Funding Sources	2004-05 Revised	2005-06 Revised	2006-07 Proposed	Change from 2005-06 Amount	Change from 2005-06 Percent
General Fund	$33,995	$36,311	$40,455	$4,144	11.4%
Local property taxes	13,021	13,675	13,863	188	1.4%
Total	$47,016	$49,986	$54,318	$4,332	8.7%

Average Daily Attendance Funding

K-12 Education Funding From All Sources

The 2006-07 Governor's budget proposes $66.2 billion in funding for K-12 education from all fund sources, as shown in Table 3 on page 3. This reflects an increase of $4.1 billion (6.6 percent) above 2005-06 revised funding levels, with funding per unit of average daily attendance (ADA) of $10,996 in 2006-07, an increase of $660 (6.4 percent) above the estimated $10,336 per-ADA rate in 2005-06.

Budget Changes in Detail

Proposition 98 funding levels for K-12 education for 2005-06 reflected in the budget are $214.1 million lower than those enacted in the 2005 Budget Act. Changes mostly affect state General Fund apportionments for revenue limits and charter school general purpose funding. The decreases are primarily due to lower estimates of local property taxes ($269.6 million), no provision for equalization funding ($110.7 million), and a reduction in unemployment insurance costs ($15.6 million). These reductions are partially offset by an increase in revenue limit funding ($64.7 million) due to higher estimates of K-12 ADA and adjustments for declining enrollment.

Table 2
K-12 Summary, All Funds*
(Funding in Millions)

Fund	2004-05 Revised	2005-06 Revised	2006-07 Proposed	Change from 2005-06 Amount	Change from 2005-06 Percent
General Fund	$34,299.5	$36,071.9	$40,014.2	$3,942.3	10.9%
Local property taxes	11,496.7	12,092.0	12,223.6	131.6	1.1%
Lottery fund	810.2	1,021.8	1,021.8	0.0	0.0%
Other state funds	110.0	125.1	145.8	20.7	16.5%
Federal funds	7,483.1	7,456.0	7,469.2	13.2	0.2%
Local debt service	1,499.9	1,499.9	1,499.9	0.0	0.0%
Local miscellaneous	3,855.4	3,855.4	3,855.4	0.0	0.0%
Total	$59,554.8	$62,122.1	$66,229.9	$4,107.8	6.6%
Funding per ADA	$9,955	$10,336	$10,996	$660	6.4%

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

The Governor's budget proposes to increase Proposition 98 funding for K-12 education in 2006-07 by $3.7 billion (8.4 percent) over revised 2005-06 levels. The major components of this change are as follows:

• Growth. The number of students in K-12 schools is estimated to increase by 12,600 ADA in the budget year, an increase of 0.21 percent over the revised current-year level. The Governor's budget provides $156 million to fund statutory growth, including $67.4 million for revenue limits, $14.8 million for child development programs, $6.5 million for special education, $4.7 million for class size reduction, and $62.6 million for other categorical programs. The actual percentage increase differs in some cases from the statewide average growth of 0.21 percent due to specific program requirements or policy choices proposed by the Governor.
• Cost-of-living Adjustments (COLAs). The statutory COLA adjustment for 2006-07 is estimated to be 5.18 percent (actual data will be available in May). The Governor's budget provides $2.3 billion to fund statutory COLAs for revenue limits and most categorical programs, including $1.7 billion for revenue limits, $161.6 million for special education, $78.4 million for class size reduction, $70.2 million for child development programs, and $283.8 million for other programs. Initial estimates of COLA amounts per ADA for school district base revenue limits are elementary districts-$258, high school districts-$310, and unified districts-$269. These estimates do not include the impact of 2006-07 equalization funding and will be revised later this year.
• Deficit Factor Reduction. The Governor's budget proposes a $200 million increase to revenue limit apportionments to reduce the deficit factors for school district and county office of education revenue limits that were imposed in the 2003-04 budget. This proposal would result in an overall remaining deficit of 0.299 percent for school districts and 0.106 percent for county offices of education, for an average increase over 2005-06 of 0.598 percent for school districts and 0.799 percent for county offices of education.

In addition to the above changes to ongoing Proposition 98 funding, the Governor proposes appropriating $213.2 million in one-time funds from the Proposition 98 Reversion Account for the following programs:

• $106.6 million for school facility emergency repairs pursuant to the Williams settlement agreement
• $63.7 million for CalWORKS Stage 3 child care base adjustments
• $18.8 million for prior year K-12 mandate claims and interest
• $9.6 million for the Teacher Credentialing Block Grant
• $9 million for the Charter School Facility Grant Program
• $3 million for allocation to a county office of education to contract with an outside entity to recruit highly qualified teachers to teach in schools with Academic Performance Index scores in deciles one to three
• $1.1 million for continuing the Chief Business Officer Training Program established in the current year
• $1 million for the Principal Training Program
• $500,000 for the High School Coaching Education and Training Program, including training on the prohibition of performance-enhancing substances

After School Programs—Proposition 49 Triggered

Proposition 49, passed by voters in November 2002, created the After School Education and Safety Program (ASES). 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 fiscal years 2000-01 through 2003-04. The budget estimates that this requirement will be triggered in fiscal year 2006-07, prompting the Governor to budget $426 million in new funds for the ASES program. An additional $2 million will be provided for state operations costs.

While the $426 million is not counted against the Proposition 98 base guarantee amount in 2006-07, the Governor's budget does include it in the maintenance factor payback amount.

Revenue Limit Equalization

The budget provides $200 million to reduce historic inequities in general purpose (revenue limit) spending. Funding disparities are rooted in historical changes to property taxes and result in significant funding differences among equally situated school districts. The 2004-05 budget provided $109.9 million for equalization adjustments. The administration estimates that this proposal will eliminate approximately half of the remaining disparity.

State Mandates

The budget provides $133 million of ongoing funding and $152 million of one-time funding to reimburse schools for a portion of the ongoing and prior years' costs of mandates.

Special Education

Including the growth and COLA adjustments, the Governor's budget provides an additional $156.3 million from the General Fund for special education programs. A local property tax increase of $17.4 million and an increase of $16 million in federal funds also are reflected in the budget.

The special education budget includes $161.6 million for a 5.18 percent COLA and $6.5 million for a growth adjustment. The COLA is proposed to be applied to the state portion of the special education budget only.

The budget continues to provide $69 million in federal funds as reimbursement to county mental health agencies for services provided to special education students and continues $31 million in ongoing General Fund support to local educational agencies for mental health services.

We note that federal Deficit Reduction Act of 2005, which was enacted too late to be included in the Governor's budget, contains funding reductions to a number of federal programs. In the case of special education, these reductions mean that California funding will decline by $1.7 million or 0.1 percent, instead of increasing by $16 million. These reductions will be incorporated in the budget during the spring legislative process.

Child Care and Development

For the first time in four years, the Governor proposes no significant changes or reforms in child care and development programs. Program funding will be increased by the K-12 statutory COLA and growth percentages except for the CalWORKs child care programs, which are caseload driven.

The family fee schedule and income eligibility limits have been frozen for another year, but budget provisional language would establish a workgroup consisting of representatives from the Administration, the Legislature, and the California Department of Education to develop a new family fee schedule and income eligibility limits.

The federal Deficit Reduction Act of 2005 contains a 1 percent funding reduction to the discretionary funding stream of the Child Care and Development Fund (CCDF), estimated to be $2.3 million. This reduction is offset by an increase of $25.8 million to the matching funding stream of the CCDF for a net increase in federal child care funds of $23.5 million.

Budget Policy Initiatives

The Governor proposes the following education initiatives in 2006-07:

Principals and Teachers

• Provide low-performing schools with additional resources to address teacher and principal staffing needs through the Teacher Recruitment and Retention Block Grant ($100 million).
• Expand the Beginning Teacher Support and Assessment System ($65 million).
• Increase the number of science and math teachers ($1.5 million).
• Streamline and reduce backlogs in the teacher credentialing process.

Opportunities for Students

• Expand career technical education courses offered at high schools, regional occupational centers and programs, and community colleges.
• Support students in preparing for the California High School Exit Exam ($40 million).
• Establish a new Digital Classroom Block Grant to provide participating schools with $3,000 per classroom to support their technology needs ($25 million).

Music, Art, and Physical Education

• Create a new Art and Music Block Grant to support standards-aligned art and music instruction ($100 million).
• Support professional development for physical education to promote healthy lifestyles for students ($85 million).

Equalization

The budget includes $200 million for revenue limit equalization to address the disparities in general-purpose funding levels across school districts. The disparities originated from historical changes to property taxes and result in differences in funding in otherwise equally situated school districts. The 2004-05 budget provided $109.9 million for equalization adjustments. The administration estimates that the budget-year proposal will eliminate approximately half of the remaining disparity.

Federal Budget Reductions

On February 8, 2006, the President signed the Deficit Reduction Act of 2006 (S. 1932). This act included an across-the-board reduction of 1 percent in many programs. Substantial changes in federal funding for California from this and other funding measures are as follows:

Table 3
Changes in Federal Funding

Program	Reduction (-)/Increase	Percent Change
Even Start	-$15,842,356	- 57.2%
Title I Basic Grants	- 49,196,850	- 2.8
Comprehensive School Reform	- 27,680,353	-100.0
Impact Aid Basic Support Payments	6,209,267	9.8
Mathematics and Science Partnerships	542,913	2.2
Educational Technology State Grants	- 30,479,803	- 46.5
21st Century Community Learning Centers	- 5,853,822	- 4.3
State Grants for Innovative Programs	- 12,371,760	- 50.1
Safe and Drug-Free Schools and Communities	- 11,202,953	- 21.2
Language Acquisition State Grants	9,859,205	6.6
Vocational Rehabilitation State Grants	11,310,219	4.5
Supported Employment State Grants	- 1,042,133	- 25.3

Next Steps in the Process

Legislative hearings on the 2006-07 budget proposals will begin in March. In May, the Governor's Department of Finance will issue its traditional May Revision of population, revenue, and expenditure projections. Growth and COLA estimates are subject to change at that time. The budget bills, having been amended in each house, will be reconciled by a joint conference committee and should be passed to the Governor in late June. Upon receiving the final Budget Bill, the Governor may then exercise his line-item veto before signing the Budget Act of 2006.

Questions regarding this letter should be directed to the fiscal policy staff in the Fiscal and Administrative Services Division at 916-445-0541.

Sincerely,

Original signed by Susan Lange

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

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