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LAO Analyses Impact of Governor’s Budget on Prop. 98 Funding

February 24, 2019

(Editor’s note: On February 13, the Legislative Analyst’s Office released a lengthy report analyzing the impact of Governor Newsom’s January budget proposal on Prop. 98 funding for K-12 education. Below, we are reprinting the report’s Executive Summary and Summary of Recommendations, along with a link to the LAO’s full report.)

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 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.

Summary of Recommendations

Proposition 98 Budget Planning

  1. 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).
    1. Expect the 2018-19 minimum guarantee to decrease about 55 cents for each dollar of lower state revenue.
    2. Expect the 2019-20 minimum guarantee to decrease about 40 cents for each dollar of lower state revenue.
  2. 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.
  3. 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

  1. 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

  1. 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.
  2. 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.
  3. 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.

Special Education

  1. 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.
  2. Consider equalizing per-student special education funding rates or providing state funding for preschool special education.

County Offices of Education

  1. 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.
  2. 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.
  3. 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

  1. 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

  1. 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.
  2. 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.

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To read the complete LAO report, click on the link below:

https://lao.ca.gov/Publications/Report/3930

Sources: Legislative Analyst’s Office



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