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

Charter Schools

Background

The budget provides $49.7 million from the General Fund (Proposition 98) for the charter school categorical block grant (CSCBG), an increase of $8.4 million, or 20 percent, from estimated expenditures in the current year. The Department of Finance (DOF) proposed the 20 percent increase as a "placeholder" for growth and cost-of-living adjustments, due to uncertainties in projecting charter school enrollment growth. The May Revision will update these estimates. Chapter 34, Statutes of 1998 (AB 544, Lempert), required the State Department of Education (SDE) to develop a new "direct block grant" funding model for charter schools. Prior to adoption of the direct funding model, charter schools received funding on a program-by-program basis through negotiation with their sponsoring school district or county office of education. Chapter 78, Statutes of 1999 (AB 1115, Strom-Martin), adopted the charter school direct funding model developed by SDE, which provides funding to charter schools through three funding streams:

• Revenue Limit. Charter schools receive revenue limit funding equal to the state average revenue limit as determined by type (elementary, high school, or unified).
• CSCBG. The block grant provides schools a per-pupil amount equivalent to what school districts receive on average through a set of specified categorical programs (see discussion below).
• Direct Application Programs. Charter schools can apply directly for programs not included in the block grant, and must adhere to all laws governing these
• programs to be eligible for funding. These programs include K-3 class size reduction, staff development buyout, after school and summer school programs, home-to-school transportation, and many other programs. This list of programs has been growing each year.

Charter School Access to Revenue Limit Funding Sunsets

We recommend that the Legislature enact urgency legislation to extend the sunset of statutes providing charter schools with revenue limit funding.

As established by Chapter 78, Education Code Section 14002 (f) and (g) provide charter schools with a continuous appropriation of revenue limits. These provisions will sunset on July 1, 2002, after which charter schools no longer will be able to receive revenue limit funding unless the Legislature either extends the sunset, or provides some alternative funding mechanism.

AB 1132 (Canciamilla), introduced in the current legislative session, proposed to extend the revenue limit provision of the charter school direct funding model by two years, as well as make numerous other changes to charter school law. The two-year extension would have provided the Legislature an opportunity to review the revenue limit funding mechanism following completion of the legislatively mandated evaluation of charter school effectiveness that will be submitted by RAND by July 1, 2003. Because of other provisions of AB 1132, the Governor vetoed the bill.

Without a change in statute, charter schools would not be able to receive revenue limit funding in the budget year either directly from the state or indirectly through their school districts. Revenue limit funding represents approximately 60 percent of the funding received by charter schools. We recommend the Legislature enact legislation to extend the sunset to July 1, 2004 to continue to provide charter schools direct access to revenue limit funding. We recommend the Legislature take this action on an urgency basis to ensure that charter schools continue to have access to these funds for the 2002-03 fiscal year.

Extending Grandfather Clause for Charter School Direct Funding Model Would Save $15 Million in One-Time Costs

We recommend that the Legislature extend a grandfather clause allowing some charter schools to opt out of the direct funding model. Extending the grandfather clause would enable the state to avoid an unbudgeted cost of $15 million in 2002-03.

Chapter 78 provided a "grandfather" clause that gave existing charter schools the option of not participating in the direct funding model during the grant's first three years of existence. Many charter schools took advantage of the option to continue their current funding relationship with their sponsoring districts. The SDE estimates that around 39,000 average daily attendance (ADA) attend charter schools opting out of the direct funding model. Many of the schools choosing to opt out of the funding model are conversion schools (charter schools that previously were noncharter public schools). Conversion charter schools often maintain strong fiscal ties with their sponsoring school districts.

Under current law, beginning in the budget year, all charter schools will have to participate in the direct funding model. We estimate that the increased cost of bringing the additional charter schools into the direct funding model will be around $15 million annually. At some point, these additional costs would be roughly offset by reductions in the costs of the categorical programs on which the categorical block grant was based. The state, however, faces a one-time transition cost of approximately $15 million. The Governor's budget makes no provision for this one-time cost.

The Legislature has three basic options to address the expiration of the grandfather clause:

• Plan for an additional cost of approximately $15 million for the categorical block grant in the 2002-03 Budget Act.
• Plan reductions of approximately $15 million in the 34 original categorical programs and newly created categorical programs that are the basis for the categorical block grant for the 2002-03 budget.
• Extend the grandfather clause.

We recommend that the Legislature extend the grandfather clause for two years. By 2004, the Legislature will be able to consider the direct funding model as part of reauthorization of charter school law. Also, the findings of the evaluation of charter school effectiveness will be complete, and may assist the Legislature in improving the funding model. Finally, extension of the grandfather provision would enable the state to avoid an unbudgeted cost of $15 million in 2002-03.

Charter School Funding Model Removes Legislative Discretion

We recommend the Legislature amend the funding calculation for the charter school categorical block grant to reflect the appropriation level made in the annual budget bill and accompanying legislation, instead of the funding level proposed by the Department of Finance at May Revision.

As discussed above, Chapter 78 created the CSCBG to provide funding in lieu of any categorical programs for which charter schools are not required to apply separately. In the first year the block grant operated, charter schools received funding in lieu of 34 specific categorical programs. Since the Legislature knew that new categorical programs would be created over time, Chapter 78 requires DOF to submit annually at the May Revision the growth rate in funding for categorical programs for which charter schools are not required to apply separately. Because the DOF is required to make the calculation at May Revision, DOF can determine, for purposes of the block grant calculation, which programs require charter schools to apply separately. Requiring the CSCBG funding amount to be based on the May Revision proposals causes four problems:

• Difficult to Make Calculation at May Revision. The original rationale for having DOF conduct the calculation at May Revision was to (1) assist DOF in determining the funding level needed for the CSCBG, and (2) assist charter schools in developing their budgets earlier. The earliest that DOF has calculated the per pupil amount of the CSCBG is the end of July, over a month after the final budget has been adopted. So, neither of the supposed benefits of basing the calculation on the May Revision are being realized.
• Removes Legislative Authority. The DOF administratively determines which categorical programs are in the CSCBG even if the Legislature disagrees. For example, the 2001-02 Governor's Budget proposed trailer bill language to remove the Elementary School Intensive Reading Program from the CSCBG, and instead allow charter schools to apply separately for the program. This would have required charter schools to adhere to all laws and regulations governing the program in order to receive funding. The Legislature rejected the DOF proposal. However, DOF's calculation of the per ADA funding level for the CSCBG excluded the reading program funds from
• the block grant because that had been the May Revision proposal. This calculation prevailed due to the current wording of Chapter 78's provision for adjusting CSCBG funding. This reduced funding for schools participating in the block grant by about $300,000. However, because the Legislature rejected the proposed DOF trailer bill, charter schools also could not apply separately for the reading program, thus losing access to program funds. In this example, an administrative action by DOF prevailed over a formal legislative vote and created an irrational "Catch-22" for the charter schools.
• The CSCBG Calculation Does Not Reflect Actual Budget Adopted by Legislature. Because the CSCBG funding level is determined by the May Revision proposal, not legislative action, the CSCBG amount is based on funding levels that inevitably differ from the funding levels adopted in the annual budget act.
• Difficult for Stakeholders to Verify DOF Funding Calculation. Because much of the fiscal data needed to make the CSCBG calculation is not publicly available at the time of the May Revision, it is difficult for anyone, to verify the DOF calculation. Last year, for example, we had numerous technical concerns with DOF's calculation. We were able to resolve some of the issues with DOF, but could not agree on others. Members of the charter school community have had similar difficulty in verifying the accuracy of the DOF calculation. If the calculation were based on the final budget decisions, the fiscal information needed to make the calculation would be available publicly, and the calculation would be more transparent.

Because the current CSCBG calculation negates the Legislature's authority and causes other problems, we recommend the Legislature amend statute to have DOF calculate the CSCBG funding level based on the final adopted budget and accompanying legislation. Implementing this recommendation would eliminate all of the point-in-time problems that arise from basing the amount on the administration's May Revision proposals and restore legislative authority.