LAO 2006-07 Budget Analysis: Education

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006


The Governor’s budget proposes $63 billion in operational spending from state, local, and federal sources for K-12 schools for 2006-07. This is an increase of $3.8 billion, or 6.5 percent, from estimated expenditures in the current year. The budget also includes a total of $34.4 billion in state, local, and federal sources for higher education. This is an increase of $1.5 billion, or 4.5 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 over $97 billion in 2006-07 from all sources (not including capital outlay-related spending).


Figure 1

K-12 and Higher Education Operational Spending

(Dollars in Millions)


Actual 2004‑05

Estimated 2005‑06

Proposed 2006‑07

Change From 2005‑06









Higher educationb













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

b    Includes spending from state, local and federal funds and student fee revenue. Excludes debt service for general obligation bonds. For community colleges, also excludes spending from funds maintained in local budgets.


Funding Per Student

The Proposition 98 request for K-12 in 2006-07 represents $8,030 per student, as measured by average daily attendance (ADA). Proposed spending from all funding sources (excluding capital outlay-related spending) totals about $10,417 per ADA.

The Proposition 98 budget request for California Community Colleges (CCC) represents about $4,859 per full-time equivalent (FTE) student. When other state funds and student fee revenue are also considered, CCC will receive about $5,382 per FTE student. This compares to proposed total funding (General Fund and student fees) of $23,900 for each FTE student at the University of California (UC) and $11,506 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 the deaf and blind and the California Youth Authority. Proposition 98 funding constitutes around three-fourths 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 the Proposition 98 tests are: (1) General Fund revenues, (2) state population, (3) personal income, (4) local property taxes, and (5) K-12 ADA. A key determinant of the formula is the change in personal income and revenues from one year to the next.


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 around 41 percent of General Fund revenues. While not applicable since 1988-89, this test may begin to determine the minimum guarantee near the end of the decade.

·   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.

»  Mechanism Exists to Ensure Growth With Economy and Attendance. When Test 3 or suspension occurs, the state creates a funding gap called maintenance factor. Proposition 98 contains a mechanism to accelerate spending to restore maintenance factor and close the gap in future years.


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 $50 billion, and increases funding to $54.3 billion for Proposition 98 in 2006-07 (an increase of $4.3 billion). This includes $1.7 billion beyond what is required by the Proposition 98 minimum guarantee, plus $426 million to fund Proposition 49 after school programs. Most of the increase in proposed Proposition 98 spending is supported by General Fund revenues ($4.1 billion). This is due primarily to the conclusion of a two-year arrangement under which local governments annually transferred $1.3 billion in local property taxes to schools. The end of those transfers requires the General Fund to backfill the loss in revenue. Proposition 98 funding issues are discussed in more detail in the “Proposition 98 Priorities” section of this chapter.


Figure 3

Governor’s Proposed Proposition 98 Funding

(Dollars in Millions)




Change From
2005‑06 Revised


Budget Act




K-12 Proposition 98






General Fund






Local property tax revenue












CCC Proposition 98






General Fund






Local property tax revenue












Total Proposition 98c






General Fund






Local property tax revenued













a    These dollar amounts reflect appropriations made to date or proposed by the Governor in the current year.

b    Detail may not total due to rounding.

c    Total Proposition 98 also includes around $105 million in funding that goes to other state agencies for educational purposes.

d    The two-year diversion of property tax revenues from local governments to schools ends after 2005-06, reducing growth in property tax revenues for the budget year.


Enrollment Funding

The Governor’s budget funds a 0.21 percent increase in K-12 enrollment, a level which is considerably lower than annual enrollment growth during the last decade. 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 2006-07, which is considerably above the expected adult population growth rate of 1.74 percent. In addition, the Governor’s budget funds enrollment increases of 2.5 percent at UC and CSU.

Setting Education Priorities for 2006-07

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 ongoing structural gap between state revenues and expenditures makes it all the more important for the Legislature to reassess program effectiveness and funding levels. In both K-12 and higher education, we provide the Legislature with alternative approaches to the budget’s proposal.

K-14 Priorities. The Governor’s proposed Proposition 98 spending increase of $4.3 billion is sufficient to adjust K-14 funding programs for the increase in student attendance and the cost of living, as well as provide $1.4 billion for new and expanded programs. The additional discretionary spending proposed in the budget results in more K-14 funding than is required under Proposition 98. Because this higher level of spending increases the state’s structural budget gap in 2007-08 and beyond, the budget raises the issue of whether the administration’s funding level could be sustained in the future. We identify several alternative budget strategies the Legislature could adopt to reduce the impact of Proposition 98 on the state’s financial condition. We also identify several key areas of the K-14 budget where we recommend a different approach than that taken in the Governor’s budget. These include the seven new categorical programs included in the K-12 budget, funding for mandated programs, the federal program for migrant students, and the implementation of Proposition 49 after-school programs. We also address concerns about the current fiscal condition of school districts.

Higher Education Priorities. The Governor’s budget presents the Legislature with three major issues in higher education: enrollment growth, student fees, and CCC equalization. The Governor’s budget proposal offers little rationale to justify its enrollment funding increases which significantly exceed projected growth in the college-age population. In addition, neither CSU nor CCC enrollment has met the level of growth funded in recent annual budgets. In the “Higher Education” portion of this chapter, we recommend different enrollment targets, funding levels, and related budget language changes for the segments.

The Governor’s budget proposes no student fee increases for 2006-07. Instead, the Governor proposes that all increased higher education costs should be funded with additional state funds. We discuss how educational costs can be allocated between students and the state in a way that preserves access and allows families to plan for future educational expenses.

The Governor’s budget proposes $130 million as a final installment to complete the effort, begun in 2004-05, to equalize per-student funding among community college districts. We discuss this augmentation, as well as the need for changes in CCC funding allocation practices that otherwise would erode the state’s equalization efforts.

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