Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

Proposition 98 Mandates

The 2002-03 Governor's Budget proposes to delay reimbursement of the $66.7 million budget-year appropriation for the School Bus Safety II mandate and suspend six other education mandates ($23 million) as shown in Figure 1. This proposal "frees up" $89.7 million of Proposition 98 funds for other K-14 spending proposed by the budget for 2002-03. (In the 2001-02 Third Extraordinary Session, the Legislature also took action to defer the current-year School Bus Safety II mandate appropriation.) Deferral of a mandate payment—as proposed for the School Bus Safety II mandate—does not free local agencies from the need to comply with the mandate's requirements. Suspension of a mandate—as proposed for the other six mandates mentioned above—would make the requirements permissive. The administration proposes to give effect to these suspensions through budget trailer bill language. Finally, the Governor's budget does not include funding for potential new 2002-03 mandates or outstanding mandate deficiencies.

We view these proposals as reasonable given the state's fiscal circumstances. We also think the Legislature can create further savings and improve efficiency in the area of education mandates without compromising education programs, as discussed below.

Background

In 1979, voters approved Proposition 4 (the Gann Limit) which, among other things, placed Article XIIIB, Section 6, into the California Constitution. This section states that when the state requires any local government entity to carry out a new program or higher level of service, the state shall provide funds to reimburse local governments for their costs.

The Commission on State Mandates (CSM) is responsible for determining whether a statute creates a state-reimbursable mandate. If the commission so determines, it develops an estimate of the statewide cost of the mandate. Usually, after CSM adopts a "statewide cost estimate," the administration proposes funds in the May Revision to reimburse local governments and the Legislature appropriates funds in a claims bill to pay for the newly approved mandates. Subsequent funding of mandate reimbursements occurs in annual budget acts. There are 45 mandates for which school districts, county offices of education, and community college districts currently receive reimbursements.

Governor's Budget

The 2002-03 Budget Bill provides $153.3 million of Proposition 98 funding for education mandates under Item 6110-295-0001. There are several categories of mandate liabilities, however, the state will eventually have to pay that are not reflected in the budget proposal. Figure 2 summarizes the following current and potential future mandate liabilities the state could face:

• Deferrals. The budget does not reflect the cost of current-year and budget-year deferral of School Bus Safety II mandate costs.
• Mandate Deficiencies. The Governor's budget also does not provide full funding for Proposition 98 mandate deficiencies. These deficiencies arise because the administration routinely underbudgets the cost of mandates. For example, CSM estimated a current-year deficiency of $193.8 million for Proposition 98 mandates, for which the 2001-02 Budget Act provided $62.5 million (Item 6110-485, Subdivision 15). Thus, the state faces a current-year Proposition 98 mandate deficiency of at least $131.3 million. In addition, the state will face potential 2002-03 mandate deficiencies, which we estimate could be in the range of $100 million. These accumulating deficiencies, in part, reflect the rapid growth of these mandate obligations.
• Newly Identified Mandates. Finally, the budget does not include funds for newly identified mandates even though it has been the policy to include a set-aside for this purpose in the budget. According to CSM, there are three new Proposition 98 mandates for 2002-03 that cost a total of $54.1 million—about $7 million of which is the annual ongoing cost and about $47 million due to prior-year and current-year costs.

We view the proposal for education mandates as reasonable under the state's fiscal circumstances, given that this approach helps minimize impacts on current education services. However, the state will be required to pay unfunded liabilities (with interest charges at the Pooled Money Investment Account rate—currently about 3 percent) at some point in the future. If the Proposition 98 guarantee increases substantially in the spring, we think the Legislature should consider funding at least some portion of these liabilities.

Mandates and Categorical Reform

We recommend, to the extent the Legislature chooses to enact our proposed block grants, that the Legislature redirect funding for related mandates to the grants. This would provide districts with increased funding flexibility and incentives to minimize mandate costs.

Although the mandate requirements of the California Constitution provide an important "check" on the ability of the state to impose new programs on local governments, the administrative process for claiming reimbursements has many shortcomings from the state's perspective:

• No Incentive to Minimize Costs. Since local education agencies (LEAs) receive full reimbursement from the state for costs of implementing mandate requirements, they have little incentive to manage costs and implement requirements efficiently.
• Administrative Burden. From both the state's and the locals' perspective, the mandate reimbursement process is time-consuming and costly. Claiming instructions and reimbursement forms are lengthy and intricate, generating much paperwork.
• Potential Disconnect With Policy Intent. Many mandates have been in place for years with little, if any, review of whether the mandate requirements still correspond to the Legislature's policy intent.

Benefits of Including Proposition 98 Mandates In Categorical Reform

To address the shortcomings mentioned above, we recommend that the Legislature redirect related mandate funding to our proposed categorical block grants. There are several advantages to such an approach. First, since school districts would be allowed to redirect their savings from mandate implementation to other education purposes permitted by the block grant, they would have an incentive to meet the requirements of the mandates in a cost-effective manner. This means that more funds could be devoted to real services to pupils rather than administrative costs. Second, our recommended approach eliminates existing incentives to maximize claims, a process that contributes to the large amounts of deficiency requests shown in Figure 2. Third, school districts' administrative costs would decrease because there would no longer be a need for the labor-intensive reimbursement process. Finally, districts would have an incentive to share information regarding which mandates appear, from their perspective, to no longer be cost-effective. This information would help the Legislature to periodically reassess the need for certain education mandates.

Mandates to Include in Categorical Block Grants

Elsewhere in this chapter of the Analysis we discuss reforming categorical program funding and recommend the following five categorical block grants:

• Academic Improvement Block Grant. Contains funding currently proposed through five ongoing and three one-time programs for a range of school improvement needs.
• Compensatory Education Block Grant. Combines eight programs for pupils who need additional services to be successful in schools into one block grant.
• Alternative Education Block Grant. Consolidates eight programs currently supporting low-performing students who are at risk of dropping out or entering the juvenile justice system.
• School Safety Block Grant. Consolidates three programs intended to ensure a safe, orderly, and crime-free school campus.
• Teacher Support and Development Block Grant. Consolidates 18 teacher preparation, induction, and professional development programs.

Based on our preliminary mandate review, we propose that the Legislature include in our recommended block grants the budgeted amounts of funding for 31 Proposition 98 mandates. The first "call" on these block grant funds would be to cover the costs associated with meeting the requirements of the specified mandates.

We think most of these mandates fit into either the Academic Improvement or the School Safety Block Grants. Figure 3 shows the mandates and the amounts we recommend including in the Academic Improvement Block Grant. We selected these mandates because, to some degree, they all support the academic environment and enrich opportunities for students and schools. Figure 4 shows the mandates we recommend including in the School Safety Block Grant.

One complication regarding this aspect of our proposal is that Proposition 98 mandates include claims from school districts, county offices of education (COEs), and community college districts. However, our proposed Academic Improvement Block Grant only includes school districts. To address this issue, we suggest redirecting 95 percent of the funding for each mandate assigned to this block grant, leaving 5 percent in Item 6110-295-0001 for COEs and community college districts. Based on data we had at the time this was written, we estimate that COEs represent a relatively small portion of the cost associated with education mandates and community college districts are affected by only a few of these mandates. If necessary, we will adjust our estimate of COE and community college mandate budgetary needs as we receive more data.

There is only one mandate, the expulsion transcripts mandate, we propose to include in the Alternative Education Block Grant. The Governor's budget provides $29,000 for 2002-03 for this mandate which, among other things, prohibits school districts from charging parents who have limited income for the cost of appealing a local board's decision to expel a pupil. We do not propose that any mandate funding be redirected to the Teacher Support and Development and the Compensatory Education Block Grants because we do not think any mandates fit into these areas. In the unlikely event that a school district's mandate cost is greater than the funding it receives through a proposed block grant, the school district would be eligible for state reimbursement of the unfunded portion of the cost of meeting the mandate requirements.

Other Mandate Issues

Below, we raise four other mandate issues.

Test Claims and Reimbursement Claims Mandate

We recommend that, to the extent the Legislature enacts our proposed block grants, it also reduce the appropriation for the Test Claims and Reimbursement Claims mandate by $6 million because school districts no longer would incur administrative costs related to the reimbursement process for the mandates included in our proposed block grants. (Reduce Item 6110-295-0001, Subdivision 10, by $6 million.)

Chapter 486, Statutes of 1975 (AB 1375, Knox), created a reimbursable mandate for the administrative costs associated with (1) filing an initial test claim and (2) the process and procedures set forth by the state to obtain reimbursement for state-mandated programs. Claimants are eligible for reimbursement for costs such as preparing and presenting test claims as well as salaries and benefits related to the reimbursement process. The Governor's budget provides $12.1 million for the Proposition 98 part of this mandate for 2002-03.

If the Legislature enacts our recommended block grants, we further recommend that the Legislature reduce the appropriation for this mandate because school districts would not incur administrative costs related to the reimbursement process for mandate funding redirected to the block grants. We estimate that the Legislature could save about $6 million due to decreased administrative costs for districts. These Proposition 98 funds could then be used for other K-14 education priorities. We would note that our proposal leaves funding for new test claims in the base for future years.

Collective Bargaining Mandates

The Governor's budget requests $41.5 million from the General Fund (Proposition 98) to reimburse K-14 districts for collective bargaining costs in 2002-03. Below, we examine this request in light of California Supreme Court rulings and mandate cost data provided by the State Controller's Office.

Background

Upon passage of the National Labor Relations Act of 1935, most private sector, nonagricultural employees had the right to bargain collectively over working conditions and the scope of employment. California's public sector employees and agricultural workers gained comparable rights through a series of state and federal laws enacted in the 1960s and 1970s. In general, the term "collective bargaining" refers to negotiations between an employer and employees to determine the conditions of employment (such as wages, hours, promotions, and benefits), as well as procedures for handling disputes between management and labor. Frequently, employees are represented at the bargaining table by a union or other labor organization. Collective bargaining laws vary in terms of the procedures specified to resolve negotiation impasses, such as arbitration, mediation, and fact-finding.

As Figure 5 shows, California's K-14 employees gained the right to bargain collectively by passage of Chapter 961, Statutes of 1975 (SB 160, Rodda), the "Rodda Act." In 1978, the Board of Control (predecessor agency to Commission on State Mandates) found that Chapter 961 imposed a state-reimbursable mandate on K-14 districts. Typical of board actions during this early era of mandate determinations, the board did not adopt a written explanation of its decision. In adopting the reimbursement methodology for the mandate (the mandate's "parameters and guidelines"), however, the board summarized its analysis. Specifically, the board stated that Chapter 961 included provisions requiring districts to meet and negotiate, and therefore created "a collective bargaining atmosphere for public school employees." Since this time, the Governor has included funds in the annual budget bill to reimbursement K-14 districts for costs incurred in the collective bargaining process.

Court Clarifies Term "Reimbursable Mandate"

While the state's obligation to reimburse local agencies for costs associated with a mandated "new program or higher level of service" has been part of California's state-local fiscal relationship for 30 years, the state's understanding of this fiscal obligation has evolved over time. In 1978, when the Board of Control considered whether Chapter 961 created a mandate, the reimbursement requirement was a statutory provision, waived frequently in the enactment of new legislation. California voters had not yet approved Proposition 4, placing the mandate provisions into the California Constitution. Accordingly, the Board of Control had scant legal precedent to guide its decision-making.

Beginning in the late 1980s, however, California appellate courts issued a series of opinions addressing the definition of a state-reimbursable mandate. The courts found that a "mandate" is created when the state requires local governments to provide a new or upgraded program to the public, or imposes a unique requirement on local governments that does not apply generally to residents and entities in the state.

In two landmark cases, summarized in Figure 6, the California Supreme Court ruled that state laws that extended worker compensation

and unemployment insurance protections to local employees did not constitute reimbursable mandates. Specifically, the court found that local government employer obligations were comparable to other employers, and were not attributable to providing a new program to the public. Together, these cases form the basis of what is commonly referred to as the "law of general applicability." That is, if a statute imposes similar obligations on the private and public sector, the public sector's costs to comply with the requirement do not constitute a state-reimbursable mandate.

Taking a Second Look at the Collective Bargaining "Mandate"

The Board of Control's approach to analyzing Chapter 961 was not consistent with the approach later outlined by the California Supreme Court. Instead of comparing Chapter 961's requirements with requirements for other employers, the board compared Chapter 961's requirements with local employment obligations in effect before enactment of the collective bargaining measure. After the California Supreme Court rulings, the state did not act to reconsider this (or any other) early mandate decision. This failure to reconsider mandates reflects, in part, a lack of attention extended to mandates—especially ones that "count" towards the Proposition 98 guarantee. The failure also reflects a weak link in the mandate determination process. Specifically, while the Commission on State Mandates has responsibility for rendering quasi-judicial initial determinations of state mandate obligations, the commission lacks legal authority to reconsider the merits of a decision once 30 days have passed.

Would Chapter 961 Meet the Modern Definition of a Mandate? While a full review of California's K-14 collective bargaining law is beyond the scope of this analysis, our review indicates that the general intent of the Legislature in passing Chapter 961 was to extend to K-14 employees the same collective bargaining rights widely available to other employees. Chapter 961 includes, however, some procedures pertaining to negotiation impasses, unfair labor practices, and public disclosure of collective bargaining proposals that may be considered to be in excess of the duties of other employers. These provisions might legitimately be considered mandates. To estimate the magnitude of costs imposed by these additional provisions, we reviewed a sample of collective bargaining mandate claims submitted to the Controller's Office. We found that the vast majority of K-14 district costs were for negotiating and administering the collective bargaining contract—responsibilities of any employer. The dispute resolution, unfair labor practice, and public disclosure requirements represent a small fraction of claimed costs, less than 10 percent.

Additional Policy and Budget Concerns

In preparation of this analysis, we reviewed five years of K-14 district mandate reimbursement claims. Our review raised several policy and budget concerns.

• Uneven Funding Distribution. Whenever a program is funded through the mandate process, rather than a statutory formula, the distribution of resources varies remarkably by district. The variation, however, seems to reflect local record keeping and claim filing practices more than policy objectives, need, or legislative intent. Figure 7 lists the K-12 districts that received the most money for collective bargaining during the five years between 1995-96 and 1999-00. Our review indicates that district collective bargaining reimbursements varied more than 20 fold when measured in terms of average annual reimbursement per student. As an example, claims submitted over the five years by districts with very similar size enrollments—Sacramento City, San Bernardino City, Garden Grove, and San Juan Districts—varied by a factor of almost 15.
• Efficiency Not Rewarded. Because the state reimburses district collective bargaining costs, districts face little incentive to undertake collective bargaining efforts efficiently.

• Budget Deficiency Likely. The Governor's budget routinely proposes insufficient amounts for education mandates, a practice that results in large deficiencies every spring. Based on mandate cost information from the State Controller's Office, we found that state costs for this mandate between 1995-96 and 1999-00 averaged $11.9 million more than was included in the respective Governor's budgets. After accounting for inflation and other factors, we estimate that K-14 mandate claims under this mandate will be about $54 million in 2002-03, or about $12.5 million more than is requested in the budget.

LAO Recommendation: Initiate Mandate Challenge

We recommend the Legislature initiate a reconsideration of this mandate by redirecting funds from the mandate appropriation to other legislative priorities and including language specifying that Chapter 961 no longer meets the criteria of a state-reimbursable mandate. (Reduce Item 6110-295-0001 by $41.5 million.)

Ideally, in cases like this, an administrative process would be in place to reexamine a mandate in light of modern legal rulings. While the Legislature may wish to create an administrative process, such an endeavor would take time and resources and may be of limited applicability. In the absence of an administrative reconsideration process, the authority to review mandates rests with the courts.

Given the shortcomings in the Board of Control's mandate determination and the policy and budget concerns discussed above, we recommend the Legislature initiate a process to cause a reconsideration of this mandate. Specifically, we recommend the Legislature eliminate funding for this program and include budget bill language with the schedule of mandate appropriations stating that Chapter 961 does not constitute a mandate consistent with the California Supreme Court rulings in the cases of County of Los Angeles v. State of California and City of Sacramento v. State of California. It is important to note that such an action would not affect any of the terms of Chapter 961. K-14 collective bargaining law would continue without modification. Districts, however, would need to pay the cost of collective bargaining from other resources.

Should a K-14 district wish to challenge this decision, it could file an action in court to compel the state to provide funding for this mandate pursuant to Government Code Section 17561. The court, in turn, would examine whether Chapter 961 poses a state-reimbursable mandate.

Budget Issues. We recommend the Legislature shift the $41.5 million provided for this mandate to other high priority education programs. In evaluating alternative uses of these funds, we recommend that the Legislature be cognizant of K-14 districts' continued need for funds to support their collective bargaining efforts. For example, the Legislature could (as we recommend elsewhere in this chapter) increase general purpose funding, which would grant maximum flexibility to local educational agencies to direct resources to collective bargaining or other district needs. Finally, should a court find that any portion of Chapter 961 constitutes a mandate, the state may be liable for the costs of these claims in the budget year, possibly including interest at the Pooled Money Investment Account Rate (about 3 percent). These mandate reimbursement costs, if any, could be funded with resources available under the Proposition 98 reversion account.

School Testing—Physical Fitness Mandate

We recommend that the Legislature delete funding proposed for the School Testing—Physical Fitness mandate because school districts and county offices of education (COEs) no longer are required to meet the provisions of this mandate. In addition, according to the State Controller's Office, school districts and COEs have not submitted any claims for reimbursement for this mandate since 1996. (Delete $696,000 in Item 6110-295-0001, Subdivision 39.)

The Governor's budget includes $696,000 from the General Fund (Proposition 98) for the School Testing—Physical Fitness mandate for 2002-03. This mandate had required school districts and COEs to conduct physical fitness tests. Chapter 760, Statutes of 1991 (SB 662, Hart), repealed the requirements of this mandate as of January 1, 1995. According to the State Controller's Office, it has not received any reimbursement claims for the School Testing—Physical Fitness mandate since 1996. Nevertheless, the budget has provided funding for this mandate since 1997-98 and provides $696,000 for 2002-03.

Chapter 975, Statutes of 1995 (AB 265, Alpert), reinstated different physical fitness testing for grades 5, 7, and 9 beginning in January 1996. These requirements led to the creation of a different mandate—the Physical Performance Tests mandate—that has a separate appropriation of $1.2 million in the budget bill (Item 6110-295-0001, Subdivision 24).

In view of the above, we recommend that the Legislature delete $696,000 of funding for the expired mandate. This action would free up $696,000 of budget-year Proposition 98 funds for other education priorities.

American Government Course Documents

We recommend that the Legislature enact legislation to make compliance with the requirements of the American Government Course Documents mandate voluntary because the state has since adopted content standards for History/Social Science that include the same requirements. Under the state's new assessment and accountability system, schools already are responsible for meeting these more recent requirements. (Delete $207,000 in Item 6110-295-001, Subdivision 40.)

The Governor's budget includes $207,000 for the American Government Course Documents mandate. Although the cost of this mandate is relatively small at present, the number of claims has increased significantly since 1996-97. Therefore, the cost of this mandate most likely will grow in the future. Chapter 778, Statutes of 1996 (AB 3086, Olberg), imposed several requirements on school districts related to American Government courses. Specifically, Chapter 778 requires that as part of the American Government and Civics courses necessary for high school graduation, school districts teach, and students read, the Federalist Papers, the Emancipation Proclamation, the Gettysburg Address, George Washington's Farewell Address, the Declaration of Independence, and the Bill of Rights.

State Content Standards Have Same Requirements. Chapter 975, Statutes of 1995 (AB 265, Alpert), created, among other things, the Commission for the Establishment of Academic Content Standards to develop academically rigorous content standards in core curriculum areas. Chapter 975 required the State Board of Education to adopt standards based on the commission's recommendation. In October 1998, SBE adopted the History/Social Science Content Standards for California Public Schools.

All of the requirements of the American Government Course Documents mandate are also part of the History/Social Science standards. For example, the standards specify that eighth grade students ". . . discuss Abraham Lincoln's presidency and his significant writings and speeches and their relationship to the Declaration of Independence, such as. . . Gettysburg Address. . . Emancipation Proclamation. . . " Eighth-graders also must read Washington's Farewell Address. The standards specify that 11^th grade students understand ". . . the debates on the drafting and ratification of the Constitution, and the addition of the Bill of Rights."

These standards serve as the basis for statewide assessment in history and social science. With the implementation of the statewide accountability system, schools already are responsible for providing curriculum aligned to these content standards. Thus, we recommend that the Legislature enact legislation to make compliance with the requirements of the American Government Course Documents mandate voluntary. This action would free up $207,000 of Proposition 98 funds for other education priorities and likely would save larger amounts in subsequent fiscal years.