March 1, 2007

Dear County, District, and Charter School Chief Financial Officers:

GOVERNOR’S BUDGET FOR 2007-08

On January 10, Governor Arnold Schwarzenegger presented his budget for 2007-08. This letter provides information on proposed changes from the 2006 budget affecting kindergarten through twelfth grade (K–12) education. Copies of this letter, as well as other budget-related documents, are available on the California Department of Education (CDE) Web site at http://www.cde.ca.gov/fg/fr/eb. Official state budget documents are available on the Department of Finance Web site at http://www.dof.ca.gov/default.asp (Outside Source)

The Governor’s Budget is just the first step in the budget process. The proposals are likely to change significantly before the budget is enacted.

Budget Overview

The state continues to face a budget challenge in 2007-08. Although the Governor’s budget proposal makes significant progress in reducing the structural budget deficit, proposed expenditures will exceed estimated revenues by $1.9 billion. Expenditures are proposed to increase by 1 percent, while revenues are estimated to increase by 7.2 percent. The Governor’s budget proposes to close the budget gap by spending down the 2006-07 ending fund balance, estimated to be $3.2 billion as a result of higher than anticipated revenues over the last two years. This would leave a balance on June 30, 2008, of $1.3 billion.

Proposition 98

The Governor’s budget proposes to fully fund the Proposition 98 guaranteed funding level of $56.8 billion for K–12 schools and community colleges, an increase of $1.8 billion and 3.3 percent over the current-year revised budget. In addition, the first annual payment of $300 million ($268 million to K–12 education) will occur in accordance with the settlement of the lawsuit CTA and O’Connell v. Schwarzenegger.

The changes in Proposition 98 funding, as proposed by the Governor’s budget, are shown in Table 1.

Table 1
Proposition 98 Summary
(in millions)

K–12 Proposition 98

Proposition 98 funding levels for K–12 education for 2006-07 reflected in the budget are $103 million lower than those enacted in the 2006 Budget Act. This is reflective of the general economy growing at a slower pace during the first six months of the current fiscal year than was estimated when the budget was enacted last summer. In addition, average daily attendance (ADA) declined at a slightly higher than anticipated pace, at 0.39 percent versus the 0.26 percent estimated in the 2006-07 budget.

The Governor’s budget proposes to increase Proposition 98 funding for K–12 education in 2007-08 by $1.4 billion (2.9 percent) over revised 2006-07 levels. The major components of this change are as follows:

• Growth. The number of students in K–12 schools is estimated to decrease by 23,040 ADA in the budget year, a decrease of 0.39 percent from the revised current year level. The Governor’s budget includes a negative growth adjustment of $150.3 million, primarily in revenue limit funding for school districts and county offices of education. The proposed budget provides growth increases in some categorical programs in accordance with specific program or statutory requirements, including $16.4 million for adult education, $14.1 million for charter school categorical block grants, $14.5 million for child development programs, $7.6 million for class size reduction, and $6.4 million for regional occupational centers and programs. Other programs will receive a downward growth adjustment in accordance with the overall decline in ADA (0.39 percent) or based on policy choices proposed by the Governor.
• Cost-of-living Adjustments (COLAs). The statutory COLA adjustment for 2007-08 is estimated to be 4.04 percent. The final COLA rate will be determined in April. The Governor’s budget provides $1.9 billion to fund statutory COLAs for revenue limits and most categorical programs, including $1.4 billion for revenue limits, $133 million for special education, $53.7 million for class size reduction, $62.1 million for child development programs, $27.2 million for adult education, $22.2 million for home-to-school transportation, and $217.3 million for all other programs. Initial estimates of COLA amounts per ADA for school district base revenue limits are elementary districts—$215, high school districts—$259, and unified districts—$225.

Major 2006-07 funding continued. The Governor’s budget continues to fund several new initiatives or augmentations from the current year budget:

• Economic Impact Aid ($350 million augmentation)
• Middle and High School Supplemental Counseling Program ($208.1 million)
• Arts and Music Block Grant ($109.2 million)
• California High School Exit Examination Intensive Instruction ($72.4 million)
• Physical Education Teacher Incentive Grants ($41.6 million)
• Certificated Staff Mentoring Program ($11.7 million)

Budget Changes in Detail

One-time Funds

In addition to the above changes to ongoing Proposition 98 funding, the Governor proposes appropriating $185.9 million in one-time funds from the Proposition 98 Reversion Account for the following programs:

• $100 million for school facility emergency repairs pursuant to the Williams settlement agreement.
• $43.9 million for the Charter School Facility Grant Program, of which $20 million will be available to reimburse facilities costs incurred in 2006-07.
• $25.7 million for CalWORKs Stage 2 child care programs to provide partial funding for the total estimated caseload need of $447.4 million in this program.
• $8.8 million for the Teacher Credentialing Block Grant to fund a shortfall in 2006-07.
• $1.5 million for the support of six regional pilot projects of the Compact for Success program to increase the college-going rate and college-completion rate of participating students. Grants would be used to fund partnerships between local school districts and California State University campuses.
• $1 million for allocation to a county office of education to develop, implement, and provide training in the use of an Internet-based information management system. This system would provide low-achieving schools and school districts a unified intervention program to help schools use assessment data and other supports to turn around designated program improvement schools or those subject to academic intervention by the state.

State Mandates

The budget defers payment for mandated costs estimated to be approximately $160 million in 2007-08. This is in addition to an estimated $130 million in mandated costs deferred in 2006-07.

Special Education

The Governor’s budget provides an additional $120.1 million in General Fund for special education programs. This includes $133 million for a 4.04 percent COLA, which is partially offset by a 0.39 percent negative growth adjustment of $12.9 million. The COLA is again proposed to be applied to the state portion of the special education budget only.

A local property tax increase of $33.6 million and an increase of $3.2 million in federal funds are also reflected in the budget. The budget continues to provide $69 million in federal funds as reimbursement to county mental health agencies for services provided to special education students and continues $31 million in ongoing General Fund support to local educational agencies for mental health services.

Child Care and Development

The budget provides $2.5 billion for Child Care and Development programs administered by CDE. Program funding will be increased by the K–12 statutory COLA and growth adjustments except for the CalWORKs child care programs, which are caseload driven. The COLA for all child development programs totals $62.1 million and growth adjustments, based on the increase in population of children aged zero through four, is $14.5 million.

The family fee schedule and income eligibility limits would remain the same as that used in 2006-07, and that became effective January 1, 2007.

The budget proposes to shift $269 million in federal (TANF) funds to Proposition 98 funding for the CalWORKs Stage 2 program. This shift will free up the TANF funds to replace non-Proposition 98 funding in the CalWORKs programs administered by the Department of Social Services.

Home-to-School Transportation

The budget proposes to shift the source of $627 million in the Home-to-School Transportation program from the Proposition 98 funding to the Public Transportation Account (PTA), and to re-bench the Proposition 98 guarantee downward by the same amount to save the General Fund dollars for other purposes.

Quality Education Investment Act

In September 2006, the Legislature enacted a bill to implement the settlement agreement in CTA and O’Connell v Schwarzenegger related to Proposition 98 K–14 funding requirements for prior years. The legislation, Senate Bill 1133 (Chapter 751, Statutes of 2006), provides a total of $2.9 billion over seven years for the Quality Education Investment Act. In 2007-08, $300 million ($268 million for K–12) is appropriated to begin implementation of the Act. These funds are for the purpose of improving the quality of academic instruction and the level of pupil achievement in about 500 low-performing schools in deciles 1 and 2 of the 2005 Academic Performance Index (API) scores. The funds must be used to reduce class size in grades K–12 schools and to increase counseling services, staff development, and efforts to improve attendance and graduation rates.

Budget Policy Initiatives

Given the proposed fund shifts out of Proposition 98 and full funding of the COLA, there is very little Proposition 98 money left over for new initiatives in this budget. The Governor proposes the following education initiatives:

• $69 million for loans for national forest area schools (non-Proposition 98). The federal government has long aided local educational agencies in national forest areas. However, a sunset provision in federal law was not extended. The Governor proposes to backfill the loss of federal aid on a short-term basis. Congress is working to renew this funding.
• $52 million to be allocated to the California Community Colleges (CCC) to partner with CDE for improving career technical education programs. $32 million of the funds from the settlement of CTA and O’Connell v Schwarzenegger is allocated to CCCs to assist Regional Occupational Centers and Programs in improving linkages between high school and CCC programs. $20 million is allocated to provide grants to consortia of CCCs and K–12 school districts to create articulated courses and align curriculum with the new career technical education standards.
• $10 million to create the EnCorps Teachers Program to increase the number of individuals entering the teaching profession, particularly in the subject areas of mathematics, science, and career technical education. This program would establish a public-private partnership with industry and business to actively recruit retiring professionals to enter the teaching profession.

Federal Budget Changes

At this time the federal government is operating pursuant to a continuing resolution, which is based on the budget levels for 2006. Various funding adjustments have been proposed for several education programs, but their final resolution and effects on California’s education allocations is not known at this time. The current continuing resolution will expire February 15, 2007, and will need to be extended by Congress in order to keep the federal government operating. On February 5, 2007, the President presented his budget proposal for federal fiscal year 2008. The federal 2008 budget will affect funding at the state level in 2008-09.

K–12 Education Funding From All Sources

The 2007-08 Governor’s budget proposes $68.6 billion in funding for K–12 education from all fund sources, as shown in Table 2. This reflects an increase of $1.8 billion and 2.7 percent above 2006-07 revised funding levels, with funding per ADA of $11,584 in 2007-08, an increase of $344 and 3.1 percent above the estimated $11,240 per-ADA rate in 2006-07.

Table 2
K–12 Summary, All Funds*
(in millions)

* Includes funds for California Department of Education state operations, state special schools, state school facilities bond repayments, contributions to the State Teachers Retirement System, State Library, and Commission on Teacher Credentialing.

Next Steps in the Process

Legislative hearings on the 2007-08 budget proposals will begin in March. In May, the Governor’s Department of Finance will issue its traditional “May Revision” of population, revenue, and expenditure projections. Growth and COLA estimates are subject to change at that time. The budget bills, having been amended in each house, will be reconciled by a joint conference committee and should be passed to the Governor in late June. Upon receiving the final budget bill, the Governor may then exercise his line-item veto before signing the Budget Act of 2007.

If you have any questions regarding this subject, please contact Mike Fuller, Education Fiscal Services Consultant, Fiscal Policy Division, at 916-323-8351 or by e-mail at mfuller@cde.ca.gov. (Note: The preceding e-mail address is no longer valid).

Sincerely,

JACK O’CONNELL

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