• Tony Wold, Ed.D.

The Real Story of CA School Funding – A Cautionary Tale (Part 3: The Implementation)

20-minute read time

We are back after a short, unexpected hiatus. Suffice it to say that the story involves a European vacation; one lost piece of luggage (which just happened to have the work computer); a canceled flight, and extra unexpected set of extra days across the Atlantic; and then the wonderful return present of bringing back the newest variant of coronavirus, and it is pretty transparent why it took a while to get to Part 3. What was supposed to be relaxing became another incident that reduces our bandwidth, similar to what was discussed in the first post of this blog.


If you missed Part 1 "The Foundation" or Part 2 "The Intent" please follow the hyperlinks to catch up and subscribe. In the first two parts of this blog, we explored the basic history of school finance and then took a deeper look at the intent of the reforms. With this foundation and understanding, Part 3 will go into detail on ten (10) factors that impact the flexibility of a budget. These are part of the data set that a Chief Business Official (CBO) uses to craft the budget for presentation to the board of education.


“Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden."

Phaedrus

The title of this issue of the blog is a cautionary tale. School funding is entirely predicated on what the State of California, or in other states what the state or local governments levy upon taxpayers in a variety of forms. In California, the large upswings in education funding are the result of the top 1% of taxpayers having a good year.


There have been a variety of ways to state this, but I believe the easiest analogy is that when the rich get the sniffles educational funding suddenly contracts pneumonia. For many years the late Ron Bennett continued to preach “don’t use one-time funds on things that eat.” The one-time block grant in the 2022 - 2023 budget is $7.936 billion, which will be allocated based on unduplicated student counts. Using the recently certified data this will be approximately $2,151 per unduplicated ADA.


Without any shadow of a doubt, the adopted budget in California is good for education and provides increases to the base funding model. This begs the question, then, as to why during this great upswell of revenue are districts and Governor Newsome still cautious regarding State revenue and increasing expenditures?


The lack of adequate funding for the basics of education and the challenge our professional educators face to maintain a living wage in the areas that they work has forced school districts, and chief business officials to utilize these one-time funding sources for ongoing staff. The one-time funds allow boards of education to not have to make reductions at a time where the need for more educators is dire. This was explained in a previous post about the staffing shortages that are especially prevalent in rural areas and the bay area.


As we discussed in Parts 1 and 2, Jerry Brown advocated for local control of funding. The initial issuance of the CARES and ESSER funds announced that these funds were to maintain public education services during the pandemic. It was in 2020 and early 2021 that politicians in Washington D.C. lauded the restoration of public education with these Covid dollars. The hope was that things would get back to normal and reduce the impacts of learning loss. For funding-strapped school districts, however, these funds just allowed the lights to stay on the people that they employed to stay employed. The significant increase of 13% in LCFF funding is fantastic but does not yet address the fact that over 42% of every LCFF dollar allocated to school districts was spent just to pay for the retirement costs of STRS and PERS.


Fast forward to 2022 and the rules have changed and school districts across the nation, especially in California, are addressing multiple financial challenges that have not been clearly articulated and understood by our constituents or the legislators who pass the laws. It seems that bureaucracy sneaks in too many good intentions and the focus on compliance takes a front seat over the good that funds can do. Because of term limits and a very divided political landscape the implementation of programs and evaluation are not evenly aligned. This has created a challenging story to tell regarding the facts of how a school budget is built differently compared to how we naturally manage our own personal finances.


"Those who fail to learn from history are doomed to repeat it."

Winston Churchill

In a household budget, the source of funds is singular (your paycheck) and the uses of those funds are plural. Moreover, in our household budget, we must prioritize our expenditures and change behaviors or priorities if there is a shortfall. Abraham Maslow defined the hierarchy of needs, which very much is a foundation for the prioritization of a budget.


  • Food & Shelter (rent or mortgage) is a top priority that addresses our physiological and safety needs. This includes foundational expenses of utilities, clothing, personal care, and some form of transportation.

  • Family and Education help us to belong and grow in our esteem and cognitive needs. This also includes extracurricular activities, hobbies, interests, and memberships.

  • If funds remain the aesthetic aspects of our desires can be addressed with “upgrades” in transportation, housing, dining, clothing, and other material collections.

Most people recognize quickly that money does not buy happiness and to move to the top of the pyramid of Maslow they find it to be an internal drive that focuses on outcomes and a sense of accomplishment and making a difference.


In our personal budgets, all funds are flexible and can be used for any purpose. When the price of gasoline crosses $6 per gallon (and now $7), and our normal 20-gallon fill-up now crosses $120 (and frustratingly you are required to stop pumping and reenter your card because the amount being charged crossed the maximum charge threshold programmed into the pump) we must determine what $40 expense are we not going to make because our core needs must be met first.


We recognize on a very personal basis that we must take care of the essentials, and the “luxuries” of life come in second to food, shelter, rent, transportation, clothing, and education. Education remains a core need as it is the pathway to opportunity and achievement and forms the foundation for whom we become. During down times, the base is our first priority, and nights out, and other less essential items take a back seat.


So, how come we fully understand the need to adjust our own personal finances but struggle to make changes in education? The reasons are complex, and at the same time simple to understand. The remainder of this blog will outline 10 individual factors, in no particular order, that have a direct impact on the quality of service from public schools. None of these factors are within the control of those who run the schools, yet those same people are held accountable for the implementation. These are the cautionary tales that are not talked about enough:


Restricted Funding


Public education budgets are a combination of several elements:

  • General Fund for any specific purpose

  • Federal Funds designed to support specific subgroups of students

  • Categorical or Restricted funds that are dedicated to a specific purpose

  • Repairing funds that are dedicated to repairing, modernization, or construction

  • Local funds that come through tax levies which are sometimes restricted

The question we must ask is what should a school district do if they do not have enough General Fund to maintain what they have? The personal finance answer would be to use our savings (restricted) funds to cover the basic needs first.

The legislators, however, continue to ignore the funding for the base and create more and more new restricted programs that they believe should be done. Education is the one industry in the world where every citizen believes that they are an expert because they once attended school and know how it works. When the budget cratered in 2007 the first thing the State did was make restricted funds flexible to school districts calling them Tier I, II, and III based on the level of freedom districts might need. At that time the legislators and governor did understand that in tough times categorical (restricted) programs are nice to have and keeping the doors open is a must-have. Somehow, over the past decade (term limits?) our legislators have forgotten that they never did quite bring back all of the funding that was lost in 2007-2008 in regard to spending authority adjusted for inflation. Now we are headed right back to having to make choices to maintain the base that dilutes the effectiveness of these funds.


Recent newspaper articles have challenged that public education misspent the “extra” Covid funding, conveniently forgetting that the base was not covered. The advocacy groups who watch over public education rightfully point out multiple areas that need to be improved. The impact of lost learning is real and something that should be highly focused upon and should be the number one thing school districts are working toward. Funding does need to be dedicated to interventions and additional support. Where the friction comes from is that these groups don’t care how the district addresses the base costs believing that is the fault of management, and just expect each of these dollars to be spent for “extra.”


Chief Business Officers and Superintendents end up with one of the hardest challenges in communication with stakeholders about the funding that is available. The fact that most of the areas of need that our outside groups are pushing for are things that we as educators believe are important too. That becomes the challenge to artfully communicate how things that matter deeply to the educational leaders cannot be done because we do not have enough of one type of money, even when we have more in a different type. With all the restricted funding there comes something else, the ever-famous audit for proper utilization of those funds.


Compliance


With restricted funding comes numerous regulations and accountability for implementation. Compliance is absolutely essential, and good school business officials embrace the need for internal controls, progress monitoring, documentation, clear processes and procedures, and utilization of external audits. Annual notifications of parent rights, school safety plans, teacher credentialing, yearly staff training, mandated child abuse reporting, and many other annual tasks need to be done well and documented that they are effective. This focus requires time, effort, resources, and staffing to ensure that the district budget is being spent appropriately. This reference to compliance, however, is when it is taken too far from the intent and creates barriers to sustained improvement, or worse results in penalties that further exasperate the tough budget issues.

Even when the intent of the funding is to bridge the gap, or provide support to maintain services, there often comes the final reckoning on how the funds were spent. This is often done after the fact when the intent has become lost in translation. In a world where “transparency” really does matter we also need to work to keep bureaucracy from hindering our core functions of education.


The most textbook example is the Federal Program Monitoring (FPM) reviews done by the California Department of Education. In these reviews, districts are required to document compliance with the law for all supplemental federal programs. The first districts in California were reviewed in the past couple of months and one of the more common findings was that “The LEA failed to provide time and effort documentation to support the salaries and benefits of those charged to the Elementary and Secondary Emergency Relief (ESSER) and other one-time funds.” This finding then requires the LEA to take General Fund to pay back the funds that were intended to ensure schools continued to provide services during the pandemic. How does it make sense to penalize school districts for using the funds for exactly what they were intended for because every teacher, custodian, and food service worker did not fill out a daily time sheet of activities?


Good business officials embrace structure and are very comfortable being held accountable for being a good steward of public funds. It is hard, however, to have a balance when the legislature passes new compliance requirements, often described as mandates, and then does not provide the funding to implement those mandates. For many years, the state required districts to document compliance with more than 50 mandates. If the documentation was done correctly the district would file a claim with the state and be reimbursed.


The problem, however, was that the state, at some point, just decided that it could not afford to pay these mandates anymore so they began to keep a ledger for each district of their submissions that met the requirements but had not been reimbursed due to the state budget. Occasionally, the state would provide a one-time grant funding and designate that receipt of those funds would be offset against past unpaid mandate claims.


This strategy could basically be explained this way. A district that faithfully had documented and ensured full compliance with the 57 mandates and filed its claims on time was owed $10 million by the State. It is very important to understand that this district has already spent $10 million from somewhere. The next year the district files another $10 million claim. Fast forward two years and the State provides a one-time block grant of $2 million and hides in the trailer bill that the funds “offset past mandates.” The belief is the district just got $2 million in additional funding, the reality is that the district just lost $18 million that was owed to them and has absorbed the costs of this compliance for 10 cents to the dollar.


When LCFF came into play, Governor Brown wanted to eliminate the constant shell game of mandate payments as part of “the wall of debt.” This created the mandate block grant where districts get a smaller figure, in our example $2 million, every year instead of having to submit the claims. This was a great way for the state to permanently pass on that cost to the district which further eroded the base. To make matters worse, the California Department of Education stopped requesting documentation of these mandates and the result has been since then the legislators have added mandate after mandate without providing funding and the best practices of accountability have been lost. Just this year, the Learning Recovery Emergency Block Grant of over $2,151 per student, if you check the language on it, you will find that this grant again erases all previous mandates.

The bait and switch of who pays for the things that are required by the legislature do not stop at restricted funds. One of the biggest impacts on school district budgets is the next item on our list.


Pension Obligations

Almost a century ago an arrangement was made between the government and employees that worked as teachers and classified support personnel to operate schools. This agreement was that in recognition of the essential work that these employees do and noting the fact that the compensation ceiling for them was more limited than that which is available in the private sector, a defined benefit pension system would be created.


The California State Teachers Retirement System (CalSTRS) and the California Public Employees Retirement System (CalPERS) were formed with a commitment and guarantee from the State of California that these obligations would be funded. A simple formula was designed that worked for a while until one of the principal parties in the agreement changed the rules.


Initially, each year the employee (8%), the school district (8%), and the State (6% or the balance) would fund the obligations for STRS. A similar arrangement was made with PERS. This was in effect, with small modifications until a decade ago. At that time, the rules changed.


The contribution of the employee was increased to approximately 10%. The contribution of the district increased each year to a point where it is now over 19% for STRS and 25% for PERS. The State continued to contribute around 6%.


This change was made in recognition of the actuarial costs of pensions and, obviously, this would require greater contributions by all parties. So how did the State not contribute a greater share of the increased contribution?


If you ask the State, they will say they did increase funding for STRS and PERS. A couple of times they made one-time deposits, but mostly if you ask today, they will explain that districts received additional money through the LCFF model that would pay for these increased costs.


In a review of the unaudited actuals for all school districts in California, we compared the total expense for STRS and PERS in the 2014 – 2015 school year to the total expense for STRS and PERS in the most recent school year, 2020 – 2021. The unaudited actuals are the most accurate financial reporting for school districts as it represents a day in time, June 30th, when the district closed the books on the previous year.


During this same period, the number of school district employees did not increase at any significant levels. Certificated (Teacher) and Classified Support salaries increased by a total of $8.3 billion which is equal to 58.8% of LCFF funding or 41.2% of all funding.


Over the past 6 years, there has been significant discussion about the tremendous “investment” in education and the ability of school districts to expand programs with these new funds. The truth, however, is that $0.42 cents of every new $1.00 dollar has been used to pay for a necessary, and promised, obligation out of the school district budgets.

The best way for the public to look at this is that when it is announced that a local school district will be receiving an additional $10 million in new LCFF funding, it means that the first $4.2 million has already been spent.


At least the district in this example would have $5.8 million in new funding for programs, right?


Contribution to Essential Special Education Programs


The answer to the question above would be not entirely. Federal law requires school districts to provide a “fair and appropriate education” (FAPE) for all students, irrespective of the costs of those programs. As school districts serve more and more students with low-incident disabilities and provide services for a growing number of students within the autism spectrum, the costs of those programs are significantly greater than the revenue that they generate.


An autism program may be staffed with an educational specialist, multiple paraprofessionals, a speech and language pathologist, an occupational therapist, and a psychologist for a caseload of 8 to 10 students. Just the salaries alone of those positions cross the half a million-dollar mark and do not include additional material and transportation expenses. The revenue, even at over $20,000 per student would not reach more than $200,000.


So where does that additional funding come from?

The answer of course is the general fund that supports base programs. In business terms, we call this a contribution from unrestricted resources to restricted resources. This is another expense that continues to increase each year, to the point that those of us who build budgets expect the increase and account for it off the top each year.


The services provided to low-incident students are essential, and every educator I have met is fully devoted and dedicated to providing anything, and everything that is necessary for their education. As a former special education teacher, I was very driven to always support special education as a Chief Business Officer. This support, though, requires the budget to account for the fact that both the State and Federal governments have created a mandate that they have not yet come close to fully funding.


To use our example above of a district receiving total new LCFF revenue of $10 million, we must account for the updated fixed costs of STRS and PERS as well as increased contributions, which in this case account for up to $0.22 cents for every $1.00 dollar.

If that were the only expenses that needed to be addressed there would still be the opportunity to provide some additional support or increase employee compensation to remain competitive in a labor shortage.


Other Costs of Keeping the Lights On

As we discussed earlier in this writing, the costs of goods and services increase from one year to the next. This is reported as part of the Consumer Price Index (CPI) and the concept is that the statutory Cost of Living Increase (COLA) that is provided by the State would cover these costs. From the Chief Business Official's lens, however, several key elements must be paid for off-the-top just to maintain services at the level they were the previous year and not to add more. These expenditures include:


Health and Welfare benefits for employees. While most districts have moved to a model where there are contributions by both the district and the employee for health and welfare benefits, the overall cost has increased by $1.3 billion in the six (6) years of our study. The accounts for 9.1% of all LCFF or 6% of all revenue.


Other statutory benefits such as Medicare, workers' compensation, unemployment, and retirement costs have added almost another $1.0 billion to costs, just about 7.4% of LCFF and 5.5% of all revenue. Not all districts have these additional retirements or OPEB obligations, but those that do have to pay up to 4% of all revenue each year on this expense, which takes away these resources from the students today.


The increased costs for utilities, goods and services, insurance, and maintenance have increased, on average, approximately 3% of LCFF revenue and 1.8% of all revenue over the past 6 years.


Employees in public schools work under a salary schedule. This schedule does increase compensation as a metric of years served. Employees move up a “step” each year which must be calculated as part of the increased costs for the next school year. In the case of certificated staff, they can also move over “columns” by obtaining additional college coursework toward masters and doctoral degrees. A conservative cost of step and column would be approximately 1.5% of all expenditures within the district or 2% of the new LCFF.


Back to our example of the $10,000,000 increase in revenue we now must also add in the increased costs of Health & Welfare 9.1% or $920,000; other benefits of $7.4% or $720,000; the increased costs of goods and services are another 3% or $300,000; and the increase in step and column is accounted for another 2% or $200,000.

As we can see the increased funding for school districts comes with multiple obligations for the funds. But there is still another factor that must be considered in building the budget.


Changes in Enrollment and Attendance


Over the past two years of the pandemic, there has been a significant shift in the number of students who are enrolled in school, as well as the rate at which they attend. First, we need to look at the enrollment trends that have shown the birth rate declining for multiple years. The common misconceptions are that families are fleeing California for more affordable living situations in other states. While there is indeed migration, the total enrollment across the nation is not growing. Most of the decline over the past two years has come from the Transitional Kindergarten through Grade 3 range.


Students in grades K – 3 are focusing on essential life-long literacy skills that will form the foundation for the remainder of their schooling. During the pandemic, many families chose not to provide a kindergarten experience on Zoom and waited to enroll or found that homeschooling might be an option. In addition, the declining birth rate contributed to an even greater drop. Finally, the U.S. public school system has consistently served newcomer students to the U.S. Those channels of new immigrants were greatly affected by both the pandemic and the political landscape of the nation. All told, this created an average decline of over 3% each year and a composite drop over two years of just over 7% for most school districts.


The rate at which students attend is measured as the Average Daily Attendance (ADA) and is used to calculate the financial support for schools in California and 4 other states. The remainder of the nation utilizes an Average Daily Membership (ADM) metric which funds those states on a per-student enrolled basis.


For an ADM state, declining enrollment is a significant impact on the budget, but it is also something that can be forecast as funding is usually based on the previous year's student count. For ADA states, however, there is the double jeopardy of losing funding for each student no longer enrolled, and then losing additional funding if the rate of attendance declines.


Most schools operate on the agrarian calendar, which provides for 180 instructional days over 10 months of instruction. The expectation of staff teaching those days is that they may find a need to utilize 1 sick day per month, which is provided by the district and the district pays that staff member from their leave balance and must pay for a substitute to cover that class.


If a student misses 10 days of school the district will now receive 94% of the total apportionment for that student in revenue. The 6% expected is lost, even though the district had to purchase materials for that student, provide them with a teacher, and all other costs of education.


In a study of over 1 million students across the nation before the pandemic over 2/3rds of the students (67%) had good or excellent attendance and never came close to missing ten days. On the other spectrum, approximately 18 – 24% of other students had chronic or severe absenteeism each crossing more than 20 days of absence each year. For those students, by the time they reach 4th grade, they would have missed more than a year of instruction. This leads to many negative consequences both in behavior and academic performance that could otherwise have been prevented (this will be the subject of a future post). As we finish the 2021-2022 school year a review again of the attendance of over 1 million students from above shows a troubling trend.

  • Not only did our good or excellent students drop down to less than half (48%);

  • The students who have become chronic or severe have passed 40% in all grade levels, with percentages reaching over half in the lower grades.

The overall impact for many districts is an aggregate decrease of almost 10% from just two years previous. While there have been multiple “hold harmless” initiatives, there will come a time when the revenue slows as the state aligns funding to either the enrollment or ADA, depending upon the state funding model. That day will likely come in 2 years as the averaging from the adopted budget and softened landing each loses emphasis in the formula.


Chief Business Officials need to include an enrollment/ADA factor into their revenue projections. The resulting factor, is, unfortunately, a negative number, meaning that the district will not receive the same dollars as the previous year baring any other changes. From an accounting aspect, rather than have it invisibly taken out of the new revenue, it should first be addressed as a cost in building our budget. For this example, where the district has declined by 7% in enrollment and changed from a 94% ADA rate to one just at 90% we will need to determine a factor of LCFF to attribute to the decline. Because of the three-year averaging, for this scenario, we can anticipate a 4.5% decrease in revenue and account for that off the top.


This is the unfortunate truth that you do not always hear when the politicians announce significant, unprecedented funding increases that school districts have been having to address these costs for the past fifteen years in hopes that the State would return funding to the level of 2007. A whole generation of students has already completed their schooling, and we have yet to catch up.


What can a district do with 8.1% of the new $10,000,000 that they look to receive?


How many stakeholders will be advocating that these resources fund their project?


Will employee groups be comfortable with the fact that this new funding is inversely directed for other purposes, by requirement, not by district choice to only have just under 10% remaining for new compensation?


Also, it is important to remember that if compensation is increased, so are proportionately the cost of STRS/PERS and other benefits. When you look at the numbers in the chart, most of the funds are still going to categories of compensation ($8,440,000) or 84% to be accurate. Yet the essential workers that are our employees have a challenge in recognizing a compensation increase that they cannot see; especially if they find that they are now struggling to meet their own basic needs. This brings us to the next major impact on the budget.


Reserves and Reliance on One-Time Funding


The Government Finance Officers Association recommends that public agencies maintain approximately two (2) months of operating expenses in reserve (approximately 18%) in case of a reduction in funding. At the end of this coming school year, the State of California will have over $30 billion in reserve.

School districts, under AB 1200 have had a required minimum reserve of 2 – 3% of expenses for the current and two subsequent fiscal years. That minimum reserve would barely cover 1 week of expenses. Living on a tightrope like this would make most agencies insolvent after one small emergency repair to a facility or other unexpected event (such as the compliance audits). For this reason, and due to concerns about changes in future revenue from the state districts have been building up their reserves and using one-time funding to maintain programs.


The Legislative Analyst Office (LAO) in California produced a mid-May analysis of the economic indicators that point to an economic recession within the next two years. Factors noted were falling consumer confidence, a tight labor market, rising inflation, and slowing of home sales which are being impacted by an increase in interest rates which resulted in pricing more people out of home ownership. In the message, the LAO wrote “past experience does not guarantee that we are heading for a recession, and the chance of a recession is high enough to pose a significant risk for the budget.”


John Festerwald in EdSource simply explained it this way “In other words, predicting a recession is like projecting hurricanes: It’s a good bet one is coming, but you don’t when it will hit or how destructive it will be.”

The fact that the average district has built up reserves is a very good thing. Those of us who were in school finance vividly remember 2007 – 2008. We opened that school year in euphoria with compensation increases between 6 – 10% after multiple years of little growth. It was a good time to be in education; until it wasn’t!


Almost overnight the State revenues plummeted due to the mortgage crisis. For several years the housing industry was booming, and capital gains were at all-time highs. Somehow, the legislature forgot that the top 1% of earners drive the California economy. In 2007 those individuals did not get the sniffles, they became ill, and it took California a decade to recover. Imagine what could happen in the covid era?


Sitting here today, it looks very similar to 2007. In the movie the Final Countdown, a familiar storm transported individuals through history and they knew well enough to know it when they saw it again to get home. That is the Hollywood version of forecasting, and since Hollywood is in California the analogy can stand.


Reserves are going to likely be necessary to stave off a change in the economy. Just as the economy was being supported by billions of dollars in mortgage industry spending, the nation has spent the past two years utilizing a trillion dollars in Federal one-time funds. Those funds are now ending, but the appetite for spending has not decreased.


So, why all this focus on reserves as a cautionary tale when the State is increasing its reserves and districts have done the same?


The answer to that is simple. A couple of years into LCFF, the State did not have sufficient funds to provide adequate COLA increases and Governor Brown was utilizing multiple years of one-time funds. A deal was struck and placed into law that in a Test 1 Position 98 year, and if several other factors are met a statutory cap on school district reserves would go into effect.


In a year that was supposed to wean public education off using one-time funding to support the base the districts now have perceived significant increases in LCFF funding coming, along with another significant one-time block grant, and the requirement to spend down reserves. And we thought the storm in the Final Countdown was severe.


Employee Shortages and Compensation

The beginning of the 2021 – 2022 school year was challenging for almost every educational professional. It was more challenging when schools across northern California and the nation began instruction without a teacher assigned to every classroom. Several districts reported over 50 vacancies (click here to see an MSNBC story on this very topic. Districts were forced to move out-of-classroom specialists back to teaching assignments; principals had to teach during the day and run the school at night; substitute teachers were even harder to find with daily rates crossing $350.


Those were just the vacancies in the classroom. Classified vacancies were even greater, crossing over 200 in some districts. Of greatest need were, and still are, special education paraprofessionals. School districts advertised signing bonuses and negotiated additional stipends for those teachers they did have. The result was that we enter the summer with an entire industry stating, “I don’t have the bandwidth to take on anything new right now.”


As we look at greater than previous increases in school funding, additional one-time funding, and a requirement to reduce reserves the pressure to do the opposite of Ron Bennett’s advice and use one-time funding on things that eat will become very difficult for communities and stakeholders to understand why not. This will require significant work to explain all the factors that are required to build a budget and the challenge of using one-time funding for ongoing expenses.


While there is no quantification measuring the pressures of employee compensation this factor must be recognized. We, in ed