Analyzing the CA Education Budget

Structural reform needed

Imagine if my kids had a constitutional right to a weekly allowance that was 5 percent of my total income every year and that they could never receive less money than the year before plus a cost-of-living increase. If I made $30,000, my kids would get a generous allowance of $25 dollars a week. However, if I made $50,000 my kids would get $45 dollars a week and if I made $100,000 my kids would get $90 a week. If I lost my $100,000 a year salary, I still must pay my kids $90 a week plus a cost-of-living increase. This is how we finance schools in California, and this is why school districts have no incentive to ever reduce spending. The Constitution guarantees that education spending will always go up by at least a small amount, even during economic downturns.

This also explains how Governor Schwarzenegger can withhold $2 billion of a $4 billion total mandated increase in education funding for 2004-2005 and still be giving schools a $2 billion dollar increase to meet cost of living and enrollment growth.

In California, schools always receive at least 40 percent of state revenue or at a minimum the same amount they received the prior year adjusted for inflation and enrollment growth. Each year from 1997-1998 through 2001-2002 the legislature actually over-appropriated the minimum Proposition 98 funding in the budget. This meant that schools got more than the minimum guarantee and this process locked in a higher minimum for the next year that was not based on actual state revenue collection. This over-allocation came to a screeching halt in the 2002-2003 school year when the legislature made mid-year budget corrections during the state’s fiscal crunch. The reason school districts faced severe mid-year cuts in 2002-2003 is that school district budgets were based on projected state revenue that did not materialize, and hence the 40 percent minimum that the state was required to pay turned out to be a lot less than what school districts were expecting. The legislature gave schools the actual 40 percent minimum guarantee rather than what was appropriated in the original 2002-2003 budget. So even the budget cuts that school districts were prepared to face last year were actually cuts in projected revenue growth that did not materialize, rather than cuts in actual school spending from the prior year. Over time the minimum guarantee has been inflated based on the legislature over-appropriating Proposition 98 funds and increasing the minimum guarantee every year. If I gave my kid $30 dollars instead of the $25 dollar minimum, the next year’s base allowance would start at $30 (plus cost of living increases) regardless of my income.

In the recent past, the increase in California’s education spending has very little relationship to the actual cost of providing education. Teachers’ salaries are a good example of how education spending has increased under Proposition 98 funding. In California teachers’ salaries are the highest in the nation according to the American Federation of Teachers (even after making regional cost-of-living adjustments). For the 2001-2002 school year, average teacher salaries in California climbed to $54,348 compared with a nationwide average salary of $44,367.

If enacted, the 2004-2005 California budget would protect schools from cuts while increasing base per-pupil funding across the board and giving local school districts more discretionary control over another $2 billion in state funding.

More specifically, in 2004-2005:

  • The Governor’s budget would give schools $2 billion less in the next fiscal year than they would have been entitled to by a strict reading of Proposition 98. The schools will still get more next year per pupil than they got this year, enough to cover enrollment growth and cost-of-living increases. And the $2 billion they will forgo remains part of the base upon which their future budgets are determined.
  • The Governor’s budget shifts $2 billion from 22 restricted categorical programs to general unrestricted education funding, allowing local districts control over how the money is used.
  • The Governor’s budget includes $110 million for funding equalization because of district per-pupil funding discrepancies caused by the complex and archaic school financing system.
  • The Governor’s budget will save $6.5 million by eliminating, for most grade levels, the CAT-6, which provides a national testing benchmark but duplicates California Standards Tests.
  • he Governor will also call for a repeal of a state law that restricts school outsourcing as a means by which local districts can redirect resources into the classroom.

The bottom line is that the Governor’s proposed education budget offers a per-pupil increase of $216 and is a good start at offering school districts more control of education funding. The budget offers the first small glimpse of the much-needed structural reform in California’s convoluted education finance system. However, the education budget provides no real incentive for school districts to control education spending.

According to the National Center for Education Statistics, instructional spending in California is only 54 percent of per-pupil spending. For example, the Los Angeles Unified School District spends only $84 per pupil on textbooks (or 90 percent of the state average) but spends $107 dollars per student on Supervisors’ salaries (which is 191 percent of the state average and does not include principals or other school level administrators). It is critical to work toward an education budget process that encourages cost-consciousness at the local level, shifts resources from non-instructional budget categories into classroom-level spending, and truly equalizes per-pupil funding based on the individual characteristics of students.

The most significant consequence of California’s complex school finance system is that too much revenue is targeted toward administering school programs and budgets rather than raising student achievement. These misdirected resources have had negative consequences for California’s most disadvantaged students. On the 2002 National Assessment of Educational Progress, California’s average reading scores for students who were eligible for free and reduced-price lunches were the lowest of any state in the nation, at both fourth and eighth grade. Sixty-seven percent of California’s poor fourth-graders scored “below basic” in reading (meaning they could not even demonstrate “partial mastery” of the subject matter for their grade level). In New York, 49 percent scored “below basic”; in Texas 52 percent; Florida, 51 percent. In eighth-grade math, the percentage of California—s poor children scoring “below basic” was 62; only Alabama and Mississippi had more low-scoring students.

To best serve California—s students, the first and most significant problem to address is fund allocation. California’s education finance system offers schools money through two types of funding streams: revenue limits, which are state allocated unrestricted per-pupil funds that can be spent at the school district—s discretion and categorical funds that include 100 different programs and have very specific requirements attached to the funding. The funding system is complex and results in unequal funding amounts at the student level. In many cases, the amount of money a school district receives depends on how savvy the school district is and the size of its central bureaucracy rather than the needs of individual students.

California should create one simple funding mechanism that distributes both categorical and revenue-limit funding based on a —weighted student formula— that would include one base allocation equalized across the state and additional weighted funds for students with additional needs including special education, poverty, and English learners. This process would make school finance in California simpler, more equitable, and bring significant cost savings by reducing categorical administration costs and central office costs and redirecting some of this savings to increase classroom-level spending.

The Governor has already committed $110 million to equalize funding disparities between districts. The money will help districts that receive less money catch up with their higher paid peers. The revenue limits that districts receive are set by 30-year old tax formulas that give some schools hundreds of thousands of dollars more than others for no apparent reason. The Governor’s $110 million will go about 25 percent of the way toward equalizing the discrepancies between districts. This budget offers a short-term fix to funding inequalities, by using the complex and unfair formulas, and then paying the loser districts part of the difference. However, the formulas will continue to produce funding inequities every year.

Serious structural reform is needed to fix these funding discrepancies rather than throwing a fiscal band-aid on the discrepancies every year. A more sensible structural reform will throw out the 30-year old formulas and base per-pupil funding on the characteristics of real students in 2004. Equalizing funding also has the potential to reduce administrative costs, because it will take fewer personnel to keep track of a single streamlined funding system.

However, political resistance from any district that receives above-average per-pupil funding based on the current maze of complex funding formulas will be very difficult to overcome. The truth is that the current funding system has some clear winners who have above-average per-pupil funding and those winners will not easily move toward equalizing student funding, if it means their districts will get less money. Despite this resistance, the only way to correct the inherent inequalities in the current system is to change the funding formula to be based on the actual characteristics of real students in 2004 and not on archaic and historical formulas that favor some school districts over others. This will be a fierce battle.

In addition, the right of school districts to use outsourcing as a tool to reduce costs is crucial for the effort to shift resources into instructional spending. Outsourcing would allow school districts to save money by hiring more efficient and less expensive private contractors to provide non-instructional services, such as cafeteria, janitorial, and yard and building maintenance, and these savings could be directed at student needs. The legislation that limits school outsourcing that took effect January 1, 2003 must be repealed. Other cash-strapped school districts across the nation have effectively used school outsourcing to increase classroom spending. A recent analysis by New York City Schools Chancellor Joel Klein showed that school maintenance repairs done by outside contractors was 46 percent cheaper than work done by unionized labor. Outsourcing maintenance would save New York City at least $20 million and provide each of the city’s 1,200 schools with a $17,000 increase in funds for repairs.

California’s Legislative Analyst Office is arguing that even after the Governor’s 2004-2005 budget with real spending cuts, California will still face a $6 billion dollar shortfall for 2004-2005. Theoretically, by adding the categorical funding to the state’s revenue limits and returning budget control to the local schools, the state could increase the amount of per-pupil allocation while cutting overall education funding by 5 percent to account for dramatic reductions in central staff and save close to an additional $2 billion.

At some point a reasonable Governor might question the sacred cow of Proposition 98 funding by asking why education funding should be determined by a percentage of state revenue, no matter how high the revenue climbs. However, even if one concedes the questionable fundamental fiscal premise of Proposition 98—that schools should always get more money when state revenues increase (over and above cost of living and enrollment growth)—the current structure of categorical and revenue-limit spending and the legal barriers to school outsourcing ensure that those ever-increasing resources are not targeted toward classroom level spending. While Arnold’s education budget is a first step toward reducing categorical administrative costs, the next step is to move toward structural school finance reform that ties funding to the characteristics of individual students and encourages schools to more efficiently target their resources to the classroom.

Lisa Snell is director of education and child welfare at Reason Foundation. She formerly taught speech courses at California State University, Fullerton.