August 31, 2006

Attention: County and District Chief Business Officials

2006 BUDGET ACT AND RELATED LEGISLATION

On June 30, 2006, Governor Arnold Schwarzenegger approved the annual budget, including Assembly Bill (AB) 1801 (Chapter 47, Statutes of 2006), the Budget Act of 2006, and AB 1811 (Chapter 48), which contains amendments to the Budget Act. In addition to the Budget Act, the Governor signed “trailer bills” that amend Education Code or other California codes for technical changes necessary to implement the budget. This year’s trailer bills affecting the education budget include AB 1802 (Chapter 79) and AB 1808 (Chapter 75). Together, the 2006 Budget Act and the trailer bills make up a comprehensive package. A list of these and other related bills is provided in Appendix A.

This letter provides summary information on the 2006 Budget Act and related legislation. Copies of this letter, as well as other budget-related documents, are available on the California Department of Education’s (CDE’s) Web site at http://www.cde.ca.gov/fg/fr/eb. Copies of budget documents themselves are available on the Department of Finance’s (DOF’s) Web site at http://www.dof.ca.gov/ (Outside Source)

Overview

The 2006-07 budget authorizes a total spending plan of $127.9 billion, including $101.3 billion from the state General Fund. It assumes General Fund revenues and transfers of $94.4 billion. The DOF projects that the 2006-07 year-end General Fund reserve will be $2.1 billion. There is a projected operating deficit of $6.9 billion for fiscal year 2006-07, which is mitigated by the 2005-06 year-end reserve of $9 billion.

2005-06 Proposition 98 Changes

The budget package provides $52.0 billion in total education funding for kindergarten through grade fourteen (K–14) programs under Proposition 98 in 2005-06, representing an increase of $2.1 billion, or 4.2 percent, over the appropriations in the enacted budget for 2005-06. The increase is due to revenue collected above the level anticipated in the Budget Act of 2005. The revised funding level for 2005-06 excludes an appropriation of $1.3 billion that will be provided in future years as part of the settlement of the lawsuit CTA and O’Connell v. Schwarzenegger discussed below.

2006-07 Proposition 98 Changes

The budget provides $55.1 billion in state and local funds for K–14 programs under Proposition 98 in 2006-07. This represents an increase of $5.1 billion, or 10.3 percent, over the appropriations enacted in 2005-06 and reflects growth and the change in California per capita personal income.

DOF projects that the final Proposition 98 guarantee in 2006-07 will be calculated under "Test 3" and that the appropriations in the 2006-07 budget package exceed the guaranteed level by $592 million. Figure 1 provides an overview of Proposition 98 principles and calculation methodology.

Proposition 98, Kindergarten through Grade Twelve (K–12)

The budget package includes $49.1 billion for K-12 programs under Proposition 98 in 2006-07. This funding level represents an increase of $4.5 billion from the 2005-06 enacted budget funding level. On a per pupil basis, K-12 Proposition 98 funding for 2006-07 is $8,244 per unit of average daily attendance (ADA). This is an increase of $842 (11.4 percent) over the 2005-06 enacted budget level of $7,402.

Due primarily to the large increase in state revenues occurring in 2005-06, and the resulting effect on the Proposition 98 guarantee calculations, there is a windfall of new money for education, but much of it is of a one-time nature. Of the $7 billion in new funding over the 2005-06 enacted budget, $4.5 billion is for ongoing K-12 spending and $2.5 billion is for one-time purposes.

One-time funding is comprised of three main sources including $2 billion due to the increase in state revenues and the Proposition 98 minimum guarantee in 2005-06, $258 million in settle-up payments to meet Proposition 98 obligations from years prior to 2004-05, and $226 million from the Proposition 98 Reversion Account.

California Teachers Association (CTA) and O’Connell v Schwarzenegger

Chapter 213, Statutes of 2004 (Senate Bill 1101), suspended the Proposition 98 minimum guarantee and specified that the 2004-05 funding level shall be $2 billion less than would otherwise be required under the Constitution. Since enactment of the 2004 Budget Act, state revenues increased. Because final General Fund revenues for 2004-05 were substantially higher than projected when the Budget Act of 2004 was enacted, the final suspension level was $3.6 billion, or $1.6 billion higher than the Chapter 213 target. As a result of the higher revenues in 2004-05, the Proposition 98 guarantee level for 2005-06 rose by another $1.3 billion.  Despite the requirements of Chapter 213, when the Proposition 98 guarantee levels increased, the Legislature and Governor Schwarzenegger did not provide additional funds for 2004-05 or 2005-06.

Figure 1
Proposition 98 Overview

In May 2006, the Governor proposed to settle the case of CTA and O’Connell v. Schwarzenegger, a lawsuit brought in August 2005 by the CTA and Superintendent O’Connell stemming from the disagreement over the suspension of Proposition 98 in 2004-05 and its subsequent impact on 2004-05 and 2005-06. The settlement agreement proposed by the Governor would provide $2.9 billion over a seven-year period beginning in 2007-08 to restore the Proposition 98 guarantee amounts for 2004-05 and 2005-06. Legislation to implement this agreement is currently being considered by the Legislature for approval in August 2006.

Programs or Activities Funded from with New Ongoing Funds

Figure 2 lists the major items of new funding for ongoing programs or activities in the 2006-07 budget. The items are then described further following the listing.

Figure 2
Ongoing K-12 Proposition 98 Changes
(in millions)

Cost-of-Living (COLA) and Growth Adjustments

The budget provides $2.4 billion for revenue limits and categorical programs to fund a COLA of 5.92 percent. Because statewide enrollment is projected to decline by 0.26 percent in 2006-07, there is no funding for a growth adjustment.

After School Programs

The budget provides $426 million in new funds for after school programs as a result of Proposition 49, which was approved by the state’s voters in 2002. The proposition specified that the program would receive additional funding if and when non-Proposition 98 state revenues rise to at least $1.5 billion above the highest level in 2000-01 through 2003-04. The budget estimates that this requirement will be triggered in 2006-07.

Revenue Limit Equalization

The budget provides $350 million for school district revenue limit equalization to reduce inequities in general purpose allocations and spending. Trailer bill language stipulates that these funds will be allocated using the current methodology, which sets targets at the 90th percentile of revenue limits and distinguishes districts by size and type.

Economic Impact Aid

The budget provides $350 million to augment the Economic Impact Aid program to help close the achievement gap of English learners and economically disadvantaged students. Trailer bill language changes the distribution formula to address data issues and historic inequities in the distribution of funds. School districts will be held harmless from the formula changes and the new methodology sets an equalization target of $600 per eligible student.

Revenue Limit Deficit Factors

The budget provides $309 million in additional funding to eliminate the remaining revenue limit deficit factors from prior years for school districts and county offices of education. Deficit factor funding provides ongoing, discretionary funding for schools.

Supplemental School Counseling Program

The budget provides $200 million for additional counselors for students in grades seven through twelve. Districts must develop a course plan to assist low-performing seventh grade students and high school students who have not passed the California High School Exit Examination. There are several conditions for receiving the funds. The program must be adopted by the district governing board and will include a provision for the individualized review of each student’s academic and deportment records. In addition, a counselor will be required to meet with each student and if practical, his or her parents or guardian, to explain the student’s progress and educational options.

Arts and Music Block Grant

The budget provides $105 million for a new Arts and Music Block Grant that will provide school districts, charter schools, and county offices of education supplemental funding to hire staff, provide staff development, and purchase equipment and supplies for arts and music programs to support standards-aligned instruction.

Child Care and Development Augmentation

The budget provides $67 million to augment child care and development programs in order to accommodate the projected increases in caseload as a result of “unfreezing” the child care income eligibility limits, which had been held to year 2000 levels based on the state median income.

Preschool Expansion

The budget provides $50 million to expand preschool programs to serve additional four-year-olds. It is intended the expansion will include quality reforms designed to promote family literacy which would be implemented pursuant to subsequent legislation anticipated to be enacted later this year. The budget also provides an additional $50 million for preschool facilities from one-time funds.

California High School Exit Examination (CAHSEE)

The budget provides $50 million for a total of $69.6 million to increase the number of students that pass the CAHSEE. The first priority for funding is to provide $500 for each eligible twelfth grade student in the class of 2007. Any remaining funds may be allocated to eligible students in the class of 2008.

An additional $5.5 million in one-time funds is provided for allocation to local educational agencies (LEAs) to purchase state-approved individual intervention materials for students who have failed the CAHSEE. Finally, the budget provides $5.1 million for two additional administrations of the CAHSEE.  

Physical Education Teacher Incentive Grants

The budget provides $40 million for incentive grants for districts to hire credentialed physical education teachers in elementary and middle schools. These funds will be used to address the rising incidence of obesity and to help kids develop healthy life-long exercise habits. Grants of $35,000 will be made available to approximately 1,100 schools serving grades K–8. Grant recipients shall be randomly selected and be equitably distributed based on school type, size, and geographic location.

Professional Development for Teachers of English Learners

The budget provides $25 million to augment the Mathematics and Reading Professional Development Program to provide ongoing professional development opportunities for teachers of English learners contingent on legislation to be enacted during the 2005-06 regular legislative session.

Certificated Staff Mentoring Program

The budget provides $11 million for the new Certificated Staff Mentoring Program to encourage excellent, experienced teachers to teach in priority schools and to assist teacher interns during their induction and first years of teaching. Part of this program and additional funding will reside in the budget for the Commission on Teacher Credentialing. This item is contingent on legislation to be enacted during the 2005-06 regular legislative session.

Other Miscellaneous Ongoing Items

Other items funded include:

• $8.2 million for foster youth services.
• $4.4 million for oral health assessments contingent on legislation to be enacted during the 2005-06 regular legislative session.

Programs or Activities funded from with One-time Funds

Figure 3 lists the major items of new funding from one-time funds for programs or activities in the 2006-07 budget. These items are described further following the listing.

Figure 3
One-time K–12 Proposition 98 Changes
(in millions)

Mandates

The budget provides $927 million to pay mandate claims from prior years that had not been funded in prior budgets. Priority for payment will go to the oldest claims no longer subject to audit.

Discretionary Block Grants

The budget provides $534 million for discretionary block grants to school districts to use for one-time purposes. Budget trailer bill language specifies that 75 percent of the funds, or $400.1 million, will be allocated to school districts for further allocation to school sites, including adult education sites and regional occupational centers and programs, on an equal per pupil basis. The funds may be used for instructional materials, classroom and laboratory supplies, library materials, educational technology, deferred maintenance, one-time expenditures designed to close the achievement gap, and professional development. Prior to any expenditure by a school site, the local district governing board must approve the proposed use.

The remaining 25 percent of the grant funds, or $133.4 million, will be distributed to school districts for expenditure by the district for the same purposes as for school sites, but with additional purposes being for home-to-school transportation and outstanding one-time fiscal obligations of the district.

The initial apportionment for 75 percent of the available funds will be allocated based on an equal amount per pupil calculated from 2005-06 California Basic Educational Data System (CBEDS) enrollment data or ADA as applicable. A final apportionment for the remaining 25 percent of the available funds will be made based on the CBEDS enrollment data for 2006-07 as of the Second Principal Apportionment. Allocations will include students in adult education programs and regional occupational centers and programs.

Arts, Music, and Physical Education Equipment Grants

The budget provides $500 million to school districts, charter schools, and county offices of education for supplies and equipment for arts, music, and physical education. Funds will be apportioned based on an equal amount per unit of average daily attendance, with a minimum funding level of $2,500 for small schools. (Note: SB 1131 has been passed by the Legislature and if signed by the Governor, this bill will also authorize funds to be expended for professional development in arts, music, and physical education.)

School Facilities Emergency Repairs (Williams)

The budget provides $137 million for emergency facility repairs. This amount represents one-half of the Proposition 98 Reversion Account pursuant to the Williams lawsuit settlement in 2004. More information on the Williams case is available on the CDE Web site at http://www.cde.ca.gov/eo/ce/wc.

Instructional Materials

The budget provides $100 million for instructional materials, school and classroom library materials, and one-time educational technology costs. Grants will be allocated to districts, county offices of education, and charter schools on the basis of an equal amount per pupil based on the fiscal year 2005-06 CBEDS enrollment data.

Preschool Facilities

The budget provides $50 million to address facilities needs for the expansion of the State Preschool Program. The funds are available for the renovation, repair, or improvement of existing buildings and for the purchase of new relocatable child care facilities. This item is contingent on legislation to be enacted during the 2005-06 regular legislative session.

Teacher Recruitment and Retention

The budget provides $50 million for teacher recruitment and retention activities for allocation to school districts for schools ranked in deciles one through three of the 2005 base Academic Performance Index (API). The funds shall be used to improve the educational culture and environment at those schools.

Career Technical Education Equipment

The budget provides $40 million to school districts, regional occupational centers and programs, adult education programs, charter schools, and county offices of education that offer career technical education programs. The funds may be used for the purchase of equipment and supplies, and minor facility reconfigurations for career technical education courses in grades seven through twelve.

Current-year Mandate Claims

The budget provides $30 million for the payment of mandated cost claims for 2006-07. This is the only item in the budget to pay current-year claims, estimated to require approximately $133 million by the Department of Finance.

English Learners Supplemental Instructional Materials

The budget provides $30 million for supplemental instructional materials specifically for English learners in grades K–12. The CDE must verify, and the State Board of Education (SBE) must approve, that the materials are substantially correlated to identified state standards. LEAs will receive up to $25 per student based on the most recent certified language census for number of English learners. Schools must use the funds to purchase materials that will accelerate students as rapidly as possible to grade level proficiency in speaking, reading, and writing English.

English Learner Best Practices Research

The budget provides $20 million for a multi-year research project to identify best practices for improving the academic achievement and language development of English learners including curriculum, instruction, and staff development for teachers, and promoting English acquisition and development. This item is contingent on legislation to be enacted during the 2005-06 regular legislative session.

Parent Involvement Grants

The budget provides $15 million for parent involvement activities under the Nell Soto Parent/Teacher Involvement Program.

School Gardens

The budget provides $15 million for schools and districts to purchase garden supplies and equipment. Each school that applies for the funds will receive a minimum of $500 and any remaining balance will be allocated to school districts on a per-pupil basis.

California School Information Services (CSIS)

The budget provides $11.5 million to prepare schools for the implementation of the California Longitudinal Pupil Achievement Data System (CALPADS).  Of these funds, $9.5 million is for allocation to school districts, charter schools, and county offices of education that have not previously received funding from the CSIS.

Other

Miscellaneous one-time items include:

• $10 million for costs of fiscal solvency plans.
• $10 million for Healthy Start supplemental support services.
• $9 million for charter school facility grants.
• $3 million for School Breakfast Startup Grants.
• $3 million for state-level teacher recruitment personnel teams contingent on legislation to be enacted during the 2005-06 regular legislative session.
• $2 million for teacher credentialing reforms.

Impact on Selected Programs

The remainder of this letter provides additional detail on the impact of the 2006-07 budget package on selected programs.

General Purpose Funding (Revenue Limits)

School district and county office of education (COE) revenue limits will receive a COLA of 5.92 percent. COLA amounts for 2006-07 school district base revenue limits per ADA are estimated to be $295 for elementary school districts, $354 for high school districts, and $308 for unified school districts as follows:

As mentioned previously, in addition to the COLA funds, the 2006-07 budget provides $309 million to eliminate the remaining revenue limit deficit from prior years. There is no growth adjustment this year as statewide ADA is now estimated to decline by 0.21 percent beginning in 2005-06 and decline further by 0.26 percent in 2006-07.

Charter Schools

General-purpose Block Grant. General-purpose funding for charter schools funded through the block grant will be automatically adjusted to reflect the impact of the increases to school district revenue limits for COLA and deficit reduction. Estimates of the general-purpose entitlement amounts per ADA will be available in late February 2007 and will be adjusted as necessary at subsequent apportionments.

Categorical Block Grant. The budget provides $95.1 million (including $5.9 million deferred to 2007-08) for charter school categorical block grants. This represents an increase of $32.9 million above the 2005-06 funding level and includes increases for a COLA (5.92 percent) and projected charter school ADA growth (8 percent). AB 740 (Chapter 359, Statutes of 2005) establishes the methodology for calculating categorical block grant funding and was enacted to clarify and simplify the funding model for charter schools. It will increase the amount of funding for categorical programs from $298 to $400 per ADA in 2006-07 and to $500 per ADA in 2007-08. 

Special Education

Overall funding for special education remained relatively flat this year. The 2006-07 budget provides $3.1 billion from the General Fund and $1.2 billion from federal funds for special education programs for individuals with special needs. The budget includes $180 million to fund a COLA (5.92 percent) on the state-funded portion of the special education program only. The state’s federal funding for special education was cut by a very small amount (less than $2 million) compared to the considerable increases of prior years.

The budget continues $100 million in funding for mental health-related services including $31 million from state funds to provide early intervention services for children who are experiencing mental health problems before they require special education services. These funds are allocated to special education local plan areas (SELPAs) on a per ADA basis. An additional $69 million from federal funds are provided for county mental health services. CDE distributes the later funds to county offices of education who in turn distribute the funds to county mental health departments.

AB 825 Categorical Block Grants

The 2006-07 budget package continues to reflect the implementation of the categorical block grant programs established by AB 825 (Chapter 871, Statutes of 2004). AB 825 consolidated 26 programs into six block grants effective July 1, 2005. Funding for the six block grants is adjusted annually to reflect a COLA and statewide ADA growth.

AB 825 allows for flexibility within each block grant, for transfers among the block grants, and for transfers between the various block grants and other categorical programs. Figure 4 summarizes the programs consolidated in each block grant and the funding transfers allowed. Information on flexibility, implementation, and allocation issues related to the AB 825 block grants can be found on the CDE Web site for the AB 825 categorical block grants at http:www.cde.ca.gov/fg/aa/ce/#background.

Figure 4
Programs in the AB 825 Block Grants

Pupil Retention (Transfers in only) New Resource Code - 7390

School Safety Consolidated Competitive Grant
(Transfers in or out) New Resource Code - 7391

Teacher Credentialing (Transfers in only) New Resource Code - 7392

Professional Development (Transfers in or out) New Resource Code - 7393

Targeted Instructional Improvement (Transfers in or out) New Resource Code - 7394

School and Library Improvement (Transfers in or out) New Resource Code - 7395

Categorical Program Flexibility

Section 12.40 of the Budget Act again provides funding flexibility for selected programs, as listed in Figure 5. LEAs may transfer up to 10 percent of the state funds apportioned in 2006-07 for any of the listed programs into any other listed program, provided that the receiving program’s state funding does not increase to a level exceeding 115percent of the 2006-07 state apportionment for that program.

Table 5
Programs Listed in Section 12.40 of the Budget Act

Note: Funds may also be transferred into the Conflict Resolution program (Education Code Section 32260, the Economic Impact Aid Program (commencing with Education Code Section 54020), and the Foster Youth Services Program (commencing with Education Code Section 42920).

The flexibility is conditioned on the LEA’s reporting to the CDE by October 15, 2007, any amounts shifted between programs. The CDE must provide this information to the Legislature and the DOF by February 1, 2008.

There are two major changes to the Section 12.40 programs listing. First, the Economic Impact Aid Program and Foster Youth Services Program were removed from the Section 12.40 flexibility provisions to prohibit transfers out of those two programs.  Second, a provision was added to Section 12.40 to allow transfers into these two programs from the other designated programs not to exceed 115 percent of their base appropriations in the budget. 

In addition to the above changes, the American Indian Early Childhood Education Program was added to the Section 12.40 programs for additional flexibility.

Deferrals

The 2006-07 budget continues the deferral of the Second Principal Apportionment (P2) payment from June to July 2007. This affects all programs funded through the principal apportionment (listed in Figure 7), regardless of whether a portion of the appropriation for that program has been deferred to 2007-08. The total amount of deferrals is unchanged at $1.3 billion.

The 2006-07 budget also continues the practice of deferring a portion of certain categorical program funding into the following year. The programs listed below have some of their state funding deferred into the 2007-08 fiscal year.

Figure 6
Non-Principal Apportionment Categorical Program Deferrals

COLA and Growth

Figure 7 summarizes the cost of living and growth adjustments for each program.  For many programs, growth is based on statewide enrollment and, because that measure is now in decline, many of the growth adjustments are set at zero. 

Figure 7
COLA and Growth Adjustments by Program

Principal Apportionment Programs

Other Programs

Other Legislation

On August 23, 2006, the Legislature passed SB 1131, an additional education budget trailer bill. As of this writing, SB 1131 has been sent to the Governor for signature. The bill makes technical changes to the Education Code or modifies budget language to allow for the efficient implementation of Budget Act items. The programs affected by this bill include:

• The Arts, Music, and Physical Education Equipment Grants
• Economic Impact Aid
• California School Age Family Education Program (CalSAFE)
• Supplemental School Counseling Program
• One-time Discretionary Block Grants
• Fiscal Solvency Plans
• Healthy Start Grants
• Career Technical Education Programs
  

The Legislature is also currently considering SB 1133 which will implement the settlement agreement in CTA and O’Connell v. Schwarzenegger described on page 2. This bill will provide $2.9 billion for education funding beginning in 2007-08 with the first installment of $300 million and $450 million each year thereafter through 2013-14. The bill will specify how the funds may be used and current language will target the funds to the lowest performing schools as measured by the Academic Performance Index (API) ranking.  

What’s Next?

The CDE is continuing to implement the Funding Web site, which contains more detailed information about funding programs than contained in this letter. On this site, which can be accessed at http://www.cde.ca.gov/fg/fo/, profiles for each program provide the legal authority, a program description, the allocation methodology, eligibility criteria, application process, and important dates, including the deadlines for applications. The newest feature of the site is Projected Funding, which presents preliminary information about programs funded in the current year, including projected dates by which CDE will release applications or apportionments.

Interested individuals may subscribe to the Funding mailing list to receive e-mail messages when requests for applications are announced and posted on the Web site. To subscribe, choose the "Join the Funding Mailing List" link at the bottom of the Available Funding Web page at http://www.cde.ca.gov/fg/fo/af/.

Detailed questions regarding the impact of the 2006-07 budget package on programs allocated through the apportionment processes should be directed to appropriate staff in the School Fiscal Services Division at 916-322-3024. Detailed questions on categorical programs should be addressed to the appropriate CDE program staff. General questions regarding this letter or the 2006-07 budget should be directed to the fiscal policy staff of the Fiscal and Administrative Services Division, at 916-445-0541 or by e-mail at cbingham@cde.ca.gov.

Sincerely,

(Original signed by Susan Lange)

Susan Lange, Deputy Superintendent
Finance, Technology, and Administration Branch

SL:mf

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

APPENDIX A
2006 Budget Package

Budget Act

2006-07 Budget Trailer Bills