State board may make it easier to follow the money

June 9, 2016

Parents and school officials review a draft of the West Contra Costa Unified LCAP.

There’s no dispute: Districts are required to spend additional money they receive for low-income students, English learners and foster children under the Local Control Funding Formula on programs and services for those kids.

But there’s a big caveat that has largely escaped public notice: The obligation disappears at the end of a fiscal year. At that point, unspent dollars under the formula flow into one pool of unrestricted money that districts can use however they want.

That “loophole” would appear to contradict the intent, if not the spirit, of the law: spend targeted dollars on targeted kids to narrow the achievement gap. But under the language of the LCFF statute and the view of the state Department of Finance, using unspent targeted money for other purposes doesn’t violate the law and is acceptable in the new world of local control, in which districts have flexibility over funding, as long as they’re clear and open about what they are doing.

Organizations advocating for minority children and analysts of LCFF spending say that a lack of clarity, ambiguities, uneven enforcement and loopholes are undermining the effectiveness of the funding law, which Gov. Jerry Brown fought hard to pass and regards as his education legacy. And they are counting on the State Board of Education to hold districts more accountable for funding for high-needs students and to make it easier for the public to monitor districts’ spending.

An opportunity will come in September, when the board revises regulations governing the template for the Local Control and Accountability Plan, the document that districts write spelling out how they will use money from the funding formula to improve results for all students and high-needs children in particular. Board members, including President Michael Kirst, have acknowledged – and 571 district administrators, parents and children’s advocates reiterated in a survey – that LCAPs have become too long and need to be simpler and better organized. They also said it is difficult to identify in many districts’ LCAPs how money is spent.

Some legislators have already expressed impatience. Pressing Kirst at a Senate Education Committee hearing in February, Sen. Marty Block, D-San Diego, asked, “Are we getting our money’s worth and how do we know?”

“Local stakeholders can only play that role (of a watchdog over spending) if they are well informed,” Children Now, a nonprofit children’s advocacy organization, wrote in a letter to the state board. “We see the LCAP template redesign as an important opportunity to address these fiscal transparency shortcomings.”

“The assumption is that local constituents will hold leaders accountable to fulfill what they promised,” said H.D. Palmer, spokesman for the California Department of Finance.

But, with superintendents cautioning the board not to return to the past, when state restrictions prevented them from deciding how money would best be used, the state board has given no sign of how much it’s willing to buttress spending rules.

“The survey (for the state board) showed that most LCAP users can’t make sense of what is happening with the money,” said Jonathan Kaplan, senior policy analyst with the California Budget and Policy Center. “But it’s not clear whether the revision to the template will produce better or more transparency on fiscal issues.” The state board will receive a draft of the revisions at its meeting in July.

Advocates for minority children have pointed to districts’ unrestricted freedom to spend unused LCFF money intended for high-needs students as one of several flaws in LCAP implementation they want to see fixed.

Other criticisms include:

Spending gaps. By law, districts are supposed to document in their LCAPs what they do with all of the money they received from the funding formula, but many districts account for only “supplemental and concentration” dollars, the money targeted for high-needs students, and not base funding, which is the bulk of their LCFF funding. An Education Trust-West analysis of 40 districts’ LCAPs found that 17 districts presented less than a third of their budgets in the LCAPs.

Old money respent. Districts are required to increase or improve services for high-needs students with the additional supplemental and concentration dollars they receive each year. But some districts claim previous spending as new services, Ed Trust-West found. And others appear to be counting the same supplemental and concentration dollars for multiple purposes, overstating what they will do with the money.

No bottom line: The state board’s LCAP regulations require that districts cite the total in supplemental and concentration funding that a district receives and itemize how it will spend the money. But districts aren’t required to add up expenditures to see if they match the spending plan. That’s left to interested parents to do. For big districts, there could be dozens if not hundreds of itemized expenditures.

Lack of distinctions. Districts can use supplemental and concentration dollars for districtwide or schoolwide purposes, such as training all teachers in the new standards for English learners. But they are supposed to explain how the spending will principally benefit high-needs students; some districts omit or gloss over the justification. If high-needs students make up a small percentage of the overall student body, districts have the additional burden of explaining how spending the money districtwide or statewide is the “most effective” option. Many districts don’t explain that either, the nonprofit law firm Public Advocates found in an analysis of sample LCAPs.

Intentionally ambiguous law

If 20 percent of a district’s LCFF funding is in supplemental and concentration dollars, the LCFF law says districts must improve or increase services for high-needs students by 20 percent. But the law doesn’t require a dollar-for-dollar accounting for supplemental and concentration spending. Nor does it say unspent dollars must be carried over to the following year to be spent on targeted students.

“There is a lot of flexibility built in,” said H.D. Palmer, spokesman for the state Department of Finance. “These are unrestricted dollars with certain conditions attached.” At the end of the year, unspent supplemental and concentration dollars can be used to help fund a general salary increase or, as Education Trust-West noted, “to plug budget holes.”

Ed Trust-West analyzed LCAP updates of five of the 40 districts it studied and found that four had underspent their projections for supplemental and concentration dollars, with two underspending by more than 10 percent. As EdTrust-West noted, there may be understandable reasons why a district underspends in some years. It may have budgeted to hire eight guidance counselors, but found only seven candidates it wanted to hire. What is required is that districts be transparent about what they did and didn’t spend in the annual LCAP updates they write the following year.

“The assumption is that local constituents will hold leaders accountable to fulfill what they promised,” Palmer said.

But Public Advocates, in its analyses of a sample of district LCAPs, concluded that “annual updates rarely acknowledged or provided explanation for significant underspending.”

In the first instance of challenging underspending, Public Advocates filed a complaint with the state that West Contra Costa Unified moved $4.3 million in supplemental and concentration funding into a reserve for a potential teacher raise that was being negotiated without justifying it in the LCAP. Months later, the district didn’t end up needing that money for the raise. Last month, the state ordered the district to hold a public hearing amending the current LCAP and explaining how it planned to use the money for high-needs students.

Though not required, some districts, like Berkeley Unified, are putting unspent supplemental and concentration dollars into a reserve for future one-time spending for high-needs students. The Monterey County Office of Education is encouraging districts it oversees to create a budget code to track unused supplemental and concentration dollars for future targeted spending. Salinas Union High School District is among those that are.

School Services of California, a Sacramento-based consulting firm for school districts, raised the issue of underspending supplemental and concentration money in a newsletter to member districts earlier this year. It warned that districts could be digging a hole for themselves by not annually spending the full amount of supplemental and concentration dollars as the law requires. When LCFF is fully funded, projected to be in 2020-21, districts could have to make up for the shortfall in previous years by cutting general spending they have added. The Riverside County Office of Education includes a similar caution to districts in LCAP approval letters.

The Department of Finance, which speaks for the Brown administration on LCFF issues, would oppose mandating a uniform budget code for all districts earmarking unspent supplemental and concentration dollars. That would be a step toward returning to the pre-LCFF system of  highly restricted state-mandated pots of dollars, called “categorical” funding, that runs counter to local control, Palmer said.

But the state board could nonetheless require districts to create their own methods of tracking the dollars and requiring districts to state how they plan to use them. That’s what advocacy groups hope the state board will do.

John Affeldt, managing attorney for Public Advocates, said that the finance department is “getting too wrapped up in what is a categorical.” LCFF created “a third way,” a requirement to spend a proportion of a district’s funding on the state’s high-needs students, and “that obligation does not go away just because the year ended. Otherwise, the law would make no sense and would be too easy to undermine.”

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