The 2019-20 Budget: Proposition 98 Analysis

The 2019-20 Budget: Proposition 98 Education Analysis GABRIEL PETEK LEGISLATIVE ANALYST FEBRUARY 13, 2019 analysis full gutter 2019-20 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Table of Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Overview of Spending Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Minimum Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Proposition 98 Budget Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Proposition 98 True-Ups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Local Control Funding Formula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Special Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 County Offices of Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Education Mandates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 School Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Summary of Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 www.lao.ca.gov analysis full gutter 2019-20 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Executive Summary In this report, we assess the architecture of the Governor’s overall Proposition 98 budget and analyze his specific proposals for K-12 education. Overall Proposition 98 Budget $2.9 Billion in New Proposition 98 Spending Proposals. These proposals consist of $2.8 billion for K-12 schools, $367 million for the California Community Colleges, and a $289 million downward adjustment to account for cost shifts. Nearly all new spending is for ongoing commitments, including $2.5 billion to cover an estimated 3.46 percent cost-of-living adjustment (COLA) for the Local Control Funding Formula (LCFF) and other K-14 programs. Total K-12 funding per student would grow to $12,018 in 2019-20, an increase of $444 (3.8 percent) over the revised 2018-19 level. Prepare for Possibility That Proposition 98 Funding Is Somewhat Lower by May. Economic events occurring after the development of the Governor’s budget suggest that estimates of the guarantee could be revised down somewhat in the coming months. Coupled with our estimate of higher program costs, the Proposition 98 budget could be tighter by May. To prepare, the Legislature may want to begin identifying proposals it would be willing to reject or reduce. We also think the Legislature should consider building a budget cushion by replacing some of the Governor’s new ongoing commitments with one-time initiatives. Undoing Proposition 98 True-Up Process Makes Future Budget Balancing More Difficult. The 2018-19 budget plan created a Proposition 98 true-up process to make unexpected changes in the minimum guarantee and the associated funding adjustments somewhat less disruptive for schools and the state. The Governor proposes to undo this true-up process and prohibit downward adjustments to school funding for the prior year. Though a benefit for schools, the proposal would make balancing the state budget during an economic downturn even more difficult. We recommend rejecting the Governor’s proposal and retaining the true-up process. Key Messages on K-12 Proposals Recommend Rejecting Automatic LCFF COLA and Proposed COLA Cap. Last year, the state enacted a statutory provision that provided an automatic COLA for LCFF going forward. The administration now proposes another formula capping the LCFF COLA at the growth rate in the Proposition 98 minimum guarantee. The administration’s proposal is an acknowledgement of the state’s experience over the past 30 years—when it has not funded the full K-12 statutory COLA about one-third of the time. Rather than budget by layers of self-imposed formulas, we recommend the Legislature make decisions about the LCFF COLA annually based upon all key budget factors and priorities at that time. Proposed Special Education Concentration Grants Are Unlikely to Achieve Core Objectives. The administration proposes providing $577 million ($390 million ongoing, $177 million one time) to districts serving large concentrations of students with disabilities, English learners, and low-income students. The funds would be distributed through a new categorical program, with a special allocation formula and spending rules. Creating a new www.lao.ca.gov 1 analysis full gutter 2019-20 BUDGET categorical program works counter to the administration’s stated policy goals of improving coordination between general and special education, reducing complexity, and alleviating administrative burden. Additionally, through prior budget actions, the state already has expanded early intervention programs and established a support system for districts that have poor special education outcomes. For these reasons, we recommend rejecting the proposal and considering better alternatives for augmenting special education funding. Consider Two Better Options for Addressing Key Special Education Issues. If the Legislature wishes to increase funding for special education, it could equalize funding rates, which currently range from $500 to $900 per student for historical reasons. We estimate equalizing these rates at the 90th percentile of existing rates would cost $333 million. (Equalizing at the 90th percentile has been the state’s most common equalization approach.) The Legislature could spread this cost increase over several years. Alternatively, the Legislature could provide funding for preschool-aged children with special needs. Depending upon specific implementation decisions, these added costs could range between $150 million and $500 million annually. Recommend Taking Action to Stop Funding Inequities From Growing Among County Offices of Education (COEs). In 2013-14, the state introduced a new funding formula for COEs that was intended to eliminate historical funding inequities. Despite this intention, the minimum state aid policy has resulted in increasingly large funding differences among COEs. Due to minimum state aid, 22 COEs currently are receiving more—some substantially more—than generated by the formula. These COEs have seen their funding grow at about twice the rate of COEs funded according to the formula. We recommend repealing the minimum state aid policy. This would produce savings in the low tens of millions each year initially, growing to low hundreds of millions over time. To minimize disruption, the Legislature could adopt a provision ensuring no COE receives less total funding than estimated under the 2018-19 Budget Act. Though such a provision maintains unjustified funding inequities in the near term, it stops those inequities from growing. School Facilities No Concerns With Larger School Facilities Bond Sales. Proposition 51 (2016) authorizes the state to sell $7 billion in general obligation bonds for school facilities. The Governor’s budget proposes to issue $1.5 billion of these bonds in 2019-20, compared to the $594 million issued in 2018-19. Were the proposed pace of bond sales to continue moving forward, the state would exhaust Proposition 51 funding by 2022-23 (over six fiscal years). We have no concerns with this proposal, as the faster pace would allow the state to clear the backlog of facility applications more quickly. Recommend Rejecting the Associated Staffing Augmentation. The Governor proposes to provide ten new positions for the Office of Public School Construction (OPSC). The OPSC currently dedicates a relatively small share of its staff (less than 20 percent) to processing school facility applications. Given the recent decision to devolve audit responsibilities from OPSC to local auditors, OPSC also is performing fewer audits than it has in the past. As the agency can internally shift positions to reflect current priorities, including addressing the application backlog, we recommend rejecting the staffing increase. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET INTRODUCTION In this report, we analyze the Governor’s Other Education Budget Analyses and Proposition 98 budget package. The first four Reference Material. Given the similarities with sections of the report focus on the architecture K-12 education mandates, we cover community of the Proposition 98 budget, with an overview of college mandates in this report, but we analyze the new Proposition 98 spending the Governor the Governor’s other community college proposals proposes, an assessment of the Governor’s in our forthcoming Higher Education Analysis. estimates of the Proposition 98 minimum We cover the Governor’s proposal to create guarantee, a discussion of several factors that more full-day kindergarten programs in our could affect the Legislature’s Proposition 98 budget forthcoming Early Education Analysis. On the planning in the coming months, and an “EdBudget” portion of our website, we post dozens assessment of the Governor’s proposal relating of tables containing additional detail about the to Proposition 98 true-ups. We dedicate the five Proposition 98 budget. In our recently released remaining sections of the report to examining report, California’s Education System: A 2019 the Governor’s major proposals involving Guide, we provide considerable background K-12 education. Specifically, we analyze his information on the state’s students, staffing, proposals for (1) the Local Control Funding Formula, schools, education programs, funding, and (2) special education, (3) county offices of education, outcomes. (4) education mandates, and (5) school facilities. OVERVIEW OF SPENDING PACKAGE In this section, we describe the main features of budget includes an associated $2 billion for the the Governor’s Proposition 98 spending package Local Control Funding Formula (LCFF), $248 million and the resulting changes in per-student funding for community college apportionments, and a levels. combined $228 million for 14 other school and Governor Proposes $2.9 Billion in New community college programs (including special Proposition 98 Spending. This amount accounts education, preschool, and adult education). for all new Proposition 98 spending across the Two Notable Policy Proposals Account 2017-18 through 2019-20 period. It consists of for Most Other New Spending. The Governor $2.8 billion for K-12 education, $367 million for proposes new special education grants totaling the community colleges, and a net downward $577 million ($390 million ongoing and $187 million adjustment of $289 million to account for cost one time) for school districts with relatively shifts (Figure 1, see next page). The largest cost high numbers of low-income students, English shift relates to the Governor’s proposal to cover Learners, and students with disabilities. Districts a larger share of State Preschool costs with could use these grants for (1) special education non-Proposition 98 General Fund. Nearly all of services for students with disabilities or (2) early the new Proposition 98 spending is for ongoing intervention programs for students not currently commitments, with only $198 million associated receiving special education services. The Governor with one-time initiatives. also proposes a $40 million increase for the Covering Cost-of-Living Adjustments (COLA) College Promise program. Under this program, Accounts for $2.5 Billion of New Spending. enrollment fees can be waived for students Most of the new spending in the Governor’s budget without demonstrated financial need who attend is dedicated to covering a 3.46 percent COLA their first year of community college on a full-time for certain education programs. Specifically, the basis. The Governor’s budget would expand the www.lao.ca.gov 3 analysis full gutter 2019-20 BUDGET program to cover a second year of Figure 1 enrollment fees for these students. Governor Proposes $2.9 Billion in New Proposition 98 Spending (For a description and summary Reflects Ongoing Commitments Unless Otherwise Noted (In Millions) assessment of the Governor’s non-Proposition 98 proposals K-12 Education relating to district pension costs COLA and attendance adjustments for LCFF $2,027 and liabilities, see the nearby box.) Special education grants ($187 million one time) 577 COLA for select categorical programs 187 Funding Per Student Grows Full-year cost of previously approved preschool slots 27 Moderately Year Over Year. COLA and attendance adjustments for COEs 9 Figure 2 shows the overall School district accounting system replacement project (one time) 3 distribution of Proposition 98 Subtotal ($2,830) funding by segment over the California Community Colleges budget period. Under the COLA for apportionments $248 Governor’s budget, K-12 funding College Promise fee waivers for second-year students 40 per student increases from COLA for select student support programs 32 the revised 2018-19 level of Enrollment growth for apportionments 26 $11,574 to $12,018 in 2019-20, Student Success Completion Grants caseload adjustment 11 an increase of $444 (3.8 percent). Legal services for undocumented students 10 Community college funding per Subtotal ($367) full-time equivalent (FTE) student Accounting Shifts increases from $8,099 to $8,306 in Three K-12 initiatives shifted to Proposition 98 budget (one time) $8 2019-20, an increase of $207 Preschool costs shifted to non-Proposition 98 budget -297 (2.6 percent). Subtotal (-$289) Total Spending Proposalsa $2,908 Funding Per Student Reaches a Reflects all proposals scored to 2017-18, 2018-19, 2019-20, or prior years. Historic High. Adjusted for COLA = cost-of-living adjustment (3.46 percent); LCFF = Local Control Funding Formula; and COEs = county offices of inflation, the per-pupil funding education. levels proposed by the Governor would be the highest since the Figure 2 Proposition 98 Funding by Segment (Dollars in Millions Except Funding Per Student) Change From 2018-19 2017-18 2018-19 2019-20 Revised Revised Proposed Amount Percent Segment K-12 Educationa $66,778 $68,693 $71,242 $2,549 3.7% California Community Colleges 8,720 9,174 9,438 264 2.9 Totals $75,498 $77,867 $80,680 $2,813 3.6% Enrollment Estimates K-12 attendance 5,954,720 5,935,229 5,928,175 -7,054 -0.1% Community college FTE students 1,125,224 1,132,757 1,136,214 3,457 0.3 Funding Per Student K-12 Education $11,214 $11,574 $12,018 $444 3.8% California Community Colleges 7,749 8,099 8,306 207 2.6 a Includes funding for instruction provided directly by state agencies and the portion of State Preschool funded through Proposition 98. FTE = full-time equivalent. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Governor’s CalSTRS Proposals District Pension Costs Are Rising. Pension benefits for teachers and other certificated school employees are administered by the California State Teachers’ Retirement System (CalSTRS). These benefits are funded by contributions from school employees, districts, and the state. CalSTRS currently has a large unfunded liability—essentially, an actuarial estimate (based on many assumptions) of the difference between the cost of future pension benefits and the assets available to pay for those benefits. In 2014, the Legislature enacted a funding plan that increased contributions from all three parties. Under the plan, district contribution rates have grown from 8.3 percent of payroll in 2013-14 to 16.3 percent in 2018-19. Districts’ associated costs have grown from $2.3 billion to $5.7 billion. Budget Provides $700 Million for District Rate Relief. The Governor proposes providing an estimated $700 million over the next two years (about $350 million per year) to provide school and community college districts with pension rate relief. Specifically, the payments would reduce districts’ CalSTRS rates in 2019-20 and 2020-21—freeing up resources for other parts of districts’ operating budgets. Under current law, district rates are scheduled to grow to 18.1 percent of payroll in 2019-20 and 19.1 percent in 2020-21. Under the proposal, district rates would be 1 percentage point lower—growing instead to 17.1 percent of payroll in 2019-20 and 18.1 percent in 2020-21.The state would make the $700 million payment from General Fund resources outside of the Proposition 98 minimum guarantee. Administration Proposes District Rate Relief When School Funding Is at Historically High Level and Growing. Most districts identify rising pension costs as one of their most significant fiscal challenges. School funding, however, has grown by nearly $22 billion (37 percent) over the past six years, significantly outpacing growth in pension costs. Under the Governor’s budget, school and community college funding continues to grow, increasing a projected 3.6 percent and reaching an inflation-adjusted all-time high. Though districts view rising pension costs as difficult to manage today, these difficulties would be more pronounced if the state were to enter a recession and Proposition 98 funding were to drop. Consider Setting Aside Funding for Paying Future Pension Costs. Rather than providing districts with budget relief over the next two years, the state could modify the Governor’s proposal to provide budget relief during the next economic downturn. Under this alternative, the state would set aside funds for future district pension costs. Later, during a downturn, the Legislature could use the additional funds to pay a portion of district pension costs. Such an approach would provide districts budget relief at a time when they would be facing even more difficult budget choices. Governor Also Has a Proposal Focused on Districts’ Share of the Unfunded Liability. The Governor also proposes a $2.3 billion payment to reduce districts’ share of the CalSTRS unfunded liability (currently about $71 billion). This proposal means the state would pay a larger share of the unfunded liability than assigned to it under the 2014 CalSTRS funding plan. According to estimates produced by CalSTRS’ actuaries, this payment would reduce the district contribution rate by four-tenths of a percentage point beginning in 2021-22. The Legislature’s decision about whether to adopt this proposal is likely to revolve around its willingness to assume additional responsibility for district liabilities at a time when the state has many other debts and liabilities. We describe this proposal in our recently released report, Structuring the Budget: Reserves, Debt and Liabilities. www.lao.ca.gov 5 analysis full gutter 2019-20 BUDGET passage of Proposition 98 in 1988. Compared $600 per student. (Both historical comparisons to the previous all-time high in 2000-01, K-12 exclude funding associated with the Adult funding would be up about $500 per student and Education Program.) community college funding would be up about MINIMUM GUARANTEE In this section, we provide background on When Test 2 or Test 3 is operative, the minimum the Proposition 98 minimum guarantee. We then guarantee equals the amount of funding provided analyze the administration’s estimates of the the previous year adjusted for changes in student guarantee and the changes that have occurred attendance and a growth factor tied to per capita since June 2018. personal income (Test 2) or per capita General Fund revenue (Test 3). The state meets the guarantee Background on Minimum Guarantee through a combination of General Fund and local Minimum Guarantee Depends on Various property tax revenue, with increases in property tax Inputs and Formulas. The California Constitution revenue usually reducing General Fund costs dollar sets forth three main tests for calculating the for dollar. Though the state can fund schools and minimum guarantee. These tests depend upon community colleges at a level higher than required several inputs, including K-12 attendance, per by the formulas, the state typically funds at or capita personal income, and per capita General near the guarantee. With a two-thirds vote of each Fund revenue (Figure 3). Depending on the values house of the Legislature, the state can suspend of these inputs, one of the three tests becomes the guarantee and provide less funding than the “operative” and determines the minimum guarantee formulas require that year. for that year. Historically, Test 2 and Test 3 have Drops in Student Attendance Must Be been operative more frequently than Test 1. Sustained to Affect Minimum Guarantee. Although the state adjusts the Figure 3 minimum guarantee for growth in student attendance whenever Three Proposition 98 “Tests” Test 2 or Test 3 applies, the State Constitution insulates the Test 1 Test 2 Test 3 guarantee from reductions when Share of General Change in Per Change in General Fund Revenue Capita Personal Fund Revenue attendance begins to decline. Income (PCPI) Specifically, the Constitution has a two-year hold harmless General PCPI Fund provision that specifies that About ADA ADA the minimum guarantee is not 40% adjusted downward for declines Prior-Year Prior-Year in attendance unless attendance Funding Funding also has declined the two previous years. Guarantee based on share Guarantee based on prior- Guarantee based on prior- “Maintenance Factor” of state General Fund year funding level adjusted year funding level adjusted Payments Required in Certain revenue going to K-14 for year-over-year changes for year-over-year changes education in 1986-87. in K-12 attendance and in K-12 attendance and Years. In addition to the three California PCPI. state General Fund revenue. main Proposition 98 tests, the Constitution requires the state ADA = average daily attendance. to track an obligation known as maintenance factor. The state 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET creates a maintenance factor obligation when Test various adjustments to the minimum guarantee 3 is operative (that is, General Fund revenue is for years prior to 2017-18. The drops associated growing relatively slowly) or when it suspends the with attendance and the maintenance factor guarantee. The obligation equals the difference payment are partially offset by higher General between the actual level of funding provided and Fund revenue. After updating estimates of LCFF the Test 1 or Test 2 level (whichever is higher). and revising costs downward (largely due to Each year moving forward, the state adjusts any lower-than-expected attendance), the Governor’s outstanding maintenance factor for changes in budget leaves Proposition 98 funding $44 million K-12 attendance and per capita personal income. above the minimum guarantee. (As discussed in a The Constitution requires the state to make later chapter, the Governor proposes to rescind the maintenance factor payments when General Fund true-up process enacted in June that would have revenue grows relatively quickly. The magnitude automatically adjusted funding to match the lower of these payments is determined by formula, with guarantee.) stronger revenue growth generally requiring larger 2018-19 Minimum Guarantee Revised Down payments. These maintenance factor payments $526 Million. Compared with the estimates made become part of the base for calculating the in June 2018, the 2018-19 minimum guarantee minimum guarantee the following year. has dropped $526 million. This drop is mainly due to the downward revision to attendance estimates Administration’s Estimates of the in 2017-18 carrying forward and the attendance Minimum Guarantee hold harmless provision not being applicable in 2018-19. Another factor contributing to the drop 2017-18 Minimum Guarantee Revised Down is slightly slower year-to-year growth in General $164 Million. Compared with the estimates made Fund revenue. The result of these changes, in in June 2018, the 2017-18 minimum guarantee combination with various smaller adjustments, has dropped $164 million (Figure 4). About half of is that school and community college funding is this drop is related to lower student attendance. $475 million higher than the revised estimate of the Whereas the June budget plan assumed guarantee. The Governor proposes to reclassify this attendance would increase slightly, the latest funding as a settle-up payment (discussed more in available data indicate a slight decline—making the next section). This action results in $475 million 2017-18 the fourth consecutive year of decline. related to LCFF costs being taken “off books” in The state’s 2017-18 maintenance factor obligation also is revised downward by $124 million to reflect Figure 4 Tracking Changes in Proposition 98 Funding (In Millions) 2017-18 2018-19 June 2018 January 2019 June 2018 January 2019 Estimate Estimate Change Estimate Estimate Change Minimum Guarantee General Fund $53,381 $52,843 -$538 $54,870 $54,028 -$842 Local property tax 22,236 22,610 374 23,523 23,839 316 Total Guarantee $75,618 $75,453 -$164 $78,393 $77,867 -$526 General Fund above guarantee $0 $44 $44 $0 $0 — Settle-up payment for LCFF 0 0 — 0 475 475 Total Funding $75,618 $75,498 -$120 $78,393 $78,342 -$50 Operative “Test” 2 1 — 2 3 — LCFF = Local Control Funding Formula. www.lao.ca.gov 7 analysis full gutter 2019-20 BUDGET 2018-19 and counted instead toward prior years one-time initiatives. (All other one-time funding is (mainly 2009-10). associated with earlier fiscal years.) 2019-20 Minimum Guarantee Up $2.8 Billion 2019-20 Guarantee Includes Adjustment Over Revised 2018-19 Level. The administration for Shift of Preschool Funding. The Governor’s estimates that the 2019-20 minimum guarantee budget proposes to shift funding for part-day is $80.7 billion, an increase of $2.8 billion State Preschool programs operated by certain (3.6 percent) over the revised 2018-19 level entities (nonprofit agencies, county welfare (Figure 5). Test 1 is operative, with the guarantee departments, and cities) from the Proposition 98 to receiving a fixed share (about 40 percent) of state non-Proposition 98 side of the budget. As a result General Fund revenue. Although the minimum of the shift, all part-day and full-day State Preschool guarantee is not growing as quickly as per capita funding for these entities would come from the personal income, the state creates no new non-Proposition 98 side of the budget. (Preschool maintenance factor (consistent with its recent programs operated by school districts, county practice in these situations). Regarding spending, offices of education, and community colleges would the Governor’s budget dedicates virtually all of the remain funded within Proposition 98.) In tandem new funding attributable to the 2019-20 guarantee with this shift, the Governor proposes to “rebench” for ongoing purposes. Of the $2.8 billion total the minimum guarantee down by $297 million increase in 2019-20, only $3 million is dedicated to in 2019-20 (reflecting the approximate cost of the programs being shifted after adjusting for growth and COLA). Figure 5 Property Tax Revenue Revised Proposition 98 Key Inputs and Outcomes Upward Over the Period. For Under Governor’s Budget 2017-18 and 2018-19, the (Dollars in Millions) administration revises its estimate of property tax revenue upward 2017-18 2018-19 2019-20 by $374 million and $316 million, Proposition 98 Funding respectively, largely to reflect General Fund $52,887a $54,028 $55,295 updated data reported by schools Local property tax 22,610 23,839 25,384 and community colleges. For Totals $75,498 $77,867 $80,680 2019-20, the administration Change From Prior Year estimates that property tax revenue General Fund $2,648 $1,141 $1,268 will grow $1.5 billion (6.5 percent) Percent change 5.3% 2.2% 2.3% over the revised 2018-19 level Local property tax $1,207 $1,229 $1,545 (Figure 5). This increase mainly Percent change 5.6% 5.4% 6.5% reflects the administration’s Total funding $3,855 $2,370 $2,813 Percent change 5.4% 3.1% 3.6% estimate that assessed property values will grow 6.8 percent in Operative Test 1 3 1 2019-20, with somewhat slower Maintenance Factor growth in various smaller property Amount created (+) or paid (-) -$1,201 $143 — tax components. Overall, we think Total outstandingb — 143 $150 the administration’s property tax Growth Rates estimates are reasonable given the K-12 average daily attendance -0.13% -0.33% -0.12% current strength of the state’s real Per capita personal income (Test 2) 3.69 3.67 5.07 estate market. Over the three-year Per capita General Fund (Test 3)c 10.20 3.48 3.33 budget period, the administration’s K-14 cost-of-living adjustment 1.56 2.71 3.46 a estimates are only $136 million Includes $44 million provided on top of the minimum guarantee. b Outstanding maintenance factor is adjusted annually for changes in K-12 attendance and per capita personal income. (0.2 percent) below our November c As set forth in the State Constitution, reflects change in per capita General Fund plus 0.5 percent. 2018 estimates. 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Additional Proposition 98-Related settle-up obligations. In contrast to previous Funding years, the settle-up payment would not be scored as a Proposition 2 debt payment. (Technically, Budget Includes Settle-Up Payment. The $654 million of the proposed settle-up payment Governor’s budget provides $687 million as a could be scored as a Proposition 2 debt payment.) settle-up payment related to meeting the minimum guarantee Figure 6 in certain years prior to 2017-18. Figure 6 shows the years for Outstanding Settle-up Obligation and which the state owes settle-up Governor’s Payment Proposal and how the proposed settle-up (In Millions) payment would be used. The largest component of the Outstanding Settle-Up by Year 2009-10 $435 payment is the $475 million to 2011-12 48 cover LCFF costs that otherwise 2013-14 172 would exceed the minimum 2014-15 32 guarantee in 2018-19. The 2016-17 1 budget dedicates the rest of the Total $687 payment to covering a portion of Settle-Up Payment Proposal the proposed one-time special Ongoing 2018-19 LCFF costs $475 education grants and a portion One-time special education grants 178 of ongoing Community College Ongoing 2019-20 CCC Strong Workforce Program costs 34 Strong Workforce Program costs. Total $687 After making the $687 million LCFF = Local Control Funding Formula and CCC = California Community Colleges. settle-up payment, the state would have paid off all Proposition 98 PROPOSITION 98 BUDGET PLANNING In this section, we describe how the fell sharply at the end of 2018. Although financial Proposition 98 budget picture could change over markets have recovered somewhat, capital gains the coming months. First, we explain how potential revenue estimates in May still could be lower reductions in state revenue could lead to a lower than the January estimates. In addition, state tax minimum guarantee in 2018-19 and 2019-20. Next, collections in January—one of the most important we identify some additional Proposition 98 costs months for personal income tax collections— that are likely to emerge in the coming months. were about $2 billion below the estimates in the Finally, we discuss how the Legislature might begin Governor’s budget. Income tax collections at the preparing for these changes. federal level were strong, however, and we think some portion of the shortfall is likely to be made up State Revenue and the in April. Finally, some recent data suggest growth in Minimum Guarantee the state economy could be slowing. Home sales and building construction slowed at the end of State Revenue Estimates Could Be Somewhat 2018 and claims for unemployment benefits have Lower by May. Although the administration’s ticked up slightly in recent months. revenue estimates are consistent with the economic Minimum Guarantee Is Sensitive to Revenue data that was available when the Governor’s budget Changes in 2018-19 and 2019-20. If revenue were was prepared, those estimates do not account for to decrease (or increase) by May, any changes some recent developments. Notably, stock prices www.lao.ca.gov 9 analysis full gutter 2019-20 BUDGET would have corresponding effects on the minimum months will affect these estimates, including guarantee. For 2018-19, the guarantee drops movements in stock prices and state tax collections about 55 cents for each dollar of lower revenue. in April. On the upside, the guarantee increases about K-14 Spending Changes 55 cents for each dollar of the first $250 million in higher revenue. Revenue increases beyond Additional Costs Likely to Materialize Over $250 million would not increase the guarantee, the Coming Months. The Governor’s budget as Test 2 would become the operative test. For currently does not reflect certain additional 2019-20, the guarantee drops or increases about costs that are likely to materialize by May. These 40 cents for each dollar of lower or higher revenue. additional costs—the most significant of which we The guarantee in 2019-20 is not likely to depend describe below—are likely to total a few hundred upon the prior-year level of Proposition 98 funding, million dollars. as Test 1 is likely to be operative. This means a one-time revenue drop in 2018-19 would not have • Property Tax Backfill for San Francisco. an interactive effect on the 2019-20 guarantee. Late last fall, the San Francisco Controller (For this revenue sensitivity analysis, we hold all reported that it would be reducing the local Proposition 98 inputs other than revenue constant. property tax revenue allocated to the school Although the other inputs are less volatile than district and community college district in the General Fund revenue, they too are likely to change county to correct for a previous overallocation. over the coming months.) When property tax revenue for a school or community college district drops, the state A Few Scenarios Illustrate the Effect of typically provides a General Fund backfill. Revenue Changes on the Minimum Guarantee. The Governor’s budget reflects the lower Figure 7 shows the interaction between state property tax revenue for the San Francisco revenue estimates and the minimum guarantee school district and community college district for a few specific scenarios. We intend these over the 2017-18 through 2019-20 period scenarios to be illustrative rather than predictive but does not account for a likely one-time of revenue changes. By May, both our office and adjustment associated with correcting for the the administration will release updated revenue overallocation in prior years. Preliminary data estimates. Many developments over the coming suggest this adjustment (resulting in higher state cost) could be in the $100 million to Figure 7 $200 million range. Reductions in General Fund Revenue • Community College Apportionment Would Reduce the Minimum Guarantee Shortfall. Based upon preliminary data from the California Community Colleges Changes Relative to Governor’s Budget (In Millions) Chancellor’s Office, the administration projects 2018-19 Scenarios: that costs for the new apportionment formula Revenue Lossa Drop in Guarantee are higher than the state estimated in June. -$500 -$271 The Governor’s budget builds these higher -1,000 -549 costs into its 2019-20 budget but does not -2,000 -1,106 provide a backfill for the cost increase in 2018-19. We estimate the 2018-19 shortfall is 2019-20 Scenarios: $69 million. Revenue Lossa Drop in Guarantee -$500 -$192 • Additional Funding for County Offices -1,000 -382 of Education (COEs). As we discuss in a -2,000 -765 later chapter, the administration’s spending -4,000 -1,530 estimates do not account for growth in the a Assumes all other Proposition 98 inputs held constant. cost of the “minimum state aid” component of 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET the funding formula for COEs. Across 2018-19 for a lower minimum guarantee coupled with and 2019-20, we estimate these costs exceed higher costs for programs within the guarantee, the administration’s estimates by nearly the Proposition 98 budget is likely to be tighter by $40 million. May. In a relatively favorable budget scenario (one • Additional Funding for Oakland and with both modest revenue drops and modest cost Inglewood Unified School Districts. Last increases), the reduction in available Proposition 98 September, the state enacted legislation funding might be addressed by adjusting some of indicating it would provide grants to cover the Proposition 98 increases beyond COLA. In a part of the operating deficit for these two less favorable budget scenario, the reduction in fiscally distressed school districts. The state available Proposition 98 funding could necessitate will determine the size of the grants based revisiting the COLA rate. In outlining these upon an independent fiscal review that is due possibilities, we assume the Legislature funds at by March 1. At the time the legislation was the minimum guarantee in 2018-19 and 2019-20. enacted, the administration estimated the The Legislature could decide to fund at a higher grants would total $28 million in 2019-20. level as long as the overall budget remains balanced. Additional Savings Likely to Offset Proposition 98 Budget Contains No Cushion Some Portion of Additional Costs. Each Against Potential Downturns. One way the state budget year, the state identifies some unspent has mitigated potential drops in the guarantee in Proposition 98 funds from previous years. These previous years has been to set aside some funding funds are available for reallocation to other inside the guarantee for one-time purposes. Over Proposition 98 programs. The Governor’s budget the past six years, this one-time funding has currently identifies $52 million in unspent prior-year averaged about $700 million per year. (This amount funds. By May, we think the amount identified is excludes one-time funds associated with prior-year likely to be at least $100 million. true-ups and settle-up payments.) Having one-time Even Small Changes in the COLA Rate funds in the budget gives the Legislature a way to Will Impact the Proposition 98 Budget. address drops in the minimum guarantee without Although the Governor’s estimate of the COLA making reductions to ongoing programs. The rate seems reasonable at this time, even small Governor’s proposed budget, however, dedicates changes to the rate have notable effects. For just $3 million inside the 2019-20 guarantee for example, a 0.5 percentage point change in the one-time purposes. Moreover, the Governor’s rate would change the total cost of COLA for budget uses $77 million in one-time funds to pay school and community college programs by about for a portion of the ongoing Strong Workforce $370 million. Assuming no other changes in the Program. Using one-time funds for ongoing costs Proposition 98 budget, a COLA cost increase of builds a shortfall into the Proposition 98 budget that size would mean the state could no longer fund the following year, effectively reducing the many of the Governor’s Proposition 98 proposals augmentations schools could expect in 2020-21 other than COLA. Conversely, a COLA cost and making future budget balancing more difficult. reduction of that size would almost double the Recommend Legislature Begin Identifying Its amount of Proposition 98 funding available for Highest Priorities and Focusing on One-Time augmentations other than COLA. (The federal Initiatives. Over the next several months, the government is scheduled to release the data the Legislature will have more opportunity to evaluate state needs to finalize the COLA rate at the end of the Governor’s proposals, prioritize among those April.) proposals, and weigh those proposals against its own interests. Given the developments noted The Bottom Line above, the Legislature may want to begin identifying Available Proposition 98 Funding Could Be proposals it would be willing to reject or reduce in Somewhat Lower by May. Based on the potential response to a smaller Proposition 98 budget. We www.lao.ca.gov 11 analysis full gutter 2019-20 BUDGET also think the Legislature should consider replacing to respond to lower revenue estimates in May or some of the Governor’s ongoing funding with a potential downturn next year while minimizing one-time initiatives. For instance, the Legislature any associated ongoing disruption for schools, might plan to cover the cost of COLA but designate community colleges, and the rest of the state other available funds for one-time purposes. budget. These steps would better position the Legislature PROPOSITION 98 TRUE-UPS In this section, we provide background on how 2018-19 Budget Plan Established an the state makes adjustments to school funding Automatic True-Up Process. Chapter 39 of 2018 when the minimum guarantee changes after a fiscal (AB 1825, Committee on the Budget) created a year has ended. We then describe the Governor’s Proposition 98 true-up account to automatically proposal to repeal the automatic true-up process adjust school funding when estimates of the the state enacted last year. We conclude with our prior-year guarantee change. For years in which the assessment and recommendation. guarantee drops, the state is to credit the funding above the guarantee to the true-up account. For Background those years in which the guarantee increases, Minimum Guarantee Is Not Finalized Until the state is to apply any credits in the true-up After Year Is Over. Unlike most other programs in account toward meeting the higher guarantee. the state budget, the calculation of the minimum If the credits are insufficient to meet the higher guarantee is not finalized until at least nine months guarantee, the state is to make a settle-up payment after the close of the fiscal year. Given most of for the remaining difference. The true-up account the Proposition 98 inputs change from the time of is intended to make unexpected changes in the budget enactment through the end of this period, guarantee and associated funding adjustments the final estimate of the guarantee almost always somewhat less disruptive for schools, community differs from the initial estimate. Swings in the colleges, and the state. guarantee after the end of the fiscal year typically Governor’s Proposal are in the range of tens of millions to hundreds of millions of dollars. Eliminates Automatic True-Up Process. The State Practice Is to True Up K-14 Funding Governor proposes to repeal the true-up account. When the Minimum Guarantee Changes. The Governor also proposes to prohibit the state When the final guarantee is higher than the initial from making any downward adjustment to school estimate, the state makes a one-time payment to funding once a fiscal year is over, while still “settle up” to the higher guarantee. When the final requiring the state to make upward adjustments. guarantee is lower than the initial estimate, the Assessment and Recommendation state often adjusts K-14 funding down to the lower guarantee. If an outstanding settle-up obligation Changes to True-Up Process Increase Risk exists, the state typically scores the difference to State Budget, Recommend Rejecting. The as a settle-up payment, thereby not reducing state historically has adjusted school funding both school funding for that year but recognizing a upward and downward in response to changes in lower base for calculating the guarantee moving the minimum guarantee occurring after enactment forward. If no settle-up obligation exists, the state of the budget. The Proposition 98 true-up typically reduces funding through other accounting account automated these adjustments but kept adjustments, such as fund swaps. The state the same basic approach of making both upward typically decides what type of adjustments to make and downward adjustments. By contrast, the as part of its regular budget process. 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Governor’s proposal would have the rest of the implications for both sides of the state budget, as state budget assume the risk of any changes the guarantee typically builds upon the prior-year to the minimum guarantee occurring after the funding level. Though the Governor’s proposal end of the year. The state would continue to clearly offers a benefit for schools, it would make be required to make settle-up payments if the balancing the rest of the state budget during an guarantee increased, but it would be prohibited economic downturn all the more difficult. For from taking any action to align school funding with all these reasons, we recommend rejecting the a lower guarantee. Not aligning school funding Governor’s proposed changes. with the guarantee in one year can have ongoing LOCAL CONTROL FUNDING FORMULA In this section, we provide background on LCFF, LCFF Has Three Main Components Plus describe the Governor’s proposals relating to the “Add Ons.” LCFF consists of base, supplemental, LCFF COLA, assess those proposals, and offer and concentration grants, as well as several small associated recommendations. add ons. Figure 8 shows the share of total LCFF funding attributable to each of these components. Background We describe each component below. State Enacted New School Funding Formula • Base Grants. The largest component of LCFF in 2013-14. Prior to LCFF, the state distributed is a base grant generated by each student. school funding through a combination of general Base funding rates differ by grade span, with purpose grants (called “revenue limits”) and more than 40 state categorical programs. Districts Figure 8 could use general purpose grants Base Grants Comprise About 80 Percent of for any educational purpose but LCFF Funding had to spend categorical funding 2018-19 on state-prescribed activities. In the years leading up to LCFF, Add-Ons policy makers were concerned Concentration this system had adverse effects. Notably, the system Supplemental was characterized by a lack of coordination across programs, a compliance-based rather than student-based mindset, a disconnect between funding and student costs, historic funding inequities, and limited local control. In response, the state eliminated most categorical programs in 2013-14, replacing Base the previous general purpose grants and program-specific funding formulas with one new formula. LCFF = Local Control Funding Formula. www.lao.ca.gov 13 analysis full gutter 2019-20 BUDGET students in higher grade spans generally receiving the largest LCFF funding increases have generating more funding than those in lower seen their funding grow more than 70 percent per grade spans. The state set per-student base student. By comparison, districts receiving the LCFF funding targets about $500 higher than smallest LCFF funding increases have experienced pre-recession funding levels adjusted for growth closer to 20 percent per student. inflation. Districts may use base funding for State Policy Is to Adjust LCFF Funding Rates any educational purpose. for COLA Moving Forward. Whereas LCFF was • Supplemental Grants. For each English intended to have big distributional impacts on learner and low-income (EL/LI) student, a districts during the transition years, it is intended to district receives a supplemental grant equal to have a uniform impact on districts over the coming 20 percent of the base grant. A student who years. Having reached full LCFF implementation, is both EL and LI generates the same funding the state decided last year to adopt a policy moving rate as a student who belongs to only one of forward of automatically adjusting LCFF per-student these groups. Districts must use this funding rates for COLA. The specific COLA rate is linked for the benefit of EL/LI students. to a national price index designed to reflect the • Concentration Grants. Districts serving a cost of goods and services purchased by state and student population more than 55 percent local governments across the country. This index EL/LI also receive a concentration grant equal is developed by the federal Bureau of Economic to 50 percent of the base grant for each EL/LI Analysis (a division of the U.S. Department of student above the 55 percent threshold. Commerce). Districts also must use this funding for the In 2018-19, State Is Estimated to Be benefit of EL/LI students. Spending $61 Billion for LCFF. LCFF is by • Add Ons. The largest add ons are associated far the state’s largest education program. With with two historical categorical programs—one $42.5 billion supported by the state General Fund supporting targeted instructional support (and $18.5 billion supported by local property tax and the other supporting home-to-school revenue), LCFF also is the largest component of the transportation. Though the state no longer state’s General Fund budget. requires districts to operate these specific Governor’s Proposal programs, districts continue to receive their 2012-13 allocations for them. Signals Commitment to LCFF and Includes Funding for COLA. Although LCFF was closely State Reached LCFF Funding Targets in associated with the previous administration, the 2018-19—Two Years Ahead of Schedule. In new administration indicates it is “committed 2013-14, the state estimated LCFF would cost to funding public schools through the LCFF.” $18 billion more than the previous system due to Consistent with that intent, the Governor’s budget its higher per-student funding targets. Given the includes $2 billion for a projected 3.46 percent size of this additional cost, the state anticipated LCFF COLA. The augmentation brings total LCFF taking eight years to phase in the rate increases. funding in 2019-20 to $63 billion. As Figure 9 shows, the state ended up increasing Proposes COLA Cap. The Governor proposes LCFF funding rates over the course of six years. to modify the COLA policy the state adopted In 2018-19, the state not only reached the funding last year. Based upon our conversations with the targets but slightly surpassed them. Department of Finance, the Governor intends During Transition, Some Districts Received to link the LCFF COLA rate to growth in the Especially Rapid Funding Increases. By design, Proposition 98 minimum guarantee. In years in the transition to full LCFF implementation resulted which the minimum guarantee grows too slowly in larger funding increases for districts with large to fund the full LCFF COLA, a formula would proportions of EL/LI students and/or historically automatically reduce the LCFF COLA to a lower low funding levels. Over the past six years, districts corresponding growth rate. The intent of the 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET policy is to align the COLA rate automatically with districts and their communities to develop locally anticipated growth in the minimum guarantee. The tailored solutions. In tandem with the increased LCFF COLA rate would be finalized upon initial local flexibility, the state has tried to strengthen enactment of the state budget for that year. (As of accountability through richer data collection and this writing, the administration had not yet released reporting as well as enhanced support for districts associated trailer bill language.) with poor outcomes. For all these reasons, we encourage the Legislature to continue providing Assessment and Recommendations most school funding through LCFF. Introducing new LCFF Improved on Categorical Funding categorical programs could work counter to the System in Several Respects. In discussions with LCFF objectives, such that developing and meeting various education groups throughout the state, we district performance goals in a concerted way could have heard widespread support for LCFF. Districts become increasingly difficult. report their business officers and program experts Projected COLA Rate and Associated now work hand-in-hand to develop education Cost Increase for 2019-20 in Line With Our programs. Legislators also have steered away from Estimates. Using the latest data available, we a one-size-fits-all approach in favor of allowing estimate the COLA rate is 3.26 percent—roughly Figure 9 State Gradually Transitioned to Full LCFF Implementation Formula for School Districts and Charter Schools (Dollars in Billions) $70 Target Gap Funding Base 100% 60 48% of gap 58% of gap funded of gap funded 53% funded 50 of gap funded 30% of gap 12% funded 40 of gap funded 30 20 10 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 73% 83% 91% 96% 97% 100% Percent of Target Level Funded LCFF = Local Control Funding Formula. www.lao.ca.gov 15 analysis full gutter 2019-20 BUDGET tracking with the administration’s earlier estimate of formula on top of a formula seems an unnecessary, 3.46 percent. The estimated rate will change based complicated, and opaque way to budget. We think upon the release of further data updates over the the Legislature should take a different approach coming months, with the state locking down the and revisit the decision to provide an automatic rate in late April. At this point, we do not expect a COLA to LCFF. Rather than budget by layers notable swing in the rate. of self-imposed formulas, we believe a better Recommend Budgeting Annually Rather Than approach would be to consider all key budget Adopting Automated Formulas. By proposing factors in any given year and decide priorities within a COLA cap, the administration acknowledges that current context. Under this approach, the the impracticality of providing an automatic LCFF Legislature would make decisions about the LCFF COLA in every budget situation. Since 1990-91, COLA based upon the best information available the state has not funded the full K-12 statutory at that time and in the context of all the other COLA ten years—about one-third of the time. objectives it wanted to achieve that year. Such Although automating reductions in the LCFF COLA an approach is more transparent and thoughtful. rate would make balancing the budget easier, For these reasons, we recommend the Legislature the Legislature might want to balance the budget reject the proposed automated cap, as well as the in other ways those years. Moreover, adding a automated COLA. SPECIAL EDUCATION In this section, we (1) provide background Share of California Students Receiving on special education and early intervention Special Education Has Increased in Recent programs, (2) describe the Governor’s proposal to Years. In 2017-18, about 12.5 percent of provide $577 million to support such programs, California students received special education. As (3) assess the proposal, and (4) make associated Figure 10 shows, the share of California students recommendations. receiving special education was virtually flat from 1997-98 through 2007-08, then grew notably over Special Education the last ten years. The share of students diagnosed Federal Law Requires Schools to Provide Students Figure 10 With Disabilities Individualized Growing Share of California Education Programs (IEPs). Students Receive Special Education Special education is instruction designed to meet the unique needs of each child with a 13% disability. As a condition of receiving federal funding, the 12 Individuals with Disabilities Education Act (IDEA) requires 11 schools to identify all students with disabilities and provide them individualized support. The specific 10 support provided to each student is detailed in his or her IEP, a 9 1997-98 2002-03 2007-08 2012-13 2017-18 legal document developed by the student’s teachers, parents, and school administrators. 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET with autism has increased at an especially fast rate, provide categorical funding specifically for special more than doubling over the past ten years—rising education (Figure 11). These fund sources from 0.7 percent of all students in 2007-08 to together cover about 40 percent of the additional 1.8 percent in 2017-18. cost of special education services. Schools cover Schools Offer a Range of Special Education remaining special education costs with general Services. About 60 percent of students receiving purpose funding (mostly from LCFF). special education have either speech impairments, Most Categorical Funding Is Allocated such as stuttering, or specific learning disabilities, to Special Education Local Planning Areas such as dyslexia. Students with these conditions (SELPAs). Most state and federal special education typically require less intensive special education funding is allocated directly to SELPAs, which are services, such as weekly pull-out sessions with typically either a regional consortium of smaller specialized teachers. An increasing number of districts or a single large district. Each SELPA California students require relatively intensive decides how to allocate its special education support, such as one-on-one assistance categorical funding among its member districts. throughout the school day with an instructional State Funds Variety of Special Education aide coupled with regular sessions with a therapist. Programs. Figure 12 (see next page) summarizes Students with autism sometimes require particularly the state’s special education programs. About intensive services from a range of specialists. 80 percent of state special education funding is Special Education Often Operates in a Silo, allocated by a formula commonly called AB 602 Separate From General Education. In 2015, a (after its enacting legislation). The formula statewide task force of education experts issued a distributes funding based on total student report detailing poor coordination between special attendance rather than a direct measure of special education and other educational services. The education costs (for example, the number of report found districts often do not include special students identified for special education or the education in broader strategic planning and special services provided). The AB 602 approach ensures education administrators rarely collaborate with schools have little incentive to over-identify their general education counterparts. In its report, students for special education or serve these the task force echoed longstanding complaints students in unnecessarily expensive ways or from teachers, administrators, and parents. settings. The federal government also allocates Special Education Supported by Combination of General Figure 11 Purpose and Categorical Funds. Schools receive billions of dollars Districts Cover Majority of Special Education each year (mostly from LCFF) to Costs With General Purpose Funding educate all students, including 2016-17 students with disabilities. These funds can be used for any State Categorical educational purpose but primarily Funding cover general education costs such as teacher compensation. Beyond these general education General Purpose costs, schools incur additional Funding costs to serve students with disabilities (for example, to Federal provide specialized support and Categorical adaptive equipment). To help Funding cover these additional costs, both the state and federal governments www.lao.ca.gov 17 analysis full gutter 2019-20 BUDGET most of its special education funding based on more intensive services. As a result, local general overall student attendance. purpose funding has been covering an increasing State Dedicates No Funding for share of special education expenditures, rising Preschool-Aged Children Requiring Special from about 45 percent ten years ago to about Education Services. Although the federal 60 percent today. government requires schools to begin providing Students With Disabilities Tend to Have special education to children with disabilities at their Poorer Outcomes Than Other Students. Students third birthdays, the state provides no categorical with disabilities perform worse than students funding specifically for this purpose. Schools without disabilities across several measures. cover related costs with a combination of federal Based upon the most recent data, students with funding and general purpose funding. In 2016-17, disabilities had low scores on standardized tests federal funding for preschool special education was of reading and math (scoring as a group at the about $150 million and schools contributed about 18th percentile of all test takers). Compared to the $500 million in general purpose funding. overall student population, students with disabilities Special Education Expenditures Have also had higher suspension rates (6.8 percent Increased Faster Than Associated Funding. Over compared to 3.5 percent) and lower graduation the last ten years, total state and federal special rates (65 percent compared to 83 percent). education funding declined (in inflation-adjusted Serving Students With Disabilities Is Districts’ terms) due to the drop in overall student Most Common Performance Problem. The state attendance. During this period, total special currently measures district performance in four key education expenditures increased, largely driven by areas for 13 student groups. If a district has poor the growing number of students receiving special performance of at least one student group in two or education coupled with some students requiring more areas, it is identified for assistance. In fall 2018, Figure 12 California Has Several Special Education Categorical Programs (In Millions) Program Description 2018-19 AB 602 Per-student funding for any special education expense. $3,163 Mental Health Services Per-student funding for mental health services to students with $374 disabilities. Out-of-Home Care Additional funding for schools located near Licensed Children’s $140 Institutions. SELPA Administration Per-student funding to support data collection, reporting, and $97 other basic administrative tasks. Workability Funding for employment training and job placement for older $40 students with disabilities. Low Incidence Disabilities Additional funding for students who are deaf, hard of hearing, $18 visually impaired, or orthopedically impaired. Technical Assistance Leads Funding for up to ten SELPAs to assist schools statewide in $10 improving outcomes for students with disabilities. Extraordinary Cost Pools Partial reimbursements for certain exceptionally costly services $6 provided to students with severe disabilities. Necessary Small SELPAs Formula providing additional special education funding to $3 counties with fewer than 15,000 students overall. Total $3,851 18 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET 374 districts were identified for assistance. Of these Districts Cover Ongoing MTSS Costs With districts, 243 (65 percent) were identified solely General Purpose Funding. Through LCFF, because of poor outcomes for their students with the state provides about $10 billion annually in disabilities. Starting in 2018-19, the state is providing supplemental and concentration funding to benefit $10 million ongoing for a network of SELPA leads to English learners and low-income students. Because offer technical assistance to these districts. MTSS disproportionately benefits such students, many districts report using supplemental and K-12 Early Intervention concentration funding to implement MTSS. (Data In Recent Years, Schools Report Relying are not available on exactly how much districts More on Early Intervention Programs. In recent spend annually on MTSS.) conversations with school administrators, many tell Governor’s Proposal us they have begun implementing early intervention programs for students who exhibit behavioral and Cites Key Concerns With Special Education. academic challenges yet do not have IEPs. Early In The Governor’s Budget Summary, the intervention programs typically consist of a range of administration characterizes special education support strategies, with levels of support increasing in California as “complex, state-driven, and as students’ challenges increase. For example, a administratively costly.” In detailing its concerns student diagnosed with a relatively minor academic with special education, the administration challenge might receive extra assistance from an specifically references the state’s patchwork of instructional aide during certain types of class special education categorical programs and poor lessons whereas a student diagnosed with a coordination between special education and other greater academic challenge might receive help educational services. both from an aide during class and a tutor after Provides $577 Million in Special Education class. Early intervention programs also tend to Concentration Grants. Of the total amount, provide certain support services to all students. For $390 million is ongoing and $187 million is one example, some schools now screen all students for time. These funds would be allocated according to symptoms of trauma and offer counseling to those a formula. All school districts and charter schools exhibiting such symptoms. serving more than the statewide average share State Dedicated One-Time Funding for of students with disabilities and having an overall Expanding Early Intervention Programs. In student population that is more than 55 percent 2015-16 and 2016-17, California provided a total English learners and low-income students would of $30 million to support a partnership between the receive funding. The administration estimates about Orange and Butte COEs to expand Multi-Tiered 425 entities meet these criteria. These districts and Systems of Support (MTSS). These COEs developed charter schools would receive funding for every trainings for school administrators and provided student receiving special education above the other forms of technical assistance for schools. statewide average identification rate. For example, Of the $30 million, $21 million was allocated as if a district identifies 13.5 percent of its students subgrants to help 51 other COEs, 490 districts in special education and the statewide average (49 percent of all districts), and 134 charter schools identification rate for districts and charter schools cover the cost of implementing MTSS. MTSS entails is 12 percent, that district would receive additional three tiers of support. The first tier is intended to funding for 1.5 percent of its student population. help teachers adopt new instructional styles that are Districts Could Use Funds for Array of designed to reach students with a variety of learning Purposes. The administration intends for the styles. The second tier consists of targeted support, funds to improve the outcomes of students with such as counseling, offered specifically to students disabilities and other students with academic and with identified academic or behavioral challenges. behavioral challenges. Districts could use the The third tier consists of traditional special education funds to provide more support for students with services for students with IEPs. disabilities, provide services to preschool-aged www.lao.ca.gov 19 analysis full gutter 2019-20 BUDGET children with disabilities, or expand early Proposed Allocation Formula Is Also intervention programs such as MTSS. Districts Misaligned With Governor’s Policy Goals. would be encouraged to use the one-time funding The Governor expresses interest in supporting for purposes such as acquiring new equipment or early intervention programs because they could providing professional development. reduce the number of students identified for special education. Under his proposal, however, Assessment districts that reduced their number of students Creating New Categorical Program Works receiving special education would experience a Counter to Many of the Governor’s Stated Goals. decrease in associated categorical funding. We Although The Governor’s Budget Summary cites the estimate the per-student rate under the Governor’s patchwork of state special education programs as proposal would be about $8,000 in ongoing funds. a notable drawback, the administration’s proposal Losing such a large amount per student likely adds to that patchwork of programs. School would discourage districts from reducing their administrators would be asked to master one more identification of students for special education. special education program, including understanding Schools Likely to Use Funding on Existing its program-specific allocation formula and Special Education Services. Under the Governor’s spending conditions. In addition, the administration proposal, schools would be able to choose whether expresses concern about the poor coordination to use their new categorical program allotments for between special education and other educational special education or early intervention. Because services, but its proposal might exacerbate these special education costs have far outpaced special coordination challenges. Districts increasingly education funding in recent years, most schools support MTSS with LCFF and consider early receiving funding under the Governor’s proposal intervention services integral parts of their overall very likely would use the funds to help them cover strategic plans. By providing categorical funding existing special education costs. specifically to support such services, the state may State Has Better Options for Increasing end up relegating these early intervention programs Special Education Funding. If it is interested in to a new silo, increasingly distant from general increasing special education funding, we believe education programs. the state has better options than introducing a Some of the Governor’s Objectives Have new categorical program. In particular, we have Been Already Addressed Through Existing State long recommended equalizing AB 602 per-student Policies. In recent years, the state already has funding rates, which vary from less than $500 to taken steps to address some of the Governor’s more than $900 for historical reasons. Another key concerns. In response to concerns about option is to modify AB 602 to allocate some funding special education performance, the state last specifically for preschool special education. year created the new network of SELPA leads to Recommendations provide districts additional support. In response to concerns about the lack of early intervention Reject Governor’s Proposal, Set Priorities programs, the state funded the expansion of for Any New Special Education Spending. For MTSS. Stemming from this latter effort, almost all these reasons, we recommend the Legislature half of districts have received an MTSS subgrant reject the Governor’s proposal and begin to and other districts have taken steps to initiate identify its highest special education priorities. If these programs. Districts also are more commonly the Legislature chooses to make special education incorporating K-12 early intervention programs into a priority, it could consider two specific special their overall strategic plans. The administration has education augmentations, described below. not provided a compelling rationale for establishing Equalization. One option is to provide funding a new categorical program with these same points for equalizing AB 602 per-student funding rates. of focus. We estimate equalizing these rates at the 90th 20 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET percentile of existing rates would cost $333 million. • Keep in mind that three- and four-year olds (Equalizing at the 90th percentile has been the currently are identified for special education at state’s most common equalization approach.) The about half the rate of K-12 students. Legislature could spread this cost increase over • Consider the shares of cost to be covered several years. by federal funds, state categorical funds, Preschool Special Education. The Legislature and local general purpose funds. Currently, also could consider providing state funding for preschool special education is estimated to preschool special education. In recent years, cost about $700 million, with federal funds various bills in this area have taken different covering a higher share of cost (20 percent) approaches, with state costs ranging from compared to K-12 special education costs (for $150 million to $500 million. In evaluating its which federal funds cover slightly less than options, we encourage the Legislature to: 10 percent of the cost). • Avoid adding unnecessary complexity by • Avoid creating incentives to over- or creating new programs while considering under-identify three- and four-year olds for ways to modify existing programs to meet special education. identified objective(s). COUNTY OFFICES OF EDUCATION In this section, we provide background on state students in specific settings, including juvenile funding for county offices of education (COEs), court schools. The formula is funded using state describe the Governor’s proposal to provide COEs General Fund and local property tax revenue, with with a COLA, assess the proposal, and offer the proportion of each funding source varying by associated recommendations. county. State Phased In Target Funding Rates Over Background Two Years. In developing the new COE funding State Created New COE Funding Formula in 2013-14. Figure 13 At the same time it introduced COE Funding Formula Has Two Parts LCFF for school districts, the state 2018-19 Rates introduced a new funding approach for COEs. As with school districts, COEs were previously supported District Support Servicesa by a mix of general purpose grants Base funding $697,058 and categorical grants. In 2013-14, Funding per district in county $116,177 the state replaced most of these Funding per student in county $43-$74b grants with a two-part funding Alternative Educationc formula. Figure 13 shows how the Base funding $11,921 formula works. The first part of the Supplemental funding $4,172 per EL/LI student formula funds COEs to support Concentration funding $4,172 per EL/LI student above 50 percent EL/LI enrollment school districts, with COEs having a Each COE recieves a base allotment plus funding for each district and student in the county. broad discretion in deciding what b Rates are graduated with less populous counties receiving higher per-student rates. types of support services to offer. c COEs receive funding for each student who is (1) under the authority of the juvenile justice system, (2) probation referred, (3) on probation, or (4) mandatorily expelled. State assumes 100 The second part of the formula percent of students at juvenile court schools are EL/LI. funds COEs to directly educate COE = county offices of education. EL/LI = English learner/low income. www.lao.ca.gov 21 analysis full gutter 2019-20 BUDGET formula, the state set target funding rates, with the services part of the formula, $244 million is for formula estimated to cost about $60 million more alternative education, $233 million is for supporting than the previous funding system. The state phased COEs still funded at their 2012-13 levels, and in the higher funding targets over 2013-14 and $113 million is for minimum state aid. (These 2014-15. Every year since 2014-15, the state has amounts reflect the administration’s January applied a COLA to the formula rates. estimates.) Some COEs Still Funded at Their 2012-13 Governor’s Proposal Levels. Both LCFF for school districts and the new COE formula were intended in part to eliminate Funds COLA for COE Formula. As with LCFF historical funding inequities. To this end, some for school districts, the administration appears COEs with very high 2012-13 funding levels have remained at those levels ever since, as other COEs Figure 14 effectively catch up. In 2018-19, 16 COEs continue Two-Thirds of COEs Receive to be funded at their 2012-13 levels (Figure 14). More Than Formula Level The lowest funded of this set receives about 10 percent more than it would otherwise generate 2018-19, Based on LAO Estimates under the formula. The highest funded of this set receives more than double what it would otherwise COEs Funded According to Formula generate under the formula. Alpine San Francisco Some COEs Have Funding Levels Increasingly Colusa San Joaquin Divergent From Formula. Despite being intended El Dorado Shasta to eliminate existing funding inequities, the formula Humboldt Sierra was paired with a new policy allowing COEs for Imperial Siskiyou Kern Trinity the first time to benefit from increases in local Kings Tulare property tax revenue. Prior to 2013-14, any COE Madera Tuolumne receiving additional property tax revenue had its Nevada Yolo state funding reduced dollar for dollar. This practice San Benito Yuba ensured no COE received greater per-student COEs Still Funded at Higher 2012-13 Level funding based solely on its property tax collections. Amador Merced Starting in 2013-14, the state introduced a Butte Mono “minimum state aid” policy that effectively upended Calaveras Plumas the previous policy. The result of the new policy Del Norte Sacramento is that many COEs experiencing particularly large Glenn San Bernadino property tax revenue growth now receive notably Lassen Santa Cruz Los Angeles Sutter more per-student funding than COEs with slower Mariposa Tehama property tax growth. Figure 14 shows that 22 COEs in 2018-19 are funded above their formula COEs Benefiting From Minimum State Aid Policy Alameda Placer rates due to this policy. (Some of these COEs also Contra Costa Riverside benefit from the 2012-13 hold harmless policy.) The Fresno San Diego lowest funded of this set receives 3 percent more Inyo San Luis Obispo than it would otherwise generate under the formula. Lake San Mateo The highest funded of this set receives more than Marin Santa Barbara double what it would otherwise generate under the Mendocino Santa Clara formula. The number of COEs benefiting in this way Modoc Solana is up from 14 in 2014-15. Monterey Sonoma Napa Stanislaus In 2018-19, COEs Receiving an Estimated Orange Ventura $1.1 Billion in Formula Funding. Of this total COEs = county offices of education. amount, $466 million is generated by the district 22 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET supportive of the current COE funding formula. we assume local property tax revenue for COEs The Governor’s budget includes $9 million for a continue to grow. Based upon our local property 3.46 percent COLA to the formula rates. tax revenue projections, we estimate the cost of minimum state aid will grow by $16 million in Assessment 2018-19 (to $129 million) and by an additional COLA Helps Mitigate Growing Funding $5 million in 2019-20 (to $134 million). Not Inequities. Providing a COLA for the 20 COEs recognizing these higher costs now makes the funded according to the formula somewhat reduces Governor’s budget appear to have more available the funding disparities between these COEs and Proposition 98 funding than is the case. Whether the higher-funded COEs. acknowledged now or later, the higher cost comes at the expense of something else in the As Property Tax Revenues Increase, COE Proposition 98 spending package. Funding Becomes Increasingly Inequitable. COEs benefiting from the minimum state aid policy Recommendations have reaped the benefits of rapidly increasing property tax revenues. Whereas COEs funded Adopt COLA to Mitigate Funding Inequities. according to the formula have seen their per-pupil We recommend the Legislature adopt the proposed funding grow in line with inflation (about 2 percent COLA, which would at least slightly reduce the per year), those benefiting from the minimum state gap between the 20 formula-funded COEs and the aid policy have seen their funding grow at nearly higher-funded COEs. double that rate. Such results run counter to the Replace Minimum State Aid With New Hold original intent of eliminating historical funding Harmless Policy. We recommend the Legislature inequities. repeal the minimum state aid provision for COEs. Cost of Minimum State Aid Increasing Over Repealing the policy would produce savings in the Time. Figure 15 tracks the growth in the cost of low tens of millions each year initially, growing to minimum state aid since 2013-14. Minimum state low hundreds of millions over time. To ensure a aid costs grew from $30 million in 2013-14 to smooth transition for COEs currently benefiting from $113 million in 2017-18. We project it will increase the provision, the Legislature could adopt a new to $134 million in 2019-20, with costs continuing to hold harmless policy ensuring no COE receives less grow as assessed property values (and associated total funding than estimated under the 2018-19 property tax revenue) continue to grow. Figure 15 Administration Underestimates Cost of Minimum State Aid Costs Are Growing Minimum State Aid. The In Millions Governor assumes the cost of $160 minimum state aid in 2018-19 and Actual 2019-20 will remain at the same 140 Projected (Administration) level as in 2017-18 ($113 million). 120 Projected (LAO) Though the Governor assumes no 100 increase in the cost of minimum 80 state aid, the administration does project growth in local 60 property tax revenue for the 40 purposes of making its other 20 Proposition 98 calculations. Consistent with both our office’s 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 and the administration’s overall local property tax outlooks, www.lao.ca.gov 23 analysis full gutter 2019-20 BUDGET Budget Act. Such a provision maintains unjustified uses this type of hold harmless approach when funding inequities in the near term but stops those implementing a new policy. inequities from growing. The state sometimes EDUCATION MANDATES In this section, we provide background on state CSM Recently Found One New State education mandates, then describe and assess Requirement to Be a Mandate. In January the Governor’s proposal to provide a COLA to the 2018, CSM determined a law requiring school education mandates block grants. Unlike other districts to undertake certain activities related sections of this report, this section covers both to Cal Grants was a reimbursable education schools and community colleges, as their mandates mandate. This mandate requires school districts block grants work very similarly. to (1) electronically submit grade point averages to the California Student Aid Commission to Background determine Cal Grant eligibility and (2) provide Constitution Requires the State to written notification to students in grades 11 and Reimburse Local Governments for Mandated 12 and their parents/guardians explaining that they Activities. Proposition 4, a constitutional measure can opt-out of this process. The CSM expects approved in 1979, requires the state to reimburse to complete its statewide cost estimate of this local governments for the cost of new programs mandate in March. Shortly after CSM releases a and higher levels of service imposed by the state. statewide cost estimate, our office is statutorily The Commission on State Mandates (CSM) is responsible for assessing the mandate and making statutorily responsible for determining if a new state associated recommendations. law, regulation, or executive action constitutes State Traditionally Paid Mandates Through a reimbursable mandate for local governments. Claims Process. Under the state’s traditional For education mandates, a local government is mandate reimbursement process, LEAs submit defined as a school district, COE, or community claims for the actual cost of performing each college district. (Prior to 2006, charter schools mandated activity. The State Controller’s Office received mandate reimbursements. In 2006, (SCO) pays claims from funds appropriated in the CSM concluded that charter schools constitute state budget. The SCO audits some claims and voluntary educational programs, rather than reduces payments accordingly. local governments, and deemed them ineligible Widespread Agreement Claims Process for reimbursements. Charter schools must still Has Serious Shortcomings. The traditional undertake some state-mandated activities.) reimbursement method results in large variation State Budget Currently Recognizes 57 in per-student claims across LEAs. Total school Education Mandates. As Figure 16 shows, the district claims currently range from $1 to slightly state currently recognizes 44 mandates that apply over $9,000 per student (with some small districts to K-12 education and 13 that apply to community not submitting any claims), while community college colleges. (Of these mandates, six apply to both claims range from $1 to $3,600 per student. The K-12 education and community colleges.) The state traditional reimbursement process also has a high has suspended many other education mandates administrative burden, requiring LEAs to document (five that apply only to K-12 education, five that specific costs and submit reimbursement forms. apply only to community colleges, and seven that Despite such efforts, LEAs can subsequently be apply to both). Local education agencies (LEAs) are audited by the SCO and have a substantial share of not required to perform the activities associated their claims disallowed. In addition, the traditional with suspended mandates and, consequently, the reimbursement process provides no incentives for state is not required to reimburse them. LEAs to perform activities efficiently or effectively. 24 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET State Created Mandates Block Grants as of school districts and COEs participating in the Alternative to Claims Process. To address K-12 block grant over time. In 2018-19, almost these concerns, the state in 2012-13 created all school districts and COEs participated, with two mandates block grants—a K-12 block grant only 51 (out of 1,002) not participating. These (for school districts, charter schools, and COEs) nonparticipating agencies represent less than and a community college block grant. The block 5 percent of all districts and COEs in the state and grants provide upfront per-student funding in lieu of around 1 percent of statewide student attendance. submitting claims. Of the 51 nonparticipating agencies, 34 continue to Block Grant Participation Is Very High. submit claims through the traditional reimbursement Figure 17 (see next page) shows the percentage process. The other 17 have not submitted any Figure 16 Various State Requirements Are Deemed Mandatesa 2018-19 K-12 Education (44 Mandates) Academic Performance Index Juvenile Court Notices II Agency Fee Arrangements Law Enforcement Agency Notificationc AIDS Prevention / Instruction I and II Mandatory Reporters Training Annual Parent Notificationb Notification of Truancy California Assessment of Student Performance and Progress Parental Involvement Programs California State Teachers’ Retirement System Service Credit Physical Performance Tests Caregiver Affidavits Prevailing Wage Rate Charter Schools I, II, III, and IV Public Contracts Child Abuse and Neglect Reporting Pupil Suspensions and Expulsions I and II County Office of Education Fiscal Accountability Reporting Pupil Health Screenings Collective Bargaining Pupil Promotion and Retention Comprehensive School Safety Plans I and II Pupil Safety Notices Criminal Background Checks I and II Race to the Top Developer Fees School Accountability Report Cards I, II, III, and IV Differential Pay and Reemployment School District Fiscal Accountability Reporting Expulsion of Pupil: Transcript Cost for Appeals School District Reorganization Financial and Compliance Audits Student Records Graduation Requirements Teacher Notification: Pupil Suspensions/Expulsionsd Habitual Truants The Stull Act Immunization Records (includes Pertussis & Hepatitis B) Threats Against Peace Officers Intradistrict Attendance Uniform Complaint Procedures Interdistrict Attendance Permits Williams Case Implementation I, II, and III California Community Colleges (13 Mandates) Agency Fee Arrangements Minimum Conditions for State Aid Cal Grants Prevailing Wage Rate California State Teachers’ Retirement System Service Credit Public Contracts Collective Bargaining Reporting Improper Governmental Activities Discrimination Complaint Procedures Threats Against Peace Officers Enrollment Fee Collection and Waivers Tuition Fee Waivers Health Fee Elimination a Mandates typically include only very specific activities associated with their name. The figure shows active mandates. Currently, 12 K-12 mandates and 12 community college mandates are suspended. b Also includes Schoolsite Discipline Rules and Alternative Schools. c Also includes Missing Children Reports. d Also includes Pupil Discipline Records. www.lao.ca.gov 25 analysis full gutter 2019-20 BUDGET mandates since the creation of Figure 17 the block grants. The mandates Almost Full Participation in K-12 Block Grant removed from the block grants Share of Participating School Districts and generally reflect suspended or County Offices of Education repealed mandates. State Has Adjusted the 100% Block Grants for a Few Added Mandates. In adding and 95 removing mandates from the 90 block grants, the state has tended not to make corresponding 85 adjustments to block grant funding. It has adjusted block 80 grant funding in response to 75 adding three mandates to the K-12 block grant. Specifically, 70 the state increased the K-12 block grant when it added 65 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 the mandates for (1) Graduation Requirements (adding $50 million and increasing the high school claims in recent years, foregoing any reimbursement for mandated Figure 18 activities. All community college State Has Added and Removed Mandates From the Block Grants districts currently participate in the Block block grant, having done so since Grant Mandate 2012-13. Added: State Has Added and 2013-14 K-12 Graduation Requirements Removed Mandates From K-12 Pupil Expulsion II the Block Grants Over Time. 2014-15 K-12 Parental Involvement Programs Currently, all active mandates K-12 Williams Case Implementation I, II, III are included in the block grants. K-12 Uniform Complaint Procedures As Figure 18 shows, certain K-12 Developer Fees K-12 Charter School Oversight IV mandates have been added and K-12/CCC Public Contracts others removed from the block 2015-16 K-12 Immunization Records for Pertussis grants since 2012-13. For the K-12 Race to the Top K-12 block grant, the state has 2017-18 K-12 Mandatory Reporters Training added 12 mandates and removed K-12 California Assessment of Student Performance and 5 mandates. For the community Progress college block grant, the state has Removed: added one mandate and removed 2013-14 K-12/CCC Absentee Ballots (suspended) K-12/CCC Brendon Maguire Act (suspended) six mandates. The Graduation K-12/CCC Mandate Reimbursement Process (suspended) Requirements mandate pre-dated K-12/CCC Open Meetings/Brown Act (deemed not reimbursable) the creation of the K-12 block CCC Sex Offenders: Disclosures by Law Enforcement grant, but virtually all of the other (suspended) mandates added to the block 2014-15 CCC Community College Construction (made permissive) grants are newly recognized 2017-18 K-12 High School Exit Exam (repealed) 26 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET rate), (2) Immunization Records Figure 19 for Pertussis (adding $1.7 million Governor’s Budget Provides COLA for Mandates Block Grants and increasing the K-8 rate), and (3) Mandatory Reporters Training Per-Student Ratesa (adding $8.5 million and increasing 2017-18 2018-19 2019-20 all K-12 rates). The state has not Grade Span Actual Actual Proposed made downward adjustments School Districts K-8 $30.34 $31.16 $32.24 to either the K-12 or community 9-12 58.25 59.83 61.90 college block grant rates to account for the mandates it has Charter Schools K-8 $15.90 $16.33 $16.90 9-12 44.04 45.23 46.79 removed since 2012-13. Legislature Has Provided COEs K-8 $30.34 $31.16 $32.24 COLA the Past Two Years. The 9-12 58.25 59.83 61.90 Countywide K-12 1.02 1.05 1.09 state provided the first COLA to the mandates block grants in Community Colleges — $28.44 $29.21 $30.22 2017-18 and provided a COLA a Based on average daily attendance for K-12 education and full-time equivalent enrollment for community colleges. From 2017-18 to 2018-19, all rates grew by 2.71 percent. From 2018-19 to 2019-20, the Governor proposes to again in 2018-19. The COLAs increase all rates by 3.46 percent. provided these two years were COLA = cost-of-living adjustment and COEs = county offices of education. 1.56 percent and 2.71 percent, respectively. Assessment and Recommendation Governor’s Proposal Providing Annual COLA for Block Grants Has Benefits, Recommend Adopting. A COLA Governor Proposes COLA for Mandates is a simple way to recognize cost increases over Block Grants. The Governor’s budget provides a time. For most mandates, the largest underlying 3.46 percent COLA for the K-12 and community costs are for staff salaries and benefits as well as college mandates block grants. The associated materials. Similarly, the primary input affecting the costs are $8.1 million for the K-12 block grant and COLA rate is the change in wages and salaries for $1.1 million for the community college block grant. local governments, with some weight also given Figure 19 shows per-student block grant funding to equipment and supply costs. By helping to rates from 2017-18 (actual) to 2019-20 (proposed). keep funding in line with cost increases, an annual Under the Governor’s budget, the total cost of COLA also serves to promote high block grant the two block grants in 2019-20 is $277 million participation—reducing any incentive an LEA might ($243 million for the K-12 block grant and have for returning to the traditional claims process, $34 million for the community college block grant). with all its drawbacks for both the state and LEAs. For these reasons, we recommend the Legislature adopt the Governor’s proposal to provide COLA for the mandates block grants. SCHOOL FACILITIES In this section, we begin by providing facility projects. We then discuss the Governor’s background on the School Facilities Program proposals to accelerate the sale of school bonds (SFP) and the Office of Public School Construction and increase staffing at OPSC. We conclude with (OPSC), which plays an integral role in reviewing our assessment and recommendation. www.lao.ca.gov 27 analysis full gutter 2019-20 BUDGET Background on of sales was despite a growing backlog of school School Facilities Funding facility applications. Considerable Local Bond Funding Is School Facility Costs Generally Are Shared Available. School districts typically raise their Between the State and Schools. Chapter 407 of share of facility funding through the sale of local 1998 (SB 50, Greene) created the SFP. The general obligation bonds, which require local voter underlying tenet of the program is that the state approval and are repaid through local property and school districts share the cost of building taxes. From November 2002 through January new school facilities and modernizing old ones. 2018, voters approved $134 billion in local general The state generally covers 50 percent of the cost obligation bonds for schools, of which $53 billion of new construction, including the purchase of remains unspent. In addition to generating funding land, working drawings, and construction of new through local bonds, schools have raised more facilities. The state typically covers 60 percent of than $11 billion from fees charged on residential the cost of renovating facilities that are at least 25 and commercial development since 1998. Schools years old. For both types of projects, the state can also can raise facility funding from various other contribute up to 100 percent of project costs if sources, including parcel taxes, but they raise districts face challenges in raising their local shares. relatively small amounts from these other sources. The state covers its share of the cost using state general obligation bonds whereas school districts Background on the typically cover their share using local general Office of Public School Construction obligation bonds. OPSC Is One of Several State Agencies Voters Approved New State Bond in 2016. Involved in Project Approval Process. To qualify Between 1998 and 2006, voters approved four for SFP funding, schools must receive approval state general obligation bonds generating a from at least three state agencies—(1) the California total of $35 billion for the SFP. After ten years Department of Education (CDE), which ensures without a new state school bond, voters approved school plans meet state educational standards; Proposition 51 in November 2016. The measure (2) the Division of the State Architect (DSA), which authorizes the state to sell $7 billion in general ensures that buildings meet state safety standards; obligation bonds for school facilities. Of the and (3) OPSC, which determines eligibility and $7 billion, the measure dedicates $3 billion to new funding for each project. To ensure that projects construction projects, $3 billion for renovation comply with an agency’s requirements, agency staff projects, $500 million for charter school facilities, conduct desk reviews of submitted documents and, and $500 million for career technical education in some cases, visit facility sites. The SFP requires (CTE) facilities. In contrast to state infrastructure CDE and DSA to approve a project before OPSC projects, the state does not list all approved school may make a final funding determination. facility projects in the annual budget act. OPSC Undertakes Several Activities When Under Brown Administration, State Was on Reviewing Project Proposals. OPSC staff first 12-Year Track to Expend All Proposition 51 review facility applications to ensure that all Funding. The state sells school bonds required components are included. If materials incrementally as it approves specific SFP projects. are missing, OPSC staff will send letters to a The Department of Finance, in consultation with district requesting the additional documents the State Treasurer, determines the exact timing within a certain timeframe. Once an application of these bond sales. The state sold a total of is considered complete, OPSC staff: analyze $565 million in Proposition 51 bonds for 2017-18 whether the project qualifies for funding (per state and intends to sell $594 million in 2018-19. At regulations), ensure that the scope of the project is this pace, the state would have taken 12 years to aligned with the funding request, evaluate whether finish selling Proposition 51 bonds. This slow pace the project qualifies for special SFP grants (such as land acquisition or multi-story building grants), 28 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET and check that the project plans submitted to increase). Releasing Proposition 51 funding faster OPSC are the same as those submitted to CDE and would allow the state to clear more of the backlog DSA. In addition to processing applications, OPSC and fund projects sooner. Assuming the proposed staff conduct outreach activities, process district pace of bond sales were to continue moving appeals of facility determinations, and prepare forward, the state would exhaust Proposition 51 materials for OPSC’s governing board. funding by 2022-23 (over six fiscal years). 2017-18 Budget Package Shifted OPSC Dedicates Small Share of Staff to Responsibility for Audits From OPSC to Local Application Processing. The 10 FTE employees Auditors. Historically, OPSC staff also conducted OPSC currently dedicates to processing SFP audits of school projects. Two years ago the state applications account for 19 percent of its 52 devolved the responsibility for these audits from authorized positions. OPSC claims that if it were OPSC to local independent auditors contracted to transition additional staff to processing facility by districts. (OPSC is still responsible for auditing applications, it would divert them from other projects funded prior to April 2017.) Although the important activities, such as processing application state shifted this responsibility away from OPSC, it appeals or conducting outreach on how to apply did not make a corresponding reduction in OPSC’s for SFP funding. We are concerned, however, with staffing level. OPSC dedicating such a small share of its staff to its core function of processing applications. Governor’s Proposal Proposed Staffing Augmentation Seems Proposes to Sell $1.5 Billion in Proposition 51 High. To allocate $1.5 billion in SFP funding, School Bonds in 2019-20. Most of the funding OPSC would need to process approximately would be allocated for new construction and 380 funding applications per year. Using OPSC’s modernization projects, with $125 million likely assumptions for hours spent per application, we designated for CTE projects. (By the end of estimate the workload associated with processing 2017-18, the state had committed nearly all of the that many applications could be accomplished $500 million designated for charter schools under by 12 FTE staff. This represents an increase of Proposition 51.) two positions relative to the positions currently Provides $1.2 Million for OPSC to Hire dedicated to application processing. In response Additional Staff. The Governor proposes to our questions, OPSC indicated that its request to provide OPSC an ongoing augmentation for ten additional positions was also based on an of $1.2 million (Proposition 51 funds) to hire anticipated increase in other activities, such as ten additional staff to process SFP funding updating eligibility for SFP, handling appeals, and applications. Of these new positions, eight would answering applicant questions. We are concerned be analysts and two would be managers. Currently, that these additional tasks were not itemized in the OPSC has ten full-time equivalent (FTE) employees Governor’s proposal and seem high relative to the processing applications, not including several time spent processing applications. managers who spend a portion of their time Staffing Proposal Assumes No Workload supervising those employees. Reduction From Shifting Audit Responsibilities. The OPSC currently has 24 positions (46 percent Assessment of all positions) associated with its audit division. Two of these positions currently are vacant. Despite Proposal to Accelerate Proposition 51 School shifting core auditing responsibilities to local Bond Sales Is Reasonable. Given a growing auditors two years ago, the Governor’s proposal facility application backlog and the historically slow does not assume any reduction in staffing for the pace of Proposition 51 bond sales, we believe audit division. In 2016-17 (the year prior to the shift the Governor’s proposal to accelerate sales is of responsibilities), OPSC indicates it completed reasonable. By the end of 2018, the backlog of 265 audits. The OPSC expects to complete less facility applications was $4.7 billion, compared than half as many audits in 2019-20, with additional to $3.3 billion 12 months earlier (a 44 percent www.lao.ca.gov 29 analysis full gutter 2019-20 BUDGET declines moving forward as projects funded prior with the Governor’s proposal to accelerate to April 2017 are closed out. We understand Proposition 51 bond sales, we believe OPSC OPSC has assumed some new workload with can manage the workload associated with the transition of its audit responsibilities, such processing additional SFP applications using as providing technical support for local auditors existing resources. The OPSC currently dedicates and assisting in the development of local audit a relatively small share of its FTE employees to procedures. Nevertheless, we are concerned that processing applications, and the reduction in its the Governor’s proposal assumes no associated audit responsibilities should free up additional staff staffing reduction when auditing is no longer a time. As a first step in aligning its staffing with the core function and a need for additional application proposed bond sales, OPSC could shift the two processing exists. currently vacant positions in its audit division to application processing. Recommendation Recommend Rejecting Proposal to Increase OPSC Staffing. Although we have no concerns 30 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET SUMMARY OF RECOMMENDATIONS Proposition 98 Budget Planning • Prepare for possible drops in Proposition 98 funding based upon (1) recent economic developments suggesting state revenues and the minimum guarantee could be somewhat lower than the Governor’s budget assumes, and (2) the likelihood of higher costs for certain programs within the guarantee. Even a small drop in the guarantee could mean the state has little ability to increase Proposition 98 programs beyond covering cost-of living adjustments (COLAs). » Expect the 2018-19 minimum guarantee to decrease about 55 cents for each dollar of lower state revenue. » Expect the 2019-20 minimum guarantee to decrease about 40 cents for each dollar of lower state revenue. • Begin evaluating the Governor’s specific proposals and identify those the Legislature might be willing to reject or reduce in response to a smaller Proposition 98 budget. • Consider replacing some of the Governor’s ongoing funding with one-time initiatives to provide a cushion if the minimum guarantee declines now or in the future. Proposition 98 True-Ups • Reject the Governor’s proposal to eliminate the automatic true-up process and prohibit downward Proposition 98 funding adjustments in the prior year. The proposal would make balancing the state budget more difficult. Local Control Funding Formula • Continue providing most K-12 funding through the Local Control Funding Formula (LCFF), which has eliminated many of the complexities and inequities associated with the state’s previous school funding model. • Reject the Governor’s proposal to cap the LCFF COLA. Also, repeal the action taken last year to provide an automatic LCFF COLA. Rather than budget by layers of self-imposed formulas, make decisions about the LCFF COLA annually based upon all key budget factors and priorities at that time. • Expect the 2019-20 COLA rate, as finalized in April, not to vary substantially from the rate estimated in January (3.46 percent). Even small swings, however, affect the overall Proposition 98 budget package. A 0.5 percentage point change in the COLA rate would change LCFF costs in 2019-20 by about $300 million. www.lao.ca.gov 31 analysis full gutter 2019-20 BUDGET Special Education • Reject the Governor’s proposal to provide new special education concentration grants. The design of the proposal works counter to the administration’s stated policy goals of improving coordination, reducing complexity, and alleviating administrative burden. • Consider equalizing per-student special education funding rates or providing state funding for preschool special education. County Offices of Education • Adopt the Governor’s proposal to provide a COLA to the funding formula for county offices of education (COEs). Providing the COLA would somewhat mitigate current inequities in COE funding. • Repeal the COE minimum state aid policy, which is producing increasingly large inequities in COE funding and diverting millions annually from other K-12 priorities. Associated state savings would be in the low tens of millions each year initially, growing to low hundreds of millions over time. • To minimize disruption, consider adopting a provision ensuring no COE receives less total funding than estimated under the 2018-19 Budget Act. Through such a provision maintains funding inequities in the near term, it stops those inequities from growing. Education Mandates • Adopt the Governor’s proposal to provide a COLA to the K-12 and community college mandates block grants. Providing a COLA recognizes cost increases over time and promotes high participation in the block grants. School Facilities • Adopt the Governor’s proposal to sell $1.5 billion in Proposition 51 school facilities bonds in 2019-20. The faster pace would help clear the application backlog and fund projects sooner. • Reject the Governor’s proposal to increase staffing at the Office of Public School Construction by ten positions, as the agency can manage additional workload within its existing resources. 32 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET www.lao.ca.gov 33 analysis full gutter 2019-20 BUDGET 34 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Contributors Jennifer Kuhn Pacella (916) 319-8332 Jennifer.Kuhn@lao.ca.gov Deputy Legislative Analyst, Education Kenneth Kapphahn (916) 319-8339 Kenneth.Kapphahn@lao.ca.gov Overview of Spending Package Minimum Guarantee Proposition 98 Budget Planning Proposition 98 True-Ups Ryan Anderson (916) 319-8308 Ryan.Anderson@lao.ca.gov Local Control Funding Formula Special Education County Offices of Education Amy Li (916) 319-8358 Amy.Li@lao.ca.gov Education Mandates School Facilities www.lao.ca.gov 35 analysis full gutter 2019-20 BUDGET LAO PUBLICATIONS 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. 36 LEGISLATIVE ANALYST’S OFFICE