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

Revenue Limits and Discretionary Funds

We recommend that the Legislature not fund revenue limit equalization as proposed by the Governor ($250 million), in light of the state's fiscal situation and increased flexibility generated by the categorical block grant. We also recommend that the Legislature delay revenue limit equalization until a year when Proposition 98 can fund growth, cost-of-living adjustments (COLAs), and pay off any remaining deferrals. We further recommend that the Legislature not create a deficit factor if it does not fund the statutory COLA.

Revenue limit spending, which is funded by local property taxes and the state General Fund, is the chief source of discretionary monies for school districts. Each year, revenue limits are increased to compensate for enrollment growth and COLAs. For 2003-04, the Governor's budget provides $322 million to compensate for 1 percent enrollment growth, but does not provide the statutory COLA of 1.55 percent, which would have totaled $441 million.

Do Not Create "Deficit Factor." In past years when the state did not fully fund the statutory COLA, the Legislature created a deficit factor which obligated the Legislature to restore the COLA at a future date. If the Legislature does not fund the COLA, we recommend that a deficit factor not be created. This would give the Legislature more flexibility to spend funds in future years yet would still permit the Legislature to restore the COLA if it wished to do so.

Delay Funding for Equalization. Despite not having sufficient funding for the COLA, the Governor provides $250 million for revenue limit equalization in the budget year. This amount exceeds by $47 million the $203 million that has already been appropriated for 2003-04 by Chapter 1167, Statutes of 2002 (AB 2781, Oropeza). In past years, we have argued in favor of revenue limit equalization because: (1) historic differences in revenue limit funding levels had no linkage to underlying cost factors and (2) it provided general purpose funding for school districts to improve academic achievement. Given the state's fiscal situation in 2003-04 and the increased flexibility generated by the proposed $5.1 billion categorical block grant, we recommend that the Legislature delay funding revenue limit equalization to future years. Specifically, we recommend that revenue limit equalization have first call on future Proposition 98 growth after the costs of enrollment, COLAs, and any remaining deferrals are addressed.

Budget Increases Discretionary Funds. Figure 1 shows general purpose funding as a percent of total K-12 Proposition 98 funding. It shows that the proportion of discretionary funds declined in the 1990s, but has been rising since 2000-01. In 2003-04, the proportion of discretionary funds increases dramatically—from 70.4 percent to 84.4 percent—due to the new categorical block grant, which we consider discretionary because of limited restrictions on the use of the funds. Given the fiscal situation districts face, creating this additional discretionary authority could help districts focus on individual priorities and mitigate the impact of receiving neither a COLA nor new revenue limit equalization funding. Providing this local discretion over spending is also essential in the context of the state's new accountability framework. The accountability framework constructed by the Governor and the Legislature puts in place a means for assessing desired educational outcomes and creating incentives for achieving them. To maximize the chances for improving educational results, the state must give school sites flexibility to fit budgetary resources to local circumstances and needs.