LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005


The Governor's budget includes a total of $58 billion in operational funding from state, local, and federal sources for K-12 schools for 2005-06. This is an increase of $1.6 billion, or 2.9 percent, from estimated appropriations in the current year. The budget also includes a total of $34.6 billion in state, local, and federal sources for higher education. This is an increase of $1.3 billion, or 4 percent, from estimated expenditures in the current year.

Figure 1 shows support for K-12 and higher education for three years. It shows that spending on education will reach almost $93 billion in 2005-06 from all sources (not including capital outlay-related spending).

Figure 1

K-12 and Higher Education Funding

(Dollars in Millions)





Change From 2004‑05









Higher education b












a  Includes state, local, and federal funds. Excludes debt service for general obligation bonds and local debt service.

b  Includes state, local, and federal funds and student fee revenue. Excludes debt service for general obligation bonds.

Funding Per Student

The Proposition 98 request for K-12 in 2005-06 represents $7,377 per student, as measured by average daily attendance (ADA). Proposed spending from all funding sources (excluding capital outlay and debt service) totals about $9,586 per ADA.

The Proposition 98 budget request for California Community Colleges (CCC) represents about $4,370 per full-time equivalent (FTE) student. When other state funds and student fee revenue are also considered, CCC will receive about $5,000 per FTE student. This compares to proposed total funding (General Fund and student fees) of $23,000 for each FTE student at the University of California (UC) and $11,500 for each FTE student at the California State University (CSU).

Proposition 98

California voters enacted Proposition 98 in 1988 as an amendment to the State Constitution. The measure, which was later amended by Proposition 111, establishes a minimum funding level for K-12 schools and CCC. A small amount of annual Proposition 98 funding provides support for direct educational services provided by other agencies, such as the state's schools for deaf and blind individuals and the California Youth Authority. Proposition 98 funding constitutes over 70 percent of total K-12 funding and about two-thirds of total CCC funding.

The minimum funding levels are determined by one of three specific formulas. Figure 2 briefly explains the workings of Proposition 98, its "tests," and other major funding provisions. The five major factors involved in the calculation of each of the Proposition 98 tests are: (1) General Fund revenues, (2) state population, (3) personal income, (4) local property taxes, and (5) K-12 ADA.

Figure 2

Proposition 98 Basics




Over time, K-14 funding increases to account for growth in K-12 attendance and growth in the economy.


There Are Three Formulas (“Tests”) That Determine K-14 Funding. The test used to determine overall funding in a given budget year depends on how the economy and General Fund revenues grow from year to year.


·   Test 1—Share of General Fund. Provides 39 percent of General Fund revenues. This test has not been used since 1988‑89.


·   Test 2—Growth in Per Capita Personal Income. Increases prior-year funding by growth in attendance and per capita personal income. Generally, this test is operative in years with normal to strong General Fund revenue growth.


·   Test 3—Growth in General Fund Revenues. Increases prior-year funding by growth in attendance and per capita General Fund revenues. Generally, this test is operative when General Fund revenues fall or grow slowly.


Legislature Can Suspend Proposition 98. With a two-thirds vote, the Legislature can suspend the guarantee for one year and provide any level of K-14 funding.

Proposition 98 Allocations

Figure 3 displays the budget's proposed allocations of Proposition 98 funding for K-12 schools and CCC. The budget proposes only technical adjustments to the current-year spending level of $47.1 billion, and increases funding to $50 billion for Proposition 98 in 2005-06 (an increase of $2.9 billion). The Governor does not provide the additional $1.1 billion in 2004-05 and $1.2 billion in 2005-06 that would have been needed to meet the funding target established in Chapter 213, Statutes of 2004 (SB 1101, Budget and Fiscal Review Committee). Under the Governor's budget, the General Fund cost of Proposition 98 is $2.4 billion more than the current year, but a portion of this higher cost ($675 million) is to backfill local property tax revenues that the state transferred to local government. Proposition 98 funding issues are discussed in more detail in the "Proposition 98 Budget Priorities" section of this chapter.

Figure 3

Governor's Proposed Proposition 98 Funding

(Dollars in Millions)



2005‑06 Proposed

Change From 2004‑05 Revised

Budget Act

Revised a



K-12 Proposition 98






General Fund






Local property tax revenue






  Subtotals b






CCC Proposition 98






General Fund






Local property tax revenue






  Subtotals b






Total Proposition 98c






General Fund






Local property tax revenue












a  These dollar amounts reflect appropriations made to date or proposed by the Governor in the
current year. The revised spending level reflects a $3.1 billion suspension of the minimum guarantee.

b  May not add due to rounding.

c  Total Proposition 98 also includes around $95 million in funding that goes to other state agencies
for educational purposes.

Enrollment Funding

The Governor's budget makes changes to enrollment funding levels for K-12 and higher education. The budget fully funds a 0.79 percent increase in K-12 enrollment, a level which is considerably lower than annual enrollment growth during the 1990s. The K-12 enrollment is expected to grow even more slowly in coming years, as the children of the baby boomers move out of their K-12 years. Community college enrollment is funded for 3 percent growth in 2005-06, which is about one and one-half times the expected rate of growth in the adult population. Consistent with the Governor's "compacts" with the public universities, the Governor's budget funds enrollment increases of 2.5 percent at UC and CSU.

Setting Education Priorities for 2005-06

In this chapter, we evaluate the proposed budget for K-12 and higher education, including proposed funding increases and reductions, budget/policy reforms, fund shifts and fee increases, and projected enrollment levels. The difficult fiscal environment that the state faces in 2005-06 makes it all the more important for the Legislature to reassess the effectiveness of current education policies and finance mechanisms. In both K-12 and higher education, we provide the Legislature with alternative approaches to the budget's proposal.

K-14 Priorities. An overriding issue for the Legislature in crafting the 2005-06 budget for K-12 education and CCC (both funded largely through Proposition 98 funds) is whether to maintain current-year spending at the level appropriated in the 2004-05 Budget Act, augment current-year appropriations to the Chapter 213 target level ($2.3 billion more over the two years), or provide some funding level in between. In developing its 2005-06 Proposition 98 budget, we recommend the Legislature use a "current services" budget approach that fully funds the existing K-14 program. We identify some key areas of the K-14 budget where we recommend a different approach than that taken in the Governor's budget. These include State Teachers' Retirement System funding, mental health costs for special education students, and several of the Governor's other reform proposals. We also raise concerns about the current fiscal condition of school districts and the impact on districts of declining student enrollment.

Higher Education Priorities. For UC and CSU, the Governor's budget proposal largely follows the compacts he developed with the segments in spring 2004. Notwithstanding the compacts, the Governor's proposal offers little rationale for the proposed fee increases and growth funding for UC and CSU. We offer our own analysis of UC and CSU's funding needs, including recommendations with regard to student fees and enrollment growth.

For CCC, the Governor proposes a substantial increase for enrollment growth, but no new funding to advance the effort, begun in 2004-05, to equalize per student funding among community college districts. In the "California Community Colleges" section of this chapter, we assess the Governor's enrollment growth funding and accountability proposals. We also recommend increasing student fees at CCC to $33 per unit, which could increase total state funding on education by about $100 million, while leveraging about $50 million in federal financial aid. At the same time, it would add almost no new net costs for students with family incomes up to about $100,000.

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