The California Legislature passed a budget bill on June 14th that gives promise of radically reforming the State’s dysfunctional school finance system. The vote marks the final major hurdle for the reform effort that is expected to have far-reaching consequences. Central to the reform is the move away from a highly complex funding system to a simpler, formula-based distribution mechanism. The need driving this reform effort is the dysfunction that has developed over forty years of inadequate funding compounded with legislation and judicial mandates layered on top of each other, resulting in a complicated arrangement of formulas, rights and restrictions. While some of this complexity is simply the inevitable byproduct of democratic governance and division of powers, in California’s case the system developed into a morass that cannot be understood outside of its historical context.

The previous generation of reforms that created the current funding system started with the Serrano vs. Priest decision in 1971, which mandated equalization of per-pupil funding across districts.  Before Serrano was fully implemented, California voters approved Proposition 13, a law that significantly cut property taxes (property tax revenue declined 40% in the first year) and imposed a 2/3 “supermajority” requirement for the legislature to pass any new revenue-generating bills. As a consequence, the state was forced to compensate for schools’ lost revenue with money from the general fund. In this new environment characterized by reduced revenues, the equalization mandate was satisfied by reducing the spending of higher-spending districts, and leveling education spending down, instead of leveling all districts up to a high level. Several attempts were made to counteract the downward pressure on education spending that resulted from the changes in the school funding system. The first of these, Proposition 98, created a minimum proportion of 40% of state general fund spending that must be dedicated to education as well as creating minimum spending levels for districts based on previous-year totals. The second way the state reacted was though categorical aid grants, which over time, have grown to over a hundred separate grant programs and make up over 30% of educational spending in the state.

The interaction between the three decades of modifications has created a system that is calcified, underfunded and highly vulnerable to economic downturns. A graph from a report by the California Budget Project shows the decline in California’s per-pupil spending relative to the national average following Proposition 13.

The changes made to educational funding in the budget are the result the most recent attempt to remedy these underlying problems. Governor Jerry Brown has led this effort to reform California’s finance system that culminated many years of work by activists, researchers and stakeholders, and is now on the verge of achieving its goal. The new system, which has its origins in a policy paper released by The Warren Institute at the UC Berkeley, has three principal aims, all of which are remain in some form in the final version of the bill (see here for a synopsis, and here for the full text)

First, it enhances equity by creating a base level of per-pupil funding, which is supplemented by allocations for students with greater need (English language learners, special education and low income students). It also creates an additional allocation for schools with concentrations of high-need students, to reflect the added difficulty of providing an adequate education to these populations. In a state where 43.6% of students come from families have incomes at or below the federal poverty line and 36% have parents that do not speak English fluently, this realignment of funding and need is of critical importance. The Governor’s proposed supplemental allocation for high needs students was 35% of base funding ($2,385 per student). The final bill approved by the California Legislature reduced this to 20% of base funding ($1,470 per student). In contrast, the grants for districts with concentrated poverty increased from the original proposal’s 35% to 50% of base funding ($3,676 per student). This large supplement for districts with concentrated poverty has created substantial controversy, especially from districts with large numbers of low income students who do not quite qualify for this enhanced supplement.

Second, the new system enhances local flexibility to spend according to particular needs. It will eliminate many of the categorical grants which made the current system so inflexible. Local and district leaders will now have the capacity to dedicate funds to school-improvement efforts that they deem necessary, without having to depend on the legislature in Sacramento. This should also free up administrators from the burden of filing the multitude of reports and applications required by categorical grants so that they can dedicate that time to tasks that support learning. This is especially important considering that California is severely lacking in administrative capacity (the state ranks 50^th in the nation in the ratio of administrators to students).

Third, to accompany the increased flexibility, the bill creates a new fiscal accountability system that improves the information on district spending available to the public in order to ensure that the money is spent on the students it is intended for. This is a clear improvement over the current funding system that is virtually impenetrable to anyone outside of the small number of experts. However, critics of the plan argue that the transparency will not be as effective as the guarantees provided by categorical grants in ensuring that funding is spent on the populations it is intended for. Notwithstanding these disagreements, the extent to which this oversight is effective will remain difficult to gauge until the State Board of Education issues the regulations in their final form.

The final bill, which Governor Jerry Brown signed on July 1^st, also contains a provision that allocates $1.25 billion in one-time funding for Common Core implementation. While some predict that this funding item, which amounts to about $200 per child, is still insufficient, its inclusion makes California one of the few states that has made a serious attempt to deal with the cost implications of the Common Core. The bill also contains a number of concessions and compromises that maintain a handful of the categorical funding streams that were slated for elimination, and will do away with cost of living adjustments that were included in the initial proposal. The implementation of the formula will be immediate, but the new funding will be ramped up over an eight-year phase-in period, using a complex formula that accounts for, among other things, the rate of economic recovery in the state. Interestingly, the effort would not have been possible without the public’s willingness to accept new taxes to prevent further cuts to educational funding in a referendum (Proposition 30) last year. If this proposition had not passed, it would have been impossible to achieve the goal of increasing funding for some without inflicting cuts on others, and that would have likely killed the reform’s political prospects.

While there is optimism surrounding this reform among many in education circles, there remains reason to be cautious. California’s long-term fiscal position remains uncertain despite this year’s surplus. The long phase in period makes the reform vulnerable to future changes or reductions in scale. In addition, Proposition 30 is a temporary measure whose revenues will begin to expire in 2016 and will not be easily replaced in a state where 2/3 of the legislature must support any tax increases.

However important this reform may be in terms of equity within the system, it must be noted that the bill does little to remedy the inadequacy of total spending in California. The state has lagged behind that of the rest of the country in per-pupil spending for the past three decades, and this difference has been exacerbated by the fiscal toll of the recession. This new budget takes some steps to increase total education spending, increasing base funding for all students and guaranteeing all districts a return to 2007-2008 levels of funding, but still has a long way to go to make up the estimated $2,500 gap in cost-adjusted per-pupil spending between California and the national average¹, let alone to the levels of funding required to meet the educational needs of disadvantaged children.

The final piece of this complex puzzle is the judicial system. There is a legal challenge to the current school finance system currently underway in California’s courts. The two cases known as Robles-Wong v. State of California and Campaign for Quality Education v. California have since been combined under the name of the latter by the Court of Appeals, where the case will be heard later this year. Governor Brown’s legislative victory preempts, in a manner of speaking, one of the two demands of this case, the replacement of the current finance system. However, the second demand, funding adequacy to meet the need of students has not been addressed as directly. As such, the outcome of the case and the final shape of the shifting educational finance system it means to address are both highly unpredictable. It may be that once again, the fate of California’s children is to be determined by the interaction between judicial mandate and legislative statute. One can only hope that the outcome is better than the last time.

July 10, 2013