LAO 2003-04 Budget Analysis: Education

Legislative Analyst's Office

Analysis of the 2003-04 Budget Bill

Governor's Categorical Program Reform Proposal

The Governor's Budget proposes to create a $5.1 billion categorical block grant in lieu of funding 58 individual K-12 programs in order to provide school districts with greater fiscal and program flexibility. We recommend the Legislature improve the proposal in various ways, thereby increasing district fiscal and program flexibility and improving incentives for local decision making.

State funds for K-12 education fall into two main categories. The largest source of funds is provided through a general purpose "revenue limit" grant. Revenue limits support core education program costs such as teacher and administrator salaries, lights and utilities, maintenance, and other costs. Categorical education programs generally support specific supplemental costs. In 2002-03, the budget contained more than 80 categorical programs that provided $12 billion in state funds for the support of a wide range of district programs, including class size reduction, special education, teacher training, and child nutrition.

Governor's Proposal  

The 2003-04 Governor's Budget proposes to provide funding for 58 existing categorical programs through a K-12 Categorical Block Grant as a means of increasing school district fiscal and program flexibility. The block grant would total $5.1 billion in the budget year, although $648 million of that amount represents the payment of 2002-03 funding for four categorical programs the Legislature deferred until 2003-04. Thus, on an ongoing basis, the block grant would provide $4.5 billion to districts.

Figure 1 displays the Governor's proposed 2002-03 and 2003-04 funding levels for programs included in the Governor's block grant. As the figure shows, the Governor proposed an 11.6 percent ($715 million) mid-year reduction in 2002-03 for the 58 programs. For 2003-04, the budget proposes an additional 4 percent reduction ($190 million). 

Figure 1

Proposed Categorical Block Grant 2003-04 Governor's Budget

(Dollars in Millions)








Change, 2002-03 Revised

Targeted Instructional Improvement






Adult Education






Home To School Transportation






Economic Impact Aid






School Improvement






Regional Occupation Centers/Programs






Supplemental Grants





Instructional Materials






Staff Development Day Buyout






Deferred Maintenance






9th Grade Class Size Reduction






Teaching as a Priority






Peer Assistance and Review






Beginning Teacher Support and Assessment






School Safety






43 other programs












a     Includes amounts deferred to 2003-04.

b  Does not include amounts deferred from 2002-03.

Totals may not add due to rounding.

According to the Department of Finance (DOF), the block grant would allow districts to direct categorical funds in a manner that best meets the needs of each district. While the trailer legislation to implement the proposed block grant was not available as this analysis was written, DOF advised it would propose the following rules:

Proposal Excludes Some Categorical Programs

The budget does not include all K-12 categorical programs in the proposed block grant. The 2003-04 proposed budget would continue separate funding for 13 categorical programs. According to DOF, the budget maintains these separate programs because they reflect an administration priority (such as K-3 class size reduction [CSR]), satisfy a federal mandate (such as special education), or would be discontinued in the near future (year round schools, principal training, and mathematics and reading staff development).

Figure 2 displays the programs and funding levels for separately funded categorical programs proposed in the 2003-04 budget. The 13 separately funded programs would distribute $5.6 billion in 2003-04. Four programs—special education, K-3 CSR, child development, and summer school—account for $5 billion, or 90 percent of the total.

Figure 2 also shows six additional categorical programs appropriated as add-ons to district revenue limits or separately funded county offices of education (COEs) programs. These programs are not separately identified in the budget, but are part of the system of district or county office revenue limits that are continuously appropriated. The programs included in the figure do not represent a complete list of the add-on programs. These six programs, however, are similar in purpose to those proposed for consolidation in the K-12 block grant. As Figure 2 shows, these programs provide $399 million to districts and COEs in the budget year. Unlike the separately funded programs, the add-on programs would experience increases in the budget year.

Figure 2

Separately Funded K-12 Categorical Programs 2003-04 Governor's Budget

(Dollars in Millions)








Change, 2002-03 Revised

Separately Funded






Special Education






K-3 Class Size Reduction





Child Development






Summer School






High Priority Schools Grant






Public School Accountability






Student Assessment






Child Nutrition






Year Round Schools






Math and Reading Staff Development






Principal Training






County Office Fiscal Oversight






Angel Gate Academy











Revenue Limit Funded






Meals for Needy Pupils






Necessary Small Schools






Beginning Teacher Salaries





Continuation Schools






COE Community Day Schools






COE Opportunity Schools












Totals may not add due to rounding.

Benefits of the Governor's Plan

In creating the K-12 block grant, the Governor's proposal would generate several important benefits for school districts. These benefits are summarized in Figure 3 and are briefly described below.

Figure 3

Benefits of Categorical Reform


· Greater Fiscal Flexibility.Districts would have greater choice to direct funds to meet local program needs.

· Improved Program Flexibility. Districts would have greater control over the program models used to deliver services.

· Clearer State/Local Relationship. Reform focuses responsibility for program and funding choices on local districts and school boards.

· Administrative Savings. Reduces state and local administrative costs created by application, accounting, and compliance requirements.

· Improved Focus on Student Learning. Reducing program complexity helps districts concentrate on maximizing the impact of funds on improving student achievement.

Greater Fiscal Flexibility. The budget proposal would provide school districts with significant new fiscal flexibility to use categorical funds to better meet local needs. Under the block grant approach, a district that currently receives funding from one program would be able to redirect the funds to a different program that satisfies a higher priority for the district. Instead of hiring reading specialists through the Miller-Unruh Reading program, for instance, a district would be able to redirect that funding to train teachers in different, potentially more effective reading methodologies.

Improved Program Flexibility. The proposal would allow districts to choose a program model that best serves students. Many categorical programs contain program requirements that limit district flexibility. These restrictions may prevent districts from tailoring program services most efficiently and effectively. For instance, although reading specialists may be an effective strategy in some districts, the program's requirement to hire specialists may prohibit other districts from using a more cost-effective approach.

Clearer State/Local Relationship. By increasing local control over the use of categorical funds, the budget proposal clarifies decision making responsibilities in K-12 education. Categorical programs can result in confusion over which level of government—the state or school districts—is ultimately responsible for the provision of a high quality, well-managed education system. This may occur because the state assumes some responsibility for adequately funding a local need when it plays a direct role in the allocation of funds for that purpose. However, in cases where local performance is less-than-adequate, local officials can point to "insufficient" state funding as the problem. As a consequence, state intervention in basic educational inputs makes it difficult for the state, as well as parents and the local community, to determine which level of government is responsible for the inadequate performance of the district. By giving districts broad discretion over the use of categorical funds, the block grant simplifies the state/local relationships and increases local responsibility for district actions.

Administrative Savings. The budget proposal would yield state and district savings by reducing the administrative effort entailed in operating multiple categorical programs. Currently, districts must apply for, separately track, and monitor the appropriate use of categorical funds. The amount of local savings that would result is unknown. The budget identifies significant state savings, however, proposing to reduce State Department of Education (SDE) administrative support by $6.7 million and 97 positions to reflect workload savings resulting from the consolidation. This represents 15 percent of the department's 2002-03 General Fund support.

Improved Focus on Student Learning. The complex web of categorical program funding rules can inadvertently divert a district's focus from implementing state content standards and improving instruction. In these cases, district concerns about compliance with state rules and regulations result in ineffective and fragmented instructional programs. All of the benefits listed above—increased fiscal and program flexibility with the accompanying local accountability for spending and program decisions, and the elimination of administrative and compliance requirements—can assist districts to focus on the activities that are critical to improving student performance. Thus, categorical reform helps districts focus on improving curriculum and instruction and better align their local education program to meet the state's student performance objectives.

The Governor's Plan—Problems and Solutions

Given the significant benefits of categorical reform, we believe the administration's proposal merits serious attention. The proposed K-12 block grant, however, raises serious policy and technical questions. Below, we describe five major problems we identified with the proposal. We also identify ways the Legislature could address those problems and improve upon the budget's plan. The major concerns we have identified in the block grant and our recommended solutions are summarized in Figure 4 and discussed below.

Figure 4

The Governor’s Categorical Reform Plan Problems and Solutions


· Proposal Ignores Negative Local Incentives. The proposal fails to grapple with the more complex issues underlying the existence of categorical programs. Solution: Increasing local accountability—using a combination of input and output measures—would result in improved local incentives for districts to “do the right thing.”

· Categorical Grants Would Become General Purpose Funds. The proposal puts categorical program funding “on the table” for virtually any district expense. Solution: Block grants can provide additional flexibility to districts without undermining the Legislature’s goal of reserving funds for supplemental services.

· Effectiveness of Accountability Systems Still Unproven. The proposal assumes state and federal accountability programs have improved district incentives to maximize the impact of spending on student achievement. Solution: Reserving funding for low-performing students and school-wide improvement activities would allow the Legislature time to evaluate the effectiveness of these programs.

· Block Grant Misses Opportunities to Clarify District Responsibilities. The proposal continues the practice of directly funding county programs for alternative and vocational education. Solution: By directing all funds for direct student services to districts, the state would increase district responsibility for adequately serving students.

· Some Programs Are Excluded Unnecessarily. The proposal maintains separate funding for several K-12 programs that are similar in nature to those included in the block grant. Solution: Including these programs would increase benefits of categorical reform.

Proposal Ignores Negative Local Incentives

One of the primary reasons the state establishes categorical programs is that it believes districts will underinvest in certain services unless the state guarantees those services through a dedicated source of funding. Frequently, low district spending results from a lack of accountability—that is, no state or local mechanism helps ensure districts devote sufficient resources to a specific program. The state can correct this accountability problem by creating a categorical spending program that results in a higher level of spending for those services.

Problem—Proposal Does Not Adequately Balance Flexibility and Accountability. A central question, therefore, is whether the Governor's proposal balances local incentives in such a way that districts would be encouraged to "do the right thing" with the flexibility afforded by the block grant. According to DOF, the Governor supports categorical reform, in part, because the state's accountability system holds districts responsible for the impact of local decisions on student performance.

Many categorical programs, however, have little direct connection to student achievement. For instance, it seems unlikely that school administrators and board members would invest in the adult education program because they see a direct connection between serving the adult population and K-12 student achievement. In fact, the imbalance between the strong K-12 accountability programs and the weak requirements for adult education suggests the budget proposal would create strong incentives for districts to reduce the level of adult services in order to increase services for K-12 students. While the budget proposal may result in a more effective use of funds from a local perspective, accountability for K-12 student achievement is unlikely to create the incentives that help districts balance the needs of the K-12 and adult population.

Solution—Get the Fiscal Incentives Right. While the budget proposal offers many benefits, it fails to grapple with the more complex issues underlying the existence of categorical programs. Understanding clearly why local incentives encourage districts to underinvest in a particular activity is the first step toward understanding whether a program needs to be continued as a separate program.

Most K-12 categorical programs address district incentives to underinvest in high-cost services needed by certain students. The higher cost of serving special needs students—such as special education or compensatory education—reduces funding available for all other students. To address this incentive problem, the state and federal governments subsidize services to these high-cost special needs students.

Solution—Use Data to Increase the Focus on Local Responsibility for Services. The state can improve local incentives in other ways than earmarking funds through categorical programs. The success of the state's accountability system in focusing schools on student achievement demonstrates the power of data to alter the local decision-making landscape. The state could apply this strategy to categorical programs as well.

The state already collects a substantial amount of performance data on schools. To use this data as an alternative to categorical funding streams, however, the state would need to ensure that the data are:

In summary, categorical reform requires an understanding of the spending pressures districts experience and the various ways the state can influence spending decisions in positive ways. In our view, the budget proposal goes too far in assuming that accountability for student performance alone corrects all local incentive problems. Through a combination of inputs (budget and policy regulation) and output measures (accountability mechanisms), we believe categorical reform can increase local flexibility and improve local incentives.

Categorical Grants Would Become General Purpose Funds

Budget bill language proposed as part of the block grant would allow districts to use funds for the "support of classroom education." Since virtually every district activity could be interpreted as supporting classroom education, this language would permit districts to use block grant funds for almost any cost. This could include district administration, employee salary increases, routine maintenance, or other expenditures supported from general purpose funds.

Problem—Proposal Undermines Supplemental Nature of Funds. As a result, the proposed budget bill language would transform supplemental categorical funding for specific activities into general purpose funding. In these tight budget times, eliminating the supplemental nature of categorical funding would create a strong local incentive for districts to use block grant funding to meet base program costs. This feature of the proposed budget would further undermine the Legislature's goal of ensuring adequate funds for specific supplemental services.

Solution—Protect Supplemental Funding, But Allow Flexibility. Districts need additional fiscal flexibility in tight budget times. The budget proposal provides districts with almost unlimited flexibility with state funds, which we think would provide strong incentives for districts to shift funds away from supplemental services to pay for base program costs. There are other ways to create flexibility for districts. The budget currently contains, for instance, provisions that allow districts to transfer limited amounts of funds between categorical programs. This type of flexibility can also be included in a system of block grants. This would allow the Legislature to provide districts with additional flexibility while also protecting the supplemental nature of categorical funds.

Effectiveness of Accountability Systems Still Unproven

State and federal accountability programs use student assessment data on achievement to hold districts and schools responsible for raising the level of student performance in California. If these accountability programs are effective, the proposal to give districts greater flexibility over the use of categorical programs targeted at compensatory or alternative education services would appear to be reasonable.

Problem—Time Needed to Prove System's Effectiveness. The effectiveness of the state and federal accountability programs is still unproven. California is at the beginning of a long process of learning to use these programs to substantially raise the level of student achievement of pupils who currently underperform. Although SDE has successfully intervened in districts to correct fiscal mismanagement, it has little experience in fixing broken educational processes.

We also are concerned that federal accountability under the No Child Left Behind (NCLB) Act is so demanding that it will prove ineffective in providing real accountability for the state's schools. The department's projections show more than 60 percent of schools in the state as failing to meet NCLB performance targets within a few years. It remains to be seen whether accountability can be meaningful if schools believe there is little chance of success.

Solution—Protect Compensatory and School Improvement Funding. As a result, we think it is premature to depend entirely on state and federal accountability programs to create the incentives that will ensure student needs are met. This suggests that protecting compensatory and alternative education funding is necessary. We also suggest protecting school improvement funds such as staff development and class size reduction.

Over time, the impact of state and federal accountability programs on student performance will become more evident. If these programs are successful, the Legislature would be able to adjust its funding structure to further increase local flexibility.

Block Grant Misses Opportunities to Empower Districts

Districts do not currently receive funding for several of the programs included in the proposed block grant. Instead, the state distributes funds directly to other local education agencies—usually COEs—and school districts choose whether to take advantage of the program's services. For example, the budget includes in the block grant $342 million in funds for Regional Occupational Centers and Programs (ROC/Ps), which is administered primarily by COEs (although some programs are run by school districts or by joint-powers agencies that serve multiple school districts).

Problem—Unknown Impact of Flexibility on COE Programs. Under the budget proposal, the block grant would direct ROC/P funds to COEs (or other agencies). This creates two problems. First, block grant funds distributed to these local agencies would come with no program requirements. Exactly what these entities would do with these funds is uncertain. COEs, for instance, could choose to divert ROC/P funds to pay for special education costs—even though the state supports special education through a separate appropriation. Under the block grant proposal, it appears joint powers ROC/Ps would receive funding with absolutely no accountability requirements. We are unclear how these programs would use this freedom.

Problem—Districts Are Not Accountable for Students in COE Programs. The second concern is that the proposal misses an opportunity to increase district responsibility to provide the type and quality of services needed by students. By directly funding COEs, the state blurs the question of which education agency is responsible for meeting the needs of students. In our view, districts have the best information (understanding of each student's needs) and the most effective accountability mechanisms (parents and local school board elections). By focusing resources on separate county administered schools, the state restricts district options for serving students and relieves the district of responsibility for the achievement of students referred to county office schools.

Solution—Fund Districts Not COEs. For these reasons, we believe categorical program funds supporting direct services to students are best allocated to districts. In our 1994 report entitled School-to-Work Transition: Improving High School Career Programs, we suggested the Legislature focus responsibility for vocational education on districts by apportioning ROC/P funds to districts rather than counties or joint powers agencies. In addition, by receiving the funds directly, districts would have greater control to purchase the type and quality of services needed by students.

To make this change too quickly could result in severe program dislocations and result in service gaps to students who need county services. We think a transition period would allow both COEs and school districts to avoid these problems. During the transition, COEs and school districts would develop compacts that prevent large funding changes in any one year and create a funding source for students who would otherwise "fall through the cracks" of the district delivery system.

Some Programs Are Excluded Unnecessarily

The Governor's budget does not include all categorical programs in its proposed block grant. As described above, several separately funded programs are excluded. In addition, the proposal does not incorporate county office programs or district programs funded through revenue limit funding.

Problem—Proposal Excludes Similar Programs. The block grant proposal excludes programs that are similar in nature to the programs that are included. We have identified the following types of exclusions:

Solution—Including Programs Would Increase Benefits of Reform. Adding the above programs to the block grant would be consistent with the overarching goals of the block grant proposal and would add to the benefits available from categorical reform. The budget proposal presents the Legislature an opportunity to simplify and consolidate the K-12 funding system. Excluding programs simply due to the funding mechanism fails to take advantage of that opportunity. Given the potential benefits that could result from reform of the categorical programs, we think the Legislature should include all programs—no matter how they are currently funded—in its deliberations over categorical consolidation.

Improving the Governor's Plan

We recommend the Legislature merge 62 separate categorical education programs into five block grants as part of a comprehensive effort to reform the K-12 funding structure and increase local flexibility and accountability

While the Governor's proposed K-12 categorical block grant presents significant benefits, it also raises major concerns. Most importantly, the proposed block grant does not adequately address the negative local incentives that led to the initial creation of many categorical programs. In addition, despite the proposal's broad-brush consolidation of most categorical programs, it misses opportunities to extend the reform.

Due to these concerns, we recommend the Legislature take steps to improve the Governor's block grant proposal. Given the many benefits of reform, we suggest the Legislature use the budget proposal as a starting point in its effort to revamp the existing system. With several major refinements, the Legislature can help districts use existing funds more effectively and increase district accountability for high-priority activities that are critical to the K-12 system.

Below, we describe the general features of our alternative proposal. We review the rationale behind the five block grants we propose, our strategy for using existing data to increase local accountability, and the fiscal and program rules that would guide districts in the use funds. Our proposal for transitioning county office alternative education programs also is discussed. Following a discussion of the general features of our alternative proposal, we describe the specific design of our proposed block grants.

General Features of the LAO Proposal

We have designed our alternative proposal to remedy problems with the Governor's proposal discussed above. We based our proposal on the idea that, like any new program, the final shape of categorical reform would evolve over time. Rather than reforming programs in one "big bite," we recommend the Legislature take a significant first step while also building in ways for the state to learn how the reforms actually work in districts. This information would allow the state to correct any problems as they emerge and make additional reforms in the future. At the same time, we have tried to keep our proposed block grants as large as possible to maximize local flexibility in the use of funds. This flexibility would assist districts in maximizing the effectiveness of categorical funds on improving K-12 educational programs.

Protect Program Areas That Alter Local Incentives

We identified several programs and program areas that warrant state protection. As discussed above, certain high-priority program areas merit separate funding until state and federal accountability programs have been more fully tested and shown effective. Accordingly, we recommend that the Legislature merge various programs into two block grants: a compensatory and alternative education block grant and an academic improvement block grant. This would give the Legislature an opportunity to monitor the progress of student performance while also expanding district choice over the use of funds.

We also propose a vocational education block grant to increase district responsibility for meeting the vocational needs of students and provide a source of funds to meet those needs. Current law fails to hold schools accountable for career preparation. In addition, most supplemental funding for vocational education goes to county office ROC/Ps, which reduces district flexibility to meet student needs. Our proposed block grant would address these problems by refocusing program responsibility and resources on districts.

Our proposal continues separate funding for a small number of programs that correct negative local incentives. For instance, we propose separate funding for the High Risk Youth program and the Foster Youth Program. These two programs help ensure that the educational needs of relatively small segments of the student population—foster care children and students returning to school from youth correctional facilities—are addressed. As the state's data systems improve, thereby allowing accountability programs to measure the progress of individual students, separate funding for these programs may be unnecessary.

We have also excluded the adult education program from any block grant because including the program would create negative local incentives. Merging the program into a K-12 block grant creates strong incentives for districts to reduce the level of adult services in order to increase services for K-12 students. We also remain unconvinced that the program fits among the basic responsibilities of the K-12 system. The state may be able to reduce redundancy and improve effectiveness by consolidating the K-12 adult programs into the community college system. Because any discussion of adult education goes beyond the question of the best way to provide supplemental funds for K-12 programs, we have excluded the program from our proposal.

Our proposal combines several programs that support core district functions into a block grant. This includes existing programs funding transportation, instructional materials, and major maintenance. Because these functions are not supplemental in nature, we considered merging the funds into district revenue limits. We opted for the block grant approach, however, to maintain the visibility of these funds while the state evaluates the effectiveness of using data to hold districts responsible for providing these services.

We also aggregated several small county administered technical assistance programs into a block grant. As discussed above, the state can play an important role in providing information and assistance to districts in the most effective uses of categorical funds. The COEs currently provide this type of assistance in lieu of a state program of technical help. We think it is an important role that counties are well positioned to provide, and the block grant approach permits COEs to be more responsive to district needs.

Use Data to Increase Local Accountability

Our alternative block grant proposal is designed as a first step in a process of learning how to support school districts in a manner that increases local flexibility and accountability. To support the ongoing learning process, we recommend the Legislature include data reporting requirements to help measure whether districts are effectively using funds to meet the state's goals. There are two elements to our proposal:

The budget proposes to eliminate a significant portion of SDE's staff that currently perform these functions for existing programs. Therefore, the proposed reductions need careful review so that fewer resources do not prevent the department from performing these important tasks.

Allow Broad Program Flexibility

Our block grants would provide significant program flexibility. Existing statutes for the programs included in the block grants would be eliminated, making funds available for any activity consistent with the purpose of each block grant. Key provisions of existing law or new provisions, however, may be needed to guide district use of funds. Existing law, for instance, limits administrative spending on categorical funds to 15 percent and requires participation by school site councils in the categorical program planning processes. Except in rare cases, we recommend eliminating program rules and regulations.

Provide Fiscal Flexibility

The fiscal structure of our block grants is simple. All funds for direct student services would be allocated to school districts. Allocations generally would be proportional to the amount received by districts in 2002-03. Future funding growth would be based on growth in student attendance in each district (except for compensatory and alternative education funds). In addition, grants would be equalized over time by redirecting to low-funded districts a portion of the annual cost-of-living adjustment that would otherwise go to high-funded districts.

Our proposed block grants would significantly increase local fiscal flexibility. Districts could redirect funds to increase support for successful program models and eliminate support for less productive programs. In addition, the greater program flexibility would allow districts to further hone local programs down to the essential services, which would further reduce local costs. Finally, we expect large savings to districts due to the elimination of state application, accounting, and monitoring requirements.

Our proposal also calls for maintaining some flexibility for districts to move funds among block grants. The 2002-03 Budget Act permits districts to transfer 20 percent of a program's funds to another categorical program and caps those transfers so that programs may grow by a maximum of 25 percent. Since districts currently use this flexibility to meet local priorities, we recommend similar provisions for our proposed block grant. The one exception to this rule is that transfers from the Compensatory Program Block Grant would be limited to 10 percent so that the Legislature's priority to ensure supplemental services for low-performing students remains intact.

Make Charter School Funding Consistent With Other Schools. Our proposal would make charter school funding as consistent as possible with other schools and neutralize any positive or negative fiscal incentive for the formation of charter schools.

Give Small School Districts Additional Flexibility. Very small districts experience unique problems that warrant additional fiscal flexibility. As we discussed in our Analysis of the 2002-03 Budget Bill, school districts with less than 1,500 average daily attendance (ADA) receive allocations that are too small to be used effectively—even when programs are grouped into block grants. For instance, based on statewide averages, we estimate a school district of 150 students would receive $37,000 from the Core Services Block Grant and a maximum of $50,000 from the Compensatory Program Block Grant.

The actual per-pupil amount of categorical funds received by many small districts, however, is considerably less than the average. Small districts are less likely to apply for state funds because the cost of complying with state application and administrative requirements are large relative to the amount of funds available through the program. Small districts also are less likely to receive funding from categorical programs that target resources to a limited number of specific districts. As a result, given block grant funds would be distributed in proportion to the amount districts received in the current year, the average small district block grant allocations would be smaller than the state average.

Therefore, we recommend the Legislature allow these districts additional flexibility to transfer funds among the block grants. We suggest setting the small district transfer authority at twice the percentage permitted to larger districts. If experience shows that greater flexibility is needed, the Legislature could adjust the limits in the future. As with charter schools, we suggest the Legislature require small districts to submit the accountability data required by each block grant.

Focus Funds and Responsibility on Districts

Three of our proposed block grants contain funds that currently support programs administered by COEs. In the preceding pages, we discussed the problems with direct funding of county office programs. For these reasons, our block grants apportion to districts the categorical funds currently distributed to county administered alternative education and vocational education programs. By taking this step, the Legislature would focus the responsibility for identifying and providing the services that best meets student needs on districts. Consistent with this responsibility, this change could give districts greater control to purchase the type and quality of services to meet those needs.

To make this change too quickly, however, could result in severe program dislocations and result in service gaps to students who need county services. Therefore, we recommend the Legislature create a transition period during which COEs and school districts would develop working plans to mitigate large funding changes in any one year and create a funding source for students who would otherwise fall through the cracks of the district delivery system (students who are referred by the courts, for example).

Specifically, we propose that in 2003-04, districts forward to COEs those funds that would have otherwise gone to county programs. During the year, the county office and districts would negotiate three-year plans for the type and amount of services desired by each district. At the end of the three years, districts would be free to use the funds for any district, county, or other program that is consistent with the intent of the block grant. The transition plan also would require districts to set aside a portion of the block grant for a countywide fund for students who require county services but are not the fiscal responsibility of any district. At the end of the transition period, these plans could evolve into annual contracts between COEs and districts. 

The transition plan is similar to the process used by the Legislature as part of the recent special education funding reform. We think the planning process would provide COEs the opportunity to convince districts of the merits of their services, to make adjustments that render the services even more valuable or effective for districts, and to adjust slowly to the level of services desired by districts.

Specific Features of the LAO Block Grants

Our alternative block grant proposal combines funding from 62 existing programs into five new categorical block grants. Figure 5 summarizes our proposed block grants, which are described in greater detail below.

Figure 5

LAO Proposed Block Grants


· Academic Improvement Block Grant ($2.8 Billion). Combines 22 programs that support staff development, instructional or curricular support, or class size reduction. Funds would be available for a wide range of general school improvement activities.

· Compensatory and Alternative Education Block Grant ($1.8 Billion). Combines 19 programs that fund supplemental services for low-performing students or alternative education settings. Funds could only be spent on these two purposes.

· Core Services Block Grant ($1.4 Billion). Consolidates 12 programs that support basic district and classroom costs, including instructional materials and deferred maintenance. Funds would support any of the services currently allowed under existing programs.

· Vocational Education Block Grant ($385 Million). Merges five vocational education programs that could be used for career counseling, vocational instruction, and vocational components of integrated academic and vocation programs.

· Regional Support Block Grant ($31 Million). Consolidates six existing county office administered programs that provide technical assistance or coordination of services. Funds would support regional support services as needed by local districts.

Academic Improvement Block Grant

We recommend the Legislature create an Academic and Instructional Improvement Block Grant that consolidates 22 existing programs and $2.8 billion in Proposition 98 funds. 

Our recommended Academic Improvement Block Grant would consolidate a total of $2.8 billion in Proposition 98 funds for 22 programs that support local activities designed to improve student achievement and enhance teacher quality. This includes 18 programs that are part of the Governor's proposed K-12 block grant and 4 programs the budget proposes to fund separately. Included among the 22 programs is K-3 CSR, the School Improvement Program, Summer School (partial), and Staff Development Day Buyout. Figure 6 summarizes the 22 programs and the amounts included in the Governor's budget for these programs in 2003-04. 

Figure 6

Programs Included in LAO Academic Improvement Block Grant

(In Millions)


2003-04 Governor’s Budget

Class Size Reduction, Grades K-3


School Improvement Program, Grades 1-12


Core Academic Summer School, Grades K-12a


Staff Development Day Buyout


Class Size Reduction, Grade 9


Teaching as a Priority Block Grant


Peer Assistance and Review


Beginning Teacher Support and Assessment


Gifted and Talented


Mathematics and Reading Professional Development


Principal Training


National Board Certification


Tenth Grade Counseling


Local Arts Education Partnership Grant


College Preparation Partnership


Academic Improvement and Achievement Act


Advanced Placement Teacher Training


Intersegmental Staff Development


Bilingual Teacher Training


Advanced Placement Fee Waivers


International Baccalaureate


Institute for Computer Technology




a We place core summer school programs in this block grant and remedial summer school programs in the compensatory block grant

Currently, the state has almost two dozen categorical programs designed to either promote general academic achievement or improve teacher quality. Many of these programs restrict district choice to determine how best to improve the educational program. Our proposed block grant would allow districts to select the strategies that are best suited to their local situation—free from constraints imposed by the existing program.

This flexibility is particularly important given the lack of data on the relative effectiveness of particular improvement strategies. For example, research suggests K-3 CSR can, under certain conditions, improve student achievement. These conditions, however, were not widely in place in California when the CSR program was initiated. As a result, the state's $1.5 billion investment in K-3 CSR was much less effective than it could have been. In addition, a growing amount of research suggests that CSR may not be as cost-effective as other strategies for improving academic achievement. By giving districts greater flexibility, we think districts can use state funds more effectively.

We recommend broadly defining the allowable uses of block grant funds. This would allow districts to use funds in the block grant for staff development, school curriculum and instructional support, and schoolwide improvement activities. Allowable uses, for example, range from reducing class size to developing specialized college preparatory programs to having teachers participate in the California Subject Matter Projects.

Accountability Provisions. To track how districts use funds from this block grant, our proposal would require districts to report the amount of funds spent on CSR, staff support and development, and all other improvement activities. These data would allow the state basic information to compare the effectiveness of different academic improvement strategies.

Additional outcome data on schoolwide student performance probably is unnecessary. Existing state testing and school accountability data fulfill this need. Because of the strong link between teacher quality and student success, we think the state should collect outcome data on each district's staff development programs. Figure 7 (see next page) displays four outcome goals and measures that describe district responsibilities for hiring and training teachers: (1) improving the quality of beginning teachers, (2) supporting new teachers in the classroom, (3) involving teachers in high-quality training, and (4) ensuring that training translates into improved student performance.

To simplify these data and make it easier to understand, the Legislature could consider blending these data elements into a single Instructional Performance Index (IPI). In calculating the index, each goal would be weighted equally and school districts would receive an overall performance score. As with the Academic Performance Index, school districts would be ranked, thereby allowing parents more easily to assess the instructional quality of their school compared to other schools. 

Figure 7

Elements of LAO Proposed Instructional Performance Index

Performance Goal

Outcome Measure

Enhance beginning- teacher quality.

Percent of new teachers hired with emergency permits or preintern certificates or any teacher working outside of his/her subject area.

Provide effective support to beginning teachers.

Retention rate of beginning teachers.

Involve teachers in high-quality professional development activities.

Percent of teachers participating in high-quality professional development activities consistent with new state standards and federal requirements.

Promote instructional improvements.

Percent of teachers whose average class score on relevant California Standards Tests improved annually.

One benefit to our proposed IPI is that two of the index's four performance goals are the same as the new federal Title II requirements. With the enactment of NCLB, the federal government now requires states to report on the percent of "highly qualified" public-school teachers and the percent of teachers receiving high-quality professional development. By incorporating these outcome measures into the proposed IPI, the teacher-related accountability systems at the state and federal levels would be aligned.

Compensatory and Alternative Education Block Grant

We recommend the Legislature create a Compensatory and Alternative Education Block Grant by consolidating $1.8 billion from 19 existing categorical programs designed to help students who need additional services to be successful in school.

The 2003-04 Governor's Budget provides a total of $1.8 billion from the General Fund (Proposition 98) for 19 existing categorical programs designed to help students who need additional services to be successful in school. Students served by these programs include low-performing students, English language learner (ELL) pupils, and students with disciplinary problems or who are at risk of dropping out of school. Figure 8 summarizes the 19 programs and the amount included in the 2003-04 Governor's Budget

Figure 8

Programs Included in LAO Compensatory and Alternative Education Block Grant

(In Millions)


2003-04 Governor's Budget

District Programs


Targeted Instructional Improvement Grant


Economic Impact Aid


Summer School Programs (remedial only)a


English Language Learner Implementation


California School Age Families Education


Continuation Schools


Community Day Schools


K-4 Intensive Reading


Miller-Unruh Reading


Dropout Prevention


Grade 7-8 Math Academies


American Indian Education Centers


Opportunity Programs


Native American Indian Education


Healthy Start



County Programs


Community Schools


Community Day Schools


Opportunity Programs






a We place the remedial summer school programs in this block grant and the core summer school programs in the academic improvement block grant.

The 19 programs included in our proposed block grant share the same general goal—improving the achievement of pupils with instructional needs that require a higher level of services or placement in an alternative setting. Of the 19 programs, 16 programs are currently administered by school districts and 3 by county offices. The programs have overlap ping missions and may impose rigid program rules on districts. As a consequence, this funding structure unnecessarily restricts district flexibility to serve students most effectively.

The largest of these 19 programs are the Targeted Instructional Improvement Grant (TIIG) program ($662.4 million) and Economic Impact Aid ($439 million). The TIIG program provides grants to school districts to (1) fund any court-ordered desegregation programs in districts that have a court order currently in force and (2) improve instruction for the lowest-achieving students. The Economic Impact Aid program provides formula grants to districts based on the number of students who are poor or have limited English proficiency.

To increase district flexibility over the use of these funds, we recommend the Legislature combine these 19 categorical programs into a Compensatory and Alternative Education Block Grant that would provide extra help to pupils with higher-cost instructional needs. The consolidation of these programs into a block grant would give districts greater flexibility and would help districts coordinate state compensatory programs with the federal Title I program.

Allocation Formula. Consistent with the other four proposed block grants, district allocations would be proportional to the amount provided in 2002-03. Future allocations under this block grant would be distributed using an ADA-based formula. Unlike the other four block grants, however, the formula would base ADA on the number of ELL students, ELL students who were redesignated as proficient in the previous year, and economically disadvantaged pupils. Districts receiving funds from the block grant would be required to first fund the costs of any court-ordered desegregation program, if such an order is in force.

Accountability Provisions. Existing state and federal law already requires districts to report adequate outcome data to measure how well districts are serving the needs of these students. We recommend the Legislature require SDE to compile a performance report on this block grant using the following data:

Core Services Block Grant

We recommend the Legislature create a Core Services Block Grant by consolidating 12 programs to provide $1.4 billion in support for the basic district and classroom costs of K-12 education.

The 2003-04 Governor's Budget proposes to spend $1.3 billion for 12 categorical programs and reimbursement for 36 state-mandated local programs that generally support basic district and classroom expenses. For instance, the instructional materials program funds the purchase of textbooks and other instructional materials needed by classroom teachers. Instructional materials constitute a core element in the resources needed by each classroom. While funds for these core activities could be added to district revenue limits, there are also legitimate concerns about whether districts are sufficiently accountable for these activities.

We propose to merge these core programs into one block grant that could be used for any of the basic district and school services that currently are allowed under the separate programs. Figure 9 lists the programs that we recommend for the Core Services Block Grant and the funding levels proposed in the Governor's budget for those programs in 2003-04. We also add $95 million above the level in the proposed budget for K-12 mandates in order to bring annual funding more closely in line with the ongoing costs of current mandates. This brings the total block grant amount to $1.4 billion.

Accountability Provisions. Measuring outcomes for several of these programs is impractical. Gauging the adequacy of a district's major maintenance program, for instance, requires examining district maintenance logs. Similarly, assessing whether students have adequate instructional materials requires visiting classrooms and evaluating whether the supply and quality of materials is sufficient. Therefore, we recommend the Legislature require districts to report expenditures on instructional materials, major maintenance, and school library materials. The SDE performance report on the Core Services Block Grant would compare district expenditures to a reasonable standard for the level of services needed by students in these areas.

Figure 9

Programs Included in LAO Core Services Block Grant

(In Millions)


2003-04 Governor’s Budget

Home-to-School Transportation


Instructional Materials Block Grant




Deferred Maintenance


Meals for Needy Pupils


School Safety


Child Nutrition


Year Round Schools


School Library Materials


School Law Enforcement Partnership


Pupil Residency Verification


Teacher Dismissal Grants




a Less than $100,000.

Outcome data, however, would be useful in two areas. The percentage of low-income students who receive subsidized meals would provide a direct measure of district efforts in this area. In addition, data required by federal law on student expulsions and suspension would summarize this aspect of the school environment. 

Include Mandates in the Block Grant. We include reimbursement for school district mandates in the Core Services Block Grant to create district incentives to reduce mandate-related costs and distribute mandate reimbursement more fairly. The budget's proposed categorical block grant does not contain K-12 mandate funding. Instead, the Governor provides $110.4 million as a separate budget item.

Under our proposal, we add a total of $199 million for the school district share of mandate funding in the Core Services Block Grant. This amount includes $104 million budgeted for district mandates plus an additional $95 million we propose to add in order to more closely align state funding and actual district costs in the budget year (the COE share would remain separately budgeted). Mandate funds would be distributed in the block grant to each district based on a uniform amount per ADA. First call on the block grant funds would be to cover the costs associated with meeting the requirements of the specified mandates. If district costs exceeded the amount included in the block grant for mandate reimbursements, a district would have access to other funds in the block grant to satisfy those costs.

For additional information on this proposal, please see our analysis of K-12 mandates later in this chapter.

Vocational Education Block Grant

We recommend the Legislature create a Vocational Education Block Grant that consolidates five existing vocational education programs and $385 million in Proposition 98 funds.

The budget proposes to spend $385 million in Proposition 98 funds for five vocational education programs which we would consolidate into a new block grant. Of this amount, funding for ROC/Ps accounts for $342 million (89 percent) of the total. Figure 10 summarizes these programs and the amounts included in the Governor's budget.

Figure 10

Programs Included in LAO Vocational Education Block Grant

(In Millions)


2003-04 Governor’s Budget

Regional Occupational Centers and Programs


Partnership Academies


Apprentice Programs


Specialized Secondary


Agricultural Vocational Education




We propose to protect funding for vocational education because there are few existing mechanisms to hold schools and districts accountable for career preparation. State graduation requirements and academic accountability programs have reduced district focus on career preparation and the time available to students to take vocational classes. The result is that students may be missing opportunities to obtain knowledge and skills that would help them find higher-paying jobs upon graduation.

Our 1994 report School-to-Work Transition identified several problems that result from an increased focus on academic preparation:

These problems suggest that schools are not meeting the career preparation needs of many K-12 students. The responsibility for helping students plan and achieve their educational goals begins in high school. Without adequate counseling and assistance in course scheduling, large numbers of students who are planning to work upon graduation will fail to obtain the vocational courses that could provide an advantage in the job market. While our report is almost a decade old, we believe the attention to career issues in California has not improved and may have worsened.

For these reasons, we propose the Vocational Education Block Grant as a means for the Legislature to increase district accountability for career preparation. Districts could spend these funds on any vocational activity—including career counseling and course placement activities, direct vocational training, and vocational components of programs like Partnership Academies. Holding districts accountable for vocational education—and providing funds for district programs—is an important step for improving career preparation in California.

Since the bulk of funding in the block grant is currently provided through ROC/Ps, a transition period—similar to what we describe earlier regarding county office services—would be needed. As discussed above, our proposal shifts to districts state funds currently appropriated to county office and joint-powers ROC/Ps. Our goal is not to eliminate ROC/Ps—we think they would remain a key part of the service delivery system—but to focus responsibility on districts and give them flexible resources to address student needs. The three-year compacts we describe as part of the transition process would allow the needed district planning to occur and give ROC/Ps an opportunity to revamp programs as necessary.

Accountability Provisions. Collecting the ideal outcome data on vocational programs is expensive because of the difficulty of tracking the work experience of high school graduates. For this reason, we suggest using both expenditure and outcome data to measure district performance in the vocational area. Expenditure data would include amounts spent on counseling, vocational classes, and other vocational support costs. Districts also would report the percent of funds dedicated to services provided to adults.

Several existing outcome measures would provide useful information in evaluating vocational programs. State test scores of students who take several vocational courses would reinforce the importance of academic success as a foundation for future success. The state could also collect data on the quality of students' work experience during school and the summer months. In the long run, data on employment rates and wages of high school graduates would provide the most meaningful assessment of local vocational programs. The SDE advises that it currently is discussing ways to capture this type of data in the future.

Regional Support Block Grant

We recommend the Legislature create a Regional Support Block Grant by consolidating six categorical programs that provide $31 million to county offices of education for technical assistance services to school districts.

The budget's categorical proposal includes $31.1 million for six programs that COEs administer to provide technical assistance and coordination of services to districts. The programs focus primarily on staff development and education technology. We recommend consolidating these six programs into a Regional Support Block Grant, as shown in Figure 11. (The amount shown for the Beginning Teacher Support Program represents the program's base administrative support cost; actual training costs of the program have been included in the Academic Improvement Block Grant.) 

Figure 11

Programs Included in LAO County Support Block Grant

(In Millions)


2003-04 Governor’s Budget

Education Technology


Teacher Recruitment Centers


Administrator Training


Beginning Teacher (base funding)


Early Intervention for School Success


Civic Education




In administering these six programs, COEs fulfill a state-level function of providing information on best practices and ensuring that districts can obtain needed staff development providers. Because COEs establish ongoing relationships with districts, counties are better positioned than the state to know what types of services and providers would be most useful to districts.

By funding separate categorical programs to support this county office infrastructure, however, the state misses the opportunity to take advantage of these relationships in determining what mix of services would be most helpful to districts. For instance, some parts of the state may have a sufficient supply of teachers, but have a pressing need for help in creating effective parent participation programs. Because none of the six existing programs targets parent participation, counties have no resources to help districts meet this need. Thus, the existing framework of dedicated categorical funds limits the ability of COEs to respond to local needs.

Our proposal would distribute funds to the 11 county office regions to align the provision of services with other regionally delivered services (such as federally funded assistance to low-performing schools) and to take advantage of the economies of scale that regionalized services offers. County offices and school districts would develop regional three-year compacts that would describe district needs in the region and the use of funds. These compacts would require district approval of the regional spending plans. 

Accountability Provisions. The design of this block grant creates accountability for the regional infrastructure system by giving districts a voice in the services provided with block grant funds. As a consequence, if district participation works as intended, there is no need for additional accountability measures. The Legislature, however, may want to monitor the use of funds over time to gain an understanding of district technical assistance needs in different regions of the state. In addition, SDE could annually survey a sample of districts to gauge satisfaction levels in the types of services provided through this block grant.

Information Needed on Proposed Staff Reductions

We withhold recommendation on the Governor's proposal to delete 97 positions and $6.7 million from the state Department of Education (SDE) pending a more accurate accounting of the actual positions to be cut and additional information on the implications of the reduction. We recommend the Legislature ask the Department of Finance and SDE to provide this information prior to budget hearings.

The Governor's budget proposes to cut 97 positions from SDE as a result of the elimination of programs included within the administration's categorical block grant proposal. The Governor's budget assumes this would generate $6.7 million in General Fund savings. This reduction would be in addition to the 82 positions proposed for elimination as a result of the child care realignment and a total of 29 positions cut for various other reasons.

We are unable to determine the appropriateness of the Governor's proposed state operations reductions associated with the categorical block grant reform for two reasons. First, DOF has been unable to justify neither the magnitude of the proposed reductions, nor the rationale for cutting specific positions. Second, although SDE has raised serious concerns about the Governor's proposal, it was unable, as of this writing, to provide an alternative proposal or document the likely implications of the Governor's proposed reductions.

Given this lack of clarity on the technical aspects of the Governor's proposal as well as appropriate alternatives, we recommend the Legislature ask DOF and SDE to provide additional information prior to budget hearings.

Although SDE had not yet documented the implications of the proposed reductions as of the time of this writing, it had identified at least two types of technical problems in the Governor's state operations proposal. In addition to these technical issues, we have two other potential concerns with the Governor's proposal as discussed in more detail below. 

Technical Problem—Eliminating Federally Funded Positions. One technical problem with the Governor's budget proposal is that it cuts General Fund dollars when it eliminates federally funded positions. Obviously, eliminating a federally funded position does not yield General Fund savings. For example, the Governor's budget proposes to eliminate several positions within the Professional Development and Curriculum Support division even though the positions currently are not supported with state General Fund monies.

Technical Problem—Eliminating Positions When Duties Remain. Another major problem with the proposal is that it eliminates positions whose duties are unaffected by the proposed block grant. For example, the Governor's budget proposes to cut 62.5 positions from the Professional Development and Curriculum Support division, thereby eliminating the entire division. The department's initial review, however, identifies only 16 of the 62.5 positions in this division as working on programs included in the block grant. Under the Governor's proposal, this division would retain responsibility for administering both the Mathematics and Reading Professional Development program and the Principal Training program (which would receive a tenfold increase in funding in the budget year). This division also would retain numerous federally related responsibilities, including: (1) administering more than $330 million in federal Title II funds; (2) reporting on the state's ability to meet the new federal requirements regarding teachers and paraprofessionals; (3) monitoring school districts' efforts to hire, train, and retain highly qualified teachers; and (4) providing technical assistance to school districts in selecting and implementing high-quality professional development programs.

Potential Concern—Maintaining Data Collection Efforts. The SDE is involved in various data collection efforts of vital interest to both the state and federal governments. In evaluating the proposed reductions, the Legislature should ensure that these critical functions are not undermined. To date, it is unclear how the Governor's proposed reductions would affect these efforts.

Potential Concern—Future Role of SDE. The Governor's budget does not include a plan for managing the transition from a categorical to a block grant environment. The budget assumes SDE has no oversight or technical assistance role under categorical reform. As we discuss above, we believe the department has an important part to play even if most categorical programs became part of a block grant system. In addition, the Governor's budget does not confront some basic transitional issues likely to emerge during the budget year. For example, the proposal eliminates several positions related to multiyear audits the department has not yet completed.

For all these reasons, we withhold recommendation on the state operations portion of the proposal pending further information from DOF and SDE on the justification for and implication of the proposed reductions.

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