Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

Governor's Categorical Consolidation Proposal

The Governor's budget proposes to increase district fiscal and program flexibility by consolidating $2 billion in existing categorical program funds for 22 programs into revenue limits. While parts of the proposal are still in development, we recommend the Legislature approve the proposal with several modifications that we believe will further the goals of the reform.

State funds for K-12 education fall into two main categories. The largest source of funds is provided through a general purpose "revenue limit." Revenue limits support "core" education program costs such as teacher and administrator salaries, lights and utilities, maintenance, and other costs. Categorical programs generally support specific supplemental costs. The 2003-04 Budget Act contains more than 70 categorical programs that provide almost $12 billion in state funds for a wide range of district programs, including class size reduction, special education, teacher training, and child nutrition.

Governor's Proposal  

The 2004-05 Governor's Budget proposes to consolidate $2 billion in funding for 22 categorical programs into a general purpose grant that would be distributed through each district's and county office's of education (COEs) revenue limit formula. Of this amount, the budget proposes to defer payment of $146 million until 2005-06. As a result, about $1.9 billion would actually be available to districts and county offices in the budget year.

By including the categorical funds in the revenue limit, the proposal would extend new flexibility to districts over the use of the $2 billion. As revenue limit funds, the consolidated grant could be used for any purpose—not just those permitted by the 22 existing categorical programs. Along with this new flexibility, the proposal requires a district plan that is intended to increase local accountability for district spending decisions.

The budget proposal would maintain the current distribution of funds to school districts and COEs. This would be accomplished by calculating the new grant for each district equal to the amount districts would otherwise receive in 2004-05 from the 22 categorical programs. In future years, the proposal would increase the grant annually to compensate for growth in the student population and inflation.

Programs Proposed for Consolidation

Figure 1 displays the 22 categorical programs that would be consolidated under the budget proposal. According to the administration, the programs selected for consolidation meet one of three criteria: the programs (1) contain few restrictions on the use of funds, (2) do not support services for special needs students, or (3) have stable district allocations.

The 22 existing programs support a wide variety of local activities. Among the largest programs included in the consolidation are Home-to-School Transportation ($520 million), which subsidizes bus services for students, and the School Improvement program ($396 million), which funds supplemental services that are identified by local school site councils. The proposed new grant also includes the portion of the Targeted Instructional Improvement Grant (TIIG)$205 million that pays for activities called for under all voluntary desegregation agreements and those court-ordered agreements that have been terminated by the courts. Funding provided for "active" court-ordered desegregation plans is not included in the proposed consolidation.

Almost all state-funded staff development programs are consolidated into the new grant, accounting for $385 million (19 percent) of the total. This includes $235 million for the Staff Development Day Buyout program and $88 million for the Beginning Teacher Support and Assessment program. Instructional Materials funds ($175 million) also are merged into the consolidated grant (although a new $188 million Instructional Materials program is proposed separately from the consolidated grant).

Accountability Requirements

The proposal requires districts and COEs to submit to the State Department of Education (SDE) an allocation plan that would describe the use of the grant funds and address six specific "accountability" issues. While draft legislation to implement the proposed block grant was not available at the time this analysis was written, the Department of Finance advises that district plans would include the following:

• An estimate of additional funding needed by districts to ensure adequate school maintenance (including clean bathrooms).
• An estimate of funding increases necessary to provide standards-aligned textbooks to all students.
• The amount of the new grant districts would use to fully restore the state-required level of reserves for economic uncertainty by 2005-06. (Trailer legislation to the 2003-04 Budget Act permits a two-year opportunity to reduce reserves by half in order to give districts greater flexibility to accommodate reductions in state funding levels, but requires the reserves to be restored by 2005-06.)
• The proportion of the new consolidated grant that would be subject to collective bargaining.
• A description of the decision making process that would govern funding distributed for school-site uses.
• A plan for public participation in district funding allocation processes.

Despite the requirement that districts address these six accountability issues, the proposal actually would not place specific requirements on the local use of the funds. Districts would not be required to spend consolidated grant funds on maintenance, textbooks, and district reserve funds—even if the local plan found that existing funding levels failed to adequately meet district needs. Similarly, the proposal does not mandate that districts distribute a share of the funds to school sites.

Instead of creating new mandates on the use of the new grant, the budget seeks to increase local accountability over district spending practices. The budget proposes to accomplish this by involving greater numbers of parents, teachers, and principals in district budgeting decisions. Highlighting maintenance, textbooks, and adequate reserves is intended to provide new information to these community members—information meant to further spur participation and discussion of district budget priorities.

In short, the administration's proposal seeks to eliminate state-level decision making over the $2 billion and the 22 narrow categorical program requirements. In its place, the proposal provides local decision making over the funds, which makes school boards accountable for making the broad trade-offs that improve local outcomes. This represents a significant change in the state's approach to school funding. In the following sections, we review the strengths and weaknesses of the proposal.

Benefits of the Governor's Plan

By giving districts greater flexibility over the use of existing categorical funding, the Governor's proposal would generate a number of important benefits for school districts. These include:

• Greater Fiscal and Program Flexibility. Greater fiscal flexibility would allow districts to direct the new grant funds to the highest priority local needs and to craft local programs that address those needs most effectively. Thus, the additional flexibility helps districts maximize the local impact of state funds.
• Administrative Savings. Eliminating the individual program requirements of the existing programs helps districts reduce local administrative costs associated with process, accounting, and compliance requirements.
• A Focus on Outcomes Rather Than Rules. Eliminating the categorical program requirements reduces the complexity of managing funds and helps districts concentrate on using funds most effectively to increase student achievement rather than compliance with state rules.
• Clearer State/Local Relationship. By increasing local autonomy over the use of funds, the state would clarify the school board's role in decision making over these funds. This would make it easier for parents and voters to participate in local budget decisions and hold school board members accountable for how funds are used.

While we have few details on the specifics of the proposal, the accountability provisions that are intended to spur increased participation in district budgeting decisions also could result in significant benefits. The state's current accountability system for student achievement is designed, in large part, to increase local pressure on districts to improve by making parents and community members more aware of the quality of education provided locally. District budgets reflect many important policy and fiscal decisions that affect the quality of education provided to students. Increasing parent and community participation in budgetary decisions can help ensure that decisions reflect the needs and desires of parents and students for improving student achievement. In addition, broader participation can increase community awareness of issues facing the district and generate new ideas that expand the range of possible solutions to those issues.

Issues and Recommendations

We have long recommended categorical program reform. Our 2002-03 and 2003-04 Analysis of the Budget Bill provided the Legislature with a description of the proposals included in prior budgets and offered two alternative proposals to consolidate current programs into categorical block grants (please see the 2002-03 Analysis, p. E-77 and 2003-04 Analysis, p. E-43). We think the Governor's proposal represents a significant step towards the goal of establishing a streamlined system of categorical programs that provides significant local flexibility and addresses the accountability issues that are implicit in the creation of many of the supplemental funding programs.

Accordingly, we recommend the Legislature approve the general approach of the proposed consolidation. We would, however, suggest several modifications to address four broad concerns we have identified with the proposed consolidation:

• Selection Criteria. We outline alternate criteria for determining which programs should be included in the new grant. Based on these criteria, we identify two types of programs where increased local accountability may not provide a sufficient balance of local interests. We also have identified several other programs the Legislature may want to consolidate in the new grant.
• Transition Issues. We have identified two "transition" issues that could undermine the goals of the proposal in the near term.
• State Information Role Is Missing. We identify a missing element of the proposal—increasing information to districts and school sites on effective uses of funding.
• Accountability Through Community Involvement. We review the essential elements of the accountability portions of the district plan—a key element of the proposal—that are needed to increase participation of community members in school affairs.

Below, we discuss these areas of concern.

Which Programs Should Be Consolidated?

We recommend the Legislature modify the list of categorical programs that are included in the proposed grant in order to consolidate those programs for which existing or expanded levels of community involvement would provide sufficient local accountability.

As discussed above, the budget proposal cites three criteria for choosing which categorical programs were included in the consolidated grant. Specifically, the programs: (1) contain few restrictions on the use of funds, (2) do not support services for special needs students, or (3) have stable district allocations. We have two concerns with the criteria. First, we think the criteria should more explicitly address whether strengthened local accountability would eliminate the need for separate categorical funding streams. Second, the proposal applies its own criteria inconsistently, consolidating programs that do not meet the three tests and excluding other programs that satisfy the criteria.

LAO Alternate Criteria—A Focus on Accountability

Categorical programs are designed to address situations where local incentives cause districts to underinvest in a particular input that is critical to the educational process. 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 input. Categorical funding guarantees that districts will spend at least a minimum amount on a particular service, thereby countering, at least in part, the local incentives to underinvest.

For this reason, we believe the criteria for categorical consolidation should focus on whether local accountability would resolve the problem of underinvestment. The proposal's criteria only implicitly address incentive problems. For example, one of the proposal's criteria is that programs included in the consolidation do not provide support for services to special needs students. This suggests that, by excluding these programs, the administration is not comfortable that local incentives for funds targeted at special needs students is sufficient to ensure the needs of these students would be met.

We think there are two basic criteria the Legislature should consider as it reviews the proposed consolidation of categorical programs (see Figure 2). The first is whether local accountability is sufficiently strong that the Legislature can feel comfortable that districts generally will provide the needed level of services and, as a result, categorical funding streams are unnecessary. The second criterion is whether adding funds to revenue limits provides a reasonable allocation of funds to districts in the future. We discuss our criteria in greater depth below.

Is Local Accountability Sufficient? Meaningful parent, teacher, and principal participation in district budget processes can provide a sufficient level of local accountability—particularly for services that have a direct impact on core classroom inputs to education. These groups directly experience the impact of spending shortfalls for inputs such as textbooks and maintenance. As a result, we believe that most categorical programs supporting core classroom services could be included in the consolidated grant. If, however, local accountability cannot adequately counterbalance a local incentive to underinvest, the program should not be consolidated.

External mandates—such as other state or federal requirements—also can create local accountability for certain actions. In these cases, categorical funding streams are not necessary. For instance, TIIG funds district costs of voluntary and court-ordered desegregation agreements. Similarly, the Beginning Teacher Support and Assessment (BTSA) program satisfies the state's induction requirement that all new teachers must meet before obtaining a teaching credential. Because these funds are designed to help districts address specific requirements, consolidating these categorical programs as proposed would not alter any requirements districts must meet.

Is District Need for Funds Measured Reasonably Well by District Attendance? By adding funds to district revenue limits, future budgets would adjust the new grant based on changes in district attendance. Therefore, programs that are identified as candidates for consolidation should be reviewed to ensure that changes in attendance supports a reasonable level of funding for program services in the future. Otherwise, consolidation may create new distributional issues—affecting districts in very different ways. Therefore, the Legislature should avoid consolidating programs for which the level of need changes differently from changes in district enrollment.

Most of the programs proposed for consolidation meet our criteria. Some do not, however. Below, we discuss modifications to the programs that, based on LAO criteria, should be included in the proposed consolidation. Specifically, we recommend:

• Removing staff development programs from the new grant.
• Removing the English Language Assistance Program (ELAP) and the portion of TIIG funds that districts with voluntary desegregations programs use for instructional services for low-performing students.
• Including in the new grant the noninstructional portion of TIIG funds allocated to districts with court-ordered desegregation programs.
• Including K-3 and high school class-size reduction and deferred maintenance in the consolidated grant.

Remove Staff Development Programs

State staff development programs—especially BTSA and the Staff Development Day Buyout—do not meet our accountability criterion. We are concerned that the difficulty of making staff development programs work effectively may result in a local incentive for teachers, administrators, and school board members to underinvest in this activity. In addition, staff development activities support a critical part of the school improvement process. Eliminating the state's programs at a time when the state and federal governments are placing significant pressure on schools to improve teacher quality may send a confusing signal to the school community.

The budget would consolidate six staff development programs into the new grant: Staff Development Day Buyout ($236 million), BTSA ($88 million), Mathematics and Reading Professional Development ($31.7 million), Peer Assistance and Review ($25.9 million), Intersegmental Staff Development ($2 million), and Bilingual Teacher Training ($1.8 million).

We are concerned that there is insufficient local accountability for providing needed high-quality staff development. Although teacher quality is one of the largest determinants of student achievement—which suggests that districts should have considerable incentives for investing in teacher training—neither teachers nor administrators may see staff development as an effective way to improve student achievement.

Effective staff development is very difficult to implement because teachers may resist making changes in their teaching practices. Research has documented the mismatch in the types of training teachers want and the types they need. Teachers often want training in areas that have immediate usefulness in their classrooms, yet this type of short-term training usually has little impact on the quality of instruction.

Staff training that results in higher student achievement has to help teachers replace less effective teaching practices with more effective approaches. Like other professionals, however, teachers are reluctant to abandon old teaching methods. Research also has documented that teachers often resist major changes in their teaching methods unless they are convinced that change is needed and likely to benefit students.

These findings suggest that staff development needs to take place in a cooperative atmosphere, where districts hold school sites accountable for improving instructional practices when needed, and teachers are involved in identifying problems and crafting solutions. This balanced approach is very difficult to implement successfully. As a result, teachers, administrators, and board members may see staff development as a relatively inefficient way of improving the quality of education.

Both the state and federal governments emphasize the importance of staff development in improving student performance. Under the federal No Child Left Behind (NCLB) Act, for example, all K-12 teachers are required to meet the state's definition of "highly qualified" by 2005-06. It appears unlikely that California will meet this deadline. The contribution of teachers to school quality also is recognized in the two state intervention programs for low-performing schools—the Immediate Intervention in Underperforming Schools Program and High Priority Schools Grant Program. At a time when the state and federal accountability programs are pressuring schools and districts to invest in their teachers' ability to meet student needs, transferring to revenue limits the state-funded categorical programs targeted at improving teacher quality may send a contradictory message to districts.

In addition, the BTSA program violates our distributional criteria. Because induction programs are required for new teachers, BTSA funds are distributed based on the number of first- and second-year teachers working in each district. As a result, district allocations of BTSA funds change over time. In addition, new teachers are not evenly distributed among districts. Districts with large numbers of poor students are more likely to have a disproportionate share of beginning teachers. Thus, changes in student enrollment do not adequately measure district need for BTSA-type induction services.

For these reasons, we think this may be the wrong time to consolidate categorical funding for staff development into the proposed new grant. This does not suggest that we believe that the existing state training programs, such as the Staff Development Day Buyout, represent the most effective approach to providing staff development. Because teacher buy-in is so critical to the success of staff development programs, greater local flexibility over the use of these funds for staff development activities is likely to result in a greater impact on teaching practices. As an alternative, therefore, we recommend grouping staff development programs into a block grant that would protect funds for this purpose but provide districts with significant additional flexibility (see our recommendation later in this chapter). If, after several years, the additional flexibility does not allow districts to create more effective staff development programs for their employees, the Legislature may want to revisit the issue of folding state funds for these programs into the revenue limit.

Remove Funding for Services to Special Needs Students

Two programs that support services for special needs students are proposed for consolidation—ELAP and TIIG. We would remove funds targeted for special needs students from the proposal, as we remain unconvinced that local accountability is sufficient. Funds for supplemental instructional services to English learner or low-performing students are protected under our proposal because districts sometimes have underinvested in services to students who may need intensive supplemental assistance to achieve. State and federal accountability programs based on student assessments are designed to alter local incentives related to this underinvestment. The success of these programs is still unproven, however. Only 19 percent of sixth grade economically disadvantaged students in California achieve at the proficient or advanced levels on the state's mathematics and English standards-aligned tests; over 50 percent of noneconomically disadvantaged students in the same grade score at these levels. Until the accountability programs on student achievement show demonstrable progress in closing the achievement gap, we recommend the Legislature maintain the protections on funds targeted for instructional services to special needs students.

The inclusion of ELAP also violates our funding distribution criteria. The program provides additional funding for services to students in grades four through eight who are learning English as their second language. District ELAP grants are not based on district attendance. Instead, district amounts change as the number of English learner students in the district changes. Since including the program would violate both of our criteria, we would exclude the program from the consolidation.

The TIIG presents a more complex situation, as the program supports instructional services for special needs students and a wide variety of other types of district services (transportation, teacher stipends, and magnet schools). Some districts spend a considerable portion of their TIIG grant on these other services, especially transportation. Because TIIG expenditures for these other services may be so interwoven into a district's overall educational program, it may be difficult to determine whether these expenditures directly benefit low-performing students or whether they underwrite base district costs.

One solution is to include TIIG funds that districts use to support instructional services to low-performing students as part of the Economic Impact Aid (EIA) program and consolidate the funds targeted at the "other" services into the revenue limits. The EIA program provides districts with targeted support for low-performing and English-learner students. In that way, the state could protect funds targeted at supplemental student services and increase district flexibility over the remaining portion of the grant without changing how districts currently use TIIG funds. Since the ultimate goal of desegregation and TIIG funding is improving the achievement of disadvantaged students, this division appears consistent with the Legislature's original intent in establishing the programs.

The budget proposal excludes from the consolidated grant TIIG funds for districts with court-ordered desegregation programs. We suggest including funds for these districts in the reform, as the court-ordered programs are not fundamentally different from the voluntary programs. Only one district program is still under court supervision. The other districts operate essentially voluntary programs. For these reasons, we think court-ordered district programs should be treated the same as voluntary programs.

Therefore, to continue state protections on funds for instructional services to special groups of students, we recommend two changes to the categorical proposal. First, we recommend the Legislature remove the ELAP from the consolidated grant. In addition, we recommend dividing TIIG grants into two parts. Funds for instructional services to students would be added to EIA and the remaining funds would be consolidated into revenue limits. We suggest the Legislature allow each district to identify the amount of its TIIG that would be included in the consolidated grant and the amount that would be added to the EIA program.

Add Three Programs to the New Grant

We have identified three additional programs that we believe warrant the Legislature's consideration for inclusion in the consolidated grant. These programs were selected because each has a direct impact on school and classroom services that are important to the school community. Consequently, we think the existing level of local accountability would likely provide a sufficient level of community oversight regarding the use of program funds. The three programs are discussed below.

Elementary and High-School Class-Size Reduction. We would include in the consolidated grant the $1.8 billion proposed for these two programs in 2004-05 for several reasons. Class-size reduction—especially in elementary schools—is very popular among parents and teachers. We think involvement of these two groups in the district budget process likely would require school boards to make a strong case that an alternative use of these funds would lead to better outcomes for students.

In fact, including class-size reduction programs in the new grant could also stimulate local participation in district financial decisions. The popularity of smaller classes could motivate individuals to participate in district affairs in order to protect the program from district budget cuts. As a consequence, including these funds in the consolidated grant could actually contribute to the success of the accountability features of the proposal.

Including these funds also would increase local flexibility over the implementation of smaller classes, thereby relieving districts of rigid state rules over the use of the funds. In the past, we have recommended changes in the 20:1 classroom cap because it creates significant administrative challenges and unnecessarily increases district costs. Furthermore, these high costs may be contributing to a reduction in district participation in the program—preliminary SDE data shows a 5.4 percent decline in the number of students in smaller K-3 classes from 2002-03 to 2003-04. Including the program in the consolidated grant would both increase flexibility over the design of local programs and actually help districts protect smaller classes from local budget pressures if they so chose.

Deferred Maintenance. We also would include $250 million in funding for deferred maintenance in the new grant. This program supports major maintenance and infrastructure projects—such as exterior painting, roof replacement, and long-term repairs to electrical, heating, and plumbing systems that result because districts do not fully fund long- term maintenance. As we have observed in the past, by funding only deferred projects, the Deferred Maintenance program may actually create a fiscal incentive for districts to defer needed projects, rather than deal with them in a more timely manner.

Local incentives for providing an adequate level of ongoing maintenance have improved with changes in the states' bond-funded modernization program. Until 1998, the state paid 80 percent of modernization programs with state bond funds. This created an incentive for districts to underinvest in major maintenance on an annual basis and correct the resulting infrastructure problems as part of modernization programs. Since 1998, however, state bond acts require districts to (1) provide 40 percent of the cost of modernization and (2) increase to 3 percent from 2 percent the proportion of district budgets spent annually on major maintenance for those districts participating in state bond-funded programs. In addition, the local matching funds required under the Deferred Maintenance program count toward the 3 percent major maintenance requirement in the bond acts. As a result, the program does little to increase local maintenance spending.

For these reasons, we recommend the Legislature include $250 million for the Deferred Maintenance program in the proposed consolidated grant.

Impact of the LAO Recommendations

Figure 3 displays the 18 programs that would be consolidated as a result of our recommendations and the seven programs that are proposed in the Governor's budget that we recommend excluding from the consolidation. While we would recommend consolidating fewer programs, we include several large programs that are not part of the budget proposal. As a result, under our recommendations, $3.8 billion in existing categorical support would be shifted to revenue limits—almost double the level proposed in the budget.

Transition Issues May Result in Unintended Consequences

We recommend the Legislature limit the uses of the consolidated grant in the budget year in order to allow district governing boards, parents, teachers, and principals time to consider local uses of the funds as part of district 2005-06 budget processes.

The new consolidated grant would contain funds that districts currently receive for the 22 existing categorical programs. Districts use these categorical funds for a wide variety of activities. Many of these district activities will need to continue in 2004-05 even if the categorical funds come to the district as general purpose monies. Thus, how the new grant operates at the district level in the budget year is critically important. Below we identify two important transition issues that may need to be addressed.

Proposal May Trigger Collective Bargaining Provisions

District collective bargaining agreements may force districts to spend a large share of the consolidated grant on salaries—thereby actually reducing district flexibility over the use of the categorical funds. Many districts have approved collective bargaining agreements with teacher and other employee unions that require the district to dedicate a proportion of new general purpose funds to increasing employee salaries. As a result, the Governor's proposal to transform the categorical funds into general purpose funds could trigger these provisions and require districts to spend a portion of the consolidated grant on salaries. These automatic provisions can require districts to devote 50 percent or more of general purpose funding increases to raising employee salaries.

In our discussions with district staff about these agreements, the automatic provisions were characterized as a way of avoiding acrimonious negotiations each year over the use of cost-of-living adjustments (COLAs) or other increases provided by the state. In addition, the proportional nature of the increases allows districts to avoid committing to specific salary adjustments that may prove difficult to afford if state funding is lower than anticipated.

In this case, however, districts are already receiving the consolidated grants as categorical funds and, presumably, they are spending the categorical funds on their intended purposes. As a result, if the budget proposal triggers these automatic salary provisions, districts will be unable to afford the same amount of services that the categorical funds purchased in the current year. If half of a district's grant is consumed by automatic salary increases, what existing services will the district forego? It is likely that "discretionary" activities, such as school improvement, will experience the brunt of any funding reductions, as districts may have little flexibility in the near term to reduce spending on transportation, textbooks, or staff development day buyout (which is included in teacher salary schedules in some districts).

If the new grant triggers the automatic salary provisions, therefore, the outcome of the budget proposal in many districts would be contrary to one goal of the proposal—to increase local funding flexibility. Elimination of state categorical restrictions may allow districts to spend the remaining funds more efficiently. Because the amount of funds that would be diverted to salaries is so large, efficiency savings would be unlikely to allow districts to obtain the same level of services as currently provided through the existing categorical programs.

This problem is easily remedied, however. The Legislature could place the consolidated grant off-limits to collective bargaining for a year or two. The COLA proposed in the Governor's budget will still provide a source of funds for teacher and staff salary increases. By protecting these funds, the Legislature would prevent the new grant from triggering automatic provisions of local employee agreements and give districts time to work with local employee unions to ensure that funding is available to satisfy high-priority local needs for transportation, textbooks, or school-site discretionary funding. In future years, when districts, unions, and community representatives have had an adequate opportunity to plan and adjust collective bargaining agreements, the legislation would allow funds to be collectively bargained.

Expanded Community Participation Is Unlikely to Occur With 2004-05 Funds

School districts begin detailed budget planning many months before the start of the new fiscal year. Districts commonly use conservative assumptions about anticipated state funding during the development process. Once the state budget is enacted, districts revise their budgets based on actual funding levels appropriated by the state.

This process protects districts from making financial commitments based on legislative proposals that are ultimately unsuccessful. Districts are particularly reluctant to assume enactment of significant new proposals, such as the Governor's categorical consolidation. As a result, unless the Legislature signals agreement to the consolidation early in the budget process, we think it is unlikely that many districts would include the consolidation—and the accompanying accountability provisions—in their spring budget development process.

Instead, district decisions about the use of the consolidated grant would likely take place as part of the fall budget revisions. Because of the short timelines of the fall revision process, we would expect most districts would not use the flexibility afforded by the new grant—except to cover shortfalls in district base budgets. Using the new grant to "plug holes" in district base budgets would result in a very different allocation of the funds compared to the existing categorical uses. In these cases, strengthened local accountability would become very important so that parent, teacher, and principal priorities were recognized during the revision process.

The short timelines of the budget revision process, however, also would make it difficult for districts to implement the accountability provisions in the proposal. Developing a meaningful assessment of whether the district has adequately provided textbooks and maintenance could take considerable time. In addition, a large proportion of parents, teachers, and principals may be on vacation during July and August when much of the budget planning would occur. We think the Legislature should consider limiting district flexibility over the use of the new grants to their current categorical uses in 2004-05. This would help ensure that meaningful community participation could occur as part of the 2005-06 district budget process.

Limit District Discretion During Transition Period

Given the above, we recommend the Legislature limit district discretion over the use of funds in two ways. First, we recommend the Legislature require districts to use funds in the consolidated grant as if the categorical programs were in place for 2004-05 (including the existing "mega-item" flexibility that allows districts to move funds between categorical programs). This would allow the funds to be reprogrammed as part of the 2005-06 local budget process. Second, we recommend the Legislature prohibit districts from spending funds from the consolidated grant for district-wide salary increases for two years. This would allow time for (1) districts to work with unions on the appropriate uses of the funds and (2) parents, teachers, and principals to gain experience in the local budget process and a greater understanding of the needs of their district and various options for using the funds before the new grant could be used for salary increases.

State Information Role Is Neglected

We recommend the Legislature appropriate $500,000 in unallocated federal Title VI funds to develop a strategic plan for meeting school and district information needs on effective programs. This plan would provide a roadmap for a longer-term program to help local decision makers make informed decisions about the uses of K-12 funds.

Decentralizing decision making as proposed in the budget magnifies the importance of ensuring that district and site staff are informed of the relative effectiveness of different expenditure options. This type of information gathering is expensive, as there are few state or federal programs that make such information easily available. Worse, existing studies may conflict in their findings on the effectiveness of services or the needed data simply may not exist.

It is easy to imagine the types of questions that may arise. For instance, under the K-3 Class-Size Reduction program, districts have little flexibility to determine how best to maximize the impact of smaller classes. If the program is included in the consolidated grant, however, districts would have to decide if a different approach to smaller classes would result in larger increases in student achievement. Of course, districts could choose to continue existing practice. If a district felt a different approach might benefit its students, how would it evaluate its options? Which grades most benefit from smaller classes? Do the benefits increase as the class size falls? Do English learner students benefit more than other students? What type of training helps teachers maximize the advantages of smaller classes?

Because the budget proposal makes no provision to assist districts and school sites in finding and interpreting available data, the proposal places this significant burden at the local level. This is not an argument against decentralization, however. Rather, we think the state should support the role of generating and disseminating information on program effectiveness. By addressing district information needs, the state could help districts obtain a higher quality of data at a much lower cost.

The absence of any such proposal in the Governor's categorical consolidation constitutes a missing element of the administration's strategy for reforming education finance. As a start to correcting this problem, we recommend the Legislature appropriate $500,000 in federal Title VI funds to support development of a strategic plan for a state information dissemination program. Title VI funds are available to states for a variety of assessment and accountability activities, including information designed to "identify best educational practices." In addition, the Governor's proposal for the Title VI funds (discussed later in this section) does not fully allocate available federal funds in the budget year.

The plan would be based on an assessment of the types of information that district staff, teachers, and principals would find most valuable. The plan would also review available sources of information that currently exist from other state, federal, and academic sources. Based on district needs and currently available information, the plan would recommend an initial program of information collection and dissemination that the Legislature could consider as part of its 2005-06 budget deliberations. In addition, the plan would identify steps the state could take to satisfy information needs that cannot be met through existing sources.

Community Involvement Is a Key Element

As we discussed above, the proposal to increase participation of parents, teachers, and principals in the district budgeting process is a key part of the budget proposal. Unfortunately, details on the administration's proposal were not available at the time this analysis was written. We will provide comments on the specifics of the proposal during budget hearings.

In our 1999 report A K-12 Master Plan, we discussed the importance of local accountability in helping school boards make decisions that are in the best interests of students. We suggested that understanding and balancing school board powers in order to create strong local accountability is an ongoing responsibility of the state. For this reason, we think the budget proposal addresses a governance issue that is critical to the overall success of our schools.

To make this feature effective, however, it is important that the proposal create incentives for community members to participate in the budget process and for districts to seek a broader range of input. Many barriers face the parent who tries to participate in local budget decisions. District staff or school board members may not want greater participation—they may see expanded involvement as only making decisions more difficult. In addition, education budgets are complex and often require substantial knowledge about the district, requirements attached to state and federal funds, and the educational improvement process. Districts may be reluctant to make the significant investment in time needed to educate new participants to the process.

In many other states, citizen involvement is spurred by a personal financial interest in the district's budgeting practices because the district governing boards establish a property tax rate as part of the budget process. Inefficient use of funds results in higher taxes for district property owners. This dynamic creates strong incentives for community involvement in school affairs. Since the passage of Proposition13, school boards in California no longer have independent taxing authority.

It may be useful, however, to examine the local processes required in other states when school boards exercise their taxing authority. For instance, some districts in Massachusetts require citizens to approve the annual budget—and the resulting tax rate—in a "town-hall meeting." Citizens in attendance at the district's annual budget approval meeting vote to approve or disapprove the proposed budget for the coming year. If citizens reject the budget, the school board must develop a new proposal for a second vote.

This process creates incentives that can lead to meaningful local accountability. The ability to vote on the district's budget empowers citizens to demand the types and amounts of services that will promote the education of the town's children. The vote also creates an incentive for districts to ensure that citizens who are likely to vote on the budget are informed about how and why district funds are spent in the manner proposed. It also encourages districts to involve "citizen leaders" in the budget process as a way of educating and soliciting input from the community. Although the town-hall meeting may not work in California because many districts are quite large, it is an example of the type of local process that empowers the local community to participate in the local decision making process and creates the incentive for districts to want increased local involvement.

Conclusion

In general, we think the proposed consolidation warrants serious consideration by the Legislature. Our recommendations are designed to improve on the proposal—protecting the Legislature's interest in using categorical funding streams to improve the incentives facing districts, avoiding near-term problems that could undermine the proposal's goals, and addressing the information needs districts face in making expenditure decisions.

While this proposal would simplify the state's system of K-12 categorical programs significantly, the Legislature may want to consider further reforms. Proposals our office has provided in the 2002-03 and 2003-04 Analysis of the Budget Bill merit consideration in expanding the flexibility of school districts in exchange for revised accountability. Below, we discuss creating new block grant programs with existing staff development and school safety programs as one avenue for building on the reforms proposed in the consolidated grant.