Analysis of the 2007-08 Budget Bill: Education

Overview

The Governor’s budget proposes almost $100 billion in operational spending from state, local, and federal sources for K-12 and higher education in 2007-08. Of this amount, $65 billion is for K-12 education. This is an increase of $1.4 billion, or 2.3 percent, from estimated expenditures in the current year. The remaining $35 billion is for higher education. This is an increase of $1.3 billion, or 3.8 percent, from the current year.

Figure 1 summarizes support for K-12 and higher education for three years. (The figure includes operational spending from all sources but excludes capital outlay-related spending.) It shows that spending on education will reach almost $100 billion in 2007-08 under the Governor’s proposed spending plan.

Funding Per Student

The proposed Proposition 98 funding level for K-12 education in 2007-08 equates to $8,524 per student, as measured by average daily attendance (ADA). Proposed spending from all funding sources (excluding capital outlay-related spending) totals $10,932 per student.

The proposed Proposition 98 funding level for the California Community Colleges (CCC) equates to $5,335 per full-time equivalent (FTE) student. Including other state funds and student fee revenue, CCC would receive about $5,804 per student. This compares to proposed total funding (General Fund and student fees) of $25,068 for each FTE student at the University of California (UC) and $12,200 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 modified by Proposition 111, establishes a minimum annual 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 total CCC funding.

The minimum funding levels are determined by one of three specific formulas. Figure 2 briefly explains these formulas (or “tests”) and some other key 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. In most years, the key determinants of the Proposition 98 minimum guarantee (or required funding level) are the year-to-year change in per capita personal income and General Fund revenues.

Proposition 98 Allocations

Figure 3 displays the budget’s proposed allocations of Proposition 98 funding for K-12 schools and CCC. For the current year, lower-than-anticipated student attendance reduces the spending level by $100 million—to total spending of $55 billion. For 2007-08, the budget includes $56.8 billion—an increase of $1.8 billion. (These figures reflect the Governor’s proposal to move the $627 million school transportation program out of Proposition 98. This proposal, discussed in the “Home-to-School Transportation” section of this chapter, affects year-to-year comparisons of growth in Proposition 98 funding.) Most of the increase in proposed Proposition 98 spending is supported by local property tax revenues ($1.4 billion). Proposition 98 funding issues are discussed in more detail in the “Proposition 98 Update” and “Proposition 98 Priorities” sections of this chapter.

Enrollment Funding

The Governor’s budget assumes K-12 attendance will decline by 0.4 percent from 2006-07 to 2007-08. This would be the third consecutive year that K-12 attendance has declined. Enrollment is expected to drop even more rapidly in coming years, as the children of the baby boomers move out of their high school years. The budget funds 2 percent growth for community college enrollment, which is somewhat above the statutory guideline—based on population growth—that calls for 1.65 percent. In addition, the Governor’s budget proposes to fund 2.5 percent enrollment growth at UC and CSU, which is more than double our projection of underlying demographically driven growth (1.1 percent).

Setting Education Priorities for 2007-08

In this chapter, we evaluate the proposed budget for K-12 and higher education, including proposed funding increases and reductions, fiscal and 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 proposes a “baseline” Proposition 98 budget for 2007-08. This includes $1.8 billion in net new spending, most of which goes to provide a cost-of-living adjustment (COLA) for most programs. Given our more recent economic and revenue data, we have serious concerns with the Governor’s plan. Our estimate of General Fund tax revenues, for instance, is lower than the administration’s by $1.4 billion over 2006-07 and 2007-08. This translates into a Proposition 98 minimum guarantee that is $609 million lower for 2006-07 and $261 million higher in 2007-08 than the Governor’s budget. In addition, we believe the administration’s proposal to rebench the Proposition 98 minimum guarantee as a result of the school transportation shift ($627 million) is unconstitutional and therefore might not result in General Fund savings.

These General Fund threats serve as an impetus to explore whether other options for General Fund savings are available within the parameters of Proposition 98. We identify an alternative that creates $609 million in one-time General Fund savings while leaving budget-year Proposition 98 spending at effectively the same level as proposed by the Governor.

Higher Education Priorities. The Governor’s budget presents the Legislature with three major issues in higher education: enrollment growth, student fees, and inflationary adjustments. The Governor’s budget proposal offers little rationale to justify its enrollment funding increases. In particular, CCC enrollment has failed to meet the level of growth funded in recent annual budgets. Moreover, the Governor’s budget funds each additional UC and CSU student using a formula the Legislature rejected in the current year. In the “Higher Education” portion of this chapter, we recommend different enrollment targets and funding levels for the segments.

The Governor’s budget proposes 7 percent and 10 percent student fee increases for UC and CSU, respectively. This is roughly double the fee increase needed to maintain students’ share of cost at 2006-07 levels. 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 base increases for all three segments. Consistent with statutory guidelines, the CCC would receive a COLA based on the same methodology as is used for K-12 schools. In contrast, there is no statutory guideline for providing a base increase for UC and CSU. Absent such a guideline, we recommend the Legislature provide base augmentations for those segments based on inflation.

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