June, 1998

Proposition 223
Schools. Spending Limits on Administration.


California's 994 public school districts receive funds from federal, state, and local sources to provide kindergarten through twelfth grade (K-12) education. In the 1996-97 fiscal year, K-12 public schools spent about $34 billion from all sources.

Each year, school districts provide information on how they spend their funds to the State Department of Education--including amounts spent on administrative costs. In general, districts determine what portion of their funds will be spent on administration.


The proposition has two main provisions. First, it limits the amount each school district can spend on administrative costs. Second, it establishes new performance budgeting requirements.

Limit on Administrative Costs. The proposition requires each school district, beginning in 1999-00, to limit certain administrative costs to 5 percent of all funds received. These funds include all federal, state, and local support. The remaining funds, which would be at least 95 percent of the total, must be spent on "direct services." The proposition defines these terms as follows:

Some expenses are easy to classify according to the proposition's definitions. For example, the salaries of classroom teachers would always be considered a direct service, and school board and superintendent expenses would be considered administrative costs.

Other expenses are harder to classify. For instance, printing and duplication expenses would be considered an administrative cost if a district duplicates or prints materials for a school site at a central location. However, if the same materials were duplicated or printed at a school site, the expense would be considered a direct service.

Performance Budgeting. This measure also requires each school district, beginning in 1998-99, to link its annual budget to specific outcome objectives related to improving student performance. The measure does not detail how this performance budgeting would work in school districts. Districts would be required to obtain an independent evaluation of the impact of performance budgeting every five years beginning in 2004-05.

Penalty for Noncompliance. Any school district that fails to comply with the administrative expenditure limit or performance budgeting requirements would be fined by the State Board of Education. Based on the provisions in the measure, the penalty would be about $175 per student.

Fiscal Effect

Based on available information and current reporting practices, school districts spend an average of 7.3 percent on administrative costs. This is about $700 million more than permitted under the proposition. About 95 percent of school districts have administrative costs exceeding 5 percent.

These districts would have three basic options to come into compliance with the 5 percent cap, and thus avoid any penalties:

Given the size of the penalty for being over the 5 percent cap, we think it is unlikely that many districts would exceed the limit. This is especially true after a year or two, after districts had sufficient time to adjust to the cap. However, districts that are unable to meet the 5 percent cap would pay a penalty of approximately $175 per student, presumably from the instructional portion of their budget. Any penalty funds collected would be redistributed to schools by the Legislature as part of the annual budget process.

Performance Budgeting. We estimate costs of around $10 million annually for the implementation of performance budgeting. The actual cost of the yearly performance budgeting requirements would depend on how school districts address these provisions. In addition, we estimate costs of around $20 million every five years for school districts to obtain the independent performance audits required by the measure. Generally speaking, all of these new costs would have to be accommodated within the 5 percent portion of the new expenditure cap. This means that school districts would have to provide funds for these new requirements by eliminating or reducing some other activities within the 5 percent portion.

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