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

K-12 Education Introduction

The budget includes an increase in K-12 Proposition 98 funding of $624 million in the budget year. This is $6,723 budgeted per pupil, or 0.6 percent more than the revised estimate of per-pupil expenditures in the current year. Adjusting funding for deferrals and realignment of child care, funding is $6,762 per pupil, or 1.8 percent more than the revised estimate of per-pupil expenditures in the current year.

Figure 1 displays all significant funding sources for K-12 education for the budget year and the two previous years. As the figure shows, Proposition 98 funding constitutes over three-fourths of overall K-12 funding. For 2002-03, the Governor proposes a mid-year reduction in K-12 Proposition 98 funding of $2,242 million, or 5.4 percent, to bring Proposition 98 appropriations down to the revised calculation of the minimum guarantee. This brings budgeted Proposition 98 per-pupil spending down from $7,067 per average daily attendance (ADA) in the 2002-03 Budget Act to $6,684. For 2003-04, the budget proposes to increase K-12 Proposition 98 funding by $624 million above the Governor's proposed mid-year revisions. This represents an increase of $39 per pupil, or 0.6 percent, bringing budgeted Proposition 98 per-pupil spending to $6,723. This increase in Proposition 98 funding is supported by a forecasted $677 million increase in local property taxes. General Fund support of Proposition 98 falls slightly.

The growth pattern of Proposition 98 spending is distorted because expenses were deferred from one fiscal year to another from 2001-02 through 2003-04. In addition, the Governor proposes realigning child care expenditures to counties, moving funding out of Proposition 98 in 2003-04, which makes cross-year comparisons difficult. Figure 2 displays the impact that the deferrals and child care realignment have on the growth of per-pupil spending. It moves deferred funds to the years when the expenditures occurred, and keeps child care expenditures in Proposition 98 for comparison purposes. Using this calculation, per pupil spending increased by $120, or 1.8 percent over the 2002-03 mid-year revision. The Legislature should focus on the programmatic funding outlined in Figure 2 when wanting to assess spending from a school district's perspective.

Spending for K-12 education from all sources is projected to decrease by $1.3 billion, or 2.5 percent, below the Governor's mid-year revisions. This reflects decreases in most K-12 funding sources. Key changes in non-Proposition 98 funds include:

• Governor Proposes Reduced Contributions to State Teachers' Retirement System (STRS)—$850 Million. Teacher retirement decreases by $850 million (General Fund) due to two proposals which would: (1) use pension obligation bonds or a loan agreement to pay the $448 million state STRS contribution in 2003-04, and (2) reduce funds for purchasing power protection by $500 million. Purchasing power protection is a program that ensures that retirees' pensions stay at 80 percent of their original purchasing power.
• Miscellaneous Reductions in Non-Proposition 98 General Fund Programs—$871 Million. Non-Proposition 98 General Fund spending for "other programs" decreases by $871 million, primarily because of $690 million in one-time current-year spending from reappropriations and reversion account funds.
• Federal Funds—$202 Million. Federal funds decrease by $202 million primarily due to $138 million in one-time current-year funds for school renovations. The federal government has not yet adopted the federal education budget for the fiscal year beginning October 1, 2002, but early indications are that total federal funds for California will increase.

The budget includes $1.5 billion in new resources for K-12 Proposition 98 for 2003-04. The budgeted Proposition 98 increase for K-12 education is $624 million. In addition, the Governor proposes to transfer child care funding and responsibilities to counties, which frees up $879 million in Proposition 98 for other uses. Figure 3 shows how the budget proposes to spend this $1.5 billion in new resources. Major changes recommended for 2003-04 include:

• Continuation of $1.5 billion in savings from across-the-board cuts.
• $382 million increase for the Public Employees' Retirement System offset reduction due to anticipated contribution rate increases.
• $364 million in net deferral costs.

 — $931 million freed up from one-time costs of deferrals from 2001-02 to 2002-03.

 — $648 million in 2002-03 program costs deferred to 2003-04.

 — Building $648 million in programs back into the 2003-04 base.

• $322 million increase for enrollment growth, based on a projected ADA increase of 1 percent in 2003-04.
• $250 million increase for school district funding equalization.
• No funding for cost-of-living-adjustments (COLA). The statutory COLA is 1.55 percent, which would cost about $635 million.
• No funding growth for any categorical programs except special education.

Proposition 98 Spending by Major Program

Figure 4 shows Proposition 98 spending for major K-12 programs. "Revenue limit" funding (available for school districts and county offices to spend on general purposes) accounts for $29 billion in 2003-04, or over two-thirds of Proposition 98 expenditures. The General Fund supports about 53 percent of revenue limit funding, and local property taxes provide the remaining 47 percent.

The Governor proposes to consolidate most "categorical programs" into a $5.1 billion block grant. The two largest categorical programs, special education and K-3 class size reduction (CSR), would remain separate programs. The budget proposes $2.7 billion from Proposition 98 sources for special education, a decrease of $9 million. K-3 CSR funding remains the same at $1.5 billion.

Enrollment Trends

Enrollment growth significantly shapes the Legislature's annual K-12 budget and policy decisions. When enrollment grows slowly, for example, fewer resources are needed to meet statutory funding obligations for revenue limits and K-12 education categorical programs. This leaves more General Fund resources available for other budget priorities both within K-12 education and outside it. Conversely, when enrollment grows rapidly (as it did in the 1990s), the state must dedicate a larger share of the budget to education. In light of the important implications of enrollment growth, we describe below two major trends in the K-12 student population.

The enrollment numbers used in this section are from the Department of Finance's Demographic Research Unit, and reflect aggregate, statewide enrollment. While the enrollment trends described here will likely differ from those in any given school district, they reflect the overall patterns the state is likely to see in the near future.

K-12 Enrollment Growth to Slow Significantly

K-12 enrollment is projected to increase by about 1 percent in 2003-04, bringing total enrollment to about 6.2 million students. Figure 5 shows how enrollment growth has slowed since 1996-97. Over the next ten years, K-12 enrollment growth will continue to slow and actually decline beginning in 2008-09. This contrasts with growth averaging 2.2 percent annually during the 1990s.

Divergent Trends in Elementary and High School Enrollment

Figure 6 shows that the steady decline in K-12 enrollment growth masks two distinct trends in elementary (grades K-8) and high school (grades 9-12) enrollment. Elementary school enrollment growth has gradually slowed since 1996-97. Growth rates are expected to become negative in 2004-05 and remain negative through 2010-11. From the current year through 2010-11, K-8 enrollment is expected to decline by 87,100 pupils (2 percent).

In contrast, high school enrollment growth is expected to accelerate in the short term, reaching a 4.1 percent growth rate in 2004-05. Then, growth is expected to slow sharply, becoming negative in 2010-11. Expected growth from the current year to 2010-11 is approximately 246,000 pupils (14 percent).

Budget and Policy Implications

These trends have significant budgetary and policy implications for issues such as class size reduction, teacher demand, and facilities investment. A few of the major implications include:

• A 1 percent increase in K-12 enrollment requires an increase of approximately $440 million (General Fund) to maintain annual K-12 expenditures per pupil.
• As enrollment growth slows, a smaller share of the state's new revenues will be consumed by costs associated with funding additional pupils. The Legislature will then have the option of devoting these revenues to increasing per-pupil spending or to other budget priorities.
• In the near term, programs aimed at elementary grades (such as K-3 CSR) will face reduced cost pressures related to enrollment. Programs aimed at high school grades will face increased cost pressures. This could present cost challenges for many unified school districts because per-pupil costs of educating high school students tend to be higher than for elementary school students.
• Because of declining enrollment provisions in state law, more school districts will benefit from the one year hold harmless provision in current law, increasing state costs per pupil.
• Despite the general downward trend in enrollment growth, significant variation is expected to occur across counties. For example, between 2002-03 and 2011-12, Los Angeles' enrollment is expected to decline by 82,000 students (a 5 percent decline) whereas Riverside's enrollment is expected to increase by 69,000 students (a 20 percent increase).