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

Discretionary Funding

We recommend that, to the extent possible, the Legislature increase revenue limit funding for school districts and county offices of education because additional general purpose funds enhance the ability of schools to improve student outcomes in ways that suit varying local circumstances and needs. Based on resources available from various spending reductions that we recommend in this Analysis, we recommend that the Legislature appropriate $75 million for equalization and $100 million to begin a phase-out of the so-called Public Employees' Retirement System reduction of revenue limits.

Relatively Little Local Discretion Over New Spending

A significant feature of the proposed budget is the relative absence of new ongoing general purpose funds for local school districts and county offices of education above increases required by law. These statutorily required adjustments in fully discretionary funds are (1) cost-of-living adjustments (COLAs) and enrollment growth adjustments to revenue limit funding (less than $1.4 billion), and (2) changes in the charter school block grant amount ($6 million). The budget does include a one-time general purpose amount of $270 million as part of a proposed settlement of the special education mandate case. That proposed settlement also requires ten annual payments of $25 million available for general purposes, beginning in 2001-02. (See the "K-12 Introduction" section of this chapter for a detailed description of the settlement agreement.) The new ongoing funds for general purposes, totaling $1.4 billion, represent substantially less than half of the $3.2 billion in new ongoing Proposition 98 funding for K-12 education proposed in the Governor's budget.

This budget would resume a long-term trend in reduced local discretion over K-12 education spending that was briefly interrupted by the infusion of $1.84 billion in the 2000-01 Budget Act to eliminate a statutory "deficit" in revenue limits. Figure 1 depicts this trend by showing general purpose funding as a percent of total K-12 Proposition 98 funding.

In our view, this decline in local discretion over spending runs counter to the increased emphasis the state has placed on accountability in K-12 education in recent years. If the state is going to hold local school districts accountable for improving student performance, it is essential that these same districts be given the resources and local budgetary discretion to allocate resources based on local needs. Without these resources and flexibility, districts are severely constrained in their ability to make necessary changes and improvements in programs and operations. (For a more detailed discussion of the need for local flexibility within a school accountability system, see our report entitled, A K-12 Master Plan, May 1999).

Background on Revenue Limits

Revenue limits provide general purpose support for school districts and county offices of education. When instituted in 1972, the revenue limit was calculated to be equal to the per-student amount of general purpose student aid and local property taxes that a district received in the 1972-73 fiscal year. Due to this origin, revenue limits vary across districts reflecting historical funding disparities. 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 districts. Currently, approximately two-thirds of state support to K-12 school districts is provided through the revenue limits. Each year, as required by statute, revenue limit funding is adjusted for changes in average daily attendance (ADA) and COLA.

Revenue Limit Equalization

The Legislature has periodically enacted legislation to reduce disparities in revenue limits among the state's school districts. One approach to equalization has been to provide a larger COLA to low-revenue-limit school districts to gradually reduce funding disparities. Examples of this include Chapter 894, Statutes of 1977 (AB 65, L. Greene) and the current COLA model established by Chapter 498, Statutes of 1983 (SB 813, Hart).

Another approach to equalization has been providing periodic "leveling-up" funds for districts with low revenue limits. Under this approach, a large infusion of funding is provided to significantly increase the revenue limits of low revenue limit districts. The amount of equalization aid for which a district qualifies depends on the amount necessary to bring its revenue limit up to a specified funding target (commonly, the average revenue limit for districts of the same size and type).

Equalization Recommendation. If the Legislature chooses to provide funding to further equalize school district revenue limits, we recommend that it specify a practical equalization goal. For example, the Legislature might specify a goal of equalizing revenue limits for 90 percent of the state's ADA. We estimate that achieving this equalization target would cost approximately $400 million annually. Based on resources available from various spending reductions that we recommend in this Analysis, we recommend that the Legislature appropriate $75 million towards such an equalization target in 2001-02. This level of augmented funding, if followed by similar augmentations in the subsequent four to five fiscal years, would result in 90 percent of the state's ADA receiving the same revenue limit (within each of the six district types).

The PERS Reduction

The Public Employees' Retirement System (PERS) reduction is an Education Code provision that reduces each school district's revenue limit payments by the amount attributed as "savings" related to district contributions to PERS. Through a complex series of calculations, this provision reduces each school district's revenue limit payments on the basis that school district costs for contributions to PERS are less today than they were in the 1982-83 fiscal year. In effect, current law "captures" for the state all savings that otherwise would accrue to school districts from reduced employer contribution rates for PERS. It was solely for the purpose of strengthening the state's budget condition that this provision was adopted in 1981. The state does not adjust revenue limit payments for changes in the cost of other specific education inputs (such as maintenance, utilities, or payroll).

Recommend Phase-Out of PERS Reduction. Eliminating or reducing the PERS reduction would be accomplished by eliminating or modifying the Education Code provision that requires the adjustment. We estimate that a complete buyback of the PERS reduction would cost approximately $550 million annually. As with equalization, elimination of the PERS reduction provision could be staged over several years. Providing funds in this manner would give additional general purpose revenues to school districts and send an important "signal" to school districts that they need to be responsible for future changes in PERS employer rates. Based on resources available from various spending reductions that we recommend in this analysis, we recommend that the Legislature allocate $100 million to begin a phase-out of the PERS reduction. This level of augmented funding, followed by similar augmentations in each of the four to five subsequent fiscal years, would fully eliminate the PERS reduction.