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

Charter Schools

The Governor's budget proposal makes significant changes to the existing charter school funding model. This existing funding model consists of three components: revenue limit funding, block grant funding, and categorical funding. The Governor's budget proposal makes a variety of adjustments to charter schools' revenue limits and eliminates the charter school categorical block grant.

Specifically, the budget adjusts the charter school funding model so as to mirror the administration's overall categorical reform proposal. This entails: (1) transferring the funding associated with 22 categorical programs into charter schools' revenue limits (as is proposed for traditional public schools), (2) eliminating the charter school block grant and shifting remaining funds into charter schools' revenue limits, and (3) providing charter schools with Economic Impact Aid (EIA) funds directly rather than providing in-lieu funding through the block grant.

Details of Governor's Proposal Problematic

Although the Governor's budget proposal seemingly would simplify the charter school funding model, we have several concerns with the details of the proposal.

Cements Certain Inequities. Under the proposal, the Department of Finance (DOF) uses two distinct methods for shifting categorical funding into charter schools' revenue limits. For 18 of the 22 categorical programs, DOF provides a per pupil funding rate to charter schools equal to the average per pupil rate for traditional public schools. However, for four of the 22 programs (Home-to-School Transportation, Instructional Materials, School Library Materials, and Staff Development Days), DOF locks in place the existing funding distributions. This has significant implications for charter schools because these four particular programs are among the largest of the 22 programs and together account for almost $1 billion of the $2 billion to be shifted into revenue limits. They also are programs in which charter schools are less likely than traditional public schools to be participating during the current year. Moreover, legislation enacted just last year (2003) moved two of these four programs into the charter school block grant—signaling the Legislature's intent that associated per pupil funding rates be the same for charter schools and traditional public schools. The Governor's budget proposal would prevent these funding changes from ever occurring.

Potentially Creates New Inequities. In the process of dismantling the charter school block grant, the Governor's budget moves ten programs into charter schools' revenue limits (see Figure 1). This shift occurs only for charter schools. This has two potentially troubling implications:

• In the future, if any funding adjustment were made to one of these ten programs, charter schools would be immune from the impact. This could result in charter schools being treated either considerably better (if one or more of the ten programs were defunded) or considerably worse (if one or more of the ten programs were augmented) than traditional public schools.
• Given this shift occurs only for charter schools, the charter school revenue limit would be slightly higher than that of the average traditional public school. Because of this anomaly, in the future, charter school revenue limits would be adjusted independently—no longer linked directly to the average revenue limit of traditional public schools. This also could generate disparities between charter schools and traditional public schools because their revenue limits would no longer be adjusted automatically in a consistent manner.

Potentially Reduces Future Fiscal Flexibility. Entirely dismantling the block grant means the state no longer has a vehicle for providing charter schools with in-lieu categorical funding. Lacking a block grant option, in the future charter schools might need to apply separately for all newly created categorical programs. Over time, this could drastically reduce their fiscal flexibility and autonomy—among the cornerstones of charter school legislation. 

Retains More Than 20 Categorical Programs for Which Charter Schools Have to Apply Separately. Even if no new programs were created in the future and 22 categorical programs were shifted into revenue limits in the budget year, charter schools still would have to apply separately for more than 20 existing categorical programs. Lacking a block grant structure, the state has no straightforward vehicle for providing charter schools with in-lieu categorical funding. Reforming the existing system therefore would be more difficult, more complicated, and potentially lead to greater inequities (as discussed above).

Restructure Charter School Funding Model—Simplify and Equalize

We recommend the Legislature reform the charter school funding model to promote greater transparency and ensure more comparable funding rates between charter schools and traditional public schools. Specifically, we recommend the Legislature: (1) shift funding associated with 17 categorical programs into charter schools' revenue limits, (2) consolidate 21 categorical programs into charter schools' base block grant, (3) enlarge the disadvantaged student component of the block grant by including eight additional programs, and (4) amend charter school law to include a comprehensive listing of the programs excluded from the block grant.

In January 2004, we released a report entitled, Assessing California's Charter Schools, in which we recommended the Legislature restructure the charter school categorical block grant and strengthen charter school oversight and accountability. (Please see report for a more detailed discussion of charter school finance.) Below, we recommend the Legislature make a variety of changes to the charter school funding model. Although we recommend the Legislature apply certain aspects of the administration's revenue limit proposal to charter schools, we recommend retaining the existing charter school block grant and using it to further categorical reform. Figure 2 summarizes the major components of our alternative funding model.

Shift 17 Categorical Programs Into Revenue Limits. Earlier in this chapter, we discussed the administration's overall categorical reform proposal. In that piece, we highlight the benefits of categorical consolidation and recommended the Legislature shift the funding associated with 17 categorical programs into revenue limits. We recommend this funding shift occur for both traditional public schools and charter schools. In the process of shifting these programs, we recommend providing a per pupil funding rate to charter schools equal to the average per pupil funding rate for traditional public schools.

Consolidate Many Remaining Categorical Programs Into Block Grant. We recommend retaining the base charter school block grant and consolidating 21 programs within it. Figure 3 lists these 21 programs. More than two-thirds are programs already in the existing block grant. Given the remaining six programs all serve traditional K-12 populations, we think they too should be consolidated within the charter school block grant. In the process of consolidating these programs, we recommend providing a per pupil funding rate to charter schools equal to the average per pupil funding rate for traditional public schools.

Expand Disadvantaged Student Component of the Block Grant. We also recommend the Legislature expand the disadvantaged student component of the block grant by consolidating charter schools' in-lieu EIA funding and funding associated with eight other programs designed specifically for disadvantaged students. Figure 4 lists these nine programs. We recommend that disadvantaged student funding continue to be based on a count of the disadvantaged students enrolled in charter schools. Consolidating all nine programs would generate additional incentives for charter schools to serve disadvantaged students—one of the core legislative objectives of charter schools—without increasing administrative burdens or adding new fiscal complexities.

Amend Charter School Law to Promote Greater Transparency. Lastly, we recommend the Legislature codify in a single section (specifically, in Education Code 47634[b]), all programs that are excluded from the charter school block grant. In tandem, we recommend the Legislature adopt a new statutory provision requiring all newly established categorical programs that are to be excluded from the block grant to be specified in this code section. Together, these actions would promote a common understanding of excluded programs and make block grant calculations less controversial.

In sum, we recommend the Legislature make a variety of changes to the charter school funding model. Similar to the administration's overall reform proposal, we recommend shifting 17 categorical programs into revenue limits for both charter schools and traditional public schools. In contrast to the administration's specific charter school proposal, we recommend the Legislature use the categorical block grant to further categorical reform and enhance charter schools' fiscal flexibility. Specifically, we recommend consolidating 21 programs within the base component and nine programs within the supplemental disadvantaged student component of the block grant. Lastly, we recommend amending charter school law to codify in a single section all the categorical programs excluded from the block grant.