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

Facilities Emergency Repair Program

The current structure of the Emergency Repair Program (ERP) makes it difficult for districts to apply for funds and provides incentives for districts to avoid addressing facility problems until they become real emergencies. We recommend the Legislature enact legislation to grant the ERP funds directly to districts with low performing schools to address facility needs identified by their facilities needs assessments, and maintain $50 million at the state level to provide districts with loans for pressing emergency repair needs.

In August 2004, the state settled out of court with the plaintiffs of the Williams v. California lawsuit. The lawsuit concerned three aspects of K-12 education: instructional materials, teacher qualifications, and facilities. The settlement obliges schools to take steps to ensure (1) all students have sufficient textbooks and materials; (2) teachers have appropriate qualifications for their assignments; and (3) facilities are clean, safe, and maintained in good repair. Most of the requirements imposed by the settlement focus on schools that scored in deciles 1 through 3 on the 2003 Academic Performance Index (the bottom 30 percent of schools based on achievement).

Chapter 899, Statutes of 2004 (SB 6, Alpert), part of the legislative package implementing the Williams settlement, created two new facilities programs. The first, known as the School Facilities Needs Assessment Program (SFNAP), provided funding to districts to conduct needs assessments of facilities at their deciles 1 through 3 schools. The 2003-04 budget provided $25 million for the SFNAP. These assessments were to be completed by December 31, 2005. The second program, the facilities Emergency Repair Program (ERP), established a procedure whereby districts can apply to the state for supplemental funding to address emergency facility repair needs at their deciles 1 through 3 schools. The law defines emergency repairs as repairs to address conditions that pose a threat to the health and safety of students or staff.

The Williams settlement requires the state to contribute the greater of $100 million or one-half the balance of the Proposition 98 Reversion Account to the ERP each year, until the program has been provided a total of $800 million. (This is separate from the $25 million provided for the SFNAP.) In 2005-06, the state provided $206 million for ERP to meet this requirement. The Governor’s budget proposes an additional $107 million in 2006-07. However, it is likely this amount will increase before the final budget is passed, as typically additional unexpended funds from prior years are identified and transferred into the Reversion Account during the second half of the fiscal year.

Despite substantial state investment in the program, almost none of the funds provided for the ERP have yet been allocated to districts. Below, we discuss problems with the current structure of the program, as well as recommendations for promoting timely and efficient distribution of the funds.

Program Structure Makes It Difficult for Districts To Apply for Funding

Of the $206 million currently available for the program, so far less than $1 million has been distributed to districts-the remaining balance is held in a state account. The large balance of unexpended funds is primarily due to the fact that very few districts have applied for ERP funds. According to informal district reports, the lack of applications does not indicate a lack of emergency facility needs, but rather results from other issues, including:

• Fears That Projects Will Not Be Approved. The ERP is structured such that a district must pay for and undertake the emergency repairs before it applies to the state for funding. If the application for the completed work is approved, the state will reimburse the district for the costs of the repairs. If the application is denied, the district will be stuck having borne the full costs of the project. Currently, there is no preapproval process. Districts report being reluctant to undertake emergency repair projects given the uncertainty over whether they will be reimbursed after the work is completed.

• Cash Flow. Many districts, especially small ones, do not have funds available to “front” the costs of the repairs while they wait for reimbursement from the state-especially given the uncertainty of whether reimbursement will come at all.

• Workload. Many district maintenance departments report they cannot afford the extra staff time necessary to complete the detailed ERP applications and gather the required documentation.

• Confusion. Districts are unsure about the application process and what types of projects qualify, and report they have received conflicting information about how the program operates.

While the state can certainly improve efforts to educate districts on the ERP application process, we believe the program’s current structure will continue to make it difficult for many districts to access ERP funds. Without preapproval for reimbursement, districts’ reluctance to front funding and undertake projects will continue. This requirement makes the program especially difficult for districts that are small or do not have excess funds available. Furthermore, the involved nature of the ERP application will continue to disadvantage districts without the staff and resources to complete reimbursement claims. For these reasons, we have concerns that the majority of funding provided for the ERP in the budget year and future years will continue to go unexpended, and that funding applications that are submitted and approved will not necessarily originate from the districts with the most emergency facility needs but rather those that had the least difficulty navigating the system.

Program Creates Bad Incentives

We think an additional problem with the current ERP structure is that it rewards districts that avoid taking proactive measures to address their facility needs. A district that has a well planned preventative maintenance system in place and uses its deferred maintenance and routine restricted maintenance funds to address repair and replacement needs on a regular basis will have fewer emergency repair needs. As such, these districts will not be eligible to receive as much ERP funding. In contrast, districts that do not manage their facility funding well or fail to address facility needs in a proactive manner will have many emergency needs, and thus be eligible for more supplemental ERP funding from the state.

Not only does this system reward poor facilities management with additional state funds, it also creates incentives for districts to ignore problematic facility conditions at deciles 1 through 3 schools. For example, if a district knows one of its deciles 1 through 3 schools has an old and temperamental boiler, it might choose to spend its maintenance funds at other district schools instead, knowing that once the boiler problem becomes an emergency it can turn to the state for funding rather than having to use its own maintenance funds to repair or replace the equipment.

Remove Bad Incentives and Get Funding out to Districts-Modify Funding Distribution System

We recommend a two pronged approach to the problems noted above, as summarized in Figure 1. First, we recommend that most of the ERP funding be distributed directly to districts as grants to address needs identified through the SFNAP. Second, we recommend the creation of a loan program to help districts with new emergencies that may occur in the future.

Grant Program. We recommend the Legislature address the existing problems with the ERP by enacting legislation to eliminate the application and reimbursement process and instead send annual grants directly to districts based on average daily attendance at their deciles 1 through 3 schools. Districts would be required to use these funds on facility needs identified by the SFNAP assessments. This will ensure that items identified in the needs assessments are addressed in a more timely fashion. Local school boards would be required to develop a priority system to determine which of these needs would be addressed first. If a district is able to address all of the needs identified in the SFNAP assessments with existing resources, then it could either use the ERP funds for other facility needs at the decile 1 though 3 schools, or create a sinking fund to set the funds aside for future needs at these schools.

Loan Program. We also recommend maintaining $50 million in the state ERP account to establish an emergency loan program. This program would be structured as a revolving fund and would assist districts in addressing any facility emergencies at decile 1 through 3 schools. Districts could access these funds either through a reimbursement or preauthorization process.

The program would require districts to repay these loans over a three-year period, paying the ERP account back out of future ERP or deferred maintenance allocations. Structuring the program as a loan instead of a grant reduces districts’ incentives to let conditions exacerbate and try to redirect repair costs to the state. However, offering the loans up-front-that is, before project work has begun-and interest-free for a period of three years would encourage districts that have true emergency needs to seek necessary assistance. We recommend this loan program continue even after the full $800 million for the ERP has been allocated. This would ensure that districts with emergency facility needs at their low-performing schools continue to get assistance when needed.

For 2006-07, district ERP grants would total at least $262 million-$155 million (the current ERP account balance minus the $50 million set-aside) plus $107 million or whatever amount is ultimately provided in the budget year.

We believe our proposed solution would meet the Williams settlement’s intention to provide districts with additional resources to address facility needs at low-performing schools. While this proposal would provide funding to all deciles 1 through 3 schools in the state rather than focusing on those schools with the most dire facility needs, we believe some needy districts may actually get more funds under our proposal than under the existing system. This is because, as discussed, the current program structure makes it difficult for many districts to even apply for the funds. Under our system, all needy districts would get at least some ERP funding, and districts with several deciles 1 through 3 schools would get a greater share than those with fewer low-performing schools. Moreover, we believe our proposal would remove both (1) barriers preventing districts from accessing the funds, as well as (2) incentives for districts to take advantage of the system by ignoring poor conditions at deciles 1 through 3 schools until the state will pay for them.