School Finance Beginners Guide for 200607

1
School FinanceBeginners Guide for 2006-07

• Francie Heim
• Deputy Superintendent
• El Dorado County Office of Education
• March 31, 2006

2
Outline

• BASIC Revenue Limit Funding Definitions
• Conceptual understanding
• Revenue Limit/ADA
• Taxes/State Aid
• Deficits
• 2006-07 Budget Details

3
Where Do Schools Get Most of Their Money?

• Primarily from Revenue Limit funds
• ADA x District Revenue Limit Entitlement
• ADA Average Daily Attendance
• Revenue Limit is different for each district
• Entitlement the amount of money you should
  receive from state aid and local taxes
• Subtract local taxes from entitlement
• Balance is state aid
• Taxes goes up, state aid goes down

4

Where Do Schools Get Most of Their Money?
SIMPLIFIED EXAMPLE - 1 Understanding ADA x
Revenue Limit Entitlement Entitlement less
Taxes State Aid
5

Where Do Schools Get Most of Their Money?
SIMPLIFIED EXAMPLE - 2 Understanding ADA x
Revenue Limit Entitlement Deficited
Entitlement less Taxes State Aid
6
High Taxes/Low Taxes

• District A low property values
• District B high property values

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Exceptions to the Rule

• BASIC Aid District

Please note this is truly an exception. Very few
districts in CA have a tax base this high.
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Exceptions to the Rule

• Necessary Small School

• Several Restrictions
• Size of District (under 2,500 ADA).
• Distance of School from other Schools.

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ADA (Average Daily Attendance)

• ADA (Average Daily Attendance)
• ADA Days of actual student attendance divided
  by days of school operated for the time period
  being reported
• Use greater of Current Year or Prior Year
• Declining Enrollment major impact is in year
  following decline
• Funding based on cumulative attendance as of last
  full school month ending April 15 (P-2 ADA)
• Some exceptions use Annual (ROC/P, Adult)

10
2006-07 Governors Budget Overview

• There is certainly reason for the K-12 education
  community to be optimistic about funding for
  2006-07.
• The budget provides for COLA (estimated at 5.18
  or higher), Growth, Deficit Reduction,
  Equalization, Mandates and New Programs.
• There is, however, still a significant amount
  (estimated at 3.2 billion) owed to education
  from the prior year Proposition 98 maintenance
  factor calculation.
• It should also be noted that even with the
  increase in funding, California still lags
  significantly behind other states in adequate
  funding for education.

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2006-07 Governors Budget Good News

• Revenue estimates for 2005-06 are up!
• 2006-07 budget reflects CA overall revenues
  increasing by 4.4.
• No tax increases are proposed.
• 3.7 billion in economic recovery bonds are NOT
  being utilized.

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2006-07 Budget Overview

• On the downside, the budget relies significantly
  on one-time funding sources.
• Revenues are up 4.4 for 2006-07 but expenditures
  are proposed to increase 8.4, therefore the
  current structural deficit increases.

13
What is the current estimate of the structural
budget gap?

• In 2006-07, the budget reflects expenditures
  exceeding income by over 6 billion.

14
How did K-12 education fare in the Governors
2006-07 initial budget proposal?

• The budget provides
• COLA (January estimate of 5.18, LAO estimates
  5.8. Stay tuned until May for final numbers)
• Growth
• Deficit Reduction
• Equalization
• Mandates
• Specific targeted grant funding
• NO negative offsets

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What is the statutory COLA for 2006-07?

• The statutory COLA is estimated to be 5.18. This
  estimate is subject to change.
• Statutory COLA is based on the Implicit Price
  Deflator for Government Goods and Services
  published in May of 2006.
• Legislative Analyst February report estimates
  COLA could be as high as 5.8

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LAO Report on COLA

• The K-12 COLA is based on the gross domestic
  product deflator for purchases of good and
  services by state and local governments (GDPSL).
• For 2006-07, the K-12 COLA will be based on GDPSL
  growth rates from the final three quarters of
  2005 and the first quarter of 2006.
• Based on the two quarters of GDPSL data available
  at the time the budget was developed, the
  administration estimated a 5.2 COLA.
• Recently released fourth quarter 2005 data
  indicates that the actual COLA factor may be even
  higheraround 5.8. (Cost just over 300 million
  more than the level currently funded in the
  Governors budget, for a total of 2.9 billion.)

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Budget Provides COLA - What Does That Mean?

• Revenue Limits (RL) receive COLA
• COLA Cost of Living Adjustment
• Implicit price deflator for government goods
• and services determined in May of each year
• Estimated in January
• Published by the Dept. of Agriculture
• Revenue Limit (RL) COLA guaranteed is added to RL
• Based on percentage of statewide average (not
  district unique revenue limit)
• BUT this does not mean funds are appropriated
  (deficit)
• Also referred to as the un-cola

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What is the Status of the Deficit Factor in
2006-07?

• The 2006-07 Budget proposes to reduce the deficit
  factor by approximately .60.
• 99.1 funding in 2005-06
• Proposed funding level of 99.7 funded
• Remaining .30 about 100 million
• About 16 per ADA remaining for average elem.
• Deficit reduction in 2006-07 estimated to be an
  average of 28 per ADA for Elementary district

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Deficit Discussion History Lesson...Back to
2003-04

• 2003-04 COLA (cost of living adjustment) 1.86
• percentage times statewide average (NOT district
  RL)
• e.g., all elementary districts receive 85 COLA
• Added to Revenue Limit, BUT NOT FUNDED
• Reduction to Revenue Limit
• 1.2 reduction to funding in 2003-04
• Result 3 funding reduction
• But funding loss from prior year was 1.2
• Balance of 1.8 resulted from COLA added and not
  funded
• Note Actual percentage varies for high/low
  revenue limit districts

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Revenue Limit Deficits

• 3 shortfall from 2003-04 is being restored over
  time (ROUNDED Number)
• 3 shortfall in 2003-04 or 97 funded
• 2 shortfall in 2004-05 or 98 funded
• 1 shortfall in 2005-06 or 99 funded
• .3 shortfall in 2006-07 or 99.7 funded
• Just 100 Million left to go!

deficit in detail
21
Deficits On Per ADA Basis (Elementary) -
Percentage translated into dollar amounts
22
What does the COLA mean in actual dollars to my
district?
23
What does the COLA and deficit reduction mean in
actual dollars to my district?

• The chart on the next slide shows the average
  COLA and deficit reduction for elementary, high
  school and unified districts.
• COLA is based on statewide averages, but deficit
  reduction impact is based on each district
  specific revenue limit.
• Potential range of Revenue Limit Increase - from
  5.8 to 6.4
• COLA of 5.18 .6 Deficit Reduction
• COLA of 5.8 .6 Deficit Reduction

24
2006-07 Possible Revenue Limit Change
(COLA/Deficit)
25
Remember Effective COLA is Another Story

• Revenue Limit is about 70 to 80 of Funding
  (sample below)

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Effective COLA

• Effective COLA

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Negotiations Debate

• Union
• 6.4 Revenue Limit equalization
• Or 8.4 (based on Prop 98 increase)
• Or some other variation
• Management
• 5.5 effective COLA is starting point
• Less step column (2)
• Less health and welfare costs
• Less fuel costs
• Less other increased costs
• Balance ??
• And then there are Declining Enrollment
  districts! Who face significant reductions in
  income and are seeing potentially no increase in
  funding.

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How does Proposition 98 (K-12 funding guarantee)
work in 2006-07?

• The Governor proposes 54.3 billion for K-14,
  1.67 billion more than required under the
  administration calculation of Proposition 98 in
  2006-07.
• The augmentation is an estimate of the 2004-05
  shortfall resulting from the promises not met in
  prior years.
• However, it does not fully mitigate the
  Proposition 98 settle-up for 2004-05 and 2005-06.

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Proposition 98 BASICS

• California voters enacted Proposition 98 in 1988
  as an amendment to the State Constitution. This
  measure, which was later amended by Proposition
  111, establishes a minimum annual funding level
  for K-14 schools (K-12 schools and community
  colleges).
• While the formulas get rather complicated at
  times, the goal of Proposition 98 is a relatively
  straightforward one.
• Generally, Proposition 98 provides K-14 schools
  with a guaranteed funding source that grows each
  year with the economy and the number of students.
  
• The guaranteed funding is provided through a
  combination of state General Fund and local
  property tax revenues.

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Proposition 98 BASICS

• There Are Three Formulas (Tests) That Determine
  K-14 Funding.
• The test used to determine overall funding in a
  given budget year depends on how the economy and
  General Fund revenues grow from year to year.
• Test 1Share of General Fund.
• Provides around 41 of General Fund revenues.
  While not applicable since 1988-89, this test may
  begin to determine the minimum guarantee near the
  end of the decade.

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Proposition 98 BASICS

• Test 2Growth in Per Capita Personal Income.
  Increases prior-year funding by growth in
  attendance and per capita personal income.
• Generally, this test is operative in years with
  normal to strong General Fund revenue growth.
• Test 3Growth in General Fund Revenues.
• Increases prior-year funding by growth in
  attendance and per capita General Fund revenues.
  Generally, this test is operative when General
  Fund revenues fall or grow slowly.

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Proposition 98 BASICS

• Legislature Can Suspend Proposition 98.
• With a two-thirds vote, the Legislature can
  suspend the guarantee for one year and provide
  any level of K-14 funding.
• Mechanism Exists to Ensure Growth With Economy
  and Attendance.
• When Test 3 or suspension occurs, the state
  creates a funding gap called the maintenance
  factor. Proposition 98 contains a mechanism to
  accelerate spending to restore the maintenance
  factor and close the gap in future years.

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Is there any additional equalization proposed for
2006-07?

• 200 million is allocated
• This is sufficient to fund approximately 45 of
  the way to the 90th percentile target.
• Two bills have been introduced
• AB 2070 (Daucher, R)
• SB 1358 (Simitian, D)

34
Why after Equalization are there so many
differences?

• Districts received significant equalization
  dollars in prior years to bring them to statewide
  average
• 1984-85, 1995-96, 1996-97
• In 1998-99, Revenue Limits were adjusted to
  reflect actual ADA
• Adjustment based on 1996-97 data absence data
• Example
• 1,000 ADA
• 50 ADA from excused absences
• 950 ADA from actual attendance
• 1,000 / 950 1.05
• Revenue limit x 1.05 (or 5 INCREASE)

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Equalization Debate Continues

• The Budget Deal Maker in 2001-02 was a
  provision for the equalization of revenue limits.
  The new formula was based on 90th percentile
  calculation
• That is, the district for which no more than 10
  of statewide ADA has higher funding
• 2001-02 budget provided one-time funding of
  9.587 of funding needed to reach target
  (approximately 40 million of over 400 million
  cost). 2002-03/2003-04 No equalizaition
  funding.
• 2004-05 Budget (110 m) 25 of funding needed to
  reach target.
• 2005-06 no further equalization (but continues
  2004-05 funding)
• 2006-07 additional equalization proposed (45 )

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quiz

• My revenue limit is the lowest in my county and
  below the statewide average. This is probably
  because
• My property tax base in 1970 was low
• My actual attendance in 1996-97 was high
  (absences low)
• My actual attendance in 1996-97 was low (absence
  rate high)

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answer

• The answer is
• My actual attendance in 1996-97 was high
  (absences low)
• e.g., 3 absence rate in base year, revenue limit
  increased only 3

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What new programs are proposed for 2006-07?

• Proposition 49 Before and After School Programs
• California High School Exit Exam (40 million
  double the prior year amount)
• Beginning Teacher Support and Assessment Funds
  (65 million) is the required third year of BTSA
  for beginning teachers in Decile 1-3 schools
• School Enrichment Block Grant Funding (100
  million) for Decile 1-3 schools to attract and
  retain staff. 50 per pupil with a minimum of
  5,000 per site.
• Science and Math Teacher Initiative (1.5
  million). Funding provided to UC and CSU.
• Physical Education Grants (85 million). Funds
  allocated on a per-student basis with minimum
  grants of 3,000 and 5,000, depending on
  enrollment at school site.
• Instructional Materials (20 million). Restores
  20 million to IMFRP base.

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What new programs are proposed for 2006-07?

• Arts and Music Grants (100 million). 20 per
  student in K-8 with a minimum of 3,000.
• Fruits and Vegetables (18.2 million). 10 per
  meal reimbursement for all meals that include one
  to two servings of fruits and/or vegetables (same
  as 2005-06).
• Digital Classroom Grants (25 million).
  Competitive one-time block grants of 3,000 per
  classroom.
• Career Technical Education (50 million).
  Increases funding for 22 vocational/technical
  education programs in high schools and community
  colleges.

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other categoricals
41
AB 825 Block Grants
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Other Issues of the Day

• Special Education
• In 2005-06 Special Education COLA was
  bifurcated - paid partially by state funds and
  part by federal.
• In 2006-07 federal dollars are not increasing,
  therefore no federal COLA for special education
  is forthcoming.
• This means special education is receiving a COLA
  only on the state portion an increase of about
  3.7
• It is hoped the final budget will provide full
  COLA.

43
Other Issues of the Day

• The most eagerly awaited document for those who
  follow the budget debate
• January
• Governors Budget is released
• February
• Legislative Analyst Report on the 2006-07 Budget
• 2006-07 Budget Perspectives Issues
• Together they set much of the framework for the
  budget discussion that ensues from March forward

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Legislative Analyst Recommendations

• Minimize Impact of Proposition 98 on Structural
  Gap
• The Governors budget proposes to increase
  Proposition 98 expenditures by 4.3 billion in
  2006-07 compared to the revised 2005-06 spending
  level. The administrations proposal for the
  budget year exceeds the minimum spending
  requirement under Proposition 98 by 2.1 billion.
• We recommend the Legislature fund Proposition 98
  at the level needed to fully fund base program
  costs in the budget year. While this would result
  in 1 billion less in K-14 spending than the
  Governors budget, it would still provide an
  increase of 3.3 billion over the current year.

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Legislative Analyst Recommendations

• Create a Fiscal Solvency Block Grant
• Districts face a variety of fiscal challenges,
  including low general purpose reserves, internal
  borrowing, declining enrollment, and costs of
  retiree health benefits.
• If the Legislature chooses to fund schools at
  the level of Proposition 98 spending proposed in
  the 2006-07 Governors Budget, we recommend the
  Legislature redirect 411.7 million proposed for
  new programs to establish a new fiscal solvency
  block grant.

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Legislative Analyst Recommendations

• Simplify the K-12 Mandates Process
• The Governors budget proposes 133.6 million
  from the General Fund to pay the costs of K-14
  education mandates in 2006-07 (about
  three-quarters of expected claims). We recommend
  the Legislature fully fund these costs. We also
  recommend trailer bill language that would
  simplify the mandate claims process and make
  mandate funding more predictable for both the
  state and districts

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Other Items of Note in LAO report

• Proposition 49 Pays Off Maintenance Factor
  Obligation
• Proposition 49 requires the state to provide an
  additional 426 million to fund After School
  Programs starting in 2006-07.
• The funding mechanism in Proposition 49 requires
  the state to first meet the Proposition 98
  minimum guarantee for the year in which the
  measure takes effect, and then provide an
  additional 426 million.
• Because of the specific statutory language of
  this requirement, both the Legislative Analysts
  Office and Department of Finance interpret the
  measure such that the additional After School
  funding would count as restoring Proposition 98
  maintenance factor. (Some in the education
  community disagree with this interpretation and
  believe the Proposition 49 funding should not
  score as maintenance factor restoration.)
• Stay tuned for this lively debate!

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Proposition 98 more details (per LAO)

• Statute requires Department of Finance (DOF), the
  California Department of Education (CDE), and
  California Community Colleges (CCC) to jointly
  certify the Proposition 98 calculation and
  funding level nine months after the end of a
  fiscal year.
• If the minimum guarantee calculation requires the
  state to provide more funding in a specific year,
  the Legislature can either appropriate those
  funds, or within 90 days, the Controller must
  allocate the funds to K-12 schools and CCC.
• This statutory requirement was only met in the
  first year Proposition 98 was operative.

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Proposition 98 more details (per LAO)

• Proposition 98 funding levels were again
  certified in the mid-1990s through the enactment
  of legislation to settle the CTA vs. Gould
  lawsuit.
• Since 1994-95, the state has not certified the
  Proposition 98 calculation.
• Chapter 216, Statutes of 2004 (SB 1108, Committee
  on Budget and Fiscal Review), included language
  intended to determine finalized Proposition 98
• required funding levels for fiscal years 1995-96
  through 2003-04.

50
Proposition 98 more details (per LAO)

• Specifically, the legislation required the SPI
  DOF to jointly determine by January 1, 2006, the
  outstanding balances - settle-up obligations - of
  the Proposition 98 minimum funding obligation for
  the nine years in question.
• In total, CDE and DOF estimate the state owes
  schools 1.4 billion to meet the minimum
  guarantee for past years.
• Another detail. LAO also recommends the
  legislature enact legislation to clarify how the
  administration should rebench Proposition 98 Test
  1 factor to reflect change in the allocation of
  property tax revenues.

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Major Issues Facing Legislature in 2006-07 (per
LAO)

• The LAO report provides a sneak peek at what they
  believe are pressing issues the legislature
  should address in 2006-07
• Retiree Health Care a growing cost for
  government (and other agencies)
• Emergencies Disasters are we prepared?
• Funding for Transportation Needs
• Reorganizing California's Energy Related Needs
• Mental Health Mandates continue to pose challenges

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Mental Health LAO Recommendation

• K-12 is watching the mental health recommendation
  carefully. LAO recommendation
• Shift Program Responsibility to K-12 Education.
• In our Analysis of the 2005-06 Budget Bill, we
  recommended shifting responsibility for AB 3632
  (county mental health) services to a K-12
  education categorical program, which we believe
  would alter the financing and governance for
  mental health services sufficiently to address
  most of the shortcomings of the current system.
• We continue to prefer this approach, under which
  special education programs would be provided a
  block grant of funds with which to support mental
  health services, thereby creating strong
  incentives for educators to operate efficient
  programs.

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Another Perspective

• LAO Bottom Line
• California has benefited greatly from an over
• 11 billion three-year revenue increase since
  the 2005-06 budget was enacted
• The Governors budget plan would still leave the
  state with major structural budget shortfalls and
  a large amount of other financial obligations
  outstanding.
• In this regard, we believe the proposal misses a
• real opportunity to finally get the states
  fiscal house in order by meaningfully addressing
  what is still a formidable fiscal problem.

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Closing thoughts

• We run the risk of another year embroiled in a
  detailed debate regarding the Proposition 98
  calculation.
• Discussion about the adequacy of school funding
  is critical.
• We need to better define the funding gap that
  exists between the level of funding we receive in
  California and the educational services delivery
  model we believe is best for our students.