Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

2002-03 Mid-Year Revisions: Proposition 98

In this section, we discuss the 2002-03 mid-year reductions proposed by the Governor and the corresponding actions taken by the Legislature in February 2003 in AB 8x (Oropeza). Assembly Bill 8x has been passed by both houses, but had not been enacted as of this writing.

Proposition 98 funding totaled $46.5 billion in the 2002-03 Budget Act, including General Fund and local property tax revenues. Due to declining General Fund revenues, the administration projects that the minimum guarantee has fallen by $2.6 billion to $43.9 billion. In the mid-year budget proposal, the Governor recommended reducing Proposition 98 funding to the minimum guarantee. The Legislature made substantially different changes than those originally proposed by the Governor, and reduced Proposition 98 funds to $44.2 billion. This results in Proposition 98 funding being $289 million higher than proposed by the Governor.

Governor's Mid-Year Budget Proposal 

The Governor's mid-year budget proposal recommended reducing Proposition 98 funds by $2.6 billion—over $2.2 billion for K-12 and $327 million for California Community Colleges (CCC). Key changes for K-12 and community colleges are described below.

Governor's Recommendations for K-12

Figure 1 highlights the significant changes the Governor proposed for K-12 Proposition 98 funds in the current year. Major changes include:

• $1.5 billion in savings from across-the-board reductions.
• $438 million in one-time savings from using funds from the Proposition 98 reversion account for current-year program costs.
• $99 million in savings from eliminating the California Work Opportunity and Responsibility to Kids (CalWORKs) child care Stage 3 starting April 1.
• $23 million in savings from not funding a second cohort of the High Priority Schools Grant Program (HPSGP).

Governor's Recommendations for CCC

Figure 2 highlights the significant changes the Governor proposed for CCC Proposition 98 funds in the current year. Major changes include:

• $158 million in savings from across-the-board reductions.
• $80 million in savings by eliminating funding for inappropriate or illegal concurrent enrollment.
• $51 million in one-time savings by using funds from the reversion account for current-year program costs.
• $33 million in lower than anticipated local property tax revenues. 

Using Prior-Year Savings to Reduce Proposition 98 Funding

The Governor's 2002-03 mid-year adjustments identify $489 million in current-year and prior-year savings for specific categorical programs. Figure 3 shows the specific program savings the Governor identified and the uses of the funds. The Governor proposes to revert the savings for these programs into the Proposition 98 Reversion Account. Since reversion account funds must be spent on K -14 programs, the Governor proposes to use the $489 million in place of General Fund support for a set of programs. Specifically, the Governor proposes to "swap" General Fund support for reversion account funds for Regional Occupational Centers and Programs, adult education, and community college Extended Opportunity Programs and Services. By swapping reversion account funds for General Fund, the Governor's proposal reduces current-year Proposition 98 appropriations by $489 million.

Mid-Year Revisions Adopted by Legislature  

In response to the Governor's proposal, the Legislature reduced expenditures by $2 billion for K-12 programs and $231 million for community colleges, for a total of $2.3 billion. The Legislature's actions leave Proposition 98 funding $289 million higher than proposed by the Governor. Key changes adopted by the Legislature for K-12 and CCC are described below.

K-12 Reductions Made by Legislature

Figure 4 highlights key actions taken by the Legislature for K-12. Major changes include:

• $1.2 billion in savings from deferring program costs to 2003-04, including: (1) the June principal apportionment payment for revenue limits, special education, adult education, supplemental instruction, and other categorical programs; and (2) payments for education mandates.
• $431 million in one-time savings from using funds from the reversion account for current-year program costs.
• $78 million in savings from using federal funds for stage 3 of the CalWORKs child care program. The Legislature rejected the Governor's recommendation to eliminate this program.
• $76 million in savings from aligning timing of funding with expenditures for HPSGP and the Immediate Intervention and Underperforming Schools Program.

The bill passed by the Legislature as amended in the Assembly on February 4, 2003, inadvertently excluded $176 million in savings intended to be in the bill. These savings include: (1) $103 million for instructional materials, (2) $60 million in available reversion account funds intended to be substituted for current-year adult education funds, and (3) $12 million for library materials. As of this writing, the Legislature had not made these technical changes. If these changes are made, then the Legislature's actions will leave Proposition 98 funding $113 million higher than proposed by the Governor instead of $289 million higher.

CCC Reductions Made by Legislature

Figure 5 highlights key actions taken by the Legislature for CCC. Major changes include:

• $157 million in savings from targeted and across-the-board reductions.
• $33 million in one-time savings by using funds from the reversion account for current-year program costs.
• $33 million in lower than anticipated local property tax revenue.
• $2 million in one-time savings by deferring the health fees mandate.

Additional Reductions Could Be Taken in the Current Year

We recommend that the Legislature make $382 million in targeted Proposition 98 reductions in the current year to bring expenditures down to our revised Proposition 98 guarantee of $43.8 billion.

The Legislature's mid-year Proposition 98 reductions were $289 million less than recommended by the Governor. In addition, our new projection of the Proposition 98 minimum guarantee for the current year is $93 million less than the Governor due to lower projections of General Fund revenues. Based on the Legislature's actions and our revised projection of the minimum guarantee, Proposition 98 would be overappropriated by $382 million. If the Legislature does not make further targeted reductions, the $382 million over-appropriation will become part of the Proposition 98 base in 2003-04. We recommend the Legislature reduce Proposition 98 spending to the minimum guarantee. In light of the $1.2 billion in deferrals made by the Legislature during the midyear revisions, we do not recommend achieving this lower guarantee through further deferrals. Instead, we recommend targeted cuts to Proposition 98 programs. Making the technical corrections noted above would reduce the overappropriation by $176 million, necessitating $206 million in additional reductions.

Deferral May Threaten Federal Funding for Special Education

We recommend the State Department of Education report to the fiscal committees on the need for a federal waiver due to the deferral of 2002-03 special education payments adopted as part of the mid-year Proposition 98 funding adjustments.

The 2002-03 Budget Act appropriates $2.7 billion as the state's share of total special education program costs of $3.7 billion. The remaining $991 million in program costs are funded by local property taxes ($314 million) and federal special education funds ($677 million). The Governor's proposed mid-year reductions to Proposition 98 programs included a $99.3 million reduction to special education.

Assembly Bill 8x did not make the $99.3 million reduction recommended by the Governor but did defer $214.1 million in program costs from 2002-03 to 2003-04. By deferring this payment, the Legislature reduced Proposition 98 spending for K-12 education in the current year and delayed reimbursing districts for the state share of program costs by a few weeks.

The deferral is unlikely to reduce the level of student services provided by local special education programs. Federal law requires districts to develop an individual learning plan that describes the services needed by each special education student. Local special education budgets are driven by the cost of fulfilling these individual plans. Because the Legislature's deferral is a reduction only in a technical sense, student services should remain relatively unaffected.

Does the Deferral Violate Maintenance of Effort (MOE)? Federal law requires, as a condition of receiving federal funds, that state spending on special education must not decrease from the prior year. (State spending is defined as General Fund support and local property taxes dedicated to special education.) States that do not maintain the prior-year level of spending may experience a reduction in federal funds. The 2002-03 Budget Act level of state and local resources to the program exceeded prior-year spending by about $5 million.

The $214 million reduction caused by the deferral may result in a technical violation of the federal MOE requirement. Later in this chapter, we discuss a problem with maintenance of effort in the 2003-04 special education budget proposal and request the State Department of Education (SDE) to explore the issue of a waiver of the requirement with the federal government.

We think it makes sense for SDE also to discuss the 2002-03 technical violation of MOE with the federal government. If the federal government interprets the deferral as a MOE violation, the Legislature would have an opportunity to request that SDE submit a wavier to the federal government or make any needed adjustments in the 2002-03 budget before the end of the fiscal year and prevent the loss of federal funding

For this reason, we recommend SDE discuss this issue with the federal Department of Education and report to the budget committees on the need for changes to the 2002-03 budget during hearings.