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2003 Budget Act

California Department of Education
Official Letter
California Department of Education
Official Letter

On August 2, 2003, Governor Gray Davis signed the 2003 Budget Act, AB 1765 (Chapter 157, Statutes of 2003). On August 9, 2003, the Governor also signed AB 1754 (Chapter 227, Statutes of 2003), the education omnibus budget "trailer bill." Budget trailer bills are generally passed and enacted along with the annual budget act. Another trailer bill, SB 1045 (Chapter 260, Statutes of 2003), was signed by the Governor on September 1, 2003. SB 1045 requires a one-time $135 million shift of property taxes in 2003-04 from redevelopment agencies to the Education Revenue Augmentation Fund in order to reduce state General Fund costs for Proposition 98.

Budget trailer bills are generally passed and enacted along with the annual budget act. Together, the budget act and the trailer bills make up a comprehensive package. Other bills may also affect the budget, but are considered to have policy implications and, therefore, take a different path through the Legislature. One such bill, AB 1266 (Chapter 573, Statutes of 2003), has been dubbed the "policy" education budget trailer bill, meaning it has been the subject of full education policy committee hearings on the content of the bill. Although generally linked to the 2003-04 budget agreements in concept, AB 1266 followed a normal legislative path and was signed by the Governor on September 28, 2003.

This bulletin provides summary information on the 2003 Budget Act and related legislation. Copies of this bulletin, as well as other budget-related documents, are available on the California Department of Education's (CDE) Web site at Copies of budget documents themselves are available on the Department of Finance's Web site at


After months of negotiation between the Governor and the Legislature, the 2003-04 budget authorizes a total spending plan of over $99 billion, including $71.1 billion from the state General Fund. The budget package addresses the state’s $39 billion budget shortfall through a combination of $17.6 billion in program cuts and savings, $10.7 billion in deficit finance through the issuance of bonds, $2.3 billion in other loans and borrowing, $4.5 billion in other revenues, and $4.4 billion in internal borrowing and fund shifts. In addition, the budget package continues to defer $1.1 billion in funding for K–12 apportionments into the 2004-05 fiscal year and defers $1.2 billion in accumulated state mandate reimbursement obligations indefinitely. At this point in time, legal questions remain unresolved concerning the $10.7 billion in deficit bonds and the $2.3 billion in other borrowing.

With all the above actions, the 2003-04 year-end General Fund reserve is projected to be just under $2 billion. However, the Legislative Analyst estimates that, at best, the state will face a cumulative budget deficit of $8 billion for the 2004-05 fiscal year. Any reduction in the revenue streams on which this budget is based that result from the upcoming change in administration will create a shortfall in the current year and add to the expected deficit in 2004-05. As a result, the state will be faced with another difficult budget process next year and may face continuing problems in the current year.


The Legislature reduced the 2002-03 Proposition 98 funding level for K–12 education three times during 2003. Chapter 4x (SBX1 18), Chapter 10x (SBX1 28), and Chapter 26 (SB 1040) reduced 2002-03 K–12 Proposition 98 funding by a total of $2.5 billion through a combination of deferrals, use of one-time prior-year Proposition 98 funds, capturing anticipated program savings, and program reductions. While most of these reductions did not significantly affect funding for education programs in place in 2002-03, they did substantially reduce the minimum guarantee requirement for 2003-04 and subsequent years.

The 2003-04 budget package includes $41.3 billion in Proposition 98 spending in 2003-04 for K–12 education. This represents an increase of $2.1 billion, or 5.4 percent, from the revised 2002-03 funding level. However, compared to the 2002 Budget Act funding level, the 2003-04 budget package reflects a reduction of around $300 million, or just under one percent.

On a per pupil basis, the revised 2002-03 K–12 Proposition 98 funding of $6,624 per unit of average daily attendance (ADA) dropped 6.3 percent from the 2002 Budget Act level of $7,067 per ADA. Proposition 98 funding for 2003-04 is $6,887 per ADA, a four percent increase over revised 2002-03 per pupil funding, but a 2.5 percent decrease from the 2002 Budget Act level.

County and District Chief Business Officials

The remainder of this memo will address the impact of the 2003-04 budget package on local educational agencies (LEAs).

Revenue Limits

District and county office of education revenue limits will experience an across-the-board reduction of 1.198 percent for districts and 1.195 percent for county offices. The reduction is the net effect of a 1.86 percent cost-of-living adjustment (COLA) for 2003-04 and two deficit factors—one to offset the COLA and the other to implement the across-the-board reduction. The deficit factors will be in place for the 2003-04 and 2004-05 fiscal years; which means that, absent further legislation, district and county office of education revenue limit entitlements will be fully restored in 2005-06.

Because the COLA increase for district revenue limits is calculated based on the prior year average base revenue limit per ADA for each district type, the actual impact of the deficit factors on individual districts will vary depending on how their base revenue limit per ADA compares to the average for their district type. The actual COLA adjustments for 2003-04 district revenue limits are: elementary districts--$85 per ADA, high school districts--$102 per ADA, unified districts--$88 per ADA.

In addition to the across-the-board reduction, the $250 million in equalization funding for 2003-04 was eliminated as part of the targeted reductions approach agreed to by the Governor and the Legislature.

The budget package also reflects the deferral of the Second Principal Apportionment payment for revenue limits (and a number of other programs funded through the principal apportionment) in 2003-04 from June 2004 to July 2004 (the “P2 Shift”), as enacted earlier this year by Chapter 4x (SBX1 18). This shifts approximately $730 million of Proposition 98 spending for revenue limits into 2004-05.

On the positive side, revenue limit growth is fully funded, the $35 million mitigation of the PERS reduction is restored, and LEAs will receive full funding for the increased PERS and unemployment insurance rates. In addition, the enacted 1.2 percent across-the-board reduction to revenue limits is significantly better than the 2.15 percent reduction originally proposed by the Governor in January.

Basic Aid Districts

The 2003-04 budget package adopts the Governor’s proposal to apply all state funding allocated to school districts towards the minimum state aid required by the constitution (the greater of $120 per ADA or $2,400). Historically, only revenue limit funding has been applied towards this requirement. This action will result in a statewide reduction of $17.8 million in state aid for districts with local revenues that are close to or above their revenue limit entitlements.

Districts whose local revenues were greater than or equal to their revenue limit entitlements as of the 2002-03 Second Principal Apportionment (“excess tax districts”) will receive an additional statewide reduction of $9.9 million to be applied as a reduction to one or more of their state funded categorical programs, as determined by the affected districts, excluding programs subject to federal maintenance of effort requirements. The reduction amount is equal to approximately 1.5 percent of the 2002-03 revenue limit entitlements of affected districts. This reduction is less than the $20 million proposed in the Governor’s May Revision and significantly less than the $126 million reduction originally proposed in the January Governor’s Budget. The CDE has notified affected districts regarding the reduction amount and the process for implementing the reduction.

Special Education

The 2003-04 budget fully funds pupil growth but provides no COLA for 2003-04 special
education programs. Funding from the Proposition 98 reversion account is provided to reimburse districts for deficiencies in prior years related to higher-than-expected growth. In order to ensure that state spending for special education will meet the federal maintenance of effort requirements for 2004-05, the budget provides the full amount of funding for special education and does not reduce the appropriation to account for the P2 shift. However, although the 2003-04 special education appropriation will not be reduced by the estimated P2 shift amounts, the 2003-04 second principal payment will still be deferred until July 2004, along with the rest of the principal apportionment.

In addition, the budget provides $69 million in federal funds to partially offset costs to counties of providing mental health services for special education students under AB 3632 of 1984.

Federal statutes require school districts to provide mental health services to students who need the services to learn. In 1984, the state required county mental health departments (rather than school districts) to provide these services. Funding to reimburse counties for these costs through the state mandate claiming system (about $100 million annually in past years) was not provided in 2002-03 and is not provided in the 2003-04 budget. Counties have voiced concern about the lack of state reimbursement for these services and one county has stopped providing services under the program. If this happens, school districts would be required to provide these services under federal law.

Child Development Programs

Funding for child development programs in the 2003-04 budget assumes approximately $342 million of savings through programmatic changes that modify current eligibility rules and reimbursement rate limits. Specific program changes include: the elimination of services to children 13 years old and over, the elimination of services to “grandfathered” families earning more than 75 percent of the State Median Income, and changes to the Regional Market Rate and administrative and support services rate for Alternative Payment Providers.

The 2003-04 budget reflects the reversal of the January proposal to shift responsibility for child development programs to local government and restores $800 million in funding that had been proposed to be eliminated. However, the Governor has stated his belief that realignment of child development programs continues to be a viable way to resolve a number of policy and fiscal concerns regarding the state’s subsidized child care and development programs. The Governor has stated that the restoration of Proposition 98 funding for child development programs in 2003- 04 is not an elimination of his proposal, but merely a deferral until the 2004-05 fiscal year, pending legislative consideration.

Vocational and Adult Education

The 2003-04 budget includes the May Revision targeted reduction of $7 million (0.73 percent) in funding for Regional Occupational Centers and Programs (ROC/Ps) and adult education programs. Additionally, the budget reduced funding for adults in correctional facilities by $5.1 million related to anticipated savings ($2.1 million compared to revised 2002-03). The 2003-04 budget package does not include other proposed reductions to ROC/Ps and adult education programs included in the May Revision. The budget also continues $1.7 million in funding for the School-to-Career Partnerships program, previously administered by the Office for the Secretary of Education. However, the 2003-04 budget package transfers the administration of the program to the CDE.

Assessment and Accountability

Funding in the 2003-04 budget for assessment programs is almost $26 million lower than 2002 Budget Act levels. Significant changes include a $16 million reduction for the elimination of the Golden State Exam and Assessments in Career Education and a $10 million unallocated reduction to assessment programs. This reduction may be realized through changes in the California High School Exit Examination (CAHSEE) and the Standardized Testing and Reporting (STAR) Programs.

Funding for programs under the Public School Accountability Act is $132 million lower than the 2002 Budget Act. Changes include a $77 million reduction to eliminate funding for awards for the High Achieving/Improving Schools program, a $54 million reduction to the Immediate Intervention/Underperforming Schools Program (II/USP) for schools exiting the program, and a $3 million reduction for corrective actions. No funding is provided for a new cohort of schools in the High Priority Schools Grant Program (HPSGP) program. However, funding is provided for the final payments for the 2002-03 II/USP and HPSGP grants that were deferred by recent legislation. The 2003 Budget Act continues this deferral of the final payments for 2003-04 grants for these programs to the 2004-05 fiscal year.

Instructional and Library Materials and Education Technology

The budget package reduces funding for instructional materials by $221 million compared to 2002 Budget Act levels (consisting of a loss of $146 million in one-time funding plus a reduction of $75 million in ongoing funding) and reduces funding for school and classroom library materials by $14.6 million compared to the 2002 Budget Act. The 2003-04 budget package also reduces funding for the California Technology Assistance Program (CTAP) by $1 million, eliminates funding for the Institute of Computer Technology, and eliminates funding for a new cohort of implementation grants for the California School Information Services project.

Staff Development and Teacher Credentialing

Funding for the Peer Assistance and Review Program is, once again, reduced; this time by $40.1 million—a 71 percent reduction from the 2002 Budget Act level and a 61 percent reduction from the revised 2002-03 funding level. The budget also eliminates funding for the Administrator Training and Evaluation Program and Advanced Placement Challenge Grant, suspends funding for the Teaching as a Priority Block Grant, and eliminates funding for the now-repealed Teacher Recruitment Centers program.

Funding for the incentives for teacher certification by the National Board of Professional Teaching Standards (NBPTS) will be $2.7 million (27 percent) below 2002-03 levels. Funding for Advancement Via Individual Determination (AVID) is equal to the revised 2002-03 level of $10.3 million. The budget also provides $31.7 million for the Mathematics and Reading Staff Development Program enacted by AB 466 (Chapter 737, Statutes of 2001) and $5 million for the Principal Training Program enacted by AB 75 (Chapter 697, Statutes of 2001).

Supplemental Instruction Programs

The 2003 Budget Act reduces funding for supplemental instruction programs by $141 million (28 percent) compared to 2002 Budget Act levels. This includes a $13 million reduction to reflect the continuation of 2002-03 expected savings, a $43.3 million reduction due to the suspension of funding for the Intensive Algebra Instruction Academies and Elementary School Intensive Reading Program and a $72 million funding cut related to a reduction in the funding cap for the core academic supplemental instruction programs from seven percent to five percent. The budget also reduces funding for supplemental instruction for second through ninth grade pupils who are retained or recommended for retention by $12.9 million to reflect the projected impact of a cap (effective January 1, 2003) on pupils who are at-risk of retention.

Other Programs

Additional actions reflected in the 2003-04 budget package include the elimination of funding for Miller-Unruh reading specialists, intergenerational programs, Geography Education Alliances, and college preparation partnership programs; and targeted funding reductions for charter school facility grants (23 percent), the School Improvement Program (10 percent), Gifted and Talented Education (18 percent), Supplemental Grants (33 percent), and deferred maintenance (63 percent). The final budget also includes reductions for projected savings due to lower-than-expected participation rates in programs for community day school pupils, high-risk youth, and beginning teacher support and assessment.

On a positive note, the 2003-04 budget restores funding for three programs that were not funded in 2002-03: the Gang Risk Intervention Program, the Academic Improvement and Achievement Act, and the Local Arts Education Partnership Grant Program.


As indicated above, the budget does not reduce the 2003-04 special education appropriation for the P2 shift. Instead, the 2003-04 budget implements deferrals in the following programs: pupil transportation ($50 million), Targeted Instructional Improvement Grants ($95 million), and school safety and violence prevention grants ($82 million). The $82 million deferral for the school safety grants defers all but $87,000 of the program into the 2004-05 fiscal year. Because pupil transportation funding is allocated through the Special Purpose Apportionment (which is subject to a statutory monthly apportionment schedule), the $50 million pupil transportation deferral will affect payments throughout the year, instead of the final payment alone. The deferral will result in an estimated $5 million (9.6 percent) reduction in each of the 10 monthly apportionments for the 2003-04 fiscal year, beginning with the September 2003 apportionment. The budget package also includes the suspension of the School Bus Safety II and School Crimes Reporting II mandates and the deferral of funding for all remaining reimbursable state mandates.

Programs Administered by Other Agencies

The 2003 Budget Act eliminates funding for the California Math Initiative for Teaching and reduces funding for alternative credentialing programs by $5.4 million (12 percent) compared to 2002 Budget Act levels. The Commission on Teacher Credentialing (CTC) administers both programs. The budget also reduces funding for the Early Mental Health Initiatives— administered by the Department of Mental Health (DMH)—by $5 million (33 percent), and eliminates funding for the Academic and Volunteer Mentor Program, administered by the Office of the Secretary for Education (OSE).

Federal Funds

The budget includes over $2.8 billion in federal No Child Left Behind (NCLB) funds for local use, for a total increase of $333 million (13 percent) compared to 2002-03. Significant increases include:

  • $211 million (15 percent) for basic Title I grants to schools in lower-income areas of the state,
  • $13.6 million (10 percent) for the Title I Reading First program, to help ensure K-3 pupils develop reading proficiency,
  • $14.0 million for the new Title II Mathematics and Science Partnership Program,
  • $20.5 million (six percent) from Title II funds for teacher training, recruitment and retention activities, and class size reduction,
  • $4.2 million (five percent) for Title II grants for education technology,
  • $21.4 million (19 percent) from Title III funds for English language instruction and
    supportive services to limited English proficient pupils,
  • $8.4 million, (37 percent) from Title V funds for charter schools, and
  • $1.2 million, (four percent) from Title VI funds to refine the state’s system of assessments and continue development of data collection to meet NCLB reporting requirements
Flexibility Language Issues

The 2003-04 budget package contains a number of budget bill and statutory language changes dealing with LEA flexibility in the use of categorical programs and reserves. The 2003 Budget Act includes the traditional “Mega-Item” flexibility budget language (Control Section 12.4) that allows LEAs to transfer funds between specified categorical programs. However, the 2003 Budget Act reduces the amount of the transfers to a maximum transfer out of 10 percent of the 2003-04 state allocation for a qualified program and a maximum increase to a qualified program from incoming transfers of 15 percent of the 2003-04 state allocation for the receiving program. The language in earlier fiscal years allowed maximum transfers of 20 percent out and 25 percent in.

The education omnibus trailer bill (AB 1754) includes several provisions to provide additional flexibility to assist LEAs in surviving the current funding reductions. AB 1754 adds statutory language (Education Code section 33128.3) that, for the 2003-04 and 2004-05 fiscal years, revises the minimum recommended reserve for economic uncertainties to be one-half of the percentage previously adopted by the State Board of Education. Beginning in 2005-06, the reserve percentages revert to their former levels.

Section 43 of AB 1754 declares the current requirement in Education Code section 17584.1 that LEAs contribute a certain amount of funds toward deferred maintenance to be inoperative for the 2003-04 fiscal year; this would not preclude them, however, from being eligible for the state’s matching share. Additionally, Section 39 of AB 1754 provides that, for the 2003-04 fiscal year only, LEAs may use up to 100 percent of their general fund and cafeteria fund restricted balances as of June 30, 2003 to mitigate the 1.2 percent reduction in revenue limits. However, Section 39 states that LEAs may not use funds reserved for capital outlay, bond funds, sinking funds, or federal funds; or balances in the following programs: Special Education, Economic Impact Aid, Targeted Instructional Improvement Grants, Public School Accountability Act programs (II/USP and HPSGP), and Instructional Materials.

Additional information on the flexibility provisions in AB 1754 will be provided in the near future in a letter from the School Fiscal Services Division (SFSD). Detailed questions regarding the impact of the 2003-04 budget on specific programs should be directed to appropriate staff in the SFSD at 916-322-3204, if the program is allocated through the apportionment processes, or to the CDE program staff for other affected categorical programs. General questions regarding this bulletin or the 2003-04 budget should be directed to the Fiscal Policy staff of the Fiscal and Administrative Services Division at 916-445-0541.

Notice: The guidance in this bulletin is not binding on local educational agencies or other entities. Except for the statues, regulations, and court decisions that are referenced herein, this bulletin is exemplary, and compliance with it is not mandatory. (See Education Code section 33308.5.)

Budget Act and Related Legislation
Prior Fiscal Year’s Budget
Bill # Chapter Year Description
AB 425 Chapter 379 2002 2002 Budget Act
2002-03 Changes
Bill # Chapter Year Description
SBX1 18 Chapter 4, First Extraordinary Session 2003 2002-03 reductions, round 1
SBX1 28 Chapter 10, First Extraordinary Session 2003 2002-03 reductions, round 2
SB 1040 Chapter 26 2003 2002-03 reductions, round 3
2003-04 Budget Act
Bill # Chapter Year Description
AB 1765 Chapter 157 2003 2003 Budget Act

2003-04 Education Trailer Bills
Bill # Chapter Year Description
AB 1754 Chapter 227 2003 Omnibus Education Trailer Bill
SB 1045 Chapter 260 2003 Local Revenue Trailer Bill
AB 1266 Chapter 573 2003 Policy Education Trailer Bill
Other Related Education Bills
Bill # Chapter Year Description
AB 300 Chapter 552 2003 Education Technical Bill
AB 1137 Chapter 892 2003 Charter School Policy Bill
Summary of 2003-04 K–12 Program Changes
General Fund ($ in thousands)
Program Reductions (compared to 2002 Budget Act)
Percent Change
6390 Adult Education apportionments
6260,-1,-3 Alternative credentialing programs (CTC)
7110 California Technology Assistance Program (CTAP)
6030 Charter school facility grants
various Child Development programs
6020 CSIS local implementation (no new cohort)
0000 Deferred Maintenance
6250 Early Mental Health Initiatives (DMH)
various Excess tax districts, cut to categoricals (about 1.2% of revenue limit)
7140 Gifted and Talented Education
7255 Immediate Intervention/Underperforming Schools Program
7156 Instructional Materials
6267 NBPTS certification incentives
7271 Peer Assistance and Review (61.4% compared to revised 02-03)
7256 Public School Accountability Act, Corrective Actions
6350 Regional Occupational Centers and Programs
6292,-6 School and classroom library materials
7260,-5 School Improvement Program
7810 School-to-Career Partnerships (was OSE now CDE)
0000 State mandates (2 suspended, rest deferred)
0000 Student assessments (excluding GSE & ACE)
various Supplemental Grants
0000 Supplemental Instruction (Core Academic--cap reduced from 7% to 5%)
0000 Supplemental Instruction (Grades 2-9 remedial--related to cap of at-risk)

Program Reductions Due to Anticipated Savings (compared to 2002 Budget Act)
Percent Change
6015 Adults in Correctional Facilities
7280 Beginning Teacher Support and Assessment (BTSA)
2430 Community Day Schools
6575 High-Risk Youth Education and Public Safety Program
0000 Supplemental Instruction (Core Academic)

Program Eliminations/Suspensions (compared to 2002 Budget Act)
Percent Change
6270 Academic Volunteer Mentor Program (OSE)
7320 Administrator Training and Evaluation
7274 Advanced Placement Teacher Training
0000 Assessments in Career Education
6261 California Math Initiative for Teaching (CTC)
7336 College Preparation Partnership Program
7810 County Office Oversight, District Hiring Practices
0000 Elementary School Intensive Reading Program
7810 Geography Education Alliances (Non-98)
0000 Golden State Exam
7125 Institute for Computer Technology
0000 Intensive Algebra Instruction Academies
6280 Intergenerational Programs (Non-98)
7200 Miller-Unruh Reading Program
6265 Teaching as a Priority Block Grant
6255 Teacher Recruitment Centers
4130 Workforce Investment Act, Vocational Education (Non-98)

Deferrals of 2003-04 funding into 2004-05 (compared to total funding)
Amount Deferred Percent Deferred
7230 Pupil Transportation
6405 School Safety and Violence Prevention Grants
7045 Targeted Instructional Improvement Grant

Significant Program Increases/Restorations (compared to revised 2002-03)
Resource Program Change

Increased /Restored

7337 Academic Improvement & Achievement Act
0000 Advanced Placement Fee Waivers
5310 Child Nutrition
6215 Gang Risk Intervention Program
7258 High Priority Schools Grant Program
7018 Local Arts Ed. Partnership Grant Program
7325 Principal Training
Summary of 2003-04 K-12 Program Changes
Federal Funds
($ in thousands)
Program Reductions/Eliminations (compared to revised 2002-03 budget)
Resource Program Change Percent Change
various Adult Education (WIA, Title II)
3718 Community Service Grant Pgm (NCLB, Title IV, Part A, Subpart B)
3710 Drug Free Schools--Safe & Drug Free Schools (NCLB, Title IV, Part A)
4015 Exploratorium--Eisenhower Teacher Training (IASA, Title II)
4110 Innovative Programs (NCLB, Title V)
various Migrant Education (NCLB, Title I, Part C)
various Perkins (Carl D) Vocational and Technical Education Act of 1998
3870,-71 Reading Excellence Act (IASA, Title VIII)
4140,-41 School Renovation Program

Program Increases (compared to revised 2002-03 budget)
Resource Program Change Percent Change
4124 21st Century Community Learning Centers (NCLB, Title IV, Part B)
0000 Assessment (NCLB, Title VI)
various Basic Grants and various other programs (NCLB, Title I)
various Child Care and Development
5310 Child Nutrition
4045 Enhancing Education through Technology (NCLB, Title II, Part D)
4035 Improving Teacher Quality--Local Grants (NCLB, Title II, Part A)
4201, -3 Language Acquisition (NCLB, Title III)
new Math & Science Partnership Grants (NCLB, Title II, Part B)
5630 McKinney-Vento Homeless Children Assistance Grants (NCLB, Title X)
4610 Public Charter schools (NCLB, Title V, Part B)
3030 Reading First (NCLB, Title I, Part B)
4216 Refugee Children--School Impact Grant
4126 Rural & Low Income School Program (REAP) (NCLB, Title VI, Part B)
various Special Education (IDEA)


Legend for Federal Program Acronyms:

NCLB = No Child Left Behind (current reauthorization of the Elementary and Secondary Education Act (ESEA))
IASA = Improving America’s Schools Act (previous reauthorization of ESEA)
IDEA = Individuals with Disabilities Act
WIA = Workforce Investment Act

Last Reviewed: Monday, September 19, 2016

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