Executive Summary

The Governor’s 2009–10 budget includes almost $55 billion in Proposition 98 funding for K–12 education and the California Community Colleges (CCC). The budget reflects major reductions to school spending in 2008–09 and 2009–10. In this report, we outline ways for the Legislature to achieve budgetary savings while minimizing the adverse effects on core educational programs. In addition, we recommend that the Legislature use the state’s fiscal crisis as an opportunity to rethink the state’s K–14 educational framework and undertake substantive reform in some key areas—categorical program funding, state mandates, and cash disbursements.

Governor’s Plan Balances K–14 Budget by Cutting K–12 General Purpose Funding. To achieve state savings, the Governor’s budget takes a deep cut to K–12 revenue limits. (“Revenue limits” reflect general purpose funding that supports schools’ base academic program.) After proposing to cut K–12 revenue limits roughly $2 billion in 2008–09, the Governor’s budget for 2009–10 makes an additional cut of roughly $1 billion. Combined, these cuts represent roughly $3 billion in budget–year solutions to help address the state’s huge shortfall.

Recommend Making More Targeted Reductions. Rather than cutting districts’ most flexible source of funding, we recommend that the Legislature make targeted spending reductions. Because the level of education savings that the state will need to achieve in 2009–10 is unknown at this time, we develop a three–tiered approach to achieving Proposition 98 savings. Under each tier, we make targeted reductions to specific K–14 categorical programs or block grants. Tier 1 reductions would provide this first step of savings with little, if any, programmatic effect. In contrast, tier 3 reductions would have relatively significant programmatic effects on schools. Taken together, the tiers are intended to give the Legislature many options for achieving budget–year solutions.

Opportunity for Categorical Program Reform

Governor’s Plan Suspends Most Categorical Program Requirements. To help school districts and community colleges respond to a tight budget, the administration proposes to permanently suspend most categorical program requirements. This means districts would no longer need to adhere to virtually any of the state’s existing program or reporting requirements. In addition, districts would be able to transfer funds among categorical programs as well as from categorical programs to general purpose accounts. Although additional flexibility would benefit districts, we have concerns with the Governor’s approach of merely disregarding—rather than reforming—the state’s categorical system.

Recommend Undertaking Substantive Categorical Reform. We recommend that the Legislature adopt a more strategic approach that provides districts with additional flexibility but also simplifies, streamlines, and improves the existing system. Specifically, we recommend consolidating 42 existing K–12 categorical programs into three large block grants focused on instructional support, at–risk students, and special education students. The three block grants would consolidate more than $10 billion, or roughly two–thirds, of all state categorical funding for K–12 education. For CCC, we recommend consolidating eight programs into two block grants focused on student success and faculty support. These block grants would consolidate $257 million, or roughly one–third, of all state categorical funding for community colleges. Under a block grant approach, districts would have much more flexibility to determine how best to meet local needs, but the state still would preserve important education priorities.

Opportunity for Mandate Reform

Governor’s Plan Suspends Most Education Mandates. To help districts respond to a tight budget, the administration also proposes to permanently suspend all but three K–14 mandates. The proposed suspensions of more than 40 education mandates would reduce associated 2009–10 mandate claims by roughly $200 million. While suspending most education mandates would reduce state obligations, such an approach does nothing to improve the existing mandate process, address currently flawed mandates, or preserve important state policies that underlie some education mandates.

Recommend Undertaking Substantive Mandate Reform. Rather than suspend virtually all K–14 mandates in one fell swoop, we recommend undertaking substantive mandate reform. We review the nine costliest K–14 mandates and make specific recommendations for addressing each one. In some cases, we eliminate the mandate as we conclude it serves no compelling statewide objective. In other cases, we eliminate the mandate but find an alternative way to fulfill its underlying policy objective. Such an approach reduces some district requirements and some state obligations, while still preserving important education priorities.

Opportunity for Cash Disbursement Reform

Governor’s Plan Includes Several Large Deferrals of K–14 Payments. To help the state achieve cash relief in critical cash–poor months, the Governor’s budget includes several deferrals of K–14 payments. Specifically, it defers $1.2 billion in July payments and $1.5 billion in August payments until October. It also would defer $115 million in January payments and $2.7 billion in February payments until July. These deferrals are in addition to $2 billion in other deferrals begun in earlier years. These various deferrals are layered on top of an existing K–14 payment structure that is not well aligned with district expenditures. The K–12 payment structure, in particular, does a poor job of linking state payments with district costs. Even without the various deferrals in the Governor’s plan, the underlying K–12 payment structure lacks transparency, predictability, and coherence.

Recommend More Rational K–14 Payment System. As with any rational payment system, we recommend the state’s K–14 payment schedule be aligned with district expenditures. Specifically, we recommend disbursing state payments at the same rate district expenses are incurred. We call the approach “5–5–9” because it would disburse 5 percent of total state payments in July and August, when district costs are lowest, and 9 percent of total state payments in every other month, when district costs are evenly spread out. The 5–5–9 approach would put the state in a comparable cash position relative to the administration’s plan while minimizing the need for deferrals.