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

Proposition 98 Mandates

We recommend that the Legislature increase funding for Proposition 98 mandates by $100 million and include $199 million for school district mandates in our proposed Core Services Block Grant. This would create school district incentives to reduce mandate-related costs and distribute mandate reimbursements more fairly.

The proposed categorical block grant does not contain any Proposition 98 mandates. Instead, the Governor provides $110 million as a separate budget item. We recommend that the Legislature increase this funding by $100 million, for a total of $210 million to be allocated as follows: (1) include $199 million for K-12 mandates in our proposed Core Services Block Grant and (2) retain $10 million outside the block grant to be used by county offices of education (COEs). The remaining $1 million would not be allocated because we recommend repealing the mandate for physical fitness testing in the "Assessments" section of this chapter.

Background

Voters approved Proposition 4 (the Gann Limit) in 1979. One of the components of this measure generally requires the state to reimburse local agencies for costs incurred in carrying out new programs or higher levels of services that are mandated by the state. The Commission on State Mandates is responsible for determining whether a statute creates a state-reimbursable mandate. If the commission so determines, it develops an estimate of the statewide cost of the mandate. There are 36 mandates in the 2003-04 budget for which school districts and COEs can receive reimbursements.

Problems With Mandates  

Although the state mandate requirements provide an important "check" on the power of the state to impose new programs on local governments, the administrative process for claiming reimbursements has many shortcomings:

Mandates Are Costly. The Governor provides $110 million for budget-year costs of education-related mandates, and proposes to defer payment of unfunded mandate costs from prior years and a portion of the ongoing costs of existing mandates. The amount budgeted for K-12 mandates has been historically underfunded. The state's education mandate liabilities through the budget year total somewhat over $1 billion.

No Incentive to Minimize Costs. Since local education agencies receive full reimbursement from the state for costs of implementing mandate requirements, they have little incentive to manage costs and implement requirements efficiently. There has also been concern of overclaiming by school districts. A sample of claims reviewed by the State Controller's Office suggests that school districts cannot substantiate over half of the claims surveyed.

Costs to Administer Mandates Vary Widely. The average amount claimed by school districts for all education mandates was $29 per average daily attendance (ADA) per year from 1998-99 through 2000-01. The amount claimed, however, varied widely from district to district. Figure 1 shows that about 88 percent of districts claimed zero to $50 per ADA per year, but a few outliers claimed over $300 per ADA.

Administrative Burden. From both the state's and local's perspective, the mandate reimbursement process is time-consuming and costly. Claiming instructions and reimbursement forms are lengthy and intricate, generating paperwork and additional state costs. One fact suggesting this burden: Our review of claims data indicates that about 60 districts did not submit any mandate claims from 1998-99 through 2000-01.

Benefits of Placing Mandates in a Block Grant

To address the shortcomings mentioned above, we recommend increasing funding for mandates by $100 million to better represent budget-year costs and including all mandate funding for school districts in our Core Services Block Grant. (Please see the preceding piece on categorical reform.) There are several advantages to such an approach. First, since school districts could redirect any savings from mandate implementation to other education purposes permitted by the block grant, they would have an incentive to meet the requirements of the mandates in a cost-effective manner. This means that more funds could be devoted to direct pupil services. Second, our recommended approach eliminates existing incentives to maximize claims, a process that contributes to the high level of state costs. Third, school districts' administrative costs would decrease because there would no longer be a need for the labor-intensive tracking and claiming process. Finally, districts would have an incentive to share information regarding which mandates appear, from their perspective, to no longer be cost effective. This information would help the Legislature to periodically reassess the need for certain education mandates.

How Mandates Would Work in a Block Grant

School districts currently claim about 95 percent of mandate costs while COEs claim about 5 percent. Under our proposal, 95 percent of mandate funding would be included in the Core Services Block Grant to be used by school districts ($199 million), and 5 percent would remain outside the block grant to be used by COEs ($10 million). The first call on the block grant funds would be to cover the costs associated with meeting the requirements of the specified mandates. The mandate funding included in the Governor's budget would be distributed in the block grant to each district based on a uniform amount per ADA. Based on our proposed funding level of $199 million, the amount per ADA for school districts would be $33.65.

Under this proposal, school districts would not be required to submit any reimbursement forms. Districts that spend less than the per-ADA amount could use the excess funds for other educational activities permitted by the block grant. In contrast, districts that spend more than the per-ADA amount would have access to other funds included in the block grant. We believe that this approach would create strong incentives for school districts to economize on mandates.

The Legislature would integrate new mandates into the Core Services Block Grant in the future. After a new mandate is established and the Commission on State Mandates has calculated an estimated ongoing cost, the budget would include that amount in the Core Services Block Grant on a per-ADA basis. (The Legislature would still be obligated to pay for the prior-year claims of new mandates through the mandates claims bill.) Similarly, the proposal would not affect past-year deficiencies that remain to be paid in future years. The Legislature will need to satisfy these claims at some point in the future.