulas. Figure 3 (see next page) briefly explains the workings of Proposition 98, its "tests," and other major funding provisions. The five major factors involved in the calculation of each of the Proposition 98 "tests" include: (1) General Fund revenues, (2) state population, (3) personal income, (4) local property taxes, and (5) K-12 ADA.

Because these factors change during the year, the minimum guarantee under Proposition 98 also changes. Any additional amount needed to fund any increase in a previous year's guarantee is referred to as Proposition 98 "settle-up" funding. The Governor's budget includes $478 million related to "settle-up" for prior years for both K-12 and community colleges ($147 million from 1996-97 and $331 million from 1997-98).

Figure 2
Distribution of School Districts by Enrollment October 1996
	Number of Districts				Enrollment
Enrollment Level	Elem	High School	Unified	Total	Total	Percent of Total
More than 200,000	--	--	1	1	667,305	12.0%
100,000 to 199,999	--	--	1	1	133,687	2.4
50,000 to 99,999	--	--	6	6	379,491	6.8
40,000 to 49,999	--	--	3	3	138,789	2.5
20,000 to 39,999	2	5	35	42	1,164,453	21.0
10,000 to 19,999	22	11	55	88	1,252,072	22.5
5,000 to 9,999	50	18	60	128	905,320	16.3
2,500 to 4,999	63	21	52	136	475,943	8.6
1,000 to 2,499	91	21	48	160	280,187	5.0
500 to 999	90	18	21	129	93,813	1.7
Less than 500	267	10	28	305	62,215	1.1
Totals	585	104	310	999	5,553,275	100.0%
Data exclude county offices of education. Grand total including county offices is 5,612,965.

Figure 3

Proposition 98 at a Glance

Funding "Tests"

Proposition 98 mandates that a minimum amount of funding be guaranteed for K-14 school agencies equal to the greater of: A specified percent of the state's General Fund revenues (Test 1), or The amount provided in the prior year, adjusted for growth in students and inflation (Tests 2 and 3).

Test 1--Percent of General Fund Revenues Approximately 34.5 percent of General Fund plus local property taxes.

Requires that K-12 schools and the California Community Colleges receive at least the same share of state General Fund taxes as in 1986-87. This percentage was originally calculated to be slightly greater than 40 percent. In recognition of shifts in property taxes to K-14 schools from cities, counties, and special districts, the current rate is approximately 34.5 percent.

Test 2--Adjustments Based on Statewide Income Prior-year funding adjusted by growth in per capita personal income.

Requires that K-12 schools and the California Community Colleges receive at least the same amount of combined state aid and local tax dollars as was received in the prior year, adjusted for statewide growth in average daily attendance and inflation (annual change in per capita personal income).

Test 3--Adjustment Based on Available Revenues Prior-year funding adjusted by growth in per capita General Fund.

Same as Test 2 except the inflation factor is equal to the annual change in per capita state General Fund revenues plus 0.5 percent. Test 3 is used only when it calculates a guarantee amount less than the Test 2 amount.

Other Major Funding Provisions

Suspension

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

Restoration ("Maintenance Factor")

Proposition 98 includes a provision to restore prior-year funding reductions (due to either suspension or the "Test 3" formula). The overall dollar amount that needs to be restored is referred to as the "maintenance factor."

Proposition 98 Allocations by Segments

The budget proposes $35 billion for Proposition 98 in 1998-99. The shares allocated to the three components remain virtually unchanged from the 1997-98 revised shares. Community College Proposition 98 funding issues are discussed in the Higher Education section of the Analysis(please see Section F).

Figure 4
Proposed 98 Allocations
1997-98 and 1998-99 (Dollars in Millions)
				1998-99 Proposed	Change From 1997-98 Revised
		1997-98
	Budget Act	Revised	Change
Proposition 98
"Test"	Test 2	Test 2	--	Test 3	--
Total Proposition 98	$32,464.4	$32,692.7	$228.3	$34,681.8	$1,989.1
K-12 Education
Amount	$29,062.4	$29,275.0	$212.6	$31,037.0	$1,762.0
Share	89.5%	89.5%		89.5%	--
Community Colleges
Amount	$3,313.6	$3,329.3	$15.7	$3,554.4	$225.1
Share	10.2%	10.2%		10.2%	--
Other Agencies
Amount	$88.4	$88.4	--	$90.4	$2.0
Share	0.3%	0.3%		0.3%	--

Governor's Budget Proposals

Prior-Year Proposition 98 Funds

• $180 million for school site block grants.
• $136 million due to a downward revision of local property taxes.
• $60 million for the High School Education Technology Incentive Grant Program.
• $40 million for a new mathematics staff development program.

We discuss the proposals shown in Figure 5 later in this Analysis.

1998-99 Budget Proposals

The major budget proposals include:

• $507.1 million for enrollment growth, based on a projected ADA increase of 1.73 percent in 1998-99.
• $657 million to provide a 2.22 percent cost-of-living adjustment (COLA).
• $350 million to buy-out eight staff development days.
• $135 million to expand the deferred maintenance program.
• $123.5 million to expand child care programs.

We discuss the details of these proposals later in this Analysis.

Proposition 98 Spending by Major Program

Except for revenue limits, the largest K-12 program is special education. Special education funding is expected to increase by $104 million in 1998-99. The class size reduction program, started in 1996-97, will be the second largest categorical program in 1998-99, with proposed expenditures of $1.5 billion. Funding for other categorical programs within the categorical mega-item is expected to increase by $109 million due to the provision of growth and COLA.

Figure 6
Governor's K-12 Budget Proposals (General Fund) 1998-99 Proposition 98
(In Millions)
1997-98 (revised)	$20,194.4
Enrollment Growth
Revenue limits	$359.6
Categorical programs	147.3
Subtotal	($506.9)
Cost-of-Living Increases
Revenue limits	$474.0
Categorical programs	183.0
Subtotal	($657.0)
Funding Adjustments
Child care	$44.0
Voluntary desegregation	19.3
Other	1.2
Subtotal	($64.5)
Program Expansion
Staff development day buy-out	$350.0
Deferred maintenance	135.0
Child care	123.5
Digital high school	26.0
Staff development programs	20.9
Test administration	20.2
High-risk youth	20.0
Other	14.9
Subtotal	($710.5)
New Programs
Deficit factor buy-out	$52.9
Remedial summer school, grades 3 - 6	10.0
Zero tolerance	6.2
Subtotal	($69.1)
Offsetting Adjustments
One-time funding in 1997-98	-$296.1
Property tax growth	-360.3
Subtotal	(-$656.4)
1998-99 (proposed)	$21,546.0
Change From 1997-98 (revised)
Amount	$1,351.6
Percent	6.7%

Figure 7
Major K-12 Education Programs Funded by Proposition 98 General Fund
1997-98 and 1998-99 (Dollars in Millions)
	Estimated 1997-98	Proposed 1998-99	Change From 1997-98
			Amount	Percent
Revenue Limits
Schools and counties	$20,505.8	$21,332.8	$826.9	4.0%
Local revenuea	8,709.8	9,062.6	352.8	4.1
Subtotals, revenue limits	($11,796.0)	($12,270.2)	($474.2)	(4.0%)
Mega-Item
Desegregation	$588.9	$613.9	$25.0	4.2%
Economic impact aid	384.9	401.2	16.3	4.2
Home to school transportation	502.0	523.4	21.3	4.2
School improvement	378.6	394.7	16.1	4.2
Instructional materials	165.1	172.1	7.0	4.2
Other programs	552.9	576.4	23.5	4.2
Subtotals	($2,572.4)	($2,681.6)	($109.2)	(4.2%)
Other Programs
Special education	$2,027.2	$2,130.8	$103.6	5.1%
Class size reduction	1,488.5	1,546.1	57.6	3.9
Child development	621.1	803.2	182.1	29.3
Adult education	475.3	498.0	22.7	4.8
ROC/P	292.6	309.5	16.9	5.8
Summer school	164.9	180.8	15.9	9.6
Mandates	137.2	140.9	3.7	2.7
Staff development day buy-out	50.0	400.0	350.0	700.0
Digital high school	50.0	76.0	26.0	52.0
Deficit factor buy-out	--	52.9	52.9	n/a
Deferred maintenance	--	135.0	135.0	n/a
Other	519.1	320.9	-198.2	-61.8
Subtotals	($5,826.0)	($6,594.2)	($768.3)	(13.2%)
Totals	$20,194.4	$21,546.0	$1,351.6	6.7%
aLocal revenue is from local property taxes and is included to show the full amount provided for revenue limits.