Simplicity
  A district's revenue limit is the minimum amount a district can count on receiving in state funds and local property taxes for each child attending school daily -- but because of modifications, there are multiple figures for each district.
Almost $11 billion reaches schools in more than 70 separate programs known as categoricals -- but despite the policy intent of each program, funding is rarely linked to actual student need or program costs.
The complexity of revenue limits and categorical programs results in extensive paperwork, public confusion, misdirected energies, misfocused incentives and many inequities.
California spends more than $3 billion on a Special Education program that is widely recognized as inequitable and inadequate.

Simplifying the System

Finding 1: The present education funding system is convoluted -- driving up administrative costs, diverting attention from educational concerns and depriving the public of readily accessible, comparative information.

Money reaches districts, school campuses and individual classrooms through complex formulas that are difficult to understand and that are constantly manipulated by state policy makers, state bureaucrats, school administrators and outside consultants. The convoluted system is very difficult for the public to understand -- and therefore to trust and support. In addition, the system is expensive for the State to administer and oversee for fiscal accountability. The same is true for districts, whose decisions are sometimes driven by financial factors that have only a tenuous connection with educating children.

None of these education financing problems is unknown to the people who make the rules and the people who live under them. The Legislative Analyst's Office, the Department of Education and the Department of Finance are under legislative direction to deliver a report this year on streamlining the basic system of providing funding to schools. In the past, the Legislative Analyst has urged reform of the system, as well as changes in the way earmarked funds are delivered to schools. The Constitutional Revision Commission and many education-specific think tanks have advanced the rationale for simplifying the system.

But the problems and complexity have stubbornly persisted and in many cases grown more so despite the decades of calls for reform. The following sections detail the two major elements that make the system complicated: revenue limits and categoricals. In addition, they provide examples of the consequences of complexity and describe various proposals for reform.

The Elements of Complexity: Revenue Limits

The base funding for school districts is known as the revenue limit -- the minimum amount a district can count on receiving in state funds and local property taxes for each child attending school daily. If the district's share of property taxes is less than the revenue limit, then the State provides enough funding to make up the difference.

Even if the district's property tax resources exceed the revenue limit, then the State still provides $120 per unit of Average Daily Attendance (ADA) -- the "basic aid" that the Constitution requires the State to give each school district at a minimum. Out of 1,000 school districts, there are about 60 basic aid districts -- mostly rural or sparsely populated districts with high assessed valuations.

Revenue limits are a product of history and policy decisions molded by court actions -- rather than a calculation of the cost of the elements that add up to an adequate education. As described in the Background, the Serrano decisions prompted the Legislature to create revenue limits as a starting point for equalizing the ability of districts to raise funds. The revenue limits were benchmarked in 1973-74 to each district's general purpose revenues per Average Daily Attendance (ADA) for 1972-73. Thus, already-existing disparities in resources and levels of local commitment to funding education were locked into place.

Then, to begin the equalization process, variable cost-of-living adjustments (COLAs) were applied to the revenue limit. If a district had a revenue limit below the state average revenue limit, then it received the full percentage COLA. If a district's revenue limit was higher than the statewide average, then the district received a smaller percentage COLA. Over time, this process was designed to squeeze the wealthy districts and raise the poor districts until -- theoretically -- everyone met at the same point.

In 1983, the percentage COLAs were replaced by a flat amount that each district received per ADA. Equalization was provided through special additional funding designed to bring the lowest districts up to the statewide average. Each year, this creates a new, higher statewide average that below-average districts needed to be raised to.

The choice to benchmark revenue limits to historical funding patterns created a slow equalization process. A faster way would have been to simply take excess property taxes away from wealthy districts and redistribute them to poor districts -- a Robin Hood approach that provides instant equity but displeases taxpayers in wealthy districts and creates the potential of moving all education programs to a mediocre level by slashing high-spending programs. The least-politically disruptive method of achieving dollar equity was to guarantee all districts their historical level of funding and then give low-spending districts incrementally larger increases to begin to close the gap.

Simple in theory, the method has proven complex in reality. First, while the Serrano decisions defined equity as being within a spending bracket of $300 (as adjusted for inflation), the courts allowed six different categories of equity. This recognized that small districts have disproportionately high costs for administration, that elementary districts are less expensive to staff than high school districts and that unified districts (encompassing both elementary and high school programs) fall in between.

As the table above indicates, equity does not mean equality: The average revenue limits for 1994-95 ranged from $3,317 at large elementary districts to $4,560 at small high school districts. (By definition, a large elementary school district has more than an average of 100 children attending daily (Average Daily Attendance or ADA), a large high school district more than 300 ADA and a large unified school district more than 1,500 ADA.)

Second, because there are 1,000 different school districts, there are 1,000 different revenue limits. That means that a child has a different revenue-raising potential that is dependent on the district the child resides in rather than on individual educational needs. Johnny Smith and Bonnie Brown -- first graders with similar socio-economic backgrounds and educational aptitudes -- may generate for their different elementary schools $3,150 and $3,450 respectively for no better reason than that they live in different parts of the state. Multiplied over a district's entire population, the $300-per-student difference allowed under Serrano can have a substantial impact on the resources available to a school and a district.

Although approximately 97 percent of students attend districts that have funding within the prescribed $300 band, many of the lowest and highest spending districts -- which as the ADA figures in the table on the previous page indicate have relatively small numbers of students -- fall outside the allowed range.

Although a level of court-accepted equity has been achieved and disparities outside the $300 band affect only small numbers of students, researchers have noted that there are patterns of inequity within the band. Urban districts receive about 7 percent less and suburban districts about 6 percent less than the state average, while rural districts -- helped by funding that compensates small districts for diseconomies of scale -- receive about 9 percent more. Urban districts make up the difference in categorical funding, the special earmarked funding not affected by Serrano that will be discussed in the next section: They receive 44 percent more than the state average in categorical funding.(40)

The third factor that plays a role in funding complexity are the adjustments, limitations and choices that may apply to all districts, be imposed on some districts or be selected by other districts. For instance, while the revenue limit began as a figure keyed to 1972-73 expenditures, the Governor and Legislature have made multiple adjustments over the years, including providing funding for equalization, longer school days and years and other modifications. One example is an amount that is subtracted from each district's revenue limit to recapture for the State a reduction in retirement contributions that employer/school districts must make to the Public Employees Retirement System.

Another adjustment is an artificially created gap between actual and "required" funding. During the recession of the early 1990s, revenue limits were allowed to increase by the COLA amount dictated by statute -- but actual funding provided by the State and property taxes was less. Better economic times have not reversed the situation and past COLA deficits have not been recouped by districts. The COLA required in 1995-96 was the first fully funded increase of the 1990s. But the COLA deficit accumulated since the 1990-91 fiscal year means that schools are being funded at about 10 percent less than their base revenue limits.(41)

In addition, there are limitations imposed on basic funding for districts. School districts with high revenue limits -- theoretically the amount they receive for each unit of ADA -- are not allowed to collect full funding for student population growth. Instead, they are limited to 105 percent of the state average revenue limit for their type of district for each unit of ADA above the 1982-83 attendance. This limits the State's share of costs and pushes high-spending districts closer to the state average ability to raise revenues.

Finally, there are choices that school districts may make about their revenue limit. At various times, districts have been given the choice of rolling some types of funding -- such as transportation and supplemental grants -- into their revenue limit rather than continuing to receive funds in specific categories. For each school, the best decision may be different depending on shifts in student population, needs and school conditions. As a result, revenue limits for schools do not always cover comparable budget items.

Because of the different modifications -- some imposed and some chosen -- there are five different revenue limits, according to the Legislative Analyst's Office, which provides the following definitions:(42)

  • Statutory Base Revenue Limit -- The revenue limit defined in statute. Based on 1972-73 actual funding plus COLAs and equalization and other adjustments that have been provided subsequently.

  • Equalization Base Revenue Limit -- Equal to the statutory base revenue limit less additional funds for longer school day, longer school year and minimum teacher salaries. Used for revenue limit equalization, this limit divides districts into six categories based on type of school and size.

  • Blended Revenue Limit -- Equal to the district's statutory base revenue limit multiplied by the ADA enrolled in 1982-83 and 105 percent of the statewide average statutory base revenue limit multiplied again by any growth in ADA since 1982-83. Applicable only for about 161 districts that have revenue limits in excess of 105 percent of the state average.

  • Deficited Base Revenue Limit -- Equal to about 90 percent of a district's statutory or blended revenue limit. The deficit factor reflects the experience of the early 1990s when revenue limit entitlements were inflated by statutory COLAs each year, but were not fully funded in the annual budget acts. All school districts are affected by this adjustment, which represents the gap between an artificial revenue limit and actual cumulative increases in funding.

  • Adjusted Funded Base Revenue Limit -- Equal to the deficited base revenue limit less recaptured savings in the Public Employees Retirement System (PERS) costs. With the exception of San Francisco Unified School District, which is not part of PERS, every school district has a unique PERS adjustment.

    Determining what revenue a district can count on, therefore, is a multi-step process. The paperwork to calculate a district's revenue entitlement exceeds two dozen pages. Even a "simple" diagram, when accompanied by a step-by-step explanation, makes it clear that the determination of a district's revenue is complicated. Revenues and Limits: A Guide to School Finance in California, a widely acknowledged "bible" for school finance, offers a diagram similar to the one below and the following description, along with 40 pages of more detailed explanation to assist schools in filling out state forms:(43)

    Step 1: The base revenue limit is equal to the prior year's limit before any deficit, with add-ons for supplemental grants the district may have chosen to fold into the limit and for equalization aid. This amount is multiplied by the ADA, which can be altered by the 105 percent limitation for ADA growth over 1982-83 for high-spending districts.

    Step 2: Added to the new base revenue limit are adjustments that are subject to the COLA deficit, such as the money for meals for needy students.

    Step 3: A deficit factor is then applied to the revenue limit to reflect the shortfall in funding since 1990-91.

    Step 4: Adjustments are then added that are not subject to the deficit, such as amounts for unemployment insurance and continuation high schools.

    Step 5: An amount that reflects the State's recapture of the lower employer payments to PERS is subtracted.

    Step 6: The amount from Step 5 that will be covered by the district's share of local property taxes is subtracted, leaving the amount of state aid required.

    Step 7: The state aid is increased by allowances for summer school.

    In each of the steps above, the school district must calculate its entitlement, making a variety of choices. For instance, before reducing the revenue limit to adjust for the PERS recapture, a district should determine what salaries may be excluded from this provision, including those that are funded federally or those that are court or federal mandates. In another example, mandatory summer school offerings for certain students are funded at one rate for growth in hours over a 1983-84 base year and a different rate for non-growth hours. There is no cap on funded hours, unlike the non-mandatory summer school program -- where the cap pertains to hours but is based on 7 percent of the district's enrollment.

    The examples above -- each with their own twists and turns -- all deal with a school district's basic funding for each child. This revenue limit funding makes up a little more than two-thirds of all school support. The complexity only increases when the focus turns to the other funding mechanisms, known as categorical programs.

    The Elements of Complexity: Categorical Funds

    About $10.8 billion reaches school districts through more than 70 separate programs known as categoricals. Funding comes from both the State and the federal government, but by far the largest amount is from the State. In general, categoricals are programs that define how money can be spent. Most sources define three types of categoricals:

  • Special needs -- These programs address the needs of certain types of students, such as special education, economically disadvantaged and non-English-speaking students. Special Education is the single largest categorical program, with about $2 billion in combined state and federal funding this year. (The funding process for Special Education will be examined in Finding 2.)

  • Special costs -- Some districts face high costs that other districts do not. For instance, if there is a court-ordered desegregation plan, then districts receive funding to cover transportation and other costs associated with carrying out the order. Other districts may have unusually small schools that are costly to administer but that are not feasible for consolidation because of geography.

  • Incentives -- The State often encourages school districts to take specific actions or implement certain programs by offering partial funding in a categorical program. For instance, school-based decision-making is encouraged by the School Improvement Program, which provides extra funding to districts that shift control of program and budgetary choices to local schools. Another example is last year's funding for schools that reduced the size of kindergarten, first- and second-grade classes. The class-size reduction program was not a mandated program, but a choice that districts could make. The State offered partial funding in return for a district's commitment to lower class sizes to 20.

    An exact count of categoricals is difficult. Some programs may be double counted because they show up in the state budget twice -- in both a general listing and a budget category known as the "mega-item." Some categoricals have multiple branches of programs under them, such as staff development, which includes administrator training, geographical education and intersegmental programs. And some are not clearly defined as categoricals -- such as state lottery funding, which is largely unrestricted in terms of spending but which is outside of basic revenues. The two listings provided below and on the following page are from the State Department of Education's Management Bulletin 96-05. They indicate a total of $8.5 billion for general categoricals and $2.3 billion for mega-item categoricals in 1996-97.

    The mega-item groups the funding for more than two dozen categoricals in a single budget listing. Originally intended by the Legislature to protect certain programs from being blue-penciled by the Governor, the mega-item gives districts limited flexibility to move up to 15 percent of funds from one category to another and to increase a single category as much as 20 percent as long as all of the programmatic requirements are met.(44)

    The mega-item has not met with universal approval: Some districts complain that there is not enough flexibility and some program advocates charge that districts have used the flexibility to keep the costs of programs from infringing on general education money rather than to expand services in specific areas of need. Special Education, originally in the mega-item, was removed under strong pressure from advocates who felt flexibility was being used by districts to shortchange Special Education needs. Nonetheless, many experts continue to push for more flexibility of expenditures at the local level as the best way to blend services and meet student need. But from a purely structural perspective, the mega-item approach is one more complication of the education finance system that requires further reporting and tracking of expenditures in unique ways.

    Unlike a school's basic funding, categoricals are not necessarily tied to pupil count or the actual costs of providing services. For instance, a district receiving funds for Gifted and Talented Education (GATE) does not receive a larger amount if it identifies more students as eligible for the program. Once a district has more than 50 GATE students, the allocation is a set amount -- about $7 -- multiplied by the district's ADA.(45) Another example is the distribution of Economic Impact Aid funds, assistance for schools with high concentrations of students with special needs. The bulk of these funds are distributed with a formula that focuses on maintaining at least 85 percent of the district's prior year funding regardless of the number of students who need services.(46)

    Also unlike basic funding, few categorical programs are increased each year for cost-of-living adjustments. That means a district may participate in a categorical program the first year it is offered and then find that the state funding is less and less able to cover program costs as inflation occurs each year.

    Despite the lack of COLAs, growth in categorical funding has been much faster than the growth in general funding. Between 1982-83 and 1991-92, the K-12 budget grew faster than inflation and enrollment growth by 11.1 percent -- but general revenues increased only 5.5 percent during this time.(47) The share of education funds going to categoricals grew from 13 percent in 1979-80 to more than 29 percent in 1991-92.(48)

    There are several reasons for this fast-paced increase in categoricals. As a practical matter, implementing change is much cheaper if a program is voluntary rather than mandated. For each dollar per student that a program costs, systemwide implementation requires $5.6 million in funding. Multiplying that by the tens or hundreds of dollars per student that a program might cost quickly reaches a staggering amount that is an effective barrier to reform. One often-used alternative is to create a categorical that offers districts partial funding as an incentive for implementing the desired reform -- limiting both the number of students affected and the State's share of the overall cost.

    Politics enters into the decision to increase categorical funding, as well. Researchers have indicated that districts have learned to band together and lobby for specific, limited types of funding because success is more likely than when educators are seeking changes that require systemwide dollars.(49)

    In addition, many members of the Little Hoover Commission's advisory committee pointed out that politicians enjoy taking credit for delivering increased funding for specific popular programs, such as class-size reduction.

    Conversely, politicians receive scant public praise for increasing base funding for schools. Commission advisory committee members also pointed out that some politicians fear that increases in basic school funding may be bargained away at the local level for higher salaries, an option not available to school boards if funding is tied up in a categorical program. These politicians prefer to see increased funding spent for reforms, supplies or enhancements rather than salary adjustments.

    What history reflects is that the well-entrenched education financing system is not unchanging -- it grows more complex all the time. With two-thirds of education funding coming from a complicated base formula and the other third from restricted programs, school districts, the State and taxpayers face a variety of problems stemming from the financing mechanisms.



    Consequences of Complexity

    No one has placed a price tag on administering school finances and ensuring compliance with restrictive requirements. There has been no calculation of the diverted energy or resources that may be better spent on teaching students. And no study has quantified the portion of taxpayer disillusionment with education that stems from the financing complexity.

    But there are real monetary costs that are a direct result of the way the education finance system is set up and many sources acknowledge a myriad of problems. These include:

  • Extensive paperwork. Each of the 1,000 districts each year calculates its revenue limit using a 30-page form that accounts for the myriad of adjustments, add-ons and subtractions that districts are allowed or forced to take. In addition, categorical programs have their own paperwork, justifying district eligibility and documenting expenditures. Teams of district personnel to fill out the paperwork are matched by teams of state workers to check it. In addition, most school districts of any size spend money on consultants for advice on how to maximize funding or pass audits.

    A recent study by the Rand Corporation indicates that districts with high amounts of categorical funding spend a disproportionate amount on administrative duties that are linked to those programs.(50) While no one the Commission talked to could estimate the cost on all sides, most agreed it was in the multi-millions of dollars statewide.

  • Public confusion. Neighboring districts with similar demographics and programs may have varying revenues because of historical spending patterns (reflected in the revenue limits) and/or individual district choices. This makes it difficult to ensure that comparisons made by the public are not apples versus oranges.

    State officials told the Commission the problem has been particularly noticeable in the past few years when the State did not fully fund the cost-of-living adjustments -- and then eventually began supplying additional funding to make up for some of the deficit in annual increases. Citizens who try to compare their district's revenue limit with another's may not know whether they are dealing with revenue limits before or after adjustments for deficits, summer school and other factors. Even if they know what they are comparing, the fact that there are differences unrelated to educational need leads to public dissatisfaction.

  • Misdirected energies. Documenting eligibility or compliance may require a district to concentrate on non-educational activities. For instance, Average Daily Attendance is a key figure in many education finance computations. As the Little Hoover Commission has noted in a prior study, California is the only state that counts pupils who are present each day and then allows a district to add in students who have documented that absence was due to illness. While some state officials have argued that this provides a district the incentive to work against truancy, the practical effect is to devote school attention to collecting "sick" notes from parents rather than educating children.

  • Misfocused incentives. If a district knows it can maximize funding by taking certain steps or making certain decisions, it is likely to be influenced in its choices by something other than specific local educational needs. For instance, schools have little incentive to reclassify children as proficient in English since having large numbers of children that have limited English proficiency increases a district's eligibility for aid.

    Another example is the class-size reduction program. Districts were under heavy public pressure to participate since small classes are very popular with parents. But one district official told the Commission he believed a higher priority for his district would have been computers and technology in high school if the district had been free to make a decision on spending the funds in a way that met local needs.

    A third, small example of choices that are not focused on education was the decision of a charter school to move from one district's sponsorship to another in 1996 (the physical location of the school remained the same). The district losing the charter school enrollment gained $250,000 in assistance for districts with declining enrollment. The district gaining the charter school grew large enough to support speciality services that are difficult to provide when a district drops below 600 students. The impact on the students and their education? According to those involved, none.(51)

  • Categorical inequity. Categorical funding was left outside the Serrano decision's mandate for equity because it supposedly addresses special needs or costs. But categorical funding in most cases is not reviewed each year to determine shifting need, nor are programs assessed to determine if they are effective.(52)

    While categoricals can increase administrative overhead, they also stretch dollars in ways that are not available to districts that are not eligible for categoricals. For instance, a principal is necessary regardless of a school's special needs. In a district with special needs, a portion of a principal's salary may be paid with categorical funding; in a district with only basic revenues, the principal's salary cannot be defrayed. Just such an argument led in 1989 to the State creating supplemental grants for schools that had low revenue limits but could demonstrate no special need and therefore were getting less than their "share" of categorical funding. The creation of a special-needs funding pot for schools with no special needs has been viewed with some sense of irony by many education critics and commentators.(53)

    In addition, one district may have qualified for a categorical program when the program was created and may continue to receive funds even if district needs have changed. Another district that did not qualify when the categorical was created may now have similar needs -- but funding limitations may prevent the new district from fully participating in the categorical allocation.

  • Categorical encroachment. The State does not pretend to fully fund the programs required in return for categorical funding eligibility. From the State's perspective, the required district funding represents a local match that ensures local efforts to be efficient and local ownership of and investment in the program. From the districts' perspective the shortfall encroaches on basic funding that should be used for general education purposes.

    A study of three categoricals, Special Education and two involving transportation, demonstrated that encroachment for these three categoricals in 88 districts in the early 1990s represented only about 6 percent of a average district's total budget -- a seemingly small amount. But when looked at from the perspective of uncovered costs, the study showed that an average of about 30 percent of Special Education and 60 percent of transportation costs had to be paid by general funds in those districts.(54)

    The problems arising from this are particularly evident in Special Education, which will be discussed in the next finding, and the class-size reduction program. District officials have complained loudly that the shortfall in funding for small kindergarten through third-grade classes means that they must chop away at programs that now serve fourth grade and up to balance their budgets.

  • Rising tensions. The separation of funding into distinct pots of money when the total amount of education dollars is a relatively fixed amount under Proposition 98 causes different interest groups to fight against each other for funding advantage. These tensions play out in the Legislature, within districts and at individual schools. The turf battles over who will get funding and who will lose funding makes it difficult to focus on overall educational needs.

    The problems arising from school financing complexity have become deeply entrenched. Districts are hesitant to embrace reform proposals or to advocate change because unintended and unsuspected consequences may leave them in worse financial shape. A large district like Los Angeles Unified School District wants to ensure in any given year that not only does it get at least as much funding as it would under any prior formula but also that it will get its "fair share" -- about 12 percent based on student population proportion -- of any new funding poured into the education pot to allow reform.

    In addition, as already mentioned in connection with categoricals, it is much more enticing for policy makers to take credit for funding specific programs than to face the maelstrom that could erupt if full-scale reform were attempted. Unraveling something as complex as revenue limits and categoricals usually does not top the agenda of those pressing for education reform -- although most agree that the way education is financed drives many of decisions that shape schools and their offerings.

    Despite these effective barriers that bolster the status quo, the calls for reform have come from many quarters and have persisted for many years.

    Reform Proposals

    As indicated in the Background, much of what school financing is today grew out of the Serrano decisions, molded by initiatives and shaped by the interplay of the economy, state resources and competing demands. But even the Serrano court acknowledged there was no one, single answer to reforming school financing. The justices wrote:

    There exist several alternative potential methods of financing the public school system of this state which would not produce wealth-related spending disparities. These alternative methods, which are "workable, practical and feasible," include: 1) full state funding, with the imposition of a statewide property tax; 2) consolidation of the present 1,067 school districts into about 500 school districts, with boundary realignments to equalize assessed valuations of real property among all school districts; 3) retention of the present school district boundaries but the removal of commercial and industrial property from local taxation for school purposes and taxation of such property at the state level; 4) school district power equalizing, which has as its essential ingredient the concept that school districts could choose to spend at different levels but for each level of expenditure chosen the tax effort would be the same for each school district choosing such level whether it be a high-wealth or a low-wealth district; 5) vouchers; and 6) some combination of two or more of the above.(55)


    It is notable that Serrano was resolved without following any of the court-offered mechanisms -- all of which envisioned the State starting from scratch to build a different financing system.

    One of the most vigorous voices for reform has been the Legislative Analyst's Office, which for many years has urged changes in both the revenue limit system and the categorical programs. In a 1993 report about categoricals, the Legislative Analyst reached several conclusions:

  • Categoricals do a good job of allocating resources to specific programs.

  • Because programs are not evaluated, little is known about how well specific programs work.

  • Categoricals encourage districts to focus on process rather than outcomes.

  • Funding formulas can reward district decisions that are not in the best interests of students.

  • The system of categoricals promotes fragmentation of services at school sites.

    The Legislative Analyst recommended increasing flexibility to allow local control; clearly identifying program goals; rewarding schools for good performance; consolidating and simplifying programs; and encouraging a system that responds to feedback about performance.(56)

    In testimony to the Little Hoover Commission, the Legislative Analyst specifically recommended collapsing 21 categoricals into four block grants: school improvement, staff development, a two-party compensatory education to meet special needs and to provide alternative education settings and K-12 evaluation. Other categoricals would continue, including transportation, year-round schools, child nutrition and Gifted and Talented Education.(57) This consolidation plan was endorsed in an April 1995 report by Policy Analysis for California Education, a widely recognized education reform advocacy group.(58) And it has been echoed in legislation last year and this year by Senator Deirdre Alpert and Assemblyman Steve Baldwin.

    As this report is being written, the Legislative Analyst's Office indicated work is still going forward on a joint report with the Department of Finance and the Department of Education on ways to simplify the revenue limit mechanism. The Legislative Analyst told the Commission that two elements of the report should be to re-benchmark the revenue limit so there is only one single figure for each district rather than the five types that exist now and to have districts pay any increases or benefit from any decreases in PERS contributions rather than making adjustments for the State to recapture these funds.

    The Legislative Analyst also urged a return to variable percentage COLAs to put the State back on track toward equal revenue limits for all schools at some point in time. The current flat-rate COLAs promise only that percentages of differences between revenue limits will grow smaller but never disappear.

    Finally, the Legislative Analyst recommended that the State eliminate "basic aid" payments to districts that have excess property tax revenues. These 56 school districts, which earn about $70 million in property taxes above revenue limits, collect another $11.2 million in aid from the State at the rate of $120 per student as dictated by the Constitution. Because this payments gives already-high-wealth districts even more revenue, the Legislative Analyst recommended following a Legislative Counsel opinion about the constitutional provision that the required aid can be of any type including categorical programs. Most, if not all, of these districts would already receive enough state aid and the State could divert the $11.2 million to other more needy districts.(59)

    Other bodies have offered reform advice. The California Constitution Revision Commission was silent about revenue limits and categoricals in its August 1996 report and recommendations. The Commission did, however, focus on the restrictive nature of Proposition 98, which requires that any new appropriation made in one fiscal year become part of the base funding for the next year. The Commission wrote:

    This provision can have a "chilling effect" on any consideration to provide funds above the minimum in a given year because such an increase will result in that new amount setting a new minimum for the following year. Future augmentations might be considered favorably if any augmentation "over the minimum" Proposition 98 funding guarantee could be a one-time practice rather than being built into the future minimum base.(60)


    The Commission recommended more flexibility be infused into Proposition 98 without losing the basic guarantee for school funding.

    EdSource, a non-profit education information center in Palo Alto, offers a menu of questions and choices rather than any specific recommendation about financing reform. Possibilities include a weighted-pupil system that reflects the cost of meeting different educational needs; improving efficiencies by centralizing some functions, regionalizing services and consolidating school districts. Calling for a "systematic review, straightforward evaluation and bold revision," the center wrote:

    An ideal school finance system would be stable, predictable, locally flexible, reasonable to administer, accurate in its data and adequately funded. It would have goals, methods for monitoring and reporting, assurance of equity, and provision for special needs and special factors, such as different financial capacities.(61)


    One long-time education expert, John Mockler of Strategic Education Services, gave the Commission a whimsically titled, but serious model to simplify and beef up education funding (see sidebar on next page right). His package, which totals $30.9 billion, provides the services that are now funded at the cost of about $26 billion (the costs of adult education, nutrition, pre-school and other services are not included). It would bring the per-pupil expenditure up to $5,700, or about 30th in the nation.

    Reform advice has come from academics as well. Lawrence O. Picus, a prolific critic of California's financing system, as well as a University of Southern California associate professor and president of the American Education Finance Association, advocates simplifying revenue limits and categoricals -- and then sending most of the funds directly to the school, which can purchase services from the district if needed. Revenue limits would be keyed to a certain year and then adjusted each year by whatever increase is allowed by the State, tossing out the 30-page form and detailed calculation of revenue limit status. Categoricals would be reduced to three: student needs, special district characteristics and program improvement. Each of these would be directly related to current student and district needs rather than historical spending patterns.(62)

    In remarks presented to a national forum on education, Picus wrote:

    Unlike most other states, California has not comprehensively evaluated and revised its school funding formulas in nearly 20 years. Instead, it has added layers and layers of complexity to the system to deal with special circumstances as they come about. It is time, in my view, to tear down the existing structure and build a new system from the bottom up....[I]t should focus on directing resources to the school level and providing funding on the basis of student needs, not historical artifact.(63)


    Summary

    It is widely recognized that the State's funding mechanism for education is complicated for reasons that have little to do with educational effectiveness or efficiency. The complexity, which grows each year with new adjustments and modifications, often hides inequities -- which, when discovered, are fixed with yet another set of adjustments and modifications.

    A variety of education experts and advocates have called for a fresh start -- or at the very least, a benchmarking process that would shed the worst of the complexities. And there are incentives for policy makers to take on the chore of reform. Many experts believe that further litigation challenging equity -- particularly in the area of Special Education -- looms over the State if action is not taken. In addition, a public whose disenchantment with the current educational system has not been addressed by policy makers may turn to the ballot box with another effort to establish vouchers or some other type of reform.

    These incentives, however, are nebulous and distant compared to the disincentives that exist. There are several barriers to reform, either wholesale or piecemeal, that eviscerate most efforts before they even get off the ground. These include:

  • A tendency for districts to embrace the status quo for fear of the unintended consequence of any reform efforts. This is particularly true for districts that believe they're entitled to whatever they received last year plus a "fair share" of any new education dollars. Such so-called "grandfathering" of funding makes it very difficult to identify sufficient funds to change the system.

  • A tendency for policy makers to embrace high-profile programs and sharply defined expenditures that they can take credit for rather than enduring the acrimony and hard work that would be required for large-scale reform of basic school finances.

  • A tendency for the public to embrace the promise of quick-fix, simplistic reforms -- like smaller classes and "back to basics" -- rather than to hold elected officials accountable for the perceived failure of schools to adequately educate children.

    Surmounting those barriers will require leadership focused on building consensus for simplicity, accountability and efficiency as the hallmarks of an effective education finance system.



    Recommendations

    Recommendation 1: The Governor and the Legislature should redesign the education funding system to simplify formulas, redirect the focus to educational needs rather than process and ensure meaningful equity of educational opportunity.

    California's education finance system is too complicated. It often acts as a stumbling block rather than facilitating the achievement of the goals of educators, policy makers and taxpayers. And the complexity has grown rather than diminished despite years of criticism and reform proposals by a variety of experts. Inertia, fear of the consequences of a new system and divergent political perspectives make it difficult to change the system. Clearly, an extraordinary and well-focused effort will be required to achieve any wholesale reform.

    Establishing a venue for reform is the first hurdle policy makers should address. To focus on overall reform rather than current resources and individual problems, the reform effort should be kept separate from the annual budget cycle. A special joint legislative committee, charged with an agenda of reform issues and a time frame for negotiations, could supply the framework for building consensus -- or at least acquiescence -- among key stakeholders. A similar process was used successfully in 1996 to address the deregulation of electricity and introducing competition to energy markets.

    Once reform discussions are under way, specific changes that policy makers should make include:

  • Adopting a Whiteneck-Mockler-style model that provides school districts with equal basic grants plus proportionate funding for special needs and special costs.

  • Changing the pupil count method to eliminate the need to track daily attendance and absence excuses, instead relying on enrollment figures -- as other states do -- and using other mechanisms to target truancy.

  • Amending the Constitution to allow one-time educational expenses that are not built into the Proposition 98 base, as recommended by the California Constitution Revision Commission.

  • Eliminating current basic aid payments to high-wealth districts by adhering to the Legislative Counsel opinion regarding ways to fulfill the State's constitutional obligation, as recommended by the Legislative Analyst's Office.

  • As a short-term measure, until comprehensive financing reform can be enacted, consolidating categorical funding in line with recommendations by the Legislative Analyst and the Alpert-Baldwin bill.




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