Year-Three Survey: Update on School District Finance in California

Year-Three Survey: Update on School District Finance in California M A C T A y l o r • le g i s lA Ti v e A nAl y sT • M A y 2 , 2 0 12 An LAO RepOR t 2 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t ExECUTivE SUmmarY For the third consecutive year, we distributed a survey to all California public school districts to gather information that could help the Legislature in crafting the state’s education budget for the coming year. The survey, distributed in January 2012, asked a range of questions about districts’ responses to recent budget reductions, flexibility policies, and funding deferrals, as well as their budgeting approaches for 2012-13. Districts Have Implemented Notable Reductions in Recent Years. Despite an influx of short-term federal aid and state interventions to minimize cuts to K-12 education, school district expenditures dropped by almost 5 percent between 2007-08 and 2010-11. Districts reduced spending by between 1 percent and 3 percent each year, spreading federal funds and reserves across years to moderate the 6 percent drop in revenues that occurred in 2009-10. Moreover, data suggest districts actually have cut programs even more deeply in order to accommodate increasing costs associated with local teacher contract provisions and health benefits contributions. Given certificated staff represent the largest operational expense in school budgets, this area is unsurprisingly where most reductions have been focused. Districts achieved some of these savings by reducing their workforce (across all employee groups) and making corresponding increases to class sizes. Additionally, districts instituted staff furloughs and made corresponding decreases to both student instructional days and staff work days. Categorical Flexibility Continues to Be Important for Districts. To provide school districts more local discretion for making programmatic reductions, in February 2009 the Legislature temporarily removed programmatic and spending requirements for about 40 categorical programs and an associated $4.7 billion. As in our prior surveys, districts continue to indicate this flexibility has facilitated their local budget processes, and most districts continue to redirect the majority of funding away from most flexed categorical programs to other local purposes. An increasing number of districts, however, report that the current categorical flexibility provisions are not sufficient to ameliorate continuing year-upon-year funding reductions and cost increases. Our survey respondents indicate that new flexibility for the categorical programs that remain restricted would help them manage budgetary uncertainties in 2012-13 as well as accommodate potentially deeper reductions. In addition to seeking more near-term flexibility, the vast majority of districts indicate they would like the state to eliminate many categorical programs on a lasting basis. Districts Planning for Challenging Budget Situation in 2012-13. In addition to constrained resources, districts face the additional challenge of budgeting for the upcoming school year without knowing whether voters will approve a revenue-generating ballot measure in November. While the Governor’s state budget proposal includes these potential revenues (and corresponding midyear trigger reductions were the voters to reject his tax measure), the vast majority of districts plan to take a more cautious approach. Specifically, because districts have a difficult time making large reductions midway through the school year, almost 90 percent of our survey respondents plan to wait for the results of the November election before spending the potential tax revenue. Districts request that the Legislature maximize local flexibility and provide them greater latitude to manage www.lao.ca.gov Legislative Analyst’s Office 3 An LAO RepOR t reductions at the local level. Specifically, were additional state funding reductions to be necessary, districts hope the state focuses them on restricted programs and activities while avoiding additional cuts to their unrestricted funding (such as revenue limits). Restoring state funding deferrals also is a high priority for districts, as a rising number have had to borrow or make cuts to accommodate these delayed state payments, and our survey suggests even more would do so were the state to implement additional deferrals in 2012-13. Recommend Legislature Take Immediate Actions to Help Districts Manage Budget Uncertainty . . . We recommend the Legislature increase the tools available for districts to balance the dual objectives of preparing their budgets during uncertain times and minimizing detrimental effects on districts’ educational programs. Because districts will only take advantage of these tools if they are sure they can count on them when they adopt their budgets this summer, we recommend these changes be part of the initial budget package and take effect July 1, 2012. Specifically, we recommend the Legislature: (1) remove strings from more categorical programs, (2) adopt a modified version of the Governor’s mandate reform proposal, (3) reduce instructional day requirements, (4) change the statutory deadlines for both final and contingency layoff notifications, and (5) eliminate statutory restrictions related to contracting out and substitute teachers. . . . And Initiate Broad-Scale Restructuring of K-12 Funding System. We also recommend the state immediately begin laying the groundwork for a new K-12 funding system. Our survey findings reaffirm how recent categorical flexibility provisions have fundamentally shifted the way districts use funds at the local level and how disconnected existing program allocations have become from their original activities and populations. Whether the state adopts a version of the Governor’s weighted student funding formula or instead opts to allocate funds based on a few thematic block grants, we recommend the Legislature initiate the new funding system now, phasing in changes over several years to give districts time to plan and adjust. To ensure the state can appropriately monitor student achievement and intervene when locally designed efforts are not resulting in desired outcomes, we also recommend the Legislature refine its approach to school accountability in tandem with changes to the school funding system. A more robust accountability system would include improvements such as vertically scaled assessments, value-added performance measures based on student-level data, a single set of performance targets, and more effective types of interventions. As a new approach to K-12 funding is being phased in, the state could maintain some spending requirements—particularly for disadvantaged students—and then remove those requirements once an improved accountability system has been fully implemented. 4 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t inTroDUCTion For the third consecutive year, we distributed of our survey, (2) discuss our major findings, and a survey to all California public school districts to (3) provide the Legislature with recommendations gather information that could help the Legislature to help districts manage budget uncertainty in the in crafting the state’s education budget for the coming year as well as improve the overall K-12 coming year. The survey, distributed in January funding system on a lasting basis. The report also 2012, asked school districts about the effects includes an appendix that contains a complete of recent state actions on their budgets and listing of this year’s survey questions and results. operations. In this report, we (1) give an overview SUrvEY FoCUSES on DiSTriCTS’ BUDgET DECiSionS Survey Asks About Districts’ Recent Actions Survey Respondents Representative of and Future Plans. As in 2010 and 2011, our 2012 State. Out of about 950 districts statewide, survey was completed by district superintendents 467 responded—the highest number of respondents or chief budget officers. This year’s survey asked in the three years we have conducted the survey. a range of questions about districts’ responses We received responses from eight of the ten to recent budget reductions, flexibility policies, largest school districts. In total, the districts that and funding deferrals, as well as their budgeting responded to our survey represent 67 percent approaches for 2012-13. To supplement our survey of the state’s average daily attendance. Figure 1 data, we also reviewed fiscal and demographic (see next page) lists several demographic factors information from other sources—obtaining and compares our survey respondents with the data on certificated and classified staff from the statewide average. As shown in the figure, the California Basic Educational Data System and on districts that responded to our survey closely school district revenues and expenditures from the mirror the socioeconomic composition of all Standardized Account Code Structure database. students in the state. FinDingS Our survey asked a number of questions about the state to treat remaining categorical programs districts’ practices in recent years, as well as their moving forward. Finally, we present survey plans and preferences for 2012-13 and future years. responses related to how districts are preparing Below, we present our findings in three main areas. their 2012-13 budgets. The first group of findings relates to the manner Districts Have implemented notable and timing in which districts have implemented reductions in recent Years recent budget reductions. The next group relates to categorical flexibility—focusing on how districts During the recent economic downturn, both have treated particular programs given recent the federal and state governments have taken steps flexibility provisions and how districts would like to mitigate programmatic reductions in California www.lao.ca.gov Legislative Analyst’s Office 5 An LAO RepOR t since 2007-08. The figure Figure 1 shows that while districts Survey Respondents Representative of the State experienced the most Percent of Student Population severe drop in revenues Survey Statewide between 2008-09 and Student Characteristics Respondents Total 2009-10 (6 percent), Latino enrollment 51% 50% White enrollment 25 27 they reduced spending Asian enrollment 9 9 at a more moderate African-American enrollment 7 7 pace across the period FRPM participation 58 57 English Learners 24 24 (1 percent to 3 percent FRPM = Free and Reduced Price Meal program. each year). Specifically, districts appear to have schools. Specifically, the federal government spread one-time monies provided $7.3 billion in one-time school aid for (including federal aid as well as certain freed-up 2008-09 through 2011-12 (including $6.1 billion reserves) strategically across the 2008-09 through from the American Recovery and Reinvestment 2011-12 period to help mitigate reductions. Act and $1.2 billion from the Federal Education Since Recession Hit, Districts Have Reduced Jobs Act). The state also has avoided deeper cuts Spending by Almost 5 Percent Per Pupil. to K-12 programs by relying heavily on payment Figure 3 provides additional detail on how K-12 deferrals (which authorize school districts to expenditures have changed over the past four support operations through short-term borrowing years. Total expenditures (excluding capital outlay in lieu of making reductions). Despite these interventions, school Figure 2 districts have experienced Comparing Trends in K-12 Revenues and Expendituresa a number of reductions to Percent Change Since 2007-08 their K-12 programs over 1% the past several years. This section describes some 0 ways in which districts have implemented these -1 K-12 Revenues reductions. K-12 Expenditures -2 Whereas Funding Dropped Steeply in One -3 Year, Districts Have Been Reducing Their Programs -4 More Gradually Over -5 Last Few Years. Figure 2 compares the percentage -6 2007-08 2008-09 2009-10 2010-11 change in K-12 revenues a Data from Standardized Account Code Structure database. Revenues include all local, state, and federal noncapital to K-12 expenditures outlay funding as well as deferred state payments. Expenditures include all noncapital outlay spending. 6 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t projects) dropped by $3.3 billion between 2007-08 of district spending, our survey responses and and 2010-11, which equates to a statewide average state workforce data suggest that reductions to reduction of $565, or 4.7 percent, per pupil. (While K-12 programs have been even greater than these statewide data are not yet available for 2011-12, data suggest. This is because districts frequently our survey responses indicate about half of have structured teacher contracts in such a way districts made additional reductions to per-pupil that they face automatic cost increases each expenditures in the current year.) The figure shows year, and therefore must cut programs just to the most significant spending change has been to maintain the same spending levels. For example, certificated staff salaries—the largest operational most districts provide annual “step-and-column” expense in district budgets. Certificated salary adjustments that automatically increase employee expenditures have decreased by $2.3 billion, salaries for each additional year of experience or including a $1.4 billion drop between 2008-09 and level of professional education. Only 6 percent of 2009-10. As discussed below, districts have reduced our survey respondents report having stopped these costs both by employing fewer teachers this practice in recent years. Additionally, the and administrators and by having them work costs of providing employee health benefits have fewer days. Districts also significantly reduced increased by an average of 6 percent each year. the amount they spent on books and supplies, The subsequent paragraphs in this section detail dropping these expenditures by $1 billion, or the ways in which districts have reduced K-12 22 percent, across the four years. Spending on programs to help accommodate the combination employee benefits notably remained constant of these cost pressures and overall decreases in across the period, even as districts employed fewer funding. staff. Many Districts Now Employ Fewer Districts Have Made Deeper Programmatic Teachers . . . Figure 4 (see next page) provides Reductions to Offset Increasing Costs. While detail on district staffing levels. The state’s teacher Figure 3 shows steady decreases to several areas workforce decreased by 11 percent (about 32,000 Figure 3 School District Expenditures Decreasinga 2007-08 2008-09 2009-10 2010-11 Expenditures (In Billions): Certificated salaries $27.5 $27.4 $26.0 $25.2 Classified salaries 10.3 10.3 10.0 9.7 Employee benefits 11.3 11.4 11.5 11.5 Subtotals—Salaries and Benefits ($49.2) ($49.1) ($47.5) ($46.4) Books and supplies $4.5 $3.7 $3.3 $3.5 Otherb 17.1 17.4 17.6 17.5 Totals $70.7 $70.1 $68.3 $67.4 Per-Pupil Expenditures (In Dollars) $11,892 $11,773 $11,516 $11,327 Year-to-year percent change — -1.0% -2.2% -1.6% Percent change from 2007-08 — -1.0 -3.2 -4.7 a Reflects noncapital outlay expenditures reported through the Standardized Account Code Structure database. Includes data for most charter schools and County Offices of Education as well as school districts. b Includes cost of maintenance, contracted services, insurance, other overhead costs, and pass-throughs to other local education agencies. www.lao.ca.gov Legislative Analyst’s Office 7 An LAO RepOR t teachers) between 2007-08 and 2010-11. The instead appearing to generate savings by shifting most significant decline occurred in 2010-11, to a greater dependence on part-time staff (who with a 7.7 percent—or 22,000 position—decrease cost less because they typically do not qualify compared to the prior year. Retirements and layoffs for benefits). Specifically, the full-time classified each accounted for roughly half of these job losses workforce decreased by 6 percent whereas in 2010-11. Regarding retirements, our survey part-time classified staff increased by 5 percent data indicate that roughly 30 percent of districts since 2007-08. provided certain fiscal incentives—often referred to Some Districts Also Have Cut Back on Some as “Golden Handshakes”—in 2009-10 and 2010-11 Salary Increases and Benefits. In addition to to encourage teachers to retire early. Regarding employing fewer staff, some districts have achieved layoffs, about half of all districts issued notices savings in recent years by changing employee in March of 2009 and 2010 in preparation to lay contracts. Prior to 2008-09, districts typically off teachers for the 2009-10 and 2010-11 school included annual cost-of-living adjustments years. Fewer districts (only about one-third) issued (COLAs) in their contracts, usually commensurate notices in March 2011 to lay teachers off for the with whatever COLA the state budget provided. 2011-12 school year. Mirroring the lack of state-funded COLAs in . . . And Fewer Administrators and Support recent years, fewer than one-fifth of districts report Staff. Along with reducing their teacher workforce, providing teacher COLAs after 2008-09. (While school districts also now employ fewer full-time our survey asked only about teacher contracts, classified staff, pupil support service providers, districts likely employed similar practices for and administrators compared to previous years. classified and other certificated staff.) A smaller but Figure 4 shows that since 2007-08, districts increasing share of districts also report reducing reduced pupil support providers (which include employer contributions to employee health benefits certificated staff such as counselors or speech (17 percent in 2011-12). therapists) by 14 percent and administrators by Average Class Sizes Have Increased. To 16 percent—the largest proportional reductions accommodate the reduction in teacher workforce, of all education employee groups. In contrast, districts have had to increase the number of districts have made lesser reductions to their students in each classroom. As shown in Figure 5, classified workforce over the same time period, average class sizes have increased in all grade levels Figure 4 Districts Have Reduced Staffing Levelsa Percent Change 2007-08 2008-09 2009-10 2010-11 2007-08 to 2010-11 Teachers 300,512 298,960 291,028 268,495 -11% Full-time classified staff 158,080 158,033 153,749 148,598 -6 Part-time classified staff 136,122 145,574 144,247 142,996 5 Pupil support service providersb 27,629 27,343 23,458 23,666 -14 Administrators 25,687 25,095 23,159 21,602 -16 a Reflects full-time equivalent employees unless otherwise noted. b Certificated staff providing specialized services, such as counseling. 8 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t since 2008-09. The largest Figure 5 increase occurred between Average Class Sizes Are Increasing 2008-09 and 2010-11, with Grade 2008-09 2009-10 2010-11 2011-12 average Kindergarten Kindergarten 23 24 26 26 through third grade class Grades 1-3 23 25 26 26 sizes growing from 23 to Grades 4-6 30 30 31 31 26 students, and all other Grades 7-12 30 31 32 32 grade levels increasing by an average of one to two proportion dropped to only 61 percent, with about student per class. The majority of school districts one-fifth of districts providing between 179 and maintained these same levels in 2011-12. 176 days, and about one-fifth having decreased to Many Districts Have Instituted Furloughs . . . the statutory minimum of 175 days. Most districts In addition to employing fewer staff, a large maintained their shorter school years in 2011-12. number of districts have achieved salary savings (The 2011-12 budget package allowed districts to by cutting back on staff work days through reduce the school year to 168 days since midyear instituting furloughs, or unpaid days, into staff “trigger” cuts were implemented. Our survey data, contracts. Furlough days were exceptionally however, indicate districts did not take advantage rare in California districts prior to 2009-10, but of this option.) At least one-third of districts 60 percent of districts report they instituted an indicate they also have decreased noninstructional average of three furlough days in 2010-11. Slightly staff work days since 2008-09. fewer districts report instituting furlough days in the current year—half of districts instituted an average of two days. Figure 6 . . . Reducing Both Some Districts Have Shortened Their School Years Instructional and Staff Percent of Respondents Development Days. 100% Furloughs can result 90 in decreases to either student instructional 80 Number of Instructional Days days or staff development 175 70 176-177 days, or both. As shown 178-179 in Figure 6, our survey 60 180 indicates that many 50 districts have reduced the 40 number of instructional 30 days. In 2008-09, almost all districts (98 percent) 20 provided at least 180 10 instructional days per year. By 2010-11, that 2008-09 2009-10 2010-11 2011-12 www.lao.ca.gov Legislative Analyst’s Office 9 An LAO RepOR t Categorical Flexibility Continues to flexibility provisions are not sufficient to ameliorate Be important for Districts continuing year-upon-year funding reductions and cost increases. To provide school districts more local Districts Continue to Shift Funding Away discretion for making programmatic reductions, in From Flexed Categorical Programs. As shown February 2009 the Legislature temporarily removed in Figure 7, most districts continue to shift programmatic and spending requirements for at least some funding away from every major about 40 categorical programs and an associated flexed categorical program. For example, at least $4.7 billion. This flexibility, currently scheduled to 75 percent of districts report diverting funding expire in 2014-15, allows districts to use funding away from high school class size reduction (CSR), originally restricted for these programs for any adult education, arts and music, professional educational purpose. For 2012-13, the Governor development, school and library improvement, proposes to extend flexibility to seven additional and the Community Based English Tutoring programs and to make this local discretion program. The trend of shifting flexed funds away permanent (as part of a larger restructuring of from their original programs has been evident in the K-12 funding system). This section describes all three years of our survey, and generally seems district perspectives on categorical flexibility, both to be increasing. That is, for many programs a for the near term and for the future. higher percentage of districts report shifting more Flexibility Continues to Be a Helpful Tool funds in each successive year. Moreover, many for Districts, but Budget Reductions Becoming districts report shifting all funding away from More Difficult to Manage. As in our prior surveys, some programs, presumably eliminating associated districts continue to indicate that categorical program activities. Specifically, at least 40 percent flexibility has facilitated their local budget of districts report shifting all funds away from processes. In particular, the vast majority of eight programs, the largest being the Targeted districts (roughly 90 percent) report that categorical Instructional Improvement Grant and Math and flexibility has made it easier to develop and English Professional Development Institutes. balance a budget and dedicate resources to local Districts Maintaining Funding for a Few education priorities. However, district responses Select Programs. In contrast to the overall trend regarding how flexibility has affected certain for most flexed programs, Figure 7 shows that a other key decisions were somewhat different in select group of programs—including Regional this year’s survey. For example, comparing survey Occupational Centers/Programs and community responses from last year with this year reveals day schools—are experiencing less notable that a smaller percentage of districts indicate funding shifts. This suggests that continuing these categorical flexibility has helped them to develop specific activities remains a high priority in many and implement a strategic plan (84 percent in communities. Additionally, comparing survey 2010-11 compared to 67 percent in 2011-12) and results across years indicates a slight decrease in the fund teacher salaries (79 percent compared to proportion of districts shifting funding away from 64 percent). This suggests that, for a growing a handful of programs, suggesting some districts number of districts, fiscal challenges are becoming are resuming activities they had temporarily increasingly difficult to manage. That is, while reduced. Many of these select programs, such as initially very helpful, the current categorical instructional materials and deferred maintenance, 10 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t involve activities that districts may have been able . . . And Long-Term Elimination of Most to defer for some years but not indefinitely. Categorical Programs. In addition to wanting Districts Desire Additional Near-Term more near-term flexibility, the vast majority of Categorical Flexibility . . . Though spending districts report a desire for ongoing relief from the requirements have been removed from many programmatic requirements associated with most categorical programs, districts responding to our categorical programs. As shown in Figure 8 (see surveys over the past three years have consistently next page), districts overwhelmingly support the requested more flexibility over the categorical elimination of many categorical programs. For programs that remain restricted. For example, example, more than 70 percent of districts report almost 40 percent of districts indicate providing wanting 12 specific programs eliminated—the more flexibility for the remaining categorical largest being the Quality Education Investment Act programs in 2012-13 would be among the most (QEIA). Districts were more likely to recommend helpful steps the Legislature could take to help elimination of two types of programs: (1) those in them accommodate their budgetary uncertainties. which only a small number of districts participate, Given the deepening and prolonged fiscal such as partnership academies or apprenticeship challenges they have been facing, districts appear to programs; and (2) professional development (PD) be indicating a desire for additional flexibility tools programs, such as Peer Assistance and Review beyond the ones established in 2009. and Math and English Professional Development Figure 7 Most Districts Shifted Funds Away From Most Flexed Programs in 2011-12a Percent of Respondents High School Class Size Reduction Adult Education Arts and Music Block Grant Professional Development Block Grant Schools and Library Improvement Block Grant Community Based English Tutoring Pupil Retention Block Grant Peer Assistance and Review Math/English Professional Development Institutes Targeted Instructional Improvement Grant Supplemental Instruction Gifted and Talented Education Deferred Maintenance School Counseling School Safety Block Grant Supplemental Instruction for Students Failing CAHSEE California School Age Families Education Principal Training Instructional Materials Intern Program/Alternative Certification Beginning Teacher Support and Assistance Community Day Schools Regional Occupational Centers/Programs 10 20 30 40 50 60 70 80 90 100% a Reflects responses for every program included in our survey. Our survey excluded programs that applied to only a small number of districts. CAHSEE = California High School Exit Examination. www.lao.ca.gov Legislative Analyst’s Office 11 An LAO RepOR t Institutes. (Roughly 30 percent of districts, not necessarily with the exact same program however, indicated wanting some targeted requirements). PD funding reinstated, but with changed Districts Planning for programmatic requirements.) In contrast, over half Challenging Budget Situation in 2012-13 of respondents reported they would like the state to continue providing some dedicated funding The Governor’s January budget proposal for essential activities such as maintenance, assumes passage of a ballot measure that would transportation, and instructional materials (though generate several billion dollars in additional state Figure 8 Most Districts Want to Eliminate Most Categorical Programs Percent of Respondents Partnership Academies Intern Program/Alternative Certification Quality Education Investment Act Apprentice Programs California School Age Families Education Community Based English Tutoring Targeted Instructional Improvement Grant Peer Assistance and Review High School Class Size Reduction Advancement Via Individual Determination Arts and Music Block Grant Math/English Professional Development Institutes Pupil Retention Block Grant Supplemental Instruction Agriculture Vocational Education Schools and Library Improvement Block Grant School Safety Block Grant Principal Training After School Education and Safety Supplemental Instruction for Students Failing CAHSEE Gifted and Talented Education Professional Development Block Grant School Counseling Beginning Teacher Support and Assistance K-3 Class Size Reduction Adult Education Economic Impact Aid Community Day Schools Regional Occupational Centers/Programs Instructional Materials Home-to-School Transportation Deferred Maintenance 10 20 30 40 50 60 70 80 90 100% CAHSEE = California High School Exit Examination. 12 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t revenue, of which a portion would be dedicated November election, our survey responses reveal a to K-12 education. Should his revenue-generating clear message from districts to the Legislature— ballot measure fail in November, the Governor maximize local flexibility and provide latitude to would trigger at least $5.4 billion in midyear manage reductions at the local level. This section reductions, including a $2.8 billion cut to K-12 discusses how districts are approaching their general purpose funding and withdrawal of his 2012-13 budget plans. proposal to pay $1.6 billion in currently late K-12 Most Districts Plan to Spend Potential Tax state payments on time. While uncertainty over Revenue After Voters’ Decision, Want State to Do how voters will act in November makes developing the Same. Figure 9 shows that, in contrast to the a spending plan difficult for the state, it also is Governor’s approach in building the state budget, exceedingly challenging for school districts, as only a limited number of districts plan to build state laws governing teacher layoffs and local their budgets assuming the ballot measure will collective bargaining provisions make large pass. Rather, almost 90 percent of districts plan midyear reductions difficult for them to implement. to wait for the results of the November election Moreover, districts seek to minimize midyear before spending the potential tax revenue. Over changes that can have disruptive and detrimental two-thirds are waiting until the funds materialize effects on students. As districts grapple with how to before they even develop a plan for how to use size their 2012-13 educational programs, including them, and half of these would not spend the funds contingency plans for possible outcomes to the until 2013-14. Moreover, most respondents (almost Figure 9 Most Districts Waiting to Spend Ballot Revenues Percent of Respondents District’s Intention: 1 Make reductions in 2013-14 if measures fails. 2 Develop plan after election to make reductions in 2012-13 if measure fails. Not Waiting to Spend 8 Adopt contingency plan that contains automatic reductions in 2012-13 if measure fails. Adopt contingency plan that contains automatic restorations in 2012-13 20 if measure passes. Waiting to Spend 33 Develop plan after election to spend ballot revenues in 2012-13 if measure passes. 36 Spend ballot revenues in 2013-14 if measure passes. www.lao.ca.gov Legislative Analyst’s Office 13 An LAO RepOR t 300 districts, or about 60 percent) request that funding, districts are required by federal law to the Legislature take a similar approach and avoid undertake the associated activities regardless of building a state budget that includes ballot-related how much funding the state provides.) revenues. If the state instead adopts the Governor’s Would Be Increasingly Difficult for Districts trigger approach, however, districts request the to Accommodate Additional Deferrals. In recent state provide additional methods for managing years, the state has increasingly relied on deferring midyear reductions. For example, 30 percent of Proposition 98 payments as a way to achieve state our survey respondents want the state to provide a budgetary savings and avoid further programmatic post-election window for laying off certificated staff reductions. In 2011-12, total K-12 deferrals should the ballot measure fail. increased from $7.4 billion to $9.4 billion (roughly Preserving Unrestricted Funding Is Districts’ 20 percent of Proposition 98 payments), with some Highest Priority. Consistent with their messages state payments delayed as long as nine months. on categorical flexibility, districts indicate an Our survey results suggest that while a majority overwhelming preference that the 2012-13 state of districts accommodate these late payments budget maintain—or increase—the timely by relying on internal reserves, this option is provision of general purpose funds. Specifically, becoming less viable. Figure 10 shows that the most when we asked how districts would prefer the recent increase in deferred payments led more state spend any additional funds available for districts to borrow from special funds and other K-12 education, 87 percent ranked revenue limits sources, with an even larger proportion of districts and 57 percent listed paying down deferrals as reporting they would turn to borrowing should their first or second priorities. Conversely, when the state institute additional deferrals in 2012-13. we flipped the question and asked how districts The increase in the number of districts that would would prefer the state make future reductions (if borrow from the private market is particularly needed), most districts selected restricted activities notable given the associated transaction and or programs serving restricted populations. interest costs. Furthermore, about one-quarter of Specifically, 77 percent ranked education mandates districts indicate they would manage any additional and 52 percent ranked Economic Impact Aid (EIA) deferrals in 2012-13 by making cuts because as their first or second most preferred place to they cannot accommodate or afford additional cut. (In contrast to this trend, few districts—only borrowing. These responses help explain why a 12 percent—listed special education as a first or majority of districts would prefer the state use any second preference for reductions. This likely is additional K-12 funding to retire existing deferrals. because even though this is a restricted source of rECommEnDaTionS Responses to our survey indicate districts without knowing whether voters will approve have made notable reductions to their educational additional tax revenues in November. Our survey programs in recent years and now face another findings also reaffirm how recent categorical challenging budget situation in 2012-13. The flexibility provisions have fundamentally shifted 2012-13 situation is particularly uncertain for the way districts use funds at the local level—and districts given they must begin the school year how disconnected existing program allocations 14 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t Figure 10 A New Deferral Would Lead More Districts to Borrow and Make Cuts Percent of Respondents 80 2010-11 ($7.4 Billion Deferral) 70 2011-12 ($9.4 Billion Deferral) 2012-13 (Potential New Deferral) 60 50 40 30 20 10 Rely on Borrow From Make Cuts Borrow Borrow From Borrow District Reserves Special Funds Externally County Treasurer From COE COE = County Office of Education. have become from their original activities and tax revenue before they commit to spending it. By populations. In light of these findings, we offer adjusting budgets now, districts protect themselves the Legislature two sets of recommendations—the against either having to make disruptive midyear first intended to help districts develop budgets in cuts or finding themselves unable to make sizeable the near term and the second designed to improve midyear cuts and facing serious corresponding the overall K-12 funding system in the long cash management problems. The large number of term. Figure 11 (see next page) summarizes these initial layoff notices reportedly issued this March recommendations, each of which is discussed in confirms that many districts are planning for more detail below. notable reductions. We recommend the Legislature take care not to adopt measures that might Take immediate actions to Help Districts actually constrain districts’ abilities to plan for manage Budget Uncertainty budget uncertainty (such as prohibiting layoffs or Given Uncertainty of Revenues, Certainty programmatic reductions), potentially leaving them of Options Would Help Districts Build 2012-13 in an untenable financial situation should revenue- Budget Plans. Our survey responses reveal that generating measures fail in November. In contrast, most districts plan to budget conservatively in we recommend the Legislature increase the tools 2012-13, waiting until voters approve additional available for districts to balance the dual objectives www.lao.ca.gov Legislative Analyst’s Office 15 An LAO RepOR t of preparing for the possibility of unsuccessful to recommend the Legislature explore options ballot initiatives while mitigating detrimental for redirecting funding associated with the After effects on districts’ educational programs. We offer School Education and Safety (ASES) and QEIA five specific recommendations for the Legislature programs. (Because it was implemented through to increase district decision-making and budgetary a ballot initiative, the Legislature would need to flexibility. Districts will only take advantage of seek voter approval to repeal the automatic ASES these tools if they are sure they can count on them spending requirement.) To ensure needy students when they adopt their budgets this summer. As continue to receive supplemental services, however, such, we recommend these changes be part of the we recommend the Legislature maintain spending initial budget package and take effect July 1, 2012. requirements for funds associated with English Remove Strings From More Categorical Learner and economically disadvantaged students, Programs. We recommend the Legislature extend whether through the existing EIA program or a categorical flexibility to several programs for which new formula. funding currently remains restricted, as requested Adopt Modified Version of Governor’s by many districts responding to our survey. Even Mandate Reform Proposal. We recommend the if the Legislature opts not to adopt the Governor’s Legislature adopt the Governor’s proposal to proposed weighted student funding formula, we eliminate the existing mandate reimbursement recommend it approve his proposals to eliminate process and instead provide funding through a spending requirements for K-3 CSR, Home-to- block grant. (Because it would add unnecessary School Transportation, and three small vocational complication, we recommend rejecting the education programs. Additionally, we continue proposal to allow districts the option of continuing Figure 11 Summary of LAO Recommendations Take Immediate Actions to Help Districts Manage Budget Uncertainty 9 Remove strings from more categorical programs. 9 Adopt modified version of Governor’s mandate reform proposal. 9 Reduce instructional day requirements. 9 Give districts until August 1 to make final layoff decisions and establish post-election layoff option. 9 Offer ways for districts to reduce costs by eliminating existing restrictions on (1) contracting out for noninstructional services and (2) pay and prioritization for substitute teachers. Initiate Broad-Scale Restructuring of K-12 Funding System 9 Replace existing funding system with weighted student formula or block grants. 9 Implement new funding system over several years to give districts time to plan and adjust. 9 Combine flexibility with stronger accountability. 16 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t to claim for reimbursement through the existing the Legislature move the final notification date mandate process.) This change would provide from May 15 to August 1. This would give districts fiscal relief for many districts by eliminating half more certainty as to both the final state budget of the state-mandated activities that districts must package and important local information (such perform under current state law as well as the as teacher retirements or resignations) prior to burdensome reimbursement claiming process. finalizing their layoff decisions. Additionally, we Districts continuously request relief from the recommend the Legislature replace the existing existing mandate system. Moreover, our survey August layoff window with a rolling emergency respondents overwhelmingly list education window whereby districts could lay off staff mandates as the first place they would like the state midyear if the state makes significant budget to cut, should state budget reductions be necessary. changes. With a guaranteed post-election layoff Reduce Instructional Day Requirements. We option to address potential midyear trigger cuts, recommend the state allow districts to provide school districts might lay off fewer teachers heading a shorter school year without incurring fiscal into the 2012-13 school year. penalties. This would provide districts additional Offer Other Ways to Reduce District Costs. We discretion to reduce their budgets based on local recommend the state remove two other statutory priorities. Different communities across the provisions that currently constrain school districts’ state may have differing perspectives as to the abilities to economize. First, we recommend relative trade-offs of a shorter school year, larger eliminating existing restrictions on school districts class sizes, or reduced programmatic offerings, that seek to contract out for noninstructional and we believe weighing those decisions at the services (such as food services, maintenance, local rather than state level could result in better clerical functions, and payroll). Providing districts educational decisions. While the purpose of this with greater discretion to choose the most recommendation is to maximize local decision- cost-effective options for these services could lead making, the state could develop a framework to savings at the local level. Second, we recommend for changing instructional time requirements removing restrictions relating to substitute based on the amount by which state funding is teachers. Specifically, we recommend repealing reduced. For example, if the state is considering a requirements that districts hire substitute teachers midyear trigger cut of $2 billion, it might reduce based on seniority rankings and pay substitute the minimum school year requirement by five days teachers at their pre-layoff salary rates. Instead, we to allow districts to achieve half of these savings, recommend districts be able to choose from among assuming districts would use a combination of the entire pool of substitute teachers and negotiate other tools to implement the remaining $1 billion associated pay rates at the local level. This could reduction (each instructional day costs about generate local savings and afford districts a better $200 million statewide). opportunity to hire the most effective substitute- Make Two Changes to Teacher Layoff teaching candidates. Process. We recommend the state change the initiate Broad-Scale restructuring of statutory deadlines for both final and contingency K-12 Funding System layoff notifications. Though districts already have initiated their layoff processes based on the The Time for Fundamental Restructuring March 15 notification requirement, we recommend Is Now. We recommend the state immediately www.lao.ca.gov Legislative Analyst’s Office 17 An LAO RepOR t begin laying the groundwork for a new K-12 maintaining some broad spending requirements funding system. Long criticized for being overly for disadvantaged students, at least until the state complex and inefficient, recent changes have has refined the existing accountability system rendered the existing system even more irrational (as discussed below). Alternatively, the state and inequitable. For the third consecutive year, could restructure K-12 funding into a few block our survey findings indicate that most districts grants. These funding “pots” could have broad have responded to recent flexibility provisions thematic objectives and requirements that provide by shifting most or even all funding away from districts with direction but also latitude as to most categorical programs. Additionally, the state how specifically to structure local services. If the has “frozen” district allocations for the flexed Legislature opts for this approach, it will want to categorical programs at 2008-09 levels, continuing avoid establishing too many grants or imposing to distribute the same proportion of funds to too many restrictions, lest it recreate some of each district regardless of changes in student the problems associated with the existing, overly enrollments during the ensuing years. These two prescriptive categorical system. trends have increasingly disconnected existing Implement New Funding System Over funding allocations from the original categorical Several Years to Give Districts Time to Plan purposes and student needs for which they were and Adjust. Regardless of which approach the originally intended. As such, we believe it is Legislature adopts, a new funding formula increasingly urgent that the state rethink its overall almost inevitably will change individual district approach to K-12 funding and craft a better system. allocations. Consequently, districts will need Districts echo this sentiment, with large majorities some time to plan for these potential changes in of our survey respondents indicating they believe resources. We believe the Governor’s proposal to most existing program requirements should be transition to a new formula over six years, while eliminated permanently. holding districts harmless from any potential loss Replace Existing Funding System With in 2012-13, is reasonable. The Legislature could Weighted Student Formula or Block Grants. We consider extending the hold harmless period recommend the Legislature pursue one of two for an additional year or two, especially given approaches to restructuring the school funding current budget conditions and fiscal uncertainties. system—a weighted student formula or thematic However, we do not believe the fact that some block grants. The Governor proposes the state districts might receive less funding in the future adopt the weighted student approach. Under this should impede the state from immediately methodology, districts serving higher proportions initiating progress towards a more rational and of low-income or English Learner students would equitable system. The Legislature will need to receive additional funding, but all funds would weigh how long to continue protecting historical be general purpose in nature, with no “strings” or advantages for certain districts against the benefits spending restrictions. While this would provide of allocating resources based on the needs of districts maximum flexibility, we are concerned current student populations. it would not provide sufficient assurances that Combine Flexibility With Stronger districts provide supplemental services for Accountability. We recommend the Legislature needy students. Were the Legislature to choose refine its approach to K-12 accountability in the weighted student approach, we recommend tandem with changes to the school funding system. 18 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t We believe ceding most authority over education targets, and more effective types of interventions. programs to districts should be contingent upon We also recommend linking a stronger focus the state’s ability to monitor student achievement on outcomes with a refocused mission for the and intervene when locally designed efforts are not California Department of Education—placing resulting in desired outcomes. While the state has a greater emphasis on data, accountability, and made great strides in developing accountability best practices in lieu of compliance monitoring. and statewide student data systems over the past Needed enhancements in accountability would take decade, we believe the existing framework is time, however, and should not impede progress not yet nuanced enough to help districts clearly towards a more rational and equitable funding determine how they need to improve or help the system. As a new approach to K-12 funding is being state clearly identify which school districts need phased in, the state could maintain some spending intervention. A more robust system would include requirements—particularly for disadvantaged improvements such as vertically scaled assessments, students—and then remove those requirements value-added performance measures based on once an improved accountability system has been student-level data, a single set of performance fully implemented. ConClUSion Responses to our district finance survey Although the state and districts continue to indicate that California schools have experienced struggle with tight budgets, we believe the notable changes as a result of the recent recession, Legislature can take a number of actions to assist including a reduced workforce, larger class districts in managing their fiscal challenges. sizes, shorter school years, and less extensive Equally important, we believe now is the time programmatic offerings. Given the slow pace at for the Legislature to lay the groundwork for which the economy is recovering, combined with long-term improvements to the K-12 funding and uncertainty over the outcome of the November accountability systems. Acting now will establish a election, school districts indicate they are bracing solid foundation upon which the state can build as themselves for additional reductions in 2012-13. fiscal conditions improve. www.lao.ca.gov Legislative Analyst’s Office 19 An LAO RepOR t 20 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t aPPEnDix 1. Which of the following best reflects how your district’s overall per-pupil operational spending in 2011-12 compares to 2010-11? (Please estimate spending from all revenue sources, including federal and state funds, local property taxes, parcel taxes, and other funds.) Our district’s per-pupil spending has: Per-Pupil Spending Percent of Respondents Increased 17% Remained flat/about the same 34 Decreased by 5 percent or less 31 Decreased by more than 5 percent 18 2. Which of the following best reflects how your district’s overall per-pupil operational spending in 2011-12 compares to 2007-08? (Please estimate spending from all revenue sources, including federal and state funds, local property taxes, parcel taxes, and other funds.) Our district’s per-pupil spending has: Per-Pupil Spending Percent of Respondents Increased 13% Remained flat/about the same 5 Decreased less than 5 percent 11 Decreased by 5 percent to 10 percent 25 Decreased by 10 percent to 15 percent 21 Decreased 15 percent or more 25 3. If the state were to increase K-12 education funding in 2012-13, how should it prioritize additional spending? Please rank the following options with one being the highest priority and six being the lowest priority. Number of Districts That Ranked Option as Option Highest or Second-Highest Funding Priority Revenue limits 395 Paying down existing deferrals 259 Special education 104 “Flexed” categorical programs 98 Education mandates 26 Economic Impact Aid/programs for disadvantaged students 23 www.lao.ca.gov Legislative Analyst’s Office 21 An LAO RepOR t 4. If the state were to reduce school funding in 2012-13, how should it make those reductions? Please rank the following options with one being the most desirable place to make reductions and six being the least desirable place to make reductions. Number of Districts That Ranked Option as Option Most or Second-Most Preferred Place to Cut Education mandates 344 Economic Impact Aid/programs for disadvantaged students 232 “Flexed” categorical programs 111 Paying down existing deferrals 109 Special education 52 Revenue limits 43 5. The Governor’s 2012-13 budget proposal assumes passage of a ballot measure that would provide new revenues for education but also includes midyear trigger reductions should the measure fail. Based on this plan, what would be your district’s approach to building its 2012-13 budget? Percent of Approach Respondents Do not spend new revenue. Adopt contingency plan that contains automatic restorations 36% in 2012-13 if measure passes. Do not spend new revenue. Intend to develop plan after election to spend new revenues 33 in 2012-13 if measure passes. Do not spend new revenue. Intend to spend new revenues in 2013-14 if measure passes. 20 Spend new revenue. Adopt contingency plan that contains automatic reductions in 2012-13 8 if measure fails. Spend new revenue. Intend to develop plan after election to make reductions in 2012-13 1 if measure fails. Spend new revenue. Intend to make reductions in 2013-14 if measure fails. 2 6. Given the uncertainty regarding the outcome of the November election, what steps could the Legislature take to help your district build its 2012-13 budget? (Assume applicable statutory changes would take effect July 1, 2012.) Please choose the two most helpful options. Number of Districts That Selected Option as Option One of Two Most Helpful Pass state budget that does not assume successful November ballot 287 measure/new revenues Provide more flexibility for remaining categorical programs 172 Provide additional post-election options for laying off certificated staff 138 Pass state budget that assumes new revenues but includes explicit trigger reductions 91 Further reduce required number of instructional days 64 Increase maximum allowable class sizes 55 Other 66 22 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t 7. For each of the following items, please indicate the extent to which the categorical flexibility the state granted in February 2009 has affected your district. Flexibility has made each of these tasks: Percent of Respondents Activity Easier More Difficult No Impact Develop and balance a budget 91% 5% 4% Dedicate resources to local education priorities 86 6 8 Fund teacher salaries and benefits 67 7 27 Develop and implement strategic plan 67 9 25 Make hiring/layoff decisions 64 7 29 Fund programs for struggling/at-risk students 49 20 31 Decide how much funding to provide to each school in the district 44 16 40 8. For each program listed below, please choose the option that best reflects what your district has done since the state granted categorical flexibility in February 2009. Our district has: Percent of Respondents Shifted All Shifted Funding Substantial Shifted Some Away From Funding Away Funding Away Made Shifted the From the From the No Funding to Program Program Program Program Change the Program High School Class Size Reduction 58% 12% 12% 16% 1% Community Based English Tutoring 46 15 14 22 3 Arts and Music Block Grant 43 20 14 17 5 Math/English Professional Development Institutes 43 16 16 21 5 Pupil Retention Block Grant 43 18 14 20 6 Peer Assistance and Review 41 19 14 23 3 Professional Development Block Grant 41 17 18 19 5 Targeted Instructional Improvement Grant 40 15 17 23 4 Schools and Library Improvement Block Grant 37 20 18 22 3 Supplemental Instruction 36 18 18 23 5 School Counseling 35 15 18 24 7 Principal Training 34 18 13 32 5 School Safety Block Grant 32 18 17 30 4 California School Age Families Education 31 17 17 33 2 Deferred Maintenance 31 18 21 25 5 Gifted and Talented Education 30 22 20 25 4 Intern Program/Alternative Certification 28 21 12 36 4 Adult Education 28 29 25 16 2 CAHSEE Supplemental Instruction 25 18 22 31 3 Beginning Teacher Support and Assistance 20 17 19 40 5 Community Day Schools 19 13 10 49 8 Instructional Materials 18 26 19 29 8 Regional Occupational Centers/Programs 4 4 18 65 9 CAHSEE = California High School Exit Examination. www.lao.ca.gov Legislative Analyst’s Office 23 An LAO RepOR t 9. The Governor has proposed fundamental restructuring of the K-12 funding system—eliminating almost all state categorical program requirements. On an ongoing policy basis, how should the state treat each of the following categorical programs. Percent of Respondents Modify (Reinstate/Maintain Eliminate Similar Categorical Maintain (Permanently Program With Some (Reinstate/Maintain Eliminate All Program Changes to Meet the All Existing Program Program Requirements) Same Goals) Requirements) Partnership Academies 82% 15% 3% Intern Program/Alternative Certification 82 16 2 Quality Education Investment Act 80 14 5 Apprentice Programs 80 17 3 California School Age Families Education 78 18 4 Community Based English Tutoring 78 18 3 Targeted Instructional Improvement Grant 76 20 4 Peer Assistance and Review 76 20 4 High School Class Size Reduction 75 19 5 Advancement Via Individual Determination 74 20 6 Arts and Music Block Grant 71 20 9 Math/English Professional Development Institutes 71 24 5 Pupil Retention Block Grant 69 27 4 Supplemental Instruction 69 23 8 Agriculture Vocational Education 68 23 9 School Safety Block Grant 67 25 9 Schools and Library Improvement Block Grant 67 23 10 Principal Training 67 29 4 After School Education and Safety 66 22 12 CAHSEE Supplemental Instruction 64 28 8 Gifted and Talented Education 64 28 7 Professional Development Block Grant 62 29 9 School Counseling 59 29 12 Beginning Teacher Support and Assistance 57 33 10 K-3 Class Size Reduction 56 24 20 Adult Education 56 32 12 Economic Impact Aid 55 27 18 Community Day Schools 54 32 15 Regional Occupational Centers/Programs 50 33 17 Instructional Materials 40 35 25 Home-to-School Transportation 38 22 41 Deferred Maintenance 27 39 34 CAHSEE = California High School Exit Examination. 24 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t 10. The state is deferring many K-12 payments. Please select the item or items below that best reflect how your district responded to late payments in 2010-11 and 2011-12. If the state were to increase these late payments in 2012-13, please select the item or items that best reflect how your district is likely to respond. Percent of Respondents 2010-11 2011-12 2012-13 Response ($7.4 Billion) ($9.4 Billion) (Potential Deferral) Relied/would rely on district reserves 68% 67% 55% Borrowed/would borrow from our special funds 34 37 45 Made/would make cuts because internal and external 22 23 26 borrowing options were/are exhausted or deemed too costly Relied/would rely on external borrowing 21 27 40 Borrowed/would borrow from our county treasurer 6 9 20 Borrowed/would borrow from our County Office of Education 2 4 11 Did/would do something else 3 4 5 11. For each of the following years, please mark the item or items below that best reflect the changes your district made to its teachers contract. Our district: Percent of Respondents Contract Provision 2008-09 2009-10 2010-11 2011-12 Provided no cost-of-living adjustment 75% 86% 88% 83% Negotiated a “golden handshake” or other early retirement incentive 26 32 30 15 Reduced noninstructional/paid professional development days 14 27 35 29 compared to prior year Negotiated higher class size maximums compared to prior year 11 23 34 32 Reduced district contribution to health benefits for teachers compared 8 10 15 17 to prior year Provided no step-and-column salary increases 4 6 6 6 Reduced post-retirement health benefits for new teachers compared to 3 5 5 6 prior year Reduced instructional days compared to prior year 2 16 31 25 12. If your district instituted furlough days for teachers, please indicate the number of furlough days instituted in each of the following years. Response 2008-09 2009-10 2010-11 2011-12 Average number of furlough days — 1 3 2 Average weighted by teachers — 2 4 3 per district www.lao.ca.gov Legislative Analyst’s Office 25 An LAO RepOR t 13. If your district increased maximum class sizes in your teacher contract, please indicate the average maximum class size negotiated in each of the following years. Grade 2008-09 2009-10 2010-11 2011-12 Kindergarten 23 24 26 26 Grades 1-3 23 25 26 26 Grades 4-6 30 30 31 31 Grades 7-12 30 31 32 32 14. For each of the following years, please indicate the number of instructional days provided in your district. Percent of Respondents Number of Instructional Days 2008-09 2009-10 2010-11 2011-12 180 99% 84% 61% 65% 179-178 >1 6 8 9 177-176 >1 4 9 9 175-174 >1 5 22 17 173-168 — — — — 26 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t www.lao.ca.gov Legislative Analyst’s Office 27 An LAO RepOR t lao Publications This report was prepared by rachel ehlers and Jeimee estrada, and reviewed by Jennifer Kuhn. The legislative Analyst’s office (lAo) is a nonpartisan office that provides fiscal and policy information and advice to the legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the lAo’s website at www.lao.ca.gov. The lAo is located at 925 l street, suite 1000, sacramento, CA 95814. 28 Legislative Analyst’s Office www.lao.ca.gov