LAO 2004-05 Budget Analysis: General Government

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004


The Governor's budget recognizes 49 state-mandated local programs for K-12 education in 2004-05. These mandates require districts and county offices of education (COEs) to conduct a wide range of instructional, fiscal, and safety activities, and require local processes designed to protect parent and student rights.

The State Constitution requires the state to reimburse local governments for the costs of complying with state mandates. State law requires the Commission on State Mandates (CSM) to determine whether state law or regulation creates a state-mandated local program and whether the mandate requires the state to reimburse local governments for their costs of following the mandate. The CSM also develops claiming guidelines for the specific mandated local activities that are eligible for reimbursement.

The budget proposes basically no funding for K-12 mandates in 2004-05. This is because the budget defers payment for 2004-05 claims to future budgets due to the fiscal condition of the state. With these budget-year deferrals (estimated at roughly $300 million), we estimate the state will owe about $1.6 billion in unpaid mandate claims at the end of 2004-05.

New Mandates Recognized. The budget recognizes for the first time eight mandates approved by CSM. These mandates are (1) Peace Officer's Procedural Bill of Rights, (2) Financial and Compliance Audits, (3) Physical Education Reports, (4) Health Benefits for Survivors of Peace Officers and Firefighters, (5) County Office of Education Fiscal Accountability Reporting, (6) Employee Benefits Disclosure, (7) School District Fiscal Accountability, and (8) Photographic Record of Evidence. Claims submitted by school districts and county offices for these eight mandates in 2001-02 total $4.5 million. 

The budget does not recognize the Standardized Testing and Reporting (STAR) mandate, which also was approved by CSM. According to the Department of Finance (DOF), the administration believes districts' claims far overstate the level of actual mandated costs experienced by districts. As a result, DOF proposes to delay recognizing this mandate until STAR claims are audited.

Mandates Proposed for Suspension or Elimination. The budget also proposes to suspend or repeal five existing mandates that were suspended as part of the 2003-04 Budget Act. These mandates are: (1) School Crimes Reporting II, (2) School Bus Safety II, (3) Investment Reports, (4) Law Enforcement Sexual Harassment Training, and (5) County Treasury Oversight Committee. The first two mandates proposed for suspension or repeal affect only K-12 education; the remaining three mandates affect all local government entities. District and county office claims for these five mandates totaled $34.3 million in 2001-02. The School Crimes Reporting II ($11.9 million) and School Bus Safety II ($22.1 million) account for almost all of the total cost for these five mandates.

Reform of the Mandate Process

The budget also proposes several changes to the mandate reimbursement process, including:

The budget proposal to reform the process for reimbursing local agency costs of mandates reflects the administration's concerns that the existing law "has created a confusing, expensive process that is not resulting in either the expected reimbursement for local agencies nor informed fiscal choices for the Legislature and the administration." 

We share those concerns. In our 2004-05 Budget Bill: Perspectives and Issues, we discuss problems with the current mandate process. Given the magnitude of the problems with the existing process, we conclude that the Legislature should consider a fundamental revamping of the state mandate process. Please see our Perspectives and Issues for our analysis of this issue.

K-12 Mandate Issues

Below, we discuss four issues specific to state-mandated programs in K-12 education. These issues were discussed in our December 2003 report entitled, New Mandates: Analysis of Measures Requiring Reimbursement. In that report, we reviewed six K-12 education mandates that were approved by CSM in 2002 and 2003 (several other mandates discussed in the report apply to all local agencies, including school districts and COEs). The report finds several problems, including:

We discuss these issues further below.

Recognize Offsetting Revenues

We recommend the Legislature add budget bill language to several K-12 budget items in order to guarantee that districts use funds the state appropriates to satisfy local mandated costs. We also recommend adoption of trailer bill language to request the Commission on State Mandates to revisit the issue of offsetting revenues in one program.

The Legislature appropriates funds in the annual budget act to pay for two programs that were recently approved as reimbursable state mandates by the CSM. The programs are the STAR program, which tests students in grades 2 through 11, and the County Office of Education Fiscal Accountability Reporting program, which requires county office oversight of school district budgeting processes. The proposed 2004-05 Budget Bill includes $11.8 million for STAR district administrative support and $5 million for county office fiscal oversight activities. Appropriations for these programs have been provided annually in the budget act since the inception of the programs.

The CSM claiming guidelines do not recognize the county office appropriations and inappropriately narrow the use of the STAR funding to offset mandated costs. As a result, our review of district STAR claims showed a sample of districts often failed to appropriately use state apportionments as an offset to district expenses. County office fiscal claims appeared to represent total costs—without recognizing state funds provided for the program. As a result, we believe the state may wind up paying for some mandated activities twice—once through the direct appropriation and a second time as part of the local mandate claims.

The budget bill does not contain explicit language requiring districts to use these funds to satisfy the programs' mandated costs. While we believe the state's intent in providing these funds is clear, there may be some legal question about whether districts and county offices could give first priority over the funds to satisfy nonmandated activities associated with the programs, and then use any remaining funds to pay for the required activities. Adding clear budget language requiring districts and county offices to use state funds appropriated for these two programs for their mandated costs would protect the state from the possibility of having to pay for the same mandates twice.

There are two other programs for which we suggest the same language. While not currently established as mandates, the CSM will consider in the future whether the California English Language Development Test (CELDT), the California High School Exit Examination (CAHSEE), and state Remedial Instruction programs constitute reimbursable mandates. The 2004-05 proposed budget also contains funds to cover remedial instruction program costs and local administrative costs for the testing programs. Adding our proposed language could reduce future mandate claims for these programs.

For this reason, we recommend the Legislature add budget bill language to Item 6110-113-0001 and Item 6110-113-0890 requiring districts to use state apportionments to first satisfy any mandated local costs of STAR, CELDT, and CAHSEE. We also recommend amending Provision 2 of Item 6110-107-0001 (county office fiscal oversight) and remedial education programs (Item 6110-104-0001) to provide the same requirement.

Require CSM to Revisit the Fiscal Accountability Reporting Mandate. As we discussed above, the CSM guidelines make no mention of existing funding that is available to counties to satisfy any local mandates created by their fiscal oversight responsibilities. The Legislature has attempted to pay for county office costs in a direct manner by providing funds in the annual budget act. Since the commission's decisions makes no acknowledgement of this appropriation, we recommend the Legislature adopt trailer bill language to request the commission to reconsider its decision on the County Office of Education Fiscal Accountability Reporting mandate and make any modifications necessary to clarify the extent to which budget act appropriations to county offices should be considered offsetting revenues to any state-mandated local costs of the program. This change could eliminate all outstanding claims for this mandate, which total $2 million through 2003-04.

Reconsider the STAR Mandate

We recommend the Legislature adopt trailer bill language requesting the Commission on State Mandates to reconsider its decision on the Standardized Testing and Reporting program mandate to clarify whether federal testing requirements would reduce the scope of the state-mandated costs and to address the issue of offsetting state revenues.

As we noted above, the Governor's budget does not recognize the CSM action to approve as state-reimbursable mandates various local activities required under the STAR testing program. In 2001-02, local claims for this program totaled $36 million.

In our December report, we identified two problems with CSM's findings on this program. First, as discussed above, CSM claiming guidelines inappropriately narrow the activities against which state funds should apply as offsetting revenues.

Second, the commission did not consider whether federal testing mandates contained in the Improving America's Schools Act (IASA) would reduce the number and cost of reimbursable state mandates. State statutes guiding the mandate process direct CSM to deny reimbursement when the state creates a local mandate in the implementation of federal law. State-required activities that exceed the federal mandate, however, are still reimbursable. 

Several of the reimbursable mandates identified by the CSM were required by the federal IASA. The state's decision to enact the STAR program was, at least in part, designed to bring California into compliance with the federal Title 1 program (which was part of IASA). Assessment requirements included in the IASA that could affect the CSM decision on STAR include:

Our review suggests that federal mandates contained in the IASA should render a significant portion of the STAR mandate costs ineligible for reimbursement. The CSM approval of the STAR mandate makes no mention of the federal requirements, however. According to commission staff, issues of federal mandates are normally raised by DOF or the State Department of Education (SDE). The record shows neither agency raised the issue of federal mandates in this case.

At this point, the commission has completed its work on the STAR mandate and the three-year period for an appeal by DOF of this decision has expired. As a result, the Legislature's only recourse is to request CSM to revisit the issue of federal mandates and modify its decision on the STAR mandate as appropriate to reflect the requirements of federal law. The Legislature also could request the commission to revisit the issue of offsetting revenues for this program. To accomplish this, we recommend the Legislature adopt trailer bill language as follows:

The Legislature requests the Commission on State Mandates review its Statement of Decision regarding the Standardized Testing and Reporting test claim and make any modifications necessary to this decision to clarify (1) whether federal testing requirements in place at the time the program was enacted should reduce the scope of the state-mandated costs and (2) whether the parameters and guidelines appropriately identify the activities against which funds provided through the annual budget act should apply as offsetting revenues.

Revise Statutes to Broaden Federal Exclusion  

We recommend the Legislature, as part of any reforms to the mandate process, broaden the federal mandate exclusion so the Commission on State Mandates could waive state reimbursement any time federal law requires the same local program. This change would result in significant savings for the existing Standardized Testing and Reporting program and several other potential K-12 mandates the commission will consider in the future.

As noted above, existing state mandate statutes direct CSM to deny reimbursement to local agencies when a mandated local program is created in the implementation of a federal program requirement. To deny reimbursement, however, the federal requirement must be in place at the time the local activities were mandated by the state.

State law requires, however, reimbursing local agencies when state law creates a mandated local program and federal law changes to also require the same program or activity. There are two situations where this can occur. State mandates that are approved by CSM and, subsequently, are required by the federal government remain a state-reimbursable local program. In 2002, for instance, NCLB was enacted to replace IASA. Testing requirements in the new federal law parallel closely those of the STAR program. Under NCLB, annual testing is required in seven grades, rather than the three required by IASA. If CSM was allowed to update its STAR decision to reflect the NCLB testing requirements, we would expect the number and cost of reimbursable STAR mandates would fall substantially.

The second situation occurs when federal law changes to conform with a program creating a state-mandated program that has not completed the CSM process. The CELDT, for instance, was first administered as a state-required testing program in 2001. In 2002, federal law changed to require a virtually identical test. Under existing law, the local costs of administering CELDT will likely constitute a reimbursable mandate for as long as state law requires the test to be administered. This situation applies to several other K-12 mandates, including the School Accountability Report Card and special education Behavioral Interventions Plans mandate claims.

This creates a rather absurd position for the state. The Legislature could eliminate the costs associated with these programs by deleting the Education Code requirements that mirror the federal mandate. The program requirements on school districts would not change, but now the mandate would be considered a federal, not state, mandate. If the state does not make these technical changes, however, the state would continue to pay for the local costs of the mandate each year.

The distinction in law that state mandates are not reimbursable only if the federal requirement comes before the state requirement is artificial. It elevates process above common sense, and disadvantages the state in the mandates process. Therefore, we recommend the Legislature change state statute so that state mandates become nonreimbursable any time federal law requires the same local activities.

Eliminate Two Mandates

We recommend the Legislature eliminate the Physical Education Reports mandate and contingent on an expected change in accounting requirements the Employee Benefits Disclosure mandate because they are unnecessary. Elimination of the two mandates would result in annual savings of at least $500,000.

Physical Education Reports. This mandate directs districts to report annually whether students in grades 1 through 8 received 200 minutes of physical education instruction every ten days, as required by state law. The SDE also is required to audit a sample of district records each year. District claims for this mandate in 2001-02 totaled $55,000.

This mandate overlaps with information obtained through another mandate—Physical Fitness testing, which requires schools to assess the physical fitness of students in three grades every two years. The results of these tests are posted on the SDE website for each school and district, and inform the Legislature, parents, and local communities about the success of school physical education programs.

In addition, the department never implemented the district report portion of the Physical Education Reporting mandate. Instead, SDE incorporated the 200-minute requirement into its review process that assesses district compliance with several state and federal mandates. The reviews of the 200-minute instructional requirement began during the current year. As a result, we are uncertain what mandated activities resulted in $55,000 of district claims in 2001-02. Because SDE implemented the intent of the Legislature in a way that does not require district reports, we recommend the Legislature delete the Physical Education Reporting mandate.

Employee Benefits Disclosure. This mandate requires districts to:

Districts submitted $450,000 in claims for these mandated activities in 2001-02.

The Governmental Accounting Standards Board (GASB) is currently considering whether to require all governmental agencies to recognize future liabilities for retiree health benefits in their financial statements. The GASB establishes standards of accounting and financial reporting used by state and local governments. The GASB proposal would require all local agencies to conduct an actuarial report on retiree health benefits every three years.

The GASB plans to issue a final ruling on its policy in spring 2004. If it adopts its proposed policy, the state mandated actuarial reports would no longer be necessary. Therefore, we recommend the Legislature delete the mandated reports if the GASB proposal is approved. We will report in budget hearings on the status of GASB's final ruling.

Return to Education Table of Contents, 2004-05 Budget Analysis