Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

K-12 Education Introduction

The budget includes an increase in K-12 Proposition 98 funding of almost $3.2 billion in the budget year. This is $479 per pupil, or 7.1 percent, more than the revised estimate of per-pupil expenditures in the current year.

Figure 1 shows the budget from all significant sources for K-12 education for the budget year and the two previous years. As the figure shows, Proposition 98 funding constitutes over three-fourths of overall K-12 funding. For 2001-02, the budget proposes to increase K-12 Proposition 98 funding by almost $3.2 billion above revised current-year estimated expenditures. This represents an increase of $479 per pupil, or 7.1 percent, on an average daily attendance (ADA) basis, bringing Proposition 98 per-pupil spending to $7,174.

Spending for K-12 education from all sources is projected to increase by nearly $3 billion, or 6 percent, above the current-year level. This reflects the budget's estimate that several non-Proposition 98 funding sources either will not grow or will decline. This estimate, however, probably understates the resources that will be available. For example, as we discuss elsewhere in this chapter, the state will be receiving a considerable amount of federal funds in the budget year that are not included in the budget.

Governor's Budget Proposals

The budget proposes a General Fund K-12 Proposition 98 funding increase of approximately $2.3 billion. The budget estimates an increase in local property taxes allocated to school districts and county offices of education of $884 million, which brings the total Proposition 98 increase for K-12 education to more than $3.2 billion. The administration, however, miscalculated its estimate of property tax revenues to be allocated to school districts during the current and budget years. This miscalculation results in an overstatement of property tax revenues to the schools of $74 million in 2000-01 and $108 million in 2001-02. This overstatement does not affect the total amounts of Proposition 98 funds available to schools in either fiscal year, but does affect the budget's estimate of the portion that must be contributed from the state General Fund. Thus, this error causes the budget to overstate the General Fund reserve by a total of $182 million.

Figure 2 highlights the significant changes proposed for K-12 Proposition 98 funds in the budget year. Major changes include:

• $1.4 billion for a 3.91 percent cost-of-living-adjustment (COLA).
• $463 million for enrollment growth, based on a projected ADA increase of 1.08 percent in 2001-02.
• $335 million to train teachers in instruction of mathematics and English based on the state's new academic content standards.
• $125 million for settlement of a long-standing special education mandate claim. The settlement also proposes a one-time payment of $270 million, attributed to 1999-00 for Proposition 98 purposes.
• $123 million to increase awards to schools under the Governor's Performance Awards program to the statutory maximum of $150 per ADA.
• $100 million for initial implementation of an incentive program to extend the school year from 180 days to 210 days in "middle school grades" (grades 6 through 9, depending on school configuration). The annual cost of this program could approach or exceed $1 billion by 2003-04.

Proposition 98 Spending by Major Program

Figure 3 shows Proposition 98 spending for major K-12 programs. "Revenue limit" funding (available for school districts and county offices to spend on general purposes) accounts for $27.2 billion in 2001-02, or nearly two-thirds of Proposition 98 expenditures. The state General Fund supports about 58 percent of revenue limit funding, and local property taxes provide the remaining 42 percent.

The largest "categorical" program (an expenditure earmarked for a specified purpose) is special education. The budget proposes to increase special education funding by $285 million, or 12 percent, to a total of $2.7 billion from Proposition 98 sources. Class size reduction in K-3 and 9^th grade is the second largest categorical spending program in 2001-02 at almost
$1.8 billion. A modest increase of $19 million (1.1 percent) is due to the COLA, offset slightly by a downward revision in estimated K-3 enrollment.

One-Time Spending

The budget proposes over $700 million of one-time spending on Proposition 98 programs. These spending proposals are funded largely by unspent balances from prior appropriations, but also in part from the state's General Fund reserve. Figures 4, 5, and 6 detail the sources and uses of one-time funds according to the fiscal year that the budget attributes appropriations for Proposition 98 purposes.

Prior Year. Figure 4 shows proposed sources and uses of funds for one-time purposes that the budget attributes to the 1999-00 fiscal year. The major spending items are (1) a one-time $270 million payment that is part of the proposed settlement of the special education mandate claims and (2) a $72 million adjustment for revenue limit payments based on final attendance data. As the figure shows, the $347 million total of proposed expenditures exceeds available resources from prior-year Proposition 98 savings, thus, requiring $189 million from the General Fund.

Current Year. As Figure 5 indicates, the budget estimates that $226 million of savings from previous Proposition 98 appropriations is available for reallocation in the current year. The budget proposes one-time reallocations totaling $86 million, leaving $140 million uncommitted. As mentioned above, however, the administration miscalculated its estimate of General Fund savings resulting from property tax allocations to school districts. As a result, savings to the General Fund would be about $66 million.

Budget Year. Figure 6 shows estimated Proposition 98 savings of $273 million available for one-time reallocation in 2001-02. These one-time savings include $130 million arising from implementation delays on recently authorized summer school programs, and $40 million arising from implementation delays on current-year expansion of child care services. The budget proposes spending all but $939,000 of these estimated savings. The largest single expenditure is $224 million in Item 6110-485 to reimburse estimated prior-year and current-year costs of a mandate for school bus safety improvements required by a series of legislation between 1994 and 1997. The budget also includes $67 million from the General Fund (Proposition 98) for the budget-year costs of this mandate. The Commission on State Mandates estimates that the state will be responsible for similar annual costs in the future. The $67 million will be included in the annual mandates claims bill.

K-12 Education Reforms

Figure 7 lists some of the major K-12 school reforms enacted by the Legislature or by the voters in the last decade. The list is meant to be illustrative rather than exhaustive. Particularly in the last several years, numerous significant reforms have taken place in K-12 education. Indeed, one of the challenges facing local school districts has been to coordinate the implementation of interrelated, and sometimes conflicting, reforms—often over very short time frames.

Enrollment Trends

Enrollment growth significantly shapes the Legislature's annual K-12 budget and policy decisions. When enrollment grows slowly, for example, fewer resources are needed to meet statutory funding obligations for revenue limits and K-12 education categorical programs. This leaves more General Fund resources available for other budget priorities both within K-12 education and, potentially, outside it. Conversely, when enrollment grows rapidly (as it did in the 1980s), schools face greater challenges in supplying enough teachers to meet demand. In light of the important implications of enrollment growth, we describe below two major trends in the K-12 student population.

The enrollment numbers used in this section are from the Department of Finance's Demographic Research Unit, and reflect aggregate, statewide enrollment. While the enrollment trends described here will likely differ from those in any one particular school district, they reflect the overall patterns the state is likely to see in the near future.

K-12 Enrollment Growth to Slow Significantly

K-12 enrollment is projected to increase by 1 percent in 2001-02, bringing total enrollment to just over 6 million students. Figure 8 shows how enrollment growth has slowed since 1996-97 and is projected to continue slowing through 2008-09. This slowing trend is expected to result in an actual decrease in the number of pupils enrolled beginning in 2007-08. This contrasts with growth averaging 2.3 percent annually during the 1990s.

Divergent Trends in Elementary and High School Enrollment

Figure 9 shows that the steady decline in K-12 enrollment growth masks two distinct trends in elementary (grades K-6 ) and high school (grades 9-12) enrollment. Elementary school enrollment growth has gradually slowed since 1996-97. Growth rates are expected to become negative in 2001-02 and remain negative through 2007-08. Over this period, elementary school enrollment is expected to decline by 180,000 pupils (5 percent).

In contrast, high school enrollment growth is expected to accelerate in the short term, reaching a 3.7 percent growth rate in 2004-05. Then, growth is expected to slow sharply, becoming negative in 2008-09. Expected growth over the next seven years is slightly over 300,000 pupils (18 percent).

Budget and Policy Implications

These trends have significant budgetary and policy implications for issues such as class size reduction, teacher demand, and facilities investment. A few of the major implications include:

• Each 1 percent increase in K-12 enrollment requires an increase of approximately $400 million (General Fund) to maintain annual K-12 expenditures per pupil.
• As enrollment growth slows, a smaller share of the state's new revenues will be consumed by costs associated with funding additional pupils. The Legislature will then have the option of devoting these revenues to increasing per-pupil spending or to other budget priorities.
• In the near term, programs aimed at elementary grades will face reduced cost pressures related to enrollment. Programs aimed at high school grades will face increased cost pressures. This could present cost challenges for many unified school districts because per-pupil costs of educating high school students tend to be higher than for elementary school students, and unified district revenue limits are not adjusted for changing proportions of these students.
• Pressures created by K-3 class size reduction on supply of both credentialed teachers and classroom space should ease somewhat.

Special Education Settlement Agreement

Background. In November 2000, the administration reached a settlement agreement with school districts and county offices of education (referred to as local educational agencies [LEAs]) that had filed claims for the cost of certain special education programs. The agreement ends a 20-year-old lawsuit in which LEAs alleged that the state mandated eight special education activities in excess of federal requirements without providing additional funds. This agreement also includes settlement of a separate mandate claim by Long Beach Unified School District regarding provision of services for students, ages 3 to 5 and 18 to 21.

Major Provisions of the Proposed Settlement Agreement. The major provisions of the agreement include:

• A $270 million one-time payment, virtually all of which goes to LEAs for general educational purposes to cover prior-year costs. This amount is attributed to the 1999-00 fiscal year for Proposition 98 purposes.
• A series of one-time payments to LEAs of $25 million per year in ten installments starting in 2001-02 for general educational purposes.
• $100 million of ongoing annual payments to Special Education Local Plan Areas beginning in 2001-02 to increase basic funding for special education.
• The LEAs waive their right to contest the settlement and to file any further special education claims unless special education law changes to create further mandates.

Conditions for the Agreement to Take Effect. In order for the agreement to take effect, the following events must occur:

• By January 31, 2001, at least 85 percent of the LEAs, representing at least 92 percent of the statewide K-12 attendance, must sign off on the settlement. At the time this was written, it appeared that this threshold would be met. Indeed, it appears that all, or nearly all, LEAs will approve the agreement.
• The parties seek a superior court ruling that the settlement is final and binding.
• The Legislature enacts legislation to approve and fund the agreement.

Other Considerations. These payments would not directly affect the state's long-term minimum funding requirement under Proposition 98. The budget eliminates any effect on the base from the $270 million payment for retrospective costs by attributing the payment to the 1999-00 fiscal year. The combined $125 million payable in 2001-02 has no direct effect because the total of Proposition 98 appropriations proposed by the budget for 2001-02 does not exceed the long-run commitment set by "test 2" of Proposition 98 (an estimated $46.4 billion of General Fund and local property tax revenue).

Under this agreement, the mandate claim is resolved only if the Legislature approves the terms of the settlement without substantive change. In other words, the agreement presented to the Legislature is a "take it or leave it" proposition. Adoption of the settlement would "close the books" on this issue.