Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

Mandates

The Governor’s budget proposes $133.6 million from the General Fund to pay for the costs of state-mandated local programs in K-12 education and community colleges in 2006-07. The proposed budget recognizes 42 mandates affecting the K-12 and community college systems. Of these, 39 mandates apply to K-12 districts and county offices of education requiring a wide range of instructional, fiscal, and safety activities.

The budget proposal represents the first time funding for ongoing mandates has been included in the Governor’s budget since 2001-02. In the intervening four years, the state has “deferred” mandate payments, which means that funding will be provided at some unspecified future time. Even though payments have been deferred, school districts have been required to perform the mandated activities.

The proposed $133.6 million in ongoing funds would not fully fund expected district and community college claims in 2006-07. The Department of Finance (DOF) estimates likely claims of $173.6 million in the budget year. As a result, the proposed level of funding would fund about three-fourths of expected mandate costs.

In addition to the ongoing funds, the budget proposes to allocate $151 million in one-time funding to reimburse school districts and county offices of education for mandate claims from past years. These funds would retire outstanding claims from the late 1990s, when mandate claims outstripped the amount appropriated in the annual budget act. To date, we estimate the state owes districts approximately $1.2 billion for unpaid mandate costs through 2005-06.

From our review of these budget proposals, we have identified four issues:

• The amount proposed in the budget bill for mandates falls short of fully funding ongoing mandate costs. In addition, the budget bill does not list the specific mandates that are funded in 2006-07.

• The mandates claims process could be streamlined and simplified by reimbursing districts on a per-pupil basis for all K-12 mandates.

• Recent action by the Commission on State Mandates (CSM) on the Standardized Testing and Reporting (STAR) mandate raises issues about how the state should address local implementation costs of this program.

• Funding for state truancy mandates could be used more effectively by transforming these programs into a categorical program aimed at reducing truancy and dropouts.

We discuss these issues below, after first reviewing newly identified mandates in the Governor’s budget.

Newly Identified Mandate Review

We recommend the Legislature approve four new K-12 education mandates adopted by the Commission on State Mandates in 2005.

Chapter 1124, Statutes of 2002 (AB 3000, Committee on Budget), requires the Legislative Analyst’s Office to review each mandate included in CSM’s annual report of newly identified mandates. In compliance with this requirement, this analysis reviews four new education mandates. Figure 1 displays the new mandates and the costs associated with each. The CSM identifies total district costs of $10.8 million for the four mandates through 2005-06. This estimate is based on actual district claims through either 2002-03 or 2003-04. The DOF identifies expected claims for these four mandates in 2006-07 of $17.3 million.

As Figure 1 displays, the annual cost of three of the four mandates is less than $50,000. However, these estimates are based on the claims of an extremely small number of districts. For instance, only one district submitted a claim for the Teacher Incentive Program in 2003-04. If more districts claim for these mandates in the future-something that usually occurs after a new mandate is approved-statewide costs are likely to increase.

Figure 1 also shows the DOF estimate of $17.3 million for the 2006-07 Pupil Promotion and Retention mandate in 2006-07. This estimate is higher than the $9 million CSM identified in total costs for the years 1997-98 through 2004-05. The DOF estimate is based on past-year data, when district claims were significantly higher than more-recent claims. For instance, 2003-04 claims for this mandate total $3.1 million. Accordingly, the DOF estimate for this mandate probably is too high.

Our review of the CSM decision on the new mandates did not identify any issues with the commission’s determination of mandated costs. In fact, we commend the commission staff for uncovering significant errors in district claims for the Pupil Promotion mandate, which resulted in the lower level of recent claims for that mandate. The Governor’s budget signals the administration’s approval by including the new mandates in its 2006-07 funding plan. We recommend the Legislature approve these four mandates.

Fully Fund Ongoing Mandate Costs

We recommend the Legislature augment by $28.2 million the amount included in the budget for K-12 state-mandated local programs in order to fully fund likely costs for these activities in the budget year. We also recommend the Legislature amend the budget bill to list the specific mandates that the 2006-07 appropriation is intended to cover.

Of the $173.6 million identified by DOF for 2006-07 K-12 and community college mandates, $161.8 million is associated with K-12 mandates (plus an additional $4 million in mandates related to the Public Employees’ Retirement System [PERS] for school and community college employees). This estimate excludes funding for several mandates that have been eliminated or suspended by the Legislature. The estimate also assumes no budget-year costs for STAR and the School Accountability Report Card mandates because of recent decisions by the CSM.

The proposed budget bill departs from the past practices of displaying the individual K-12 mandates that are funded in the budget as well as those that have been suspended or eliminated. The DOF advises that the list is specified in the Governor’s budget document, and that a similar list in the budget bill is unnecessary.

Overall, our review indicates that DOF’s cost estimate is reasonable (even though our estimates for individual mandates differ somewhat). Our estimate of total mandate costs, which is based on more recent data than was available to DOF, suggests the costs are about $15 million lower. According to the State Controller’s Office (SCO), however, the number of districts claiming mandate reimbursement has declined in the past few years since no funding was available in the budget. Once ongoing funds are appropriated, claims are likely to increase. On net, then, we think the DOF estimate represents a reasonable estimate of what might be claimed.

The Governor’s budget would partially fund the $161.8 million in estimated K-12 claims, as only $133.6 million is included in the budget. We have previously recommended that the Legislature restore ongoing funding for mandates because it represents part of the base K-12 budget. Failure to fully fund these costs is a form of borrowing from school districts. It is important to address these “holes” in the budget and end this type of borrowing.

We recommend the Legislature increase the 2006-07 appropriation by $28.2 million and fully fund the $161.8 million in expected mandate claims. As we note earlier in the chapter, we believe that fully funding the K-12 base budget warrants a much higher priority for state funds than new programs. By addressing this issue, the Legislature would end the recent practice of borrowing from school districts for these activities and fix a significant problem with the K-12 budget.

We also recommend the Legislature amend the budget bill to list: (1) the specific mandates funded, (2) the amount allocated for each mandate, and (3) those mandates suspended in 2006-07. This list is important for the Legislature and for school districts. For the Legislature, the list serves to explain the significant expenditure of state funds that is proposed in the budget. For school districts, the list provides critical information on which mandates are funded in the budget. By listing suspended mandates, the language also serves notice to districts that these activities are not required in the budget year.

Create New Mandate Block Grant

We recommend the Legislature create an Educational Mandate Block Grant that would streamline and simplify the financing of K-12 mandate programs and improve the distribution of mandate reimbursements to districts.

Lack of funding for K-12 mandates is only one of the problems encountered by the state and school districts in the mandate reimbursement system. In fact, mandates may be one of the more contentious fiscal issues in K-12 finance. In addition to the lack of ongoing funding for education mandates, we have identified the following problems with the system.

Mandates Often Not the Most Effective Financing Mechanism

We generally advise the Legislature to avoid using state mandates to achieve state policy goals. We make this recommendation for several reasons. First, categorical programs or other approaches usually provide the state with a greater ability to accomplish its policy goal. The mandate process affords little opportunity for the state to assess the outcomes of the mandate or hold local governments accountable for meeting specific goals. Second, categorical programs give the state greater control in determining the funding that is provided in support of a state policy or program. Since state mandate costs are determined by local mandate claims, the state loses control over the statewide cost of the mandate. Finally, categorical or other approaches allow the state to distribute funds to those areas with the greatest need. With mandates, district claims are based on local costs of complying with the mandate, not necessarily need.

A Lengthy and Legalistic Process for Identifying New Mandates

The current CSM process operates in a quasi-judicial fashion, in which the commission’s decisions are based primarily on case law and written briefs submitted by state agencies and school districts. This structure was intended to create a fair process for both the state and local governments that established a clear record documenting the commission’s decisions.

The CSM process, however, lacks a strong “mediation” process that courts commonly use to encourage plaintiffs and defendants to find a negotiated settlement to a dispute. As a result, commissioners must choose among the various arguments introduced into the record. For complex mandates, this often asks the commissioners, who are not program experts, to make important decisions on limited information submitted by DOF and districts. These comments should not be interpreted as criticism of the CSM and its staff, who try hard to be thorough and fair. The current process, however, does little to encourage the state and school districts to craft an “out-of-court” settlement that better balances the interests of both sides.

The process also takes years to complete. It currently takes more than five years for the CSM to approve a new mandate for state funding. During this process, districts must incur costs to implement the mandate while at the same time guessing what types of costs will be reimbursed by the state. For the state, the length of the process for new mandates results in a buildup of costs that come due at the completion of the CSM process. This is the first time the Legislature is informed about the size of the costs associated with a new mandate. In the case of the School Bus Safety II mandate, the accrued costs reached several hundreds of millions of dollars-far more than originally anticipated. At that point, however, the state usually has limited options for reducing past costs.

A Claiming Process That Requires Significant State and Local Administrative Effort

State mandate laws allow local governments to claim for costs caused by a new state requirement. The amount claimed by districts can differ significantly depending on the administrative effort made to maximize state mandate funding. School district accounting practices usually are not designed with the idea of accurately capturing these costs. As a result, districts must expend a significant effort to identify the amount of funding to which they are entitled. Even with that effort, district officials indicate they sometimes claim only for costs that are more easily identified, and therefore they believe that claims are less than the actual cost of administering mandated activities.

Small districts are especially affected by this problem. These districts lack the specialized staff for administering mandated programs and identifying additional costs that are common in larger districts. Data from SCO suggests that many small districts fail to make claims for most mandate reimbursements. Only about half of all districts apply for reimbursement for most mandates. Because districts can submit mandate claims as part of a county office of education claim, it is uncertain how many districts actually are reimbursed for each mandate. From our review of past claims, however, we think it’s likely that many small districts receive little or no mandate funding.

The claiming process also results in significant state costs. The SCO develops claim forms, answers district inquiries about specific mandates, receives annual claims for district reimbursements, submits local claims to a “desk audit” review, and distributes state funds to reimburse districts. With 1,000 school districts eligible to claim for 39 mandates, this administrative effort is substantial.

Audit Process Increases Friction Between Districts and the State

The SCO audits school districts to verify local claims for mandate reimbursements. Since January 2003, when SCO was given staff to conduct field audits of local government mandates, the office has conducted audits in 27 school districts. The audits were the state’s response to concerns that local government mandate claims exceeded the level of allowable costs. The SCO audits have disallowed a significant amount of local claims. For instance, SCO auditors disallowed $32.7 million in 2001-02 claims to date, which represents 18 percent of the $185.4 million in district claims. In total, SCO has disallowed $177 million in claims for the years through 2001-02. According to SCO, a majority of disallowed costs result from the lack of supporting documentation for the claim.

Audit findings have angered some district officials, who claim that the audit standards used by SCO require a greater level of documentation than in the past. In addition, large districts believe they are targeted for audits because their relatively large claims offer a greater likelihood of large audit reductions.

Friction over state audits reflects the different perspectives of the state and school districts over mandated programs-and the problems that mandates present to both sides. For the state, the lack of control over the cost of mandates raises concerns that districts will inflate their claims to increase local revenues. From that perspective, audits are a reasonable way to address that issue. For districts, because of the administrative effort needed to accurately capture the incremental cost of implementation, many districts believe their claims do not represent the full cost of mandated activities. As a result, districts see state audit findings over supporting documentation as an attempt to further reduce the proportion of local costs covered by the state.

An Education Mandate Block Grant

The existing mandate reimbursement process does not serve either the state or school districts well. From the state’s perspective, mandates often represent an inefficient way to accomplish state policy goals, and the open-ended nature of the current reimbursement process generates an understandable concern about the reasonableness of local cost claims. New mandates take years to process, which can result in the buildup of unexpectedly large local claims. The cost of maintaining the state infrastructure for mandates also is considerable.

From a district perspective, payments for mandates often fall short of actual costs. Districts have no guarantees about the amount the state will provide for new mandates until the CSM process is complete, which usually takes at least five years. State audits reduce reimbursements further, often because local documentation is incomplete.

To address these issues, we recommend the Legislature adopt a new K-12 mandate reimbursement process that offers solutions to many of the problems cited above. Specifically, we recommend the Legislature establish a mandate block grant that would provide a set amount of district reimbursement that would cover all existing K-12 mandates. Because the State Constitution requires paying local governments for their actual costs of complying with state mandates, our block grant would give districts the option of continuing to submit claims for each individual mandate or accepting the block grant amount as adequate reimbursement for all 39 K-12 mandates. Our proposal also includes an alternative process for including the costs of new mandates in the block grant. Specifics of our proposal are discussed below.

Distribute Ongoing Mandate Reimbursements in a Per-Pupil Block Grant. Rather than require districts to separately claim for each mandate, we recommend providing a per-pupil block grant that would compensate districts for the costs of implementing all K-12 mandates. Our proposal would free districts from having to account for the individual cost of each mandate. This also would ensure that all districts, including small districts, would receive some reimbursement for their efforts. Based on the DOF estimate of full funding of 2006-07 mandate costs, districts would receive about $27 per student in mandate reimbursement. If the Legislature adopts our recommendation below to transform two truancy mandates into a categorical grant program, this amount would drop to about $24 per pupil. Our recommendation also would keep $4 million outside of the block grant to pay for the two PERS mandates.

No Audits of Claims Covered by Block Grant Funding. By accepting funding from the block grant, districts would waive their right to claim for individual mandates. These districts also would not be subject to financial audits for costs covered by funds from the mandate block grant. Districts that continue to submit individual claims for mandates, however, could be audited. In addition, districts accepting the block grant would be reviewed periodically to ensure they carry out the mandated activities.

Incorporating New Mandates Into the Block Grant. In future years, we think the costs of many new mandates could be “rolled into” the mandate block grant. This would work, however, only for those mandates for which a unit cost could be established-that is, a cost that can be measured in dollars per student. To facilitate this, we think the Legislature should explore a “shortcut” around the CSM process for identifying new mandates in order to give both the state and school districts earlier information about the scope and cost of new mandates. As discussed above, we think creating opportunities to find a negotiated settlement of mandates and their associated costs could result in outcomes that both the state and districts find reasonable. The Legislature’s budget process could provide a venue for such negotiations. For instance, the Legislature could direct DOF to submit as part of the budget each year a proposed increase to reflect new mandates. During budget hearings, districts would comment on the DOF proposal, and the Legislature would approve a per-pupil reimbursement rate it found reasonable as part of the annual budget act.

Summary. Our proposed solution to the problems of the existing K-12 mandate process attempts to address both the state and local perspective. Districts deserve reasonable compensation for mandated costs, and the process should not be so complex that this goal is frustrated. Our block grant would greatly simplify the mandate process for districts and provide an assured amount of reimbursement each year for those costs.

The block grant approach also has several advantages for the state. A block grant would reduce the state’s costs of processing and auditing district mandate claims. If most districts accepted per-pupil funding for mandates, our proposal also would result in more predictable state budget costs for these activities. Finally, our proposal also would create more immediate feedback on the cost of newly created mandates-provide the Legislature an opportunity to shape the implementation, and the associated long-term costs-of new state directives.

Revisit the STAR Mandate

We recommend the Legislature enact legislation to establish a “reasonable reimbursement methodology” for the Standardized Testing and Reporting (STAR) mandate and provide an additional $11.2 million in ongoing funds and appropriate $104.5 million in one-time funds proposed in the budget for past mandate costs to retire all outstanding STAR mandate obligations.

The 2006-07 budget assumes no costs for the STAR mandate in the budget year. According to DOF, the proposal reflects the recent CSM decision that substantially reduces the STAR activities for which school districts may claim. The DOF believes that reimbursement provided through the state’s assessment budget for local STAR administrative costs is sufficient to pay for all claimable mandated costs.

Background. The STAR program includes three different tests. The California Standards Tests (CSTs) assess student knowledge of the state content standards in mathematics, English, history, and science. A “norm-referenced” test is given to students in grades three and seven in English and mathematics. The third test assesses language and mathematics skills in Spanish, and is administered to English-learner students under certain conditions.

In our Analysis of the 2004-05 Budget Bill, we identified a number of issues related to the STAR mandate. Specifically, we found that the CSM decision on STAR failed to recognize the fact that the program allowed the state to comply with federal assessment mandates included in the No Child Left Behind (NCLB) act. We also noted the large increases in federal funding provided through NCLB that was intended to pay for the act’s new requirements. In response to our recommendation, trailer bill language was enacted to direct the CSM to review the STAR mandate in light of federal testing requirements in place at the time STAR was enacted. The commission’s review resulted in the following findings:

• Only the Norm-Referenced Portion of STAR Is a Reimbursable Mandate. The CSM review dramatically scaled back the number of STAR activities that district may claim as mandated. The commission found mandated costs only for administrative costs associated with the norm-referenced test given in grades three and seven.

• CST Is Not a Reimbursable Mandate. No activities were identified for the CSTs because districts had failed to submit a new mandate claim when these tests were enacted in state law. Since no new test claim was submitted by districts before the statutory deadline (which is one year after enactment of the new requirement), districts appear to have missed their opportunity to obtain reimbursement for these costs.

• Primary Language (in Spanish) Test Is Not a Mandate. No mandated activities were identified for the testing of English-learner students because such testing is required by federal law and past court findings.

• Commission Did Not Review Prior STAR Claims. The CSM’s findings do not apply to STAR claims prior to 2004-05. The commission found that the statutory language guiding its review did not authorize a review of these issues for previous years. As a result, the CSM did not review the issue of federal requirements or other issues relating to the STAR mandate for these past years. District claims for the program through 2004-05 total $220 million.

A Proposal to Settle All STAR Claims

The commission’s STAR findings leave important issues unanswered. First, its decision did not address the issue of the interaction between state and federal testing requirements for past years or for the CSTs. In our view, the decision does not help the Legislature untangle the complex interaction of state and federal mandates for this program.

Second, we have concerns with the possible outcomes for both the state and districts. By not reviewing past-year STAR issues, the Legislature faces the possibility of paying for STAR costs that, in our view, were mandated by federal law. If federally required, the state would be relieved of a significant portion of the $220 million in prior-year claims. Because districts failed to submit a test claim for the CSTs, they will be unable to receive compensation for the administration of CSTs that are not required by federal law. Districts had assumed that these costs would be covered as part of the STAR mandate.

The DOF also has taken steps to not pay districts for the administrative costs of the CSTs in the years prior to 2004-05. Because the CSM decision excludes the CSTs as a reimbursable mandate, DOF has requested SCO to deny claims for CST administrative costs from all district claims for STAR, including 2003-04 and prior years. Because district claims are not sufficiently detailed to permit SCO to comply with this request, the administration’s action likely will create more controversy and delay.

We believe the Legislature could improve on these outcomes. The STAR tests comprise the centerpiece of the state’s assessment system. The results of the tests are used by parents, teachers, and administrators for school and district performance measures in the state’s accountability programs and for state policy purposes. Given the value of the data from STAR, establishing a system of cost reimbursement that is fair to both the state and districts is in the state’s long-term interest.

For this reason, we have developed a proposal that would address both the past-year STAR claims as well as establish a higher ongoing reimbursement rate that would be distributed to districts through the testing item in the budget bill. Underlying our proposal is the assumption that the state would not pay for those activities that also are mandated under federal law. As a result, our proposal would relieve the state of a portion of the STAR mandate costs.

Specifically, we recommend the enactment of legislation to establish a “reasonable reimbursement methodology” (RRM) for past and future state-mandated STAR costs. Section 17518.5 of the Government Code allows the state to establish an RRM as a way of developing a payment formula that simplifies the claiming process and provides a level of funding that fully satisfies the actual costs of a majority of claimants. Using this provision of state law, we think the Legislature can establish a simple formula to reimburse districts for past and future STAR activities that are not required under federal law.

Our proposed methodology generates a reimbursement level for each year STAR has been administered based on average district claims for the STAR mandate and the proportion of tests that state law, but not federal law, requires for students in each grade. We calculated this level as follows:

• First, we converted average district STAR claims into a per-pupil testing cost. This per-pupil amount represents the total district cost of STAR testing each student.

• Second, our formula determines the proportion of tests that are required only by state law. By multiplying this proportion and the per-pupil total costs, we calculate the proportion of total costs in each grade our formula would cover. For example, since federal law does not require testing in second grade, our methodology would reimburse districts for the full per-pupil cost of testing for all second grade students. For third grade, the state would pay for only one-third of the total cost because federal law mandates two (CSTs in mathematics and English language arts) of the three tests administered in this grade (the norm-referenced test is not a federal mandate).

Our model generates lower levels of reimbursement than claimed by districts for prior years. Specifically, it generates costs of $104.5 million, slightly less than half of the amount claimed by districts. For the budget year, our model generates an additional $11.2 million in mandate costs above the level already included in the STAR budget item.

We think this represents a fair trade for both districts and the state. Our proposal recognizes that testing in California is driven, in part, by federal mandates-and under state law, schools are not guaranteed reimbursement for federal mandates. Districts are compensated for these costs as part of the $1.8 billion in support provided through the federal act each year. It also recognizes that districts do incur costs that reasonably should be funded by the state as a mandated local activity. Finally, it recognizes the critical role of the STAR tests by placing state support for the administration of the program on a solid long-term basis.

For these reasons, we recommend enactment of legislation to implement the following package. This would retire pending past claims against the state for the STAR mandate and cover current costs.

• Additional Ongoing Funding ($11.2 Million). Consistent with the methodology outlined above, this additional funding would pay for the portion of the STAR assessment that is mandated exclusively by state law. This funding would be on top of the $12 million provided in item 6110-113-0001, and would only be provided to those districts participating in the settlement. In future years, this funding would be folded into the STAR appropriation item.

• One-Time Funding to Settle Up Past Years ($104.5 Million). Second, we recommend the Legislature amend trailer bill language and appropriate $104.5 million in support of our proposed STAR mandate settlement for the years 1997-98 through 2004-05. This would use the bulk of the $151 million in funds proposed in the budget for prior-year mandates. The remaining $46.5 million would remain available to retire mandate obligations from the late 1990s, as proposed by the administration.

Our proposal represents a middle ground between DOF’s assertion that the state should deny reimbursement for any CST costs and districts’ belief that the state is responsible for all administrative costs associated with STAR. For the state, our proposal would build a solid administrative foundation under this program, which represents the state’s most important testing program. Our proposal also recognizes that state testing requirements exceed those contained in federal law and attempts to compensate districts fairly, rather than take advantage of the districts’ failure to submit a test claim for the CSTs and avoid these payments.

For districts, our proposal structures a long-term settlement of both past and future mandates that recognizes that K-12 testing policy is driven, in part, by federal law. Districts receive substantial amounts of federal funding-$1.8 billion in 2005-06-in program and administrative support through NCLB, and it is reasonable to ask districts to use these funds for federally required testing. Because the DOFs request to SCO signals a possibility that districts may receive almost no STAR reimbursements for past year claims, we think districts have a strong incentive to settle this issue.

Create a New Truancy Program

We recommend the Legislature adopt trailer bill language to eliminate two existing truancy mandates and appropriate the $16.9 million in funding currently allocated for these mandates for a new truancy grant program. This would increase effectiveness of funds targeted at reducing truancy and the number of students dropping out of school.

Two of the 39 mandates affecting K-12 education target the problem of truancy-students who are absent from school or classes without permission at least three times during a school year. State law creates a variety of tools for educators to address truant students, including suspension of a student’s drivers license, referral to a School Attendance Review Board, or requiring a student to perform up to 40 hours of community service. The two state-mandated local programs are created by requirements to notify or meet with parents of students who are truant. Specifically, state law requires:

• Notification of Truancy. Schools are required to notify parents of truant students by mail or other reasonable method. The DOF estimates 2006-07 claims for this mandate total $9.8 million. Districts will receive an estimated $15.40 for each notification made pursuant to this mandate.

• Habitual Truant. Students who are absent from school or class five or more times in a year are considered “habitual” truants, and schools are required to “make every effort” to meet with the parents of habitual truants. The DOF estimates 2006-07 costs for this mandate at $7.2 million.

Problems With the Mandate Approach to Truancy

Truancy is an important issue, for several reasons. State law requires students under the age of 18 to attend school each day. Students who are not in school are also more likely to commit crimes or engage in other negative behaviors such as drug use.

Students who are not in school also are not learning. Research shows that truancy is a sign of disengagement from schoolwork-that students are losing the commitment to succeed in school, usually because they are failing in their coursework. As we discussed in our 2005 report Improving High School: A Strategic Approach, research shows that dropping out of school is the final step in a student’s disengagement from school. Thus, effective interventions to reduce truancy and keep students engaged in their studies can help reduce dropout rates.

California’s dropout rate is high. In our report, we estimate that about 30 percent of entering high school freshmen fail to graduate from high school four years later. Available attendance and graduation data do not permit a precise calculation of the dropout rate, so the figure may be somewhat higher or lower than our estimate. Clearly, however, the state’s dropout rate is too high. For that reason, the state needs to ensure that funds provided for local truancy programs encourage districts to focus on reducing the number of truant students and, ultimately, reducing the number of dropouts.

Our review indicates that state funds currently used to pay local claims for the two truancy mandates could be used to greater effect. We have identified three problems that reduce the effectiveness of the state’s current investment in addressing truancy and dropout rates. We discuss these problems below.

Mandate Can Create the Wrong Incentives. The Notification of Truancy mandate provides $15.40 in reimbursement each time a district notifies parents of a truant student. This unit cost approach to district reimbursement of this mandate establishes a simple, widely accepted, method of paying district mandate costs.

The unit cost approach, however, also encourages districts to maximize the number of parent contacts under the mandate each year in order to maximize state funding. While it could be argued that more information to parents about attendance problems with their students is always a good thing, the unit cost approach of the truancy notification can lead to absurd results. For instance, if a student skips an entire week of class, the student would be judged a truant three times during the week-and a district could receive $46 for notifying the parents of the three truancies. If the notices are sent by mail, none of the notices is likely to reach the parents until after the entire week of missed classes. While notifying parents of attendance problems is an important element of a truancy program, we question in this example the effectiveness of sending three letters.

Districts sometimes take this approach as a way of maximizing state funding. We discussed this mandate with one district official who uses this mandate as a “revenue source.” That is, since the cost to the district of sending notification letters is significantly less than the state reimbursement rate, the district sends as many parent notifications as possible in order to maximize district claims under the mandate. According to the district official, the additional revenue was used to pay for district school safety programs-not truancy or dropout programs. Thus, the unit cost approach for this mandate creates incentives for districts to maximize notifications without actually reducing the number of truancies.

Despite Requirements, District Implementation Is Uneven. While state law requires all districts to follow state truancy laws, district claims suggest that implementation of the two mandates differs significantly across the state. One large urban district, for example, claimed about $8,500 in 2002-03, which translates into 620 notices. The district’s reported dropout rate in that year was 6.9 percent, which means that 1,300 high school students dropped out of school. Thus, since each student who drops out also is truant, it appears that this district did not implement the truancy mandates as state law requires. On the other hand, a small suburban district also claimed about $8,500 for the Notification of Parents mandate. Yet, in 2002-03, the district reported no dropouts. Because it is a small district (4,300 enrollments), it seems clear that the level of implementation in this district is much greater than the large urban district.

Funds Are Not Necessarily Targeted to Districts With the Biggest Problem. The unevenness of claims also indicates another problem-funding for truancy programs is not targeted to districts that have the most severe truancy problems. As noted above, the large urban district received $8,500 (0.1 percent of the state total) for the Notification of Parents mandate despite the fact the district enrolls more than 57,000 students (0.9 percent of the state’s total).

At the other end of the spectrum, a large suburban high school district claimed $260,000 for the Notification of Parents mandate. This claim translates into more than 19,000 notifications. The district is relatively large, serving about 38,000 high school students. As a high school district, it could be expected to have higher truancy rates than a unified district, which serves grades K-12. The high school district’s claim, however, was the third highest in the state-much larger than its size would suggest.

Establish a New Truancy Grant Program

In summary, while the two truancy mandates appear to promote a policy of increasing parental involvement in the area of truancy, the mandates create the wrong incentives for districts and implementation falls far short of a uniform statewide program. In addition, while research suggests that educators and parents must work together to address the needs of students who are disengaging in schools, it does not suggest that a formal notification process is among the more effective approaches. Instead, direct teacher contacts with parents generally is considered to be more effective.

Given these problems, we think a more direct and flexible state approach to addressing truancy would help districts create more effective truancy programs. Therefore, we recommend the Legislature adopt trailer bill language to eliminate the two truancy mandates and establish a new truancy grant program. The program would provide the same level of funds in the form of a grant program for local truancy prevention that districts could use to (1) identify students whose attendance suggests they are at risk of dropping out of high school or in danger of falling significantly behind in their classes, (2) contact students’ parents, and (3) develop a plan to address the educational or other issues that create a barrier to the students’ progress in school. While there is no perfect way to distribute funds for this purpose, our proposal would allocate the $16.9 million based on the number of students who drop out in each district annually. While this data currently is not considered reliable, the quality of the data will improve over the next several years as the state’s new student-level database is implemented.

Districts currently have strong incentives for addressing truancy problems because most state funding is based on attendance. Thus, we think they have reason to continue contacting parents when students are absent from class without permission. Districts also have an incentive for reducing dropout rates, as this data is used as part of the federal NCLB accountability system. Building on these incentives, the state could increase the impact of funding currently spent on truancy reduction by focusing state support on activities that can directly help reduce the number of dropouts in the state rather than on procedural mechanisms that are of limited effectiveness.