Analysis of the 2007-08 Budget Bill: Education

Quality Education Investment Act

The approach taken to school reform in the Quality Education Investment Act (QEIA) has several shortcomings that we think the Legislature could address by enacting relatively modest program changes. Specifically, we recommend the Legislature build on the existing experimental features of the QEIA program by allowing participating schools to select one of three teacher-oriented reform options. This would have the double benefit of allowing schools to select the reform most likely to benefit their students while allowing the state to study the effectiveness of several reform strategies. Later in this section, we also recommend the Legislature identify QEIA payments in the annual education trailer bill to ensure transparency.


This write-up contains six parts. The first three parts provide background on the recent California Teachers Association (CTA) lawsuit, the resulting settlement reached by CTA and the administration, and the subsequent enactment of QEIA, which allocates settlement funds to particular programs. The fourth part highlights shortcomings of the QEIA program as currently structured. The fifth part identifies some modest changes the Legislature could adopt to address these concerns and significantly improve the potential benefits of the program. The last part discusses the accounting and tracking of QEIA monies.

Lawsuit Sought Additional $2.8 Billion for K-14 Education

In 2004-05, the state suspended the Proposition 98 minimum guarantee. The suspension was effectuated by Chapter 213, Statutes of 2004 (SB 1101, Budget Committee), which stated that funding for K-14 education in that year was to be $2 billion lower than the guarantee. Final General Fund revenues for 2004-05 came in substantially higher than initially assumed, thereby raising the Proposition 98 minimum guarantee. As a result, the 2004-05 funding level ended up being $3.6 billion lower than the guarantee—or $1.6 billion lower than the designated Chapter 213 level. Because the Proposition 98 minimum guarantee is calculated based on the prior-year funding level, the 2005-06 funding level also was affected—being $1.2 billion less than what it would have been had the Chapter 213 level been met. As shown in Figure 1, the difference between the Chapter 213 levels and funded levels totaled $2.8 billion over the two years (see nearby box for why this number has changed over time). In August 2005, CTA sued the Governor regarding his application of Chapter 213, which it claimed resulted in a loss of $2.8 billion for K-14 education.

Technical Note on the Numbers

Because the disagreement over Chapter 213, Statutes of 2004, (SB 1101, Budget Committee), is ultimately linked with the Proposition 98 minimum guarantee and the guarantees for 2004-05 and 2005-06 have been fluctuating based on updated revenue data, the dollar amount at stake in the disagreement also has been fluctuating. Early last year, the amount was estimated at $3.2 billion ($1.7 billion for 2004-05 and $1.5 billion for 2005-06). When the 2006-07 budget was enacted, the amount was estimated at $2.9 billion ($1.6 billion for 2004-05 and $1.3 billion for 2005-06). The underlying data have since been updated, with the amount at stake now estimated at $2.8 billion ($1.6 billion for 2004-05 and $1.2 billion for 2005-06). This most recent revision is the result of approximately $75 million more-than-expected Proposition 98 funding now being provided for 2005-06, thereby dropping the outstanding obligation for that year by a like amount. Given the applicable revenue data are now finalized, the $2.8 billion amount should no longer fluctuate.


K-14 Education to Receive Additional $2.8 Billion Over Next Seven Years

In May 2006, the Governor decided to settle with CTA—agreeing to provide the additional $2.8 billion over a seven-year period (2007-08 through 2013-14)—$2.5 billion for K-12 education and approximately $300 for the California Community Colleges (CCC). In September 2006, the Governor signed legislation reflecting the terms of the settlement. As specified in the settlement, Chapter 751, Statutes of 2006 (SB 1133, Torlakson), designates a first payment of $300 million in 2007-08 ($268 million for K-12 education and $32 million for CCC). In each subsequent year, Chapter 751 designates payments of $450 million ($402 million for K-12 education and $48 million for CCC) until the full obligation has been met. Figure 2 shows this payment schedule.


Figure 2

Settlement Payment Schedule

(In Millions)



2008-09 Through 2012-13a



K-12 education





Community colleges











a  Annual payments.

b  Includes $38 million for career technical education and $10 million for block grants.


Payments on Top of Ongoing Proposition 98 Funding. These annual payments will count toward the agreed-upon 2004-05 and 2005-06 Proposition 98 obligations. State funding for 2006-07 assumed these obligations already had been fulfilled. As a result, the state essentially has erased any ongoing effect of the 2004-05 Proposition 98 suspension—leaving only the “back” payments to 2004-05 and 2005-06. These annual settlement payments therefore will be in addition to otherwise required ongoing Proposition 98 funding.

Funding Source Identified Only for First Few Payments. The state currently is in the process of selling approximately $900 million in tobacco securitization bonds to fund the first few settlement payments. Once these bond monies are exhausted, the General Fund will likely be needed to pay remaining obligations.

Funds Designated for Major New Program. The settlement itself did not specify how the additional monies were to be used. The Legislature therefore is not bound by court order to use the funds to support any specific education activities. Chapter 751, however, statutorily established the QEIA program. The act designates that the funds are primarily to be used for class size reduction (CSR) in grades 4 through 12 and expanding career technical education in community colleges. Below, we describe the K-12 provisions of QEIA. For more information about the major community college provisions, please see the “Career Technical Education” write-up in the “Crosscutting Issues” section of this chapter.

K-12 Monies Support New CSR Initiative

In this section, we describe QEIA’s eligibility criteria, selection process, funding provisions, “regular” program requirements, and “alternative” program requirements for K-12 education. We also provide a timeline showing the progression of required start-up activities.

Almost 1,500 Schools Eligible for QEIA Funds. Public schools, including charter schools, are eligible to receive QEIA funds if they are ranked in deciles 1 or 2 of the 2005 Academic Performance Index (API). Based on this criterion, 1,455 schools are eligible for funding. Figure 3 shows the number of eligible schools by county. (Regulations specify that schools with less than 99 students are not eligible because of the statistical uncertainty of their API scores.)


Figure 3

Eligible QEIA Schools by County






Butte (7)

San Joaquin (45)

Los Angeles (409)


Sonoma (7)

Tulare (44)

San Bernardino (110)


Mendocino (6)

Contra Costa (38)

Fresno (93)


Yuba (5)

Monterey (35)

Riverside (84)


Lake (4)

Santa Clara (33)

San Diego (78)


Yolo (4)

Ventura (26)

Kern (75)


Sutter (3)

San Francisco (23)

Alameda (67)


Colusa (2)

Santa Cruz (18)

Orange (59)


Humboldt (2)

Stanislaus (17)

Sacramento (55)


Napa (2)

Kings (15)



San Benito (2)

Solano (15)



Siskiyou (2)

Merced (14)



Del Norte (1)

San Mateo (14)



El Dorado (1)

Imperial (13)



Inyo (1)

Santa Barbara (12)



Marin (1)

Madera (10)



Mono (1)




San Luis Obispo (1)




Shasta (1)




Random Draw at State Level, Districts Prioritize at Local Level. The act contains little direction on how eligible schools are to be selected. It specifies only that the Superintendent of Public Instruction SPI and Secretary for Education are jointly to recommend schools to be funded, ensuring selected schools are representative of geographic areas of the state and grade levels. Regulations require districts to submit applications on behalf of schools and rank them in priority order for funding. The state will then randomly draw district slots for the regular and alternative programs, and top-ranked schools will be selected. Funding is sufficient to support about 1 in 3 eligible schools.

High Per-Pupil Funding Rates. For schools chosen, QEIA designates annual funding rates of $500 per K-3 pupil, $900 per grades 4 through 8 pupil, and $1,000 per grades 9 through 12 pupil. Figure 4 shows how many students are to be funded in each of these grade spans. The act allows first-year funding ($300 million) to be used for facilities—if those facilities are needed to meet the program’s CSR requirements. In general, all funds provided on behalf of a QEIA school must be spent at that school.


Figure 4

Estimated Funding Allocations by Grade Span

Grade Levels:





Number of students





Per-pupil funding rate




  Total funding






Student Achievement Goals Similar to Regular Standards. Every school in the state is expected to meet annual student achievement growth targets (equal to 5 percent of the difference between its current API score and the state target of 800). The QEIA program has a similar achievement standard—requiring that participating schools exceed their API growth target averaged over the second through fourth years of the program. (“Exceeding” typically is defined as at least one point above the target.) Beginning in the fifth year of the program, QEIA schools are expected to meet their annual API growth targets, but they continue receiving funding even if they fail to meet those targets. Instead of a fiscal repercussion, they become subject to review and assistance under the state’s other intervention program for low-performing schools (the High Priority Schools Grant Program, or HPSGP).

Strict Regular Program Requirements. Schools that receive QEIA funding and participate in the regular program must meet the following requirements:

Strict Timeline Requirements. If one or more of these program requirements are not met, schools have until the end of the subsequent school year to meet them or else risk losing funding. Specifically, schools must be at least one-third the way toward meeting the input-oriented requirements by the end of the second year of the program. (For example, they must have reduced average class size by at least 1.7 students—one-third of the 5 student goal.) By the end of the second year, schools also must meet all the requirements of the Williams settlement (which relate to teacher qualifications, instructional materials, and school facilities), and school districts must ensure that each administrator in a funded school has “exemplary qualifications and experience.” Schools must be two-thirds of the way toward meeting QEIA requirements by the end of the third year of the program and then achieve full implementation by the end of the fourth year of the program. At that time, all funded schools also must have increased pupil attendance and high schools must have increased graduation rates. In addition, schools must provide professional development to at least one-third of their teachers annually.

Strict Alternative Program Prerequisites. School districts may apply on behalf of schools to use an alternative program. Up to 15 percent of the pupils funded under QEIA may be served by one of these alternative programs. High schools that are unable to decrease class sizes because of facility constraints receive priority for the use of alternative programs. To be approved for such a program, a school district must demonstrate that the alternative program would result in a higher level of academic achievement than the regular QEIA program. The proposed alternative program also must be based on sound scientifically based research and reliable data. Schools approved for alternative programs must meet the same general progress requirements as schools using regular programs or else risk losing funding.

Next Six Months Critical Oversight Period. Figure 5 provides a timeline of required start-up activities. As shown, CDE will be making several critical decisions over the next six months—including issuing application guidelines, selecting which schools to fund, and creating a teacher experience index. Thus, the next several months will be a critical period for conducting oversight activities.


QEIA Approach to School Reform Has Several Shortcomings

We think the QEIA program has five major shortcomings, which we discuss below. In the following section, we recommend a few small changes to the program that we think would address some of these shortcomings and significantly improve its potential benefits.

School-Based Approach Already Found Unlikely to Work. As a school-based reform program, QEIA perpetuates an approach already found unlikely to work. Independent evaluations of the state’s existing school-based intervention programs show lackluster results, with participating schools generally not performing better than nonparticipating schools. Across a series of evaluations of the state’s Immediate Intervention/Underperforming Schools Program and HPSGP, the American Institutes for Research found virtually no difference in student achievement between participating and nonparticipating schools. The evaluations of both programs suggest that school-based interventions might fall short of expected results because they ignore the critical role of the district. District leaders, for example, hire and assign school administrators and teaching staff, negotiate the terms of collective bargaining agreements, and determine how to distribute discretionary resources. The QEIA program, as with the state’s other school-based intervention programs, do not attempt to influence those types of decisions.

Decile Approach Too Limited. Although decile rank can show that some schools are scoring lower than other schools, it fails to distinguish between schools that are making great strides in improving student performance and those whose performance is not only low but worsening. For example, the average growth of all deciles 1 and 2 schools between 2002-03 and 2005-06 was 23 API points, but 35 percent of these schools had gains of more than 100 points. The QEIA program, however, treats all these schools the same—presuming that all are “low-performing” and all are equally needing and deserving of additional funding.

Top-Down, One-Size-Fits-All Approach Can Undermine Local Reform Efforts. The QEIA approach also can undermine local reform efforts. Over the last several years, many low-decile schools have received special state funding to develop and implement local improvement plans. Other low-decile schools have initiated their own systemic reforms tailored to local needs. Rather than trying to bolster existing reform efforts, QEIA creates a new top-down, one-size-fits-all, highly prescriptive reform program that assumes all low-decile schools can benefit from the same class size reduction initiative. Such an approach can disrupt and/or undermine local reforms—some of which might have the potential to be much more effective at improving student achievement.

Funding Approach Creates New Inequities. By providing such high per-pupil funding rates to roughly 5 percent of schools, QEIA creates new funding inequities. Over the life of the program, for example, a mid-size decile 1 high school would receive $14 million in QEIA funding whereas neighboring schools, even those serving equally disadvantaged students, would receive no QEIA monies. Such large funding inequities run counter to the Legislature’s longstanding efforts to reduce such disparities. In 2006, for example, the Legislature provided a $350 million augmentation to further equalize school districts’ per pupil general purpose monies (or revenue limits) and a $350 million augmentation to further equalize Economic Impact Aid per-pupil funding rates.

Also Creates Significant Out-Year Cost Pressures. Although QEIA is set to end in 2014-15, it creates large out-year cost pressures. Given QEIA schools are required to implement a major CSR initiative, ending abruptly would create staffing and facility issues. Thus, participating schools likely will seek to sustain the program. In addition, (1) eligible QEIA schools that were not funded and (2) higher performing schools serving equally disadvantaged students that were not eligible under the initial rules very likely will seek funding in future years.

Small Changes Could Yield Significant Benefits

We recommend the Legislature build on the existing experimental features of the Quality Education Investment Act program. Specifically, we recommend (1) allowing schools to self-select themselves into one of three reform groups and (2) funding an independent evaluator to assess the performance of the groups over the seven-year life of the program.

Although addressing all of the above shortcomings would require a different approach to school reform, the Legislature could address some of the shortcomings by making relatively modest changes to the basic QEIA structure. Below, we describe these recommended changes.

Allow Schools to Select One of Three Teacher-Oriented Reform Options. We think the potential benefits of QEIA would be maximized if it were run as a pilot program. Specifically, as described in Figure 6, we recommend the Legislature allow participating schools to pick one of three reform strategies (with an independent evaluator ensuring that a sufficient number of schools are in each group to yield statistically significant findings). One group would adhere to the existing QEIA program requirements and implement CSR in grades 4 through 12. A second group would be required to hire the same number of teachers as under the QEIA program but be allowed to deploy these teachers as it thought fit. For example, it could hire additional teachers to be reading specialists, language specialists, or on-site professional development coaches. A third group would be exempt from most QEIA requirements. Instead, we suggest it be allowed to use QEIA funds for any teacher quality initiative—including new teacher recruitment or retention programs, compensation bonuses, enhancements to working conditions, or additional professional development opportunities.


Figure 6

Running QEIA as Pilot Program
Would Maximize Benefits

Reform Group 1

Reform Group 2

Reform Group 3

Control Group

Must adhere to all
QEIA requirements—including class size reduction (CSR)

Exempt from CSR
requirements but require schools to hire same number of teachers as otherwise required under QEIA.
Allow schools/districts
to deploy teachers as they see fit.

Exempt from essentially
all QEIA requirements. Require schools/districts
to use QEIA funds for any teacher quality initiative—including teacher recruitment, retention, compensation, and professional development initiatives.

A group of comparable schools that receive no QEIA funding and participate in no state intervention program.


Fund Independent Evaluator. Chapter 751 requires CDE to perform, or contract with an independent evaluator to perform, two interim and one final evaluation. The interim reports are due January 1 of 2010 and 2012, with the final report due January 1, 2014. The reports are to include student achievement data. We recommend the Legislature provide $250,000 each year of the program, beginning in 2007-08, to fund these evaluations and require CDE to contract with an external evaluator. The evaluator would play an important role in setting up the reform groups, identifying an appropriate control group, collecting needed achievement and implementation data, conducting site visits and interviews, and preparing the required reports.

Small Changes Could Yield Significant Benefits. These relatively modest changes could significantly improve the program by ensuring that the state learned as much as possible from the $2.5 billion investment in K-12 education. By having at least a few different types of reforms implemented, the state could begin comparing which types of strategies appear to work best for which types of schools and students. Rather than allowing only 15 percent of schools to select an alternative reform program, the experimental approach offers considerably more flexibility while simultaneously ensuring that the various reform options can be studied and systemic lessons gleaned from them. Having most schools able to self-select their reform strategy also would help cultivate local support for the endeavor. Finally, officially declaring the program an experiment could reduce out-year cost pressures while allowing the state to use the findings of the experiment to determine which future investments likely would be worthwhile.

In sum, we think QEIA’s approach to school reform has several shortcomings that the Legislature could address by enacting relatively modest program changes. Specifically, we recommend the Legislature build on the existing experimental features of the QEIA program by allowing participating schools to select one of three reform options. This would have the double benefit of allowing schools to select the reform most likely to benefit their students while allowing the state to study the effectiveness of several reform strategies.

Make Accounting of QEIA Monies More Transparent, Accurate

We recommend the Legislature reflect the Quality Education Investment Act payments in the annual education trailer bill. Over the life of the program, this would enhance transparency—making the payments easier for all parties to track.

Below, we describe the administration’s treatment of QEIA monies. From an accounting perspective, this treatment both lacks transparency and distorts the state’s budget picture.

Lacks Transparency. As described above, the state is to make its first QEIA payment in 2007-08. Consistent with the intent of the settlement, the administration has decided to attribute the payment back to 2004-05 on the grounds that it is meant to satisfy the Proposition 98 obligation for that year. That fiscal year, however, already is “closed” from a budget accounting perspective. Thus, the payment is not showing up in 2004-05. For that matter, it is not showing up in any year but rather is accounted for through a downward adjustment to the prior-year carry-in balance. As a result of this treatment, the $300 million payment does not appear as a budget-year expenditure—even though the funds are being used to support programs in 2007-08. Such treatment also means that interested parties cannot directly “find” the monies in any budget-year document. It does not appear in the budget bill, the proposed education trailer bill, or any of the Proposition 98 budget documents the administration routinely prepares. In short, such accounting treatment lacks transparency from both an overall budget perspective and an education perspective.

Distorts Budget Picture. Whereas the administration does not reflect the $300 million QEIA payment as a budget-year expenditure, it does reflect related tobacco securitization bond monies as budget-year revenue. That is, the budget reflects QEIA-related revenue but not QEIA-related expenditures. As a result of such accounting treatment, the 2007-08 operating shortfall is underestimated by $300 million.

Enhance Transparency, Ensure Accuracy. We recommend the Legislature include language in the annual education trailer bill that would identify the amount of the QEIA payment being made in that year. This would greatly improve the transparency of QEIA payments, thereby helping all parties track the payments over the life of the seven-year program. We also would encourage the Legislature to work with the administration to develop a method for reflecting QEIA revenues and expenditures that would result in a more accurate portrayal of the state’s operating condition.

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