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

Economic Impact Aid

We find that the Economic Impact Aid (EIA) funding formula is outdated and results in district allocations that appear arbitrary and unpredictable. We recommend the Legislature simplify the EIA formula so that district allocations are predictable and meet local needs for serving both poor and English learner students.

The 2004-05 Governor's budget provides $548 million for the Economic Impact Aid (EIA) program. This funding level represents a $49.1 million increase from the current year due to: (1) $34.6 million for growth and inflation and (2) the Governor's proposal to shift $14.5 million in EIA funding from the charter school block grant into a separate schedule within the EIA budget item.

The EIA program provides funding to school districts to provide compensatory education services to low-performing and English learner (EL) pupils. School districts use funding for a variety of purposes, including: (1) extra assistance to low-achieving pupils, (2) supplemental instructional services to EL students, (3) training to teachers who instruct EL students, and (4) supplementary materials.

School districts receive EIA funding based on two main formulas:

• Primary Formula. The primary formula uses a complex multistep process that includes the following features:

1. — "Need" for EIA funds is measured by each district's relative concentration of EL, poor, and transient students.
2. — Poverty is by far the most important factor in determining district EIA need. The formula uses two different measures of poverty—the enrollment of students from families receiving California Work Opportunity and Responsibility to Kids (CalWORKs) grants and poverty data from the 1990 Census.

In 2003-04, the primary formula determined EIA allocations for 205 school districts, providing an average of $280 (ranging from $220 to over $1,000) for each EL and CalWORKs student in these districts.

• Secondary Formula. The secondary formula distributes funds to districts whose primary funding allocations would not be sufficient to serve a "reasonable" portion of the population of pupils from disadvantaged backgrounds. The secondary formula has two elements:

1. — Per-Pupil Grant. Districts that would receive a relatively small allocation through the primary formula receive funding based solely on the number of CalWORKs and EL students. In 2003-04, approximately 600 school districts received $219 for each student in the two target groups.
2. — Minimum District Grant. Districts with very low numbers of EL pupils and pupils from families receiving CalWORKs receive a minimum grant. In 2003-04, approximately 175 school districts received minimum grants.

EIA Formula Is Outdated and Problematic

The EIA funding mechanism has been in existence for more than 25 years. During this time, the state's demographics and the needs of the student population have changed dramatically. For example, 25 years ago, pupils living in poverty represented a majority of the student population in need of compensatory funding. Since that time, poverty as measured by students in CalWORKs families has declined and the number of EL students has grown dramatically. Figure 1 displays the trends for these two groups.

As the figure shows, the number of EL students increased by 450 percent since 1980 and CalWORKs increased by 17 percent. As a result, the EL population, which was half the size of the group of students whose families received welfare in 1980, is now 2.5 times larger than the CalWORKs group. District use of EIA funds reflect these trends. Districts report using about 85 percent of EIA funds for EL services.

These changes in student demographics have resulted in the allocation of a greater share of EIA funds to districts with large proportions of EL students. Because of the formula's heavy emphasis on poverty, however, districts with large numbers of poor students still receive far more than districts with large numbers of EL students. In addition, the complexity of the EIA formula results in allocations that appear arbitrary and unpredictable. We discuss these issues in greater detail below.

Heavy Emphasis on Poverty Skews Per-Pupil Payments

As noted above, districts report using 85 percent of EIA funds for EL services. The heavy emphasis on poverty in the EIA formula, however, results in allocating large per-pupil amounts to districts with high poverty rates. As a result, we question whether the formula does a reasonable job of allocating funds to help districts address the needs of both groups of students.

A close look at EIA allocations for two districts of similar size illustrates the heavy emphasis on poverty. Figure 2 displays the EIA allocations and the number of EL and CalWORKs students in Oakland and Santa Ana Unified School Districts. In 2003-04, Oakland received $350 for each EL and CalWORKs student in the district based on about 31,500 students in the two groups. Santa Ana received $221 for each based on about 46,000 students in the two groups. As a result, Oakland received about $11 million, or about $900,000 more than Santa Ana, despite having many fewer targeted students.

District Allocations Appear Arbitrary and Unpredictable

As discussed above, the EIA formula is extremely complex. This complexity results in district allocations that are hard to understand based on underlying district demographics. Our review of district EIA allocations reveals that the formula:

• Treats Similar Districts Very Differently. Districts with almost identical numbers of EL and CalWORKs students can receive very different amounts of EIA funds. For instance, Burrel Union Elementary receives $812 for each of the 34 EL and CalWORKs students in the district (21 and 13, respectively). Buena Vista Elementary receives only $221 for each of the 35 students in the two groups (23 and 12, respectively). Given that the number of students needing extra assistance in these two districts are almost identical, the widely differing amounts seem hard to justify.
• Generates Unpredictable Changes in District Allocations. The EIA formula creates unpredictable results from year-to-year, which complicates district planning efforts. For instance, more than 300 districts received increases in 2003-04 even though the number of EL and CalWORKs students enrolled in the district declined. Similarly, 16 districts received funding decreases in 2003-04 despite experiencing an increase in the number of students in the two groups.

Simplify and Refocus EIA Formula

Given these problems, we recommend the Legislature revamp the EIA formula so that it distributes funding based on the number of poor and EL pupils enrolled in each district. This would direct more of the funds to districts based on the number of EL pupils, which is consistent with how districts currently use EIA funds. This also would result in more stable and predictable district allocations, which would change as the target populations rise or fall. Below, we describe the features of our proposed EIA formula.

Maintain Key Features of the Current Funding Model

Rather than completely redesign the EIA formula, our proposal builds on three existing features of the formula, as follows:

• Per-Pupil Grants. Districts would receive a set amount of funding for each EL and CalWORKs pupil, similar to the existing secondary formula.
• Concentration Grants. Additional funding would be distributed to districts with a large proportion of poor and EL pupils.
• Minimum District Grants. A minimum grant would be available for districts with small numbers of eligible pupils.

These three design elements would ensure that districts receive a level of funding that is proportional to the needs of the targeted populations. While most districts would receive a uniform amount for each EL and CalWORKs student, the concentration and minimum district grants recognize that all districts do not face the same circumstances. The minimum grant ensures a minimal level of funds to operate a program—no matter how few EL or poor students attend the district. The concentration grant recognizes that districts may face a more difficult challenge in educating students when the proportion of EL and poor students is relatively high.

Per-Pupil Grants. Under our proposal, most EIA funds would be distributed to districts through a per-pupil grant of approximately $210 for each EL or CalWORKs student enrolled in the district. In addition, our EIA formula would provide a per-pupil grant for each EL student who was redesignated as "fluent" in the previous year. This is intended to reduce the fiscal incentive for school districts to keep students classified as EL.

Concentration Grants. Districts with a large proportion of EL and poor pupils would receive additional funds. Under our proposal, districts in which the proportion of CalWORKs and EL students exceeds 55 percent of their total enrollment would be eligible to receive an additional $180 per pupil for each pupil above the 55 percent threshold. We estimate that, using our formula, about 125 school districts would receive a concentration grant.

One benefit to our proposed concentration grant is that it increases as the proportion of students in the two groups increases. For example,

• District A, with 55 percent of its students EL or CalWORKs, receives only the base funding of $210 per pupil.
• District B has 70 percent of its students EL or CalWORKs, and receives almost $250 per pupil.
• District C, with 90 percent of its students EL or CalWORKs, receives $280 per pupil.

As with the existing formula, EL students could be counted as both EL and a poor student.

Minimum District Grant. Our proposal would continue the two existing EIA minimums ($4,901 and $7,356), which are based on the number of EL and CalWORKs students in the district.

District Allocations Under the LAO Proposal

Our proposal provides several "levers" within the revised funding formula that could be used to alter the distribution of funds. For instance, by increasing concentration grants, the formula would provide more funds to heavily impacted districts and less to all other districts. Similarly, increasing the concentration "threshold" focuses concentration funds on a smaller subset of districts.

We ran several simulations using different assumptions for these policy options to find the combination that minimized the number of districts that would receive significant funding reductions under our proposed formula. By increasing the formula's emphasis on EL students, however, our proposal would create a significantly different distribution of EIA funds.

Under our formula, about half of all districts would not experience a change of more than 5 percent in their existing EIA grants. There is, however, a fairly large group of districts whose allocation would change significantly. For instance, about 18 percent of districts would experience an increase of more than 20 percent. These districts generally have larger EL populations and smaller numbers of CalWORKs students. Another 13 percent of districts would experience a reduction of at least 20 percent.

In recognition of the fiscal difficulty a significant decrease in EIA funding could cause districts, we suggest a transition period that limits reductions in district EIA allocations to 15 percent each year. This practice is similar to protections afforded school districts under the current funding mechanism.

Merge Other Funds Into EIA

We recommend including funding for the English Learner Assistance Program and a portion of the Targeted Instruction Improvement Grants into Economic Impact Aid in order to consolidate all state programs that support instructional services to English learners and low-income students.

Earlier in this section, we reviewed the Governor's proposed consolidation of 22 categorical funds into revenue limits. In that analysis, we recommend the Legislature exclude two programs from the consolidation—English Learner Assistance Program (ELAP) and a portion of Targeted Instruction Improvement Grants (TIIG). We made this recommendation because we think categorical protection for instructional services to "at-risk" students is needed.

Rather than maintain separate appropriations for ELAP and TIIG, however, we suggest an alternative course. Specifically, we recommend consolidating ELAP funds into the EIA program and appropriating TIIG funds districts spend for instructional services to low-performing students as part of EIA. This would maintain the current uses of these funds and simplify the state's system of categorical funding.

ELAP. Adding the $53.2 million in ELAP funds into EIA would result in distributing the ELAP funds based on our proposed formula. The ELAP increases state support for services to EL students in grades four through eight. Folding ELAP funds into EIA would resolve two issues with the existing program. First, by providing additional funds for students in grades four through eight, the state may reward districts that have failed to redesignate quickly their English learner students. Because of the program's focus on grades four through eight, districts that help students master English quickly receive a smaller share of the ELAP funds. Merging ELAP funds into EIA would eliminate this problem.

Second, districts would like to be able to use ELAP funds for students in grades other than four through eight. A recent evaluation of EL programs in California included survey results showing that district staff believe that restricting these funds to students in the five grades creates a barrier to using the funds most effectively. By distributing the ELAP funds through the EIA formula, our recommendation would give districts flexibility to use funds to meet their highest priority needs.

TIIG. We suggest a different course for the TIIG funds. Specifically, we recommend the Legislature maintain district allocation of TIIG funds used for instructional services as an "add-on" to the amount these districts receive through the EIA formula. We do not propose folding TIIG funds into the main EIA formula because it would redistribute the desegregation funds now going to a few districts to a much larger set of districts. Because of the large amounts districts receive through TIIG and because they may have formal or informal local agreements about how these funds are used for desegregation purposes, we think the Legislature should not at this time alter the distribution of TIIG funds. In the future, the Legislature could reduce differences in the amounts of total EIA funds provided to "desegregation" districts and all other districts.

Conclusion

The EIA program provides critical resources to schools for meeting the needs of EL and low-income students. Our recommendations would retool the EIA funding formula to be more responsive to changes in these K-12 populations. Our proposal also would simplify the funding formula, making district allocations easier to understand and more predictable. Finally, our recommendations would streamline the state's system of categorical funding by consolidating into EIA two programs that provide support for the same populations. While our recommendations would reduce some district allocations while increasing others, in the long-run, we think all districts would be better served by a simple, transparent funding formula that recognizes district needs for both their EL and poor students.