February 21, 2003

 Memorandum

 To:            CCEA Executive Committee

 From:       Peter Birdsall & Theresa Inslee

 Subject: Analysis of Governor’s 2003-04 Proposed Budget Released

Last Wednesday, the Legislative Analyst released her analysis of the Governor’s Proposed 2003-04 State Budget.  This is part of the annual budget process whereby the Legislative Analyst’s Office (LAO), a non-partisan entity that provides fiscal and programmatic analysis, reviews the Governor’s proposed budget and makes recommendations to the Legislature.  Typically, the LAO’s recommendations set the agenda for subsequent budget hearings. 

 As part of this analysis, the Analyst makes a number or recommendations to the Legislature regarding K-12 education, with respect to issues such as funding deferrals and shifts, block grants, assessment and accountability, among others.  It is important to emphasize to CCEA members that the LAO is proposing a K-12 Categorical Block Grant that includes continuation schools.

As you are aware, the Governor is proposing to block grant 58 categorical programs into a “$5.1 billion block grant for the general purposes of professional development, instructional materials and technology, specialized and targeted instructional programs, school safety and student services,” as well as repeal specific statutes that authorize these programs.

 Upon reviewing the Governor’s proposal, the LAO believes it would generate several important benefits for school districts.  These benefits include:

1. Significant fiscal flexibility with districts having a choice to fund programs and meet local needs,
2. Improved program flexibility, allowing districts to have more control over program model delivery services,
3. Defined state and local responsibilities,
4. Reduction in costs associated with administrative responsibilities, and
5. Reducing program complexity, which allows districts to focus and improve student achievement.

 While supportive of the Governor’s proposal, the LAO has raised serious policy and technical questions.  According to the Analyst, the proposal:

1.      Ignores negative local incentives,

2.      Allows categorical grants to become General Fund money, thereby making these funds susceptible to any district expense,

3.      Relies upon unproven state and federal accountability systems to maximize the impact of spending on student learning and outcomes,

4.      Unnecessarily maintains separate funding for certain programs that are similar to programs proposed to be included in the Governor’s block grant proposal.

 The LAO recommends that the Legislature use the Governor’s budget proposal as a starting point in an effort to revamp the existing categorical system.  Accordingly, the LAO is proposing its own alternative to "increase district fiscal and program flexibility while increasing district accountability for providing needed services to students."  Specifically, the LAO recommends the Legislature consolidate 62 separate programs into five block grants.   It is important to note that the LAO is recommending continuation schools be included in one of these categorical block grants.

 The LAO Alternative Block Grant

The LAO recommends an “alternative” categorical block grant proposal that would establish 5 separate block grants to replace 62 individual categorical programs.  The proposal is designed to "…increase district fiscal and program flexibility while increasing district accountability for providing needed services to students.”  The five block grants are as follows.

 Compensatory and Alternative Education Block Grant ($1.8 billion) ~ This block grant would consolidate 19 existing programs that currently fund supplemental services for low-performing alternative education students. Funds would only be spent for these two purposes.

 Major programs proposed to be included in this block grant are:  Continuation Schools, Dropout Prevention, Economic Impact Aid (EIA), remedial Summer School, ELL Implementation, CalSAFE, Healthy Start, Community Day Schools, K-4 Intensive Reading, Miller Unruh Reading, Opportunity Programs, and County Community Schools.

 Academic Improvement Block Grant ($2.8 billion) ~ This block grant would consolidate 22 existing programs that support staff development, instructional or curriculum support, and well as class size reduction.  Funds would be targeted to “…general school improvement activities.”

 Major programs proposed to be included in this block grant are:  K-3 and 9^th Grade Class Size Reduction, School Improvement Program, Core Academic Summer School, Staff Development Day Buyout, Peer Assistance and Review (PAR), Beginning Teacher Support and Assessment (BTSA), Math and Reading Professional Development, Principal Training, Bilingual Teacher Training, Gifted and Talented Education (GATE), and National Board Certification.

 Core Services Block Grant ($1.4 billion) ~ This block grant would consolidate 12 existing programs that support basic district and classroom costs, including instructional materials and deferred maintenance. 

 Major programs proposed to be included in this block grant are:  Home-to-School Transportation, Instructional Materials Block Grant, Mandates, Deferred Maintenance, Meals for Needy Pupils, School Safety, Child Nutrition, Year‑Round Schools, School Library Materials, School Law Enforcement Partnership.

 Vocational Education Block Grant ($385 Million) ~ This block grant would merge 5 vocational education programs requiring only that funds be utilized for career counseling, vocational instruction, and vocational components of integrated academic and vocation programs. 

 The five programs proposed to be included in this block grant are:  ROC/P, Partnership Academies, Apprentice Programs, Specialized Secondary Programs, and Agricultural Vocational Education Programs.

 Regional Support Block Grant ($31 Million) ~ This block grant would consolidate 6 existing county office administered programs that provide technical assistance or coordination of services. Funds would support regional support services as needed by local districts.

 The six programs proposed to be included in this block grant are:  Education Technology, Teacher Recruitment Centers, Administrator Training, Beginning Teacher (base funding), Early Intervention for School Success, and Civic Education.

Overall, the Analyst believes that the Governor's budget proposal for K-12 education is balanced and reasonable and contains three essential components.  Specifically, the Governor’s proposal, “(1) reduces the level of funding deferrals, (2) relies on ongoing rather than one-time spending reductions, and (3) provides school districts with greater fiscal and programmatic flexibility to respond to these reductions.  We recommend the Legislature adopt this general approach and include the same basic components in the budget.”

As a result of the Legislature deferring a substantial portion of program funding in the last two budget years rather than reduce it, the state now faces an increasing balance on what the LAO refers to as the “education credit card."  While this has allowed the Governor and Legislature to reduce the Proposition 98 minimum guarantee in future years without requiring additional state General Fund money, it has exacerbated subsequent fiscal years as these deferrals are required be repaid.  In 2001-02, experts were predicting the “quick down, quick up” scenario, where the state’s economy would rebound quickly, allowing the state to make this repayment without the burden of a burgeoning deficit.  However, this particular scenario did not come to pass and the Legislature has continued to defer spending, with the effect of establishing “running debt” that only compounds the state’s deficit.  In order to address this issue the LAO is recommends the following:

 “Establish Deferral Repayment Plan. We recommend the Legislature begin gradually paying off deferrals and develop a repayment plan to eventually restore all deferred funds. For 2003-04, the Governor's budget (1) repays $681 million in funds deferred from 2002-03 to 2003-04 and (2) restores the $681 million in base funding.  While we believe the Governor's proposal heads in the right direction, we suggest an alternative repayment plan that prioritizes paying off specific deferrals faster than others.  In future years, we recommend the Legislature make it a priority to repay deferrals before making expenditure increases or funding new programs.

 “An LAO Spending Alternative

“We have identified approximately $427 million of additional Proposition 98 funding needs for 2003-04 because either (1) the Governor's budget under-funded specific programs or (2) the Legislature increased 2003-04 obligations because of actions taken to date in the First Extraordinary Session.  We recommend that the Legislature fund these priority needs, and make other funding reductions to stay within the proposed Proposition 98 funding level.  Specifically, we recommend:

•  “Set-Aside Funding for Special Education Deferral ($214 million). …we believe that the Legislature's deferral of special education funding in AB 8x may result in a federal maintenance of effort (MOE) problem.  Because an MOE violation could risk federal funds, we recommend the Legislature take two actions immediately: (1) direct the State Department of Education (SDE) to work with the federal Department of Education (DOE) to seek a possible waiver and (2) set aside $214 million for special education pending the outcome of SDE's discussion with DOE.

• “Paying Ongoing Mandate Costs ($100 million). We recommend the Legislature increase funding for reimbursable state mandates by $100 million to better represent the ongoing costs of existing mandates.  To eliminate some of the negative incentives the current funding mechanism creates, we recommend folding the mandate funding into the Core Service Block Grant…

• “Fully Funding State Intervention and Sanction Programs ($50 million). The cost of fully funding the state's intervention and sanction programs is higher than proposed in the Governor's budget in part because the Legislature rejected the proposed elimination of funding for a second cohort in the High Priority Schools Grant Program.  To partially offset these additional costs, we have identified $274 million of recommended savings.  The Governor's budget proposes using $250 million for equalization and $24 million to fund various other programs.  Although equalizing revenue limit funding is an important goal, we think providing a $250 million augmentation for equalization, while at the same time making a $612 million reduction to revenue limits as part of an across-the-board cut, seems contradictory. We suggest the Legislature amend current law to delay equalization funding until the state can first pay for the base program.  Because the additional savings we have identified do not fully offset the additional costs, we suggest continuing a small portion of the categorical program deferrals ($153 million of the $681 million) into 2004-05. We believe that this alternative minimizes the total amount of deferrals.”

Recommends Full Integration Of State And Federal Accountability Programs

The LAO recommends that the Legislature “…take steps to integrate state and federal sanction and intervention programs to send a clear message of expectations to schools and districts.”  The LAO goes on to recommend that “…state interventions be focused at the school district level and that the state intervene directly at only the lowest-performing schools.”

 Opposes Equalization Funding/Creation Of New Deficit Factor

The LAO recommends that the Legislature “…not fund revenue limit equalization as proposed by the Governor ($250 million), in light of the state's fiscal situation and increased flexibility generated by the categorical block grant.”  The LAO went on to recommend that the Legislature “…not create a deficit factor if it does not fund the statutory COLA.”

Proposes Including CSR In Block Grant/Recommends Pilot Study

As earlier noted, the LAO recommends that K-3 CSR “…be included in a new Academic and Instructional Improvement Block Grant.”  However, should the Legislature opt to retain the separate K-3 Class Size Reduction (CSR) program, the LAO recommends that they “…establish a pilot program to compare the cost-effectiveness of various CSR and teacher initiatives.”

Recommends Reducing Emphasis On Norm-Referenced Tests

The LAO recommends that the Legislature “…continue to reduce emphasis on the norm-referenced test by requiring school districts to administer the California Achievement Test-6 (CAT/6) only in grades 4 and 8 instead of grades 2 through 11.”

The LAO is also recommending the elimination of the Golden State Exam.

Focus State Interventions At the School District Level

The LAO recommends that the accountability system be restructured to focus on providing technical assistance at the school district level to build capacity for districts to intervene at schools.

Redesign HPSGP to Serve State and Federal Purposes

The LAO recommends that the Legislature restructure the High Priority Schools Grant Program (HPSGP) to serve as the primary accountability program for state and federal purposes.

Transition Schools In State Intervention Programs To New System

The LAO recommends that the Legislature “…enact legislation that expeditiously transitions schools currently in the Immediate Intervention/Underperforming Schools Program and High Priority Schools Grant Program to the newly integrated accountability system while following through on existing sanction commitments.”  They go on to recommend that the Legislature “…end use of significant growth as a criterion for further funding.”

Change Definition Of Proficiency

The LAO recommends that the Legislature “…amend the Public Schools Accountability Act to define "proficiency" for purposes of the federal No Child Left Behind Act as passage of the high school exit exam for grades 10 through 12, and being on-track to pass the high school exit exam for grades two through eight.”

Recognize AB 2519 Text Adoptions As Standards-Aligned

The LAO recommends that the Legislature “…enact legislation to allow materials adopted…[under] AB 2519… to be recognized as standards-aligned materials for the purposes of eligibility for categorical programs” -- in an effort to recognize the districts’ significant investments in these materials and to relieve districts from the costs of new materials.

 If you are interested in reviewing the LAO’s analysis in its entirety please visit the Analyst’s website at:  www.lao.ca.gov and select “Analysis of the 2003-04 Budget Bill”.