LAO 2003-04 Budget Analysis: Education

Legislative Analyst's Office

Analysis of the 2003-04 Budget Bill


The Governor's budget includes a total of $52.1 billion in operational funding from state, local, and federal sources for K-12 schools for 2003-04. This is a decrease of $1.4 billion, or 2.7 percent, from estimated expenditures in the current year. The budget also includes a total of $30.3 billion in state, local, and federal sources for higher education. This is an increase of $447 million, or 1.5 percent, over estimated expenditures in the current year.

Figure 1 shows support for K-12 and higher education for three years. It shows that spending on education will reach $82 billion in 2003-04 from all sources (not including capital-related spending).

Figure 1

K-12 and Higher Education Funding

2001-02 Through 2003-04 (Dollars in Millions)


Actual 2001-02

Estimated 2002-03

Proposed 2003-04

Change From 2002-03









Higher educationb












a Includes state, local, and federal funds. Excludes debt service for general obligation bonds.

b Includes state, federal, and local funds. Excludes direct capital outlay spending and debt service for general obligation bonds.

Funding Per Student

The Proposition 98 request for K-12 in 2003-04 represents $6,723 per student, as measured by average daily attendance (ADA). Proposed spending from all funding sources (excluding capital outlay and debt service) totals about $8,750 per ADA.

The Proposition 98 budget request for California Community Colleges (CCC) represents $3,790 per full-time-equivalent (FTE) student. This compares to proposed General Fund spending of $7,816 for each California State University (CSU) FTE student and $16,754 for each University of California (UC) FTE student.

Historical Perspective of Funding Per Student

To place funding for K-12 and higher education into an historical perspective, we have compared state and local funding per FTE student in the four public segments from 1987-88 through 2003-04, adjusting for the effects of inflation over this 17-year period (see Figure 2). As the figure shows, per-student funding for K-12 schools remains near the high point for this period. Per-student funding for higher education declines from historic highs in the past two years, although much of this decline is offset by student fee increases.

Proposition 98

California voters enacted Proposition 98 in 1988 as an amendment to the California Constitution. That act, which was later amended by Proposition 111, establishes a minimum funding level for K-12 schools and CCC. Proposition 98 also provides support for direct educational services provided by other agencies, such as the state's schools for the deaf and the blind and the California Youth Authority. Proposition 98 funding constitutes over three-fourths of total K-12 funding.

The minimum funding levels are determined by one of three specific formulas. Figure 3 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 are: (1) General Fund revenues, (2) state population, (3) personal income, (4) local property taxes, and (5) K-12 ADA.

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).

· 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 (CCC) receive at least the same share of state General Fund tax revenues 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 CCC 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.

· Test 3B Supplement. Statute requires that, in Test 3 years, K-14 Proposition 98 funding per student grow at least as fast as per capita General Fund spending on non-Proposition 98 programs. This can require that a supplemental amount be added to the minimum guarantee.

Other Major Funding Provisions


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")

Following a suspension or Test 3 year, the Legislature must increase funding over time until the base is fully restored. The overall dollar amount that needs to be restored is referred to as the maintenance factor.

Proposition 98 Allocations

Figure 4 displays the budget's proposed allocations of Proposition 98 funding for K-12 schools and CCC. The budget proposes $44.1 billion for Proposition 98 in 2003-04. This proposed appropriation exceeds the constitutionally required minimum level by $104 million. In contrast, the Governor's 2002-03 mid-year revisions take the Proposition 98 allocation down from the 2002-03 Budget Act amount of $46.5 billion to the revised minimum guarantee of $43.9 billion. Proposition 98 funding issues are discussed in more detail in the "Proposition 98 Budget-Year Priorities" and "California Community Colleges" sections of this chapter.

Figure 4

Proposed Proposition 98 Allocations  a   


2002-03 and 2003-04 (Dollars in Millions)


Estimated 2002-03

Proposed 2003-04

Change From 2002-03













California Community Colleges





Other agencies





 Proposition 98 Totals b





a General Fund and local property tax revenue.

b Totals may not add due to rounding.

Proposition 98 "Split." For over a decade, state law has specified that K-12 districts and CCC receive the same percentage of Proposition 98 funds that they received in 1989-90 (89.17 percent and 10.93 percent, respectively). In every budget act since adopting this provision, the Legislature has allocated funding differently than described in this statute. (Of Proposition 98 funds provided to CCC and K-12 schools since Proposition 98 was enacted, CCC's share has ranged from 9.45 percent to 11.85 percent. The Governor's budget proposes a 2003-04 CCC share of 9.2 percent.) Rather than rely on a fixed percentage, we recommend the Legislature annually adjust the funding share to express its budget priorities in light of current circumstances. 

Enrollment Growth

Figure 5 (see next page) displays budgeted enrollment growth for K-12 and higher education. The increase in K-12 enrollment—1 percent—is considerably lower than annual growth during the 1990s. The K-12 enrollment is expected to grow even more slowly in coming years, as the children of the baby boomers move out of their K-12 years. Community college enrollment is projected by the administration to decline by 5.7 percent in 2003-04, largely due to attrition resulting from a proposed fee increase of $13 per unit. In contrast, the Governor's budget funds enrollment increases of about 7 percent at UC and CSU.

Setting Education Priorities for 2003-04

In this chapter, we evaluate the proposed budget for K-12 and higher education, including proposed funding increases and reductions, program consolidations and realignments, fund shifts and fee increases, and projected enrollment levels . The difficult fiscal environment that the state faces in 2003-04 provides the Legislature with the opportunity to reassess the effectiveness of current education policies and finance mechanisms. In both K-12 and higher education, we provide the Legislature with alternative approaches to achieve the level of savings that the Governor has proposed.

Figure 5

Budgeted Enrollment a  


2002-03 and 2003-04




Change From 2002-03























a Enrollment shown in average daily attendance for K-12 and in full-time equivalent students for UC, CSU, and CCC.

K-12 Priorities. In K-12 we are generally supportive of the Governor's major initiatives—categorical program reform and child care realignment to counties. However, we believe that these two major proposals are currently at the conceptual level, and will require hard work to make them operable. Regarding the Governor's categorical block grant proposal (consolidating 58 programs into one block grant), we provide an alternative that addresses shortcomings in the Governor's proposal. Specifically, our proposal to consolidate most categorical programs into five block grants allows the Legislature to better hold districts accountable for meeting student needs while also increasing district fiscal and program flexibility.

Higher Education Priorities. In higher education the Governor proposes to achieve General Fund savings through a variety of programmatic reductions and by raising student fees at all three segments. The budget proposal also would fund enrollment growth of about 7 percent at UC and CSU, while reducing enrollment funding at CCC by 5.7 percent. While we recommend adoption of most of the proposed programmatic reductions, we offer an alternative budget in the areas of student fees, enrollment growth, and financial aid for UC and CSU. In general, we recommend lower fee increases and lower enrollment growth, as well as restructured financial aid. Our alternative would achieve about the same level of General Fund savings as proposed by the Governor while improving student access to higher education. With regard to the community colleges, we identify several options for improving student access, including enhancing financial aid and increasing enrollment funding.

Return to Education Table of Contents, 2003-04 Budget Analysis