Analysis of the 2007-08 Budget Bill: Education

A Proposition 98 Roadmap

By creating a long-term funding roadmap for the use of Proposition 98 funds, the Legislature could strengthen its role in the annual budget process, increase its ability to identify and pay for high-priority policy initiatives, and help school and community college districts plan and implement state initiatives more effectively.

Budgeting—whether for one’s personal finances or for state government—entails balancing funding inflows and outflows. In either case, “needs” and “wants” typically exceed resources, which requires choices about how best to use available funds. Budgeting under a short-term perspective often means that any new resources are spent on things that appear important at the time spending decisions are made.

Short-term priorities, however, may be inconsistent with the best long-term use of extra resources. To align short-run budgeting decisions with long-term goals, financial experts counsel people and governments to make explicit their long-term program and financial goals. Once these goals are identified, short-term budget decisions can be structured to support the longer-term goals.

Proposition 98 offers the Legislature a tool for long-term budget planning. Because the minimum guarantee in most years is determined by growth in the economy and K-12 student population, the Legislature can develop a long-term estimate of the amount of new funds that may be available if the economy behaves as expected. Using these revenue projections, the Legislature could develop a long-term expenditure plan that addresses its high-priority uses for new funding. This expenditure plan would serve as a guide to the work of the budget subcommittees in allocating Proposition 98 funds each year.

Many Benefits From Taking a Long-Term Perspective

In this section, we recommend the Legislature develop a roadmap for the use of Proposition 98 funds that we project will become available over the next five years. We call it a roadmap because we think it would help guide the Legislature’s fiscal choices so that it would more readily reach its long-term program objectives—despite the unexpected bumps and detours that inevitably occur along the way.

We see many advantages in creating a roadmap for the use of Proposition 98 funds. Figure 1 summarizes these benefits. First, the development of a plan would create a forum for the Legislature to identify its longer-term priorities. We do not see the roadmap as creating binding long-term obligations, but rather an opportunity for the Legislature to assess the progress of students and identify ways that additional funds could further support schools and community colleges in meeting the state’s educational goals.

 

Figure 1

Benefits of a Proposition 98 Roadmap

 

ü   Helps the Legislature Identify Its Long-Term Priorities

ü   Strengthens the Legislature’s Role in the Budget Process

ü      Helps Coordinate Spending Plans With Other Policy and Administrative Actions

ü   Facilitates Local Implementation Process

 

A roadmap also would strengthen the Legislature’s role in the budget process. Because growth in the economy and General Fund revenues is hard to predict, the Legislature often faces the task of budgeting hundreds of millions, or even billions, in discretionary dollars at the time of the May Revision. Without a longer-term perspective on the best use of these funds, the Legislature’s choices are framed by the Governor’s proposals or by other policy issues facing the Legislature at that particular moment. A roadmap would provide a broader range of choices to the budget committees. It also would help members assess the relative importance of immediate needs and longer-term program goals.

A plan also would help the Legislature put in place the other policy structures that might be needed to implement its long-term priorities. Additional money often constitutes only one of several ingredients needed for successful policies or programs. Considerable planning time may be needed, for instance, if new facilities are required to implement the Legislature’s policy directives. A long-term plan would allow the Legislature to initiate these changes in coordination with its expenditure plan.

By making the state’s policy goals more explicit—and the budget process more predictable—schools and community colleges also would benefit from a roadmap. Just as the Legislature finds itself reacting to last-minute proposals to spend significant new Proposition 98 resources, K-12 and community college districts must implement the resulting new programs under tight timeframes.

The state’s experience with implementing K-3 class size reduction (CSR) shows how last-minute budget proposals—particularly ones creating complex new programs that require significant lead time for local planning and implementation—can result in unintended negative consequences. The rapid implementation of CSR in 1996-97 resulted in immediate and severe shortages of credentialed teachers and available classroom space. Studies suggest that the employment opportunities created by the program resulted in credentialed teachers moving from inner-city schools to suburban schools. Perhaps as a result of the implementation challenges created by the very short implementation timelines, evaluations of the class-size program showed little impact on student achievement. Alternatively, a Proposition 98 roadmap could signal future spending directions and give school and community college districts a better chance to implement new programs effectively.

Significant New Revenues in Forecast

The possibility of significant and sustained Proposition 98 increases over the next five years make this an opportune time for the development of a roadmap. Figure 2 displays the LAO Proposition 98 projections of the annual amount of new discretionary funds that will be available from 2007-08 through 2011-12. Discretionary funds represent the growth in year-to-year Proposition 98 funds that is left after providing for baseline costs such as changes in attendance and cost of living. As the figure indicates, the amount of discretionary funds available in 2007-08 and 2008-09 is small—we project about $500 million in each year. In 2009-10, more than $1.5 billion in new funds is available for new programs (this is the year we project that Proposition 98 begins using Test 1 to determine K-14 funding levels). In 2010-11 and 2011-12, more than $2 billion is available in discretionary funds each year.

When the incremental annual amounts shown in Figure 2 are cumulated, the state will have $6.6 billion in new discretionary resources available for Proposition 98 by 2011-12. (Using the statutory division of Proposition 98 funds, K-12 education would receive about $5.9 billion of these funds and community colleges would receive about $750 million.) These are permanent, new resources that would substantially boost ongoing per-pupil funding levels for schools and community colleges.

As discussed above, actual annual increases in the minimum guarantee are rarely as orderly as projected. Our five-year projection assumes annual increases based on long-term economic and revenue trends. Since actual annual changes can vary substantially from these long-run averages, the pattern of Proposition 98 increases probably will diverge from our projection. Slower General Fund growth, for instance, could mean that Test 1 would begin determining Proposition 98 spending levels later than we currently project. Despite these caveats, we believe our projections provide a realistic starting point for planning purposes.

Recent Research Efforts Could Help Inform Planning

The 2007-08 legislative session may represent an opportune time to develop a Proposition 98 roadmap for another reason: the results of a foundation-supported effort to study the issues of funding adequacy and efficiency in K-12 education are expected to be released in the spring of 2007. These studies may help inform the Legislature’s discussions about where additional funds are most needed and identify policy changes that should accompany new monies.

At the request of the Assembly Speaker, the Senate Pro Tempore, the Governor, and the Superintendent of Public Instruction, four foundations joined to fund about 20 studies covering a variety of K-12 topics. These studies have two general goals. One is to advise the Governor and legislators whether K-12 schools are “adequately” funded—that is, supported at a level sufficient to ensure that all students can achieve at levels consistent with state achievement standards. The studies will examine funding adequacy for the system as a whole as well as for specific subgroups of students, such as special education and English learner (EL) students.

The second goal is to help state policymakers identify other reforms that would help the K-12 education system operate more efficiently and effectively. Studies include a broad array of topics, including governance, teacher quality and training, and a review of the existing K-12 funding system.

If the studies on California’s system conform with the experience of other states that have conducted adequacy studies, the foundation reports will call for substantial increases in support for K-12 education. The reports also are likely to call for programmatic and structural changes to improve the operation of the system. In this event, the reports will provide the Legislature with informed perspectives that can jump-start the discussion over a K-14 roadmap.

A Roadmap Expresses Priorities, Other Program Goals

Creating a long-term roadmap for K-14 expenditures requires an understanding of the critical issues facing the state’s education system and how strategic investments can address those issues. Fundamentally, however, it is a priority-setting exercise. While policymakers can disagree about the critical issues in the system, the state’s assessment and accountability system puts the Legislature in a much better position than in the past to inform this discussion with data on student success and other outcomes. As a result, the priority-setting discussion establishes an avenue for taking stock of the performance of schools and community colleges and charting the next steps for improvement.

While student success is the most important issue underlying the path outlined in a funding roadmap, a variety of issues may warrant attention. For example, the Legislature has an interest in maintaining the fiscal health of school and community college districts. In addition, the Legislature may want to provide discretionary funds to let local educational agencies pursue critical local priorities.

In considering its high-priority areas, the Legislature should keep in mind some key objectives:

Education research has established that, by itself, additional funding may not result in higher student performance. The above factors, therefore, represent important fiscal and program elements—fairness, transparency, flexibility, accountability—that help create the necessary conditions for schools and community colleges to translate higher funding levels into improved student achievement.

We have identified two major priorities for the LAO roadmap: investing in services to students who are at-risk of low achievement and maintaining the long-term fiscal health of districts. These twin goals emerged from our sense of the major challenges facing school districts in the next five to ten years. We do not suggest, however, that these represent the only significant issues facing K-14 education. The critical part of developing a roadmap is for the Legislature to establish its priorities.

Major Components of a K-12 roadmap

Our suggested roadmap would chart two main courses: (1) investing in child development programs and supplemental funding programs for the major subgroups of K-12 students who perform well below state standards, and (2) helping districts address the long-term financial challenge posed by retiree health insurance costs.

Data Reveal Significant Performance Gaps

A place to begin the planning process is to assess how students currently fare in our schools. The state’s testing programs provide critical data on the achievement of students. This data reveal that major subgroups of our student population struggle to work at levels consistent with graduating from high school. In addition, data also show that schools are not adequately preparing students for the challenges of college and employment after high school.

The state’s Standardized Testing and Reporting (STAR) testing program provides a perspective on the achievement of students in grades 2 to 11. Figure 3 displays the proportion of sixth graders that scored at the basic level or above on STAR in English language arts in 2006. The STAR tests report student scores in five performance levels—advanced, proficient, basic, below basic, and far below basic. While the State Board of Education identified the proficient level as the state’s goal for all students, the basic performance level roughly equates to the skills needed to pass the high school exit examination.

As Figure 3 illustrates, the average performance of students in the five groups differs markedly. More than 90 percent of the “All Other” group score at basic or higher on STAR. At the other end of the spectrum, only 28 percent of special education students score at these levels. In between these two groups, 44 percent of students who are identified as “EL and Low-Income” and 59 percent of students in the “EL Only” group score at basic or above. Students in the “Low Income Only” group fare relatively well, with more than 80 percent of students scoring at or above the basic level.

Given the extensive research showing a strong relationship between income and school achievement, however, we are concerned that the current measure of income—eligibility for free or reduced price lunch—may have family income thresholds that are too high to be a good indicator of economic disadvantage. Indeed, the STAR data identify 56 percent of sixth graders as low income.

It is also important to recognize the limitations of these data. Most importantly, students are not permanently assigned to the three “risk” groups. When an EL student becomes fluent in English, for instance, that student leaves the EL category. Similarly, special education students who successfully resolve their disability and low income students whose families move up the economic ladder leave their respective category.

This “group transiency” has a major impact on the accuracy of STAR data over time. Part of the explanation for the low EL and special education scores is that students generally enter the categories due to low expected or actual performance and leave the category when they begin to achieve at higher levels. Because STAR tracks group scores, not the progress of individual students in the groups, group transiency means that STAR understates the progress of students in these groups. Getting a clearer picture of the progress of these groups will require California to develop measures of achievement growth for individual students.

Address Needs of High School Students

The consequences for students of the achievement trends discussed above become most evident when they reach high school. The same groups of students that showed low performance in sixth grade continue to lag in high school. Low achievement contributes to the state’s high dropout rate. Data suggest that about 30 percent of 9th grade students do not graduate with their class four years later. While the state’s data is unable to reveal what types of students are most likely to drop out, research suggests that low-performing students are most at risk.

Low achievement levels also are evident in pass rates on the California High School Exit Examination(CAHSEE). The test, which students must pass to graduate, is designed to ensure students possess the mathematics and language skills needed for success as adults. Figure 4 displays the pass rates for the class of 2008. About 65 percent of the class passed the test as 10th graders last spring. Similar to the STAR data, the passing rates of low-income, EL, and special education students are significantly lower than for other students (unlike the STAR data, students may be included in more than one of these groups).

 

Performance problems also affect the transition of students to adult life. Specifically, data show that a significant proportion of high school students are unprepared for the challenge of college or the labor market. For instance, national data show that a quarter of high school graduates remain unemployed six months after graduation. In addition, more than 40 percent of recent high school graduates attending community college need to repeat basic mathematics and English classes. As we discuss in our report Improving High School: A Strategic Approach (May 2005), research suggests that the achievement and transition issues are linked. Low-performing students see little advantage to working hard in school, and many choose to drop out. This led us to conclude that upgrading vocational education was a key part of a strategy to give students a greater range of curricular choices that help them connect academics to their post-high school education and employment goals.

Maintain School District Fiscal Health

The second major priority of our roadmap is to secure the long-term fiscal health of school districts. In our Analysis of the 2006-07 Budget Bill, we discussed the long-term financial challenge to K-12 districts posed by unfunded retiree health benefits. Because of a new policy adopted by the national Governmental Accounting Standards Board, districts must begin identifying the cost of retiree health care benefits that each district has promised to its current employees and retirees. The accounting requirement will be phased in over a three-year period beginning in 2007-08. Because most districts have not set aside funds to pay for these benefits (as they do with pensions), many districts are expected to report large unfunded liabilities.

About 60 percent of school districts reported providing some amount of health benefits to retirees. Some districts report very large unfunded liabilities. Figure 5 displays selected data from a 2006 survey by the California Department of Education (CDE) on the extent of district liabilities for retiree health benefits. Since only 125 districts reported their liabilities, the cost data is likely to change as more districts conduct their cost studies.

 

Figure 5

Estimated K-12 Retiree Health Benefits
Unfunded Liabilities

(Dollars Per Student Enrollment)

 

Number of
Districts

Per-Pupil Liabilitiesa

Benefit

High

Average

Low

Lifetime

76

$23,734

$5,583

$85

Over age 65, not lifetime

116

6,662

1,878

65

Up to age 65

431

27,397

2,302

42

 

a  These estimates are based on a subset of districts that provide the given benefit.

 

In some cases, the reported liabilities are very large. When translated into per-pupil figures, the largest per-pupil liabilities top $20,000 per student. Unfunded costs of this magnitude pose a major financial threat. To put this into context, the average district receives about $8,000 in state and local funds per student each year. Thus, the health benefit liabilities faced by some districts exceed twice their annual revenues. In the long-run, the financial pressure on districts with very large liabilities may become so severe they eventually will seek financial assistance from the state. Some may even require emergency loans because of this problem.

For most districts, however, liabilities are smaller. As the figure displays, districts that provide lifetime health benefits show average costs of more than $5,500 per student. The average liabilities of districts that end coverage at a specific age—either age 65 (when retirees become eligible for Medicare) or after age 65—are even lower, at about $2,000. Even for these districts, the size of the liabilities remain a concern. Districts with liabilities of $5,000 per student would need to set aside about $350 per student each year to retire this obligation over a 30-year period. In addition these liabilities are growing because the current “pay as you go” method of budgeting followed by most districts does not cover the long-term costs of benefits for current employees.

Information on district liabilities will improve significantly over the next few years as districts comply with the new accounting requirements. We expect, however, that new data will paint a dark fiscal picture for many districts. Because the funding challenge posed by retiree health benefits is so significant, our roadmap allocates funding to address it.

Implementing the Roadmap’s K-12 Priorities

Our roadmap would invest new discretionary Proposition 98 funds in three program areas: child development programs, existing programs that support supplementary services to low-performing and at-risk students, funding, and “fiscal solvency” block grants.

Our overview of the K-12 system’s most significant issues identified two major areas of concern: the achievement of low-income, EL, and special education students and the fiscal threat posed by long-term retiree health benefit liabilities. To address these issues, our plan would direct new discretionary Proposition 98 funds into these areas. In crafting this plan, we have tried to use existing funding streams whenever possible. Our plan also includes complementary policy changes that would improve existing programs, fix problems with current funding formulas, and help make new funds more productive.

Specifically, we would focus a substantial proportion of the anticipated new funds on child development activities for low-income children under the age of five, existing state programs for special education and EL students, support for high school alternative programs and vocational education, and block grants that would protect districts from the fiscal challenge posed by retiree health benefit liabilities. Below, we briefly describe our approach in these areas.

Early Child Development and Preschool

The LAO roadmap allocates a major portion of new discretionary funds for early childhood development programs and preschool. Research shows that early intervention with disadvantaged and disabled students can improve long-term student outcomes. The long-term returns to quality preschool services—higher achievement and graduation rates, fewer referrals to special education, better adult outcomes—have been documented through long-term evaluations. For California, enrolling all EL children in preschool would appear to offer the additional benefit of getting these students earlier exposure to English. Although past studies of preschool were not focused on EL students, we think it is likely that the benefits of providing preschool also extend to this group of children.

Based on research into the cognitive development of infants, however, preschool is now considered to provide support “relatively late” in the lives of children. Evaluations indicate that supporting parents of infants can have positive long-term impacts on children. As a result, other states are beginning to fund programs that promote improved parenting skills. These programs help parents learn about nutrition, health, constructive parenting and discipline techniques, literacy, and educational options. These programs also often provide referrals to other social services.

Given the strong evidence about the long-term benefits of early childhood development programs, our roadmap would set as a goal providing access to preschool classes for all low-income 3- and 4-year olds. In addition, we would include significant funding for a new infant-parent education program that would be modeled after similar programs in other states.

Accompanying this new funding would be several policy changes designed to enhance the impact of the new services. We would dedicate a modest amount of the new funds, for instance, to promote a closer working relationship between preschool providers and K-12 education. These funds would encourage the K-12 system to help preschool programs improve their educational curriculum, identify toddlers who may have disabilities, and provide parents and kindergarten teachers with assessments of student readiness for kindergarten.

We also would place a premium on ensuring high quality preschool services. Consistent with our recent report Developing Safety and Quality Ratings for Child Care (January 2007), our plan would include funds to establish a child development quality rating system, which would collect and disseminate information on the quality of state-funded child care programs.

Augment Programs Targeting At-Risk Students

Our roadmap also would dedicate a significant amount of new discretionary resources for programs that support supplemental services to low-performing and at-risk students. Specifically, our plan would increase funding levels for four programs: special education, the Economic Impact Aid (EIA) program (which provides extra support based on the number of EL and low income students), alternative high schools, and vocational education programs:

There are other steps that we would suggest the state take to complement these funding increases. First, data need to be improved. We would require the CDE to explore ways to measure the annual growth of students on the STAR tests. As discussed above, group transiency renders STAR a poor measure of annual student growth, particularly for the subgroups of students most at risk of low performance. Thus, the development of good student growth measures would play a critical role in our plan. Additional work also is needed to refine the state’s measure of family income. Our current measure—eligibility for the free and reduced price meals program—may be too broad to reveal important underlying relationships between low income and low achievement.

We also see the need to refine the state’s accountability programs. As we discussed in our Improving High Schools report, the state needs to reconcile its policy of holding schools accountable under the federal No Child Left Behind Act for helping all students reach the proficient level of achievement while holding students accountable for passing the CAHSEE (which is roughly equivalent to scoring at the basic level on STAR). In our report on alternative high schools, we also recommend substantially revising the state’s Alternative Schools Accountability System. This system fails to effectively hold alternative schools accountable for meeting the needs of students.

Create Fiscal Solvency Block Grants

Our roadmap would include significant new funding for fiscal solvency block grants. Districts with unfunded retiree health benefit liabilities would be required to use block grant funds for two purposes. First, districts would set-aside an amount in each year’s budget equal to the “normal” cost of retiree health benefits—the amount that, if set aside each year over each employee’s working life, would pay for all projected benefit costs during retirement. By budgeting for the normal cost of these benefits, the Legislature would ensure that district liabilities would grow no further. Second, any funds remaining would be set-aside to reduce the amount of unfunded liabilities that districts already have accrued. Districts that have no retiree health liabilities could use the block grant funds for any K-12 purpose.

The cost of these block grants will be high. Under our plan, all K-12 districts would receive this new block grant. Although it would be less expensive for the state to target funds only to districts with significant liabilities, we would not suggest this approach. By targeting funding at only problem districts, the state would essentially reward districts whose costs threaten to spiral out of control and penalize districts that have been financially responsible. In general, we think districts should bear responsibility for the consequences of their fiscal decisions. By providing funding to all districts, therefore, districts with significant liabilities would be “penalized” by the requirement to spend the new funds only for those costs. Districts without these liabilities, on the other hand, would be free to spend the funds on program improvements.

If the state were to provide block grants to all districts, even large grants would translate into relatively small district amounts. For instance, for every $1 billion distributed through the block grants, the state would provide about $175 per student to districts. This amount would fall far short of covering costs in districts with the largest liabilities. Even in districts with moderate liabilities, it might also be insufficient to pay for the unfunded past-year costs and the ongoing normal cost of these services. As a consequence, the roadmap would target a significant percentage of the new discretionary funds for the retiree health issue.

How the LAO Plan Adds Up

Figure 6 illustrates how our plan would allocate the cumulative $5.9 billion in discretionary funds the we project over the next five years for K-12 education. In rough magnitudes, our roadmap would dedicate: $2 billion of the new funds for child development programs, $1.9 billion to for programs for various at-risk students, and $2 billion for the fiscal block grants.

Major Components of a CCC Roadmap

Our suggested roadmap would provide new discretionary resources for two new block grants: (1) fiscal solvency grants to help districts address the long-term challenge posed by retiree health insurance costs; and (2) student success grants to help improve student performance.

We base our recommendations for a California Community College (CCC) roadmap on three connected issues: (1) recent improvements in community college funding, (2) a projected slowing of enrollment growth, and (3) continuing performance challenges in the form of low student success rates.

Major Recent Improvements in Community College Funding

In recent years, the Legislature has made major improvements in community college funding. For example, for many years the Legislature has sought to raise the per-student funding rates of many districts in order to “equalize” funding near the level of the highest-funded districts. After adding about $300 million in base funding for this purpose over the past three years, the Legislature’s equalization goal has been achieved. In addition, Chapter 631, Statutes of 2006 (SB 361, Scott), revised CCC’s apportionment allocation formulas to help ensure that district funding rates remain equalized in the future. Moreover, most of the budget reductions enacted during the budget crisis several years ago (including reductions to matriculation, scheduled maintenance, economic development programs, and base apportionments) have been restored.

Major new investments also have been made in Career Technical Education (CTE) programs, with additional funding totaling more than $400 million planned over the next seven years. (Please see our discussion of these CTE programs in the “Crosscutting Issues” section of this chapter.) Major new augmentations were also recently provided for financial aid services and outreach, with the result that student participation in the Board of Governors waiver program is at an all-time high. Starting in the current year, a new, enhanced funding rate is being provided to high-priority noncredit programs. (Examples include English as a second language and short-term vocational programs.) This new rate is about $500 per student higher than the old noncredit rate and is intended to provide additional resources to districts that offer precollegiate and job-skills courses.

Reversing earlier trends, the Legislature has also addressed long-standing concerns regarding enrollment funding. Specifically, no community college district currently has enrolled more students than it is funded to serve. (During a time of rapid enrollment increase in the late 1990s, some districts experienced enrollment increases that exceeded their budget expectations.) In fact, for the past several years, enrollment growth funding has exceeded actual enrollment growth. Some of this unused enrollment growth funding has been redirected by the Legislature to other CCC priorities, including enhancing basic skills programs and creating a new remediation program for students who fail to pass the high school exit examination.

Moreover, student fees are at their lowest point in several years, with the per-unit rate having dropped by 23 percent in January 2007. Reductions in student fee revenue were backfilled with state funds to ensure that program funding levels were not affected. We also note that under the Governor’s budget proposal, the community colleges’ share of Proposition 98 resources would actually exceed the statutory “split” of 10.93 percent for the first time since 1990.

Some Funding Needs Still Have Not Been Addressed. To some extent, the recent improvements in community college funding were made possible by delaying payment for some other costs. For example, $200 million in 2003-04 apportionment funding was effectively “borrowed” from future years by continually delaying payment of this amount into the next fiscal year. Paying off this “deferral” would require a one-time cost of $200 million. Similarly, about $100 million in past mandates obligations is owed to community college districts. Some scheduled facility maintenance work also has been delayed as funding was moved to other priorities. And, as with K-12 school districts, community college districts have a substantial unfunded liability for future retiree health care costs. Overall, however, there have been significant funding improvements.

Projected Slowing of CCC Enrollment

As discussed in more detail in the “California Community Colleges” section of this chapter, the size of the traditional college-age population has been growing modestly (between 1 percent and 2 percent) over the past several years. We project this rate will peak at about 2.5 percent in two years, after which it will slow rapidly. We project that by 2013, this population will actually start to shrink.

Assuming constant participation rates, the leveling off of the underlying adult population means that community college enrollment will likewise slow. While some individual districts may continue to experience high growth, the amount of new funding required to accommodate enrollment growth statewide will likely decline from the levels required several years ago.

Community College Performance Challenges

A number of recent studies have highlighted several critical performance challenges facing community colleges. Of particular concern is the large percentage of CCC students who fail to either earn a degree or certificate or transfer to a four-year institution. For example, a recent student by the Institute for Higher Education Leadership and Policy found that about 60 percent of the students entering community colleges seek to earn a certificate or a two- or four-year degree. Of those students, only about one-quarter succeed in their goals within six years. Similarly, the Public Policy Institute of California recently reported that the production of associate’s degrees per 100 full-time equivalent (FTE) students at California’s two-year colleges is only about three-quarters the rate of the rest of the country. Other reports have made similar findings.

The causes of low rates of student completion are varied and difficult to isolate. However, two points stand out. First, existing funding mechanisms create stronger incentives to increase enrollment than to increase student completion. This is because the allocation of apportionment funding to CCC districts is based almost exclusively on enrollment (as measured in FTE students), with little linkage to student outcomes. For example, community colleges receive apportionment funding based on students being in attendance early on in the semester. The colleges’ funding has nothing to do with students completing courses or being successful in them.

Second, various restrictions impinge on districts’ ability to allocate resources in a way that best meets their needs. For example, a substantial portion of CCC funding is restricted for certain “categorical” purposes such as providing part-time faculty office hours, funding telecommunications services, or promoting regional economic development. In addition, state law imposes other restrictions on certain aspects of district resource allocation, such as a requirement that at least 50 percent of funding support direct instructional costs.

We believe that districts should be able to allocate financial resources in a way that best serves their students, but categorical and statutory funding restrictions, coupled with fiscal incentives to simply increase enrollment, can often work against those preferred allocation choices.

Investing New Resources to Meet CCC’s Challenges

The recent new budgetary investments in the community college system, coupled with the slowing of demographically driven enrollment demand, limits the amount of new resources that will be needed for normal workload increases over the planning period of our roadmap. This creates an opportunity to direct new Proposition 98 funding to paying off outstanding liabilities (such as retiree health benefits) and making improvements in student completion and graduation rates.

Specifically, we recommend that the Legislature consider directing roughly one-half of each year’s new, discretionary Proposition 98 funding for CCC outstanding liabilities, including paying off the $200 million deferral, reimbursing local districts for past mandates claims, and helping districts to fund their retiree health benefits liability. The latter liability could be addressed similarly to what we propose for K-12 districts—a fiscal solvency block grant.

We recommend the Legislature use the other half of new, discretionary Proposition 98 funding to improve student performance. In the “California Community Colleges” section of this chapter, we recommend redirecting a small amount of base funding in the budget year for a pilot block grant program to help targeted districts invest in programs that improve student success. In future years, the Legislature could expand this pilot and provide more grant funding to districts that is linked to improvements in student performance. Also, as noted above, we think part of the low student success rates is due to restrictions and disincentives inherent in the way community colleges are funded. Therefore, we recommend that these grants be coupled with relaxing some of these existing restrictions.

How the LAO Plan for the CCC System Adds Up

Our plan would allocate approximately $750 million in discretionary funds for CCC education that are available by the end of our five-year fiscal forecast. Our roadmap would dedicate one-half—$375 million—for “student success” block grants and a similar amount for fiscal solvency block grants. We also suggest that the Legislature set aside funds in the early part of the period to pay off the one-time costs of the deferral and prior-year mandate claims.

Conclusion

This discussion of a K-14 roadmap illuminates the benefits of a long-term legislative plan for the use of Proposition 98 funds that may be available over the next several years. Whether the substantial new discretionary funds actually become available depends primarily on the health of the economy. Even if the flow of new funds is modest, however, we think a roadmap has a number of important benefits. Most importantly, it helps the Legislature identify the problems of the K-14 system and how best to use available new funding—whenever it becomes available—to address those problems.

It is important to remember that these discretionary funds would accumulate over the five years, and that the total $6.6 billion would be realized at the end of this period. Much smaller amounts would be available in the near term. Under our revenue forecast, for instance, only about $500 million in discretionary funds would be available in 2008-09 for K-14 programs. Under our suggested priorities, for example, the Legislature could use a portion of these funds in that year to pay for child care facilities that would be needed to accommodate the proposed expansion of preschool programs. This would pave the way for the ramp up of preschool programs that would occur as the larger sums of discretionary funds became available in later years. Similarly, allocations for low-performing students and fiscal solvency grants would increase over the five years as the new discretionary funds became available. As a result of the roadmap approach the Legislature could ensure that its priorities for new spending were accomplished over the period.

The roadmap also illustrates that, with a long-term perspective, the Legislature can make major investments in school district and community colleges. Because our five-year projection results in so much new discretionary money, our roadmap results in funding allocations on a grand scale. Even smaller amounts, however, accumulate into large sums over time. Later in this chapter, for instance, we review the Governor’s proposal on career technical education improvement grants. Our recommendations are based on a long-term perspective—that the program will receive $400 million over the next seven years—rather than the typical short-term budget perspective. Taking a long-term perspective changes the perception of what the program can accomplish.

The process of developing a roadmap also is an important issue. Because the process includes program and funding issues, it would be important to have the budget subcommittees working jointly with the policy committees in each house on the development of a roadmap. The committees also would want to seek input from a variety of sources—including the foundation researchers who are involved in the new studies on adequacy and efficiency. While the task of developing a roadmap represents considerable work, we would hope that the Legislature would see it as an opportunity to take stock of the performance of the K-14 system and chart a long-term course for its improvement.

Return to Education Table of Contents, 2007-08 Budget Analysis