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DISTRIBUTING RESOURCES EQUITABLY
PART 2. CATEGORICAL PROGRAM ADJUSTMENTS

Part 2 of our report investigates factors that justify differences in the amount of education revenues provided to local educational agencies for instructional and related services. These factors fall into two major categories: 1) District characteristic adjustments to account for differences in the costs of education that are beyond the control of local school administrators, and 2) Student characteristic adjustments, provided in recognition of specific needs or factors that call for additional services to make high quality educational opportunities for all students a reality. We also propose consideration of a third category, specifically for funding new initiatives that may be appropriately targeted to unique circumstances of individual districts and to evaluate new ideas prior to statewide implementation^[8].

Background

California school finance has a long history of providing adjustments to base revenues for schools in recognition of special needs and conditions. While some adjustments are included in the calculation of school district revenue limits, most are provided through separate funding streams commonly referred to as categorical programs. California currently has many categorical programs, ranging from class size reduction to textbooks to tenth-grade counseling. Some categorical programs are large and some are very small, both in terms of dollars and number of students served. An individual student may receive benefit from many different categorical programs, each with its own unique set of administrative requirements and funding restrictions. Coordinating services to students through this categorical structure can be administratively intensive and cumbersome.

Purpose of categorical programs

Categorical programs provide resources to accommodate differences in student needs, to meet selected state policy goals, and to spur reforms in the delivery of educational services. We support appropriate categorical programs and the purposes they serve. California is a very diverse state, and that diversity reflects differences that must be addressed by targeting funds to selected districts and students. Further, need-based differentials are recognized constitutionally and the courts have affirmed the appropriateness of recognizing differences in funding based on students needs.

California’s experience

However, California hasn’t limited itself to establishing categoricals to address student needs and district differences. Instead, over 80 different categorical programs exist today, some very narrowly focused. Examples include a variety of hourly funded programs for summer school, after school, remediation, proficiency and other purposes, funded at different hourly rates.

Our many categorical programs segregate funding into dozens of “pots” for the typical school district. They are often administratively cumbersome, separately developed and independently approved by a higher agency. Categoricals have a wide range of purposes, some to respond to historical differences in needs, and some provided in response to unique circumstances, such as the effects very large or very small school and district size. If you can name a purpose, it likely has a categorical program associated with it.

Added over a course of years without a master plan, categorical programs have become a hodgepodge of funding sources, often responding more to momentary needs of politicians or the insistent demands of special interest groups. Further, legislative committees have no guide for what a good or a bad categorical program may be – no way to sift legislation through a common “strainer” with a rational rubric.

Impact

The proliferation of categorical programs has had a large impact on school finance in California.

Categorical program funding now accounts for a high percentage of district total revenues, a trend that continues to grow.
Funding is often targeted to very limited areas, with high administrative accountability, and narrow or restricted use of resources.
High administrative costs result because of narrow focus and inflexible uses.
There is no common delivery system; instead, diverse and arbitrary rule differences governing categorical program administration prevail.

We believe that categorical programs cry out for reform.

Proposal

The Finance & Facilities working group proposes that all operational funding for K-12 education be grouped within four classifications: (1) base “adequacy” funding, (2) district characteristic adjustments, (3) student characteristic adjustments, and (4) initiative funding. Categorical programs that do not fit within categories 2 through 4, above, will be folded into the general purpose funding provided through the adequacy model.

Reforming Categorical Adjustments

The Finance & Facilities Working Group reviewed literature and research on price adjustments and differential factor adjustments in search of options for improving the traditional cornucopia of highly differentiated categorical programs. Our assessment leads us to not recommend to the Legislature at this time the use of factor adjustments based on calculated price differences. Such adjustments are complex in their derivation, with theoretical equity subject to the practical limitations of data available at an appropriate regional scale. In addition, such adjustments have not avoided many of the shortcomings of traditional categorical programs, including the appearance of a certain amount of subjectivity in their application^[9].

Instead, the working group recommends simplifying the existing categorical structure by considering the use of only three broad categories of adjustments.

District Characteristic Adjustments

Like many other states, California currently makes certain adjustments to school district funding based on geographic differences. Examples include rural transportation funding adjusted for sparsity and weather-related factors, and scale adjustments for small schools and districts.

Recommendation 2.1:

The Finance & Facilities Working Group recommends that the school finance system recognize a limited set of differential costs, primarily geographic in nature, that are not under the control or influence of the school district, by establishing a District Characteristic adjustment. The additional revenue provided to school districts in recognition of these uncontrollable cost factors would result in similar levels of real resources.

We also recommend that the Legislature designate the California Quality Education Commission to assess the advisability of a broader application of other price factors within District Characteristic adjustments as part of its charge to develop an adequacy-based school finance system (see Appendix A).

Student Characteristic Adjustment

The circumstances of students that affect achievement, and the resources needed to ameliorate those circumstances, should be incorporated into the school finance system. However, historically, determining the best funding adjustment in response to differing student characteristics has been more art than science. The national and state-level evidence on the relationship between school resources and student achievement is reviewed in Resources and Student Achievement: An Assessment (Betts and Danenberg)^[10]. Their review notes that most studies show at best a weak relationship between resources and achievement, especially when compared with the strength of the association between student performance and socioeconomic status found in recent research based on California data. Nonetheless, that research does show a modest association between gains in student performance and teacher qualifications related to education, experience, and full credentialing.

Applying the results of this research to a simulation of the benefits of improving teacher resources at low-performing schools, Betts and Danenberg found that raising teacher characteristics to the 90^th percentile level for teacher qualifications statewide would reduce the achievement gap by about one-third. The gap, as measured between median (50^th percentile) and low achieving (25^th percentile) schools is 15 percent or more for national scores in both reading and math. The analysis indicates that increasing teacher qualifications in low performing schools may result in a reduction of that gap to less than 10 percent.

Based on spending patterns at those schools currently employing the most qualified teachers, such a change would cost approximately $300 per student. As the report notes, this estimate may significantly understate the actual cost of recruiting the most qualified teachers to teach in low-performing schools. It does, however, provide a starting point for considering incentives and other methods for bringing more qualified instructors to the schools most in need, and shows some evidence grounded in research that such a change would result in narrowing of the student achievement gap.

Recommendation 2.2:

Therefore, the Finance & Facilities Working Group recommends that the Legislature include in the California school financing system block grants for allocation to school districts on the basis of student characteristics that mark the need for additional educational resources. Further, we strongly suggest that the adjustments in this category be limited to additional funding for (1) special education, (2) services for English language learners, and (3) resources provided in recognition of the correlation of family income level with student achievement. New programs in these areas would be tested and implemented through an initiatives process, described below.

Initiatives

The proliferation of categorical programs in the California system of school finance has, in part, resulted from well-intentioned ideas that were implemented statewide before the resulting programs had been tested for effectiveness. In addition, categorical programs have been established to meet real, but temporary, needs with no clear process for ending them. To address these issues, we make the following recommendation:

Recommendation 2.3:

The Finance & Facilities Working Group recommends that the Legislature establish a category of grants that will be clearly identified as initiatives. These initiatives will be limited in duration, and will serve one of two purposes:

Pilot and evaluate proposed new programs before they are implemented statewide. Once implemented statewide, the funding for such a program would be consolidated into the base funding for schools, or one of the two major categories of adjustments – student characteristic and district characteristic.
Meet immediate, but temporary, needs for additional funding targeted to specific districts to mitigate the effects of transitory, but possibly unforeseen, shocks to the instructional program. For example, funding provided for programs specifically targeted to reduce the number of emergency permit teachers would be a high priority, but presumably time limited, effort.

The table on the following page demonstrates how the major categorical programs might be allocated among the four categories we are proposing.

Program	Adequacy base	Student	District	Initiative
Revenue Limit^[11]	X
Adult Education^[12]	N/A
Beginning Teacher Salary	x
BTSA			x
Child Development, Preschool	N/A
Child Nutrition	N/A
Class Size Reduction, primary & secondary, CSR facilities^[13]	x
Community Day Schools		x
Deferred Maintenance	x
Desegregation		x
Dropout / High Risk Youth Programs	x
Drug/Tobacco Prevention	x
Educational Technology	x
EIA		x
GATE	x
Healthy Start				x
Instructional Materials^[14]	x
Peer Assistance & Review	x
Miller-Unruh Reading	x
Opportunity Programs	x
Partnership Academies^[15]				x
Pupil Testing	x
Reading Initiative	x
Reading materials, K-3	x
ROC/P	N/A
SIP	x
Special education^[16]	x	x
Targeted truancy, public safety				x
Tenth Grade Counseling	x
Transportation			x
Year-round school incentives				x

A Note on Accountability

We recognize that categorical consolidation provides greater local flexibility in the use of funds, but will also require high accountability to assure that funds are used effectively. Until such an accountability system is in place, it may be difficult to consolidate some categoricals. For example, instructional materials funding is currently restricted for use only to purchase approved instructional materials and equipment. Under our proposal, this funding would become part of the base adequacy funding. No separate funding formula would be needed to allocate dollars for instructional materials, and schools would be free to use this base funding with broad discretion. At the same time folding instructional materials funding into the base runs the risk that California’s goal of adequate instructional materials for all students won’t be realized. Before a program such as this is added to base funding, there needs to be a strong accountability system in place.

Controlling the Proliferation of Categorical Programs

As noted in the introduction to this section, the Legislature does not have a consistent rubric for evaluating newly proposed education initiatives. We believe, however, that consistent criteria for adoption of new initiatives would serve both the Legislature and the education system well. Therefore, we make the following recommendation:

Recommendation 2.4:

We recommend that the Legislature adopt specific guidelines and criteria for the Legislature to use in evaluating proposed initiative programs. We believe that, similar to the process used for consideration of mandated cost claims, it would be possible to develop sound criteria, such as the following:

Avoid establishing programs with separate or unique administrative controls or supervision, which result in high costs.
Assure a goal or delivery focus, not a process focus.
Establish approval, oversight and supervision as close to the local agency as possible. This would call for regional rather than state responsibility.
Do not make an initiative a substitute for accountability.
Use regionalized service delivery wherever appropriate. Examples include low incidence services, specialized programs and high cost programs.
Establish reasonable implementation and sunset timelines for new initiatives.
Assure that each new initiative is reviewed and assessed by the Quality Education Commission with the same rigor as any educational component that would be included in the Quality Education Model.

Model Delivery and Model Budgeting

Recommendation 2.5:

We recommend that sufficient funding be provided for state agencies, or other appropriate entities, to develop material describing best practices for the administration and delivery of categorical programs. This includes the development of standardized cost models that local agencies can use to assess implementation of the program. Several alternative approaches should be developed, any one of which would meet the goals of the program.

Improving Administrative and Supervisory Controls

Recommendation 2.6:

We recommend that every new initiative program have a comment period on all administrative and supervisory controls proposed by the administering agency. Alternatively, an advisory committee representative of those agencies that must administer the program may be used to develop administrative guidelines.

Table of Contents
Summary	1. Finance	2. Equity	3. Community
4. Accountability	5. Facilities	Appendices	Members