A new K-12 funding system demands new thinking in building local budgets

July 18, 2013

As the most sweeping change in K-12 school funding in decades, the new school finance system that took effect this month will require school officials to clear their minds of old formulas and assumptions and to think anew in constructing their budgets.

That’s the advice of School Services of California, a Sacramento-based consulting firm that is giving budget seminars around the state this week for school officials.

For most of the hundreds of school officials at the Sacramento Convention Center on Tuesday, the session was their first exposure to the Local Control Funding Formula, which the Legislature passed last month with significant changes from Gov. Jerry Brown’s proposal in May. With the passage of LCFF in doubt mid-June, most districts passed 2013-14 budgets conservatively, using last year’s revenues and assumptions. This year they’ll start to feel the impact of LCFF’s new formula. Next year, they’ll create their first budgets knowing ahead of time the rules and their allocations, which will vary from district to district.

The intent of LCFF is to simplify an unwieldy and illogical funding system based on decades of outdated, complex funding streams. It will shift the focus from funding dozens of state-mandated programs to funding based on local district control and student needs, with substantial extra dollars allotted to low-income children, foster youth and English learners.

The distribution of additional money (in green) under the Local Control Funding Formula when fully funded. The district at left, with no high-needs students, will receive additional increases only in base funding, totaling $8,000 per student. The district in the middle, where 60 percent of its students are high-needs (about the statewide average) will receive $9,100 per student. The district at right, with 100 percent of its students high-needs, will get $11,300 per child. The orange band shows what districts will get this year, the first of a projected eight year phase-in period: $180 per student for districts with no low-income children, foster youth and English learners; $312 per student for districts with the statewide average; and $576 per student for districts with only high-needs students. Source: School Services of California, Inc.

If fully implemented in 2020-21, as proposed, the LCFF will bring uniformity and predictability to school finance; districts with similar populations of high-needs students will receive the same per-student funding, for the most part. But the transition will be complex.

“The LCFF is a really good model, but during the implementation phase, there will be a lot of anomalies, with unintended consequences,” said School Services Vice President Robert Miyashiro.

At full funding, districts with all high-needs students will get about $3,000 more per student than districts with none or only a few: $11,300 vs. $8,000 (see School Services chart). As LCFF is rolled out over eight years – in increments of about 12 percent per year – each district will get a different increase per year, depending on the proportion of high-needs students they serve. This year, with $2.1 billion in new money funding the first phase, some districts with mostly high-needs students will get nearly a double-digit increase in per-student funding ($576 per student on average) while others will see only 2 or so percentage points ($180 on average). Those districts with close to the average proportion of targeted students – about 60 percent – will receive about $316 more funding per student.

But averages are deceiving.

Complicating the calculations is the fact that every district is starting at a different level of per-student funding – what they got under the old system. Eliminating the historical inequities also will lead to different funding trajectories in the years of transition to the new system. (A high-needs district that got below-average funding under the old system will get more than a high-needs district that benefited greatly in the past.)

What will matter is not the overall annual increase under Proposition 98 but the unique impact of the LCFF formula for each district, Miyashiro said. A danger is that the public and teachers will believe all districts receive the same amount and press school boards to increase spending based on high expectations.

Solid revenue estimates

Gov. Jerry Brown resisted pressure from the Legislature to up Department of Finance revenue projections for 2013-14, and so the state budget uses a conservative forecast. School Services is also predicting higher revenues – $3 billion – this year, which then carries through to 2016-17. School Services says it would be risky to assume these healthy increases will then continue for an additional four years, without a recession or economic setback. Brown assumes eight straight years of good revenues will enable full funding of the Local Control Funding Formula in 2020-21. Source: School Services of California, Inc.

What districts should feel confident in – at least during the next several years – is the state’s healthy K-12 revenue projections, School Services said. But, in building their budgets, they should be very skeptical of the state’s forecast that the Local Control Funding Formula can be fully funded in eight years. They shouldn’t make long-term commitments based on that assumption, School Services said.

“Be cautious in budgeting the out years,” said School Services President John Gray. Full implementation assumes what has never happened: eight straight years of growth averaging 6 percent. “We’ve had three years, but not eight,” he said.

Besides economic recessions, world cataclysms and stock market downturns, the passage of Proposition 30 last November adds a new degree of unpredictability, Miyashiro said. While it stabilized state finances and will provide an average of $6 million per year to the General Fund for seven years, Prop. 30 primarily raises taxes for the top 1 percent of wage earners. Basing a state budget on the actions and decisions of relatively so few earners adds volatility to an already unstable tax base, Miyashiro said.

Based on conservative numbers for next year, the Department of Finance is projecting that the General Fund will increase from $97 billion this year to $116 billion in 2016-17. The portion for Proposition 98, funding K-12 and community colleges, would rise from $55.3 billion to $65.5 billion.

School Services, in consultation with economist Brad Williams of Capitol Matrix Consulting, is predicting higher General Fund revenue: from $100 billion this year rising to $119.7 billion in 2016-17. There is about a three-in-five chance that state revenues will exceed Finance’s forecast, and a two-in-five chance it will fall short, Williams concluded.

The LCFF should prompt districts to redefine risk and recalculate how much they will need in reserve, Gray said.

Under the old system, districts were required to keep between 1 and 3 percent of their budget as a reserve, with smaller districts building a larger reserve. With so much uncertainty over funding – and the passage of Prop. 30 last year – some districts accumulated larger reserves.

With the shift to LCFF, districts with the most high-needs students, expecting the biggest increases, paradoxically should build the biggest reserves, Gray said. They’ll be the ones most vulnerable if revenues vanish, and if they’ve added staff and increased pay.

For districts getting the least under the formula, a sudden cut will be like stepping off a curb, Gray said. “For high-income LCFF districts, it will be like falling off a building.”

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