Does California's Fiscal Future Bode Ill for Education?

Many analysts and legislative groups have argued that California's current fiscal problems are not merely transitory effects of a recession but are signs of a bleak new era for the "Golden State." Is this true? And, if so, how is a new era of fiscal limitations likely to affect the state's education systems? To help address these issues, Stephen Carroll, Eugene Bryton, Peter Rydell, and Michael Shires analyzed the trends that will shape the California budget over the next several years.

Their results indicate that California indeed faces a budget crisis, and the long-term prospects for state support of some public service systems--including education--are bleak. Three trends appear likely to dominate the state's long-term fiscal condition:

State revenues will grow--but only moderately--in the foreseeable future.
"Receiver populations" (the elderly, school-age children, and others who tend to depend on state aid) will grow at least as fast as revenues.
Corrections costs (primarily the costs of building and operating state prisons)--driven by "three-strikes"[1] legislation--will skyrocket.

The implications of these results are unsettling: The demands that mandated programs make on the budget will grow considerably faster than revenues--and the resulting pinch will be especially painful, because the battle for funds will be fought over the relatively small portion of state spending that remains open to change. The prospects for continuing state support at the present level are very bleak in some areas, particularly higher education.

The findings, data, and methods that support these conclusions and implications are fully described in Projecting California's Fiscal Future, a recent Institute on Education and Training study.

Transitory Problems or Long-Term Change?

In making their projections, the analysts assumed that current demographic and economic trends, tax policies, and mandated spending programs all continue through the next decade; and they projected the implications for state General-Fund revenues and spending through 2005. They did not address the problems of balancing the budget in any given year. Rather, their objective was to determine whether the state's current fiscal policies and programs are consistent with the constellation of forces that will bear on the state's long-term fiscal future.

The authors analyzed the spending categories that dominate the California budget, focusing on the state General Fund--about $42 billion this year. The General Fund comprises the monies raised by state income tax, sales tax, and business and corporation taxes--the funds that the governor and the legislature can budget, debate about, appropriate, and control to some degree. The other types of state spending are essentially not under state control. Almost $30 billion of total state spending is, in fact, federal spending, such as Title I aid to education, which the state simply passes on without influence. Another $12 billion consists of special funds: money from specific sources that is earmarked for specific purposes, such as the highway trust fund, and cannot be spent on anything else. For all practical purposes, the authors explain, the General Fund is the total state budget.

Where does that money go? In fiscal year 1994, three major spending categories accounted for 80 percent of the General Fund--(1) health and welfare, 33 percent; (2) corrections, 8 percent; and (3) K-14 education, 39 percent. Roughly 10 percent went to higher education, primarily the University of California and the California State University systems. State spending for all other purposes, including the costs of operating all three branches of government, accounted for the remaining 10 percent of the total.

The critical question is how spending in these categories is likely to grow, keeping in mind that General-Fund revenues will increase only moderately:

California spends less than the national average per pupil (K-12)

Health and welfare: Although benefit levels have been decreasing over the past decade, the size of eligible populations has been increasing. The increase in beneficiaries has outweighed the effects of reduced benefit levels. As a result, total spending in this area has grown about as fast as the General Fund has, and that trend is likely to continue.
Corrections: With the state's new three-strikes legislation and ballot initiative (Proposition 184), corrections' share of the budget will probably more than double by fiscal year 2005.
K-14 education: Propositions 98 and 111 define minimum spending per pupil. Demographic trends suggest that total enrollment in California public schools will grow by 30 percent over the next decade. It appears that required state spending on K-14 education will grow about as fast as the state's General Fund.

How will these trends translate into budget shares? If current laws and policies do not change, the study's best prediction for 2005 has health and welfare spending at 32 percent, K-14 education at 39 percent, and corrections at 20 percent--for a total of 91 percent of the state's budget. Only 9 percent will be available for higher education and all other government functions.

How Will Limitations Affect Education?

The implications for education are particularly troublesome. If California expects high technology to fuel economic growth, the state needs a strong education system. But California has lagged behind most other states in K-12 funding per pupil for well over a decade and now provides fewer dollars in absolute terms to higher education than it did in 1988. The analysis implies that the state will be hard-pressed to increase per-pupil spending in K-12 education fast enough to keep pace with inflation. If, as is likely, other states increase real spending per pupil in the future, California will likely fall further behind the rest of the nation.

Even under optimistic assumptions about the state's fiscal future, California's public colleges and universities will have to turn away thousands of potential students

Similarly, if current trends persist to 2005, the University of California and the California State University systems will have to turn away more than 135,000 full-time-equivalent students while California's community colleges will turn away another 180,000 full-time-equivalent, degree-credit students.

From these projections and their implications, the study concludes that California's long-term budget constraints may be limiting its future economic growth by limiting its investments in education.

[1]California's three-strikes law mandates 25 years to life in prison for anyone convicted of a felony following two prior convictions for serious crimes.

RAND research briefs summarize research that has been more fully documented elsewhere. This research brief describes work done for RAND's Institute on Education and Training with funds from the Lilly Endowment Inc. The work is documented in Projecting California's Fiscal Future, by Stephen Carroll, Eugene Bryton, C. Peter Rydell, and Michael Shires, MR-570-LE, 1995, 96 pp., ISBN: 0-8330-2364-0, available from National Book Network (Telephone: 800-462-6420; FAX: 301-459-2118). A profile of the IET, abstracts of its publications, and ordering information may be viewed on the World Wide Web () and on RAND's gopher server (gopher://info.rand.org:70/11/IET). RAND is a nonprofit institution that helps improve pubic policy through research and analysis; its publications do not necessarily reflect the opinions or policies of its research sponsors.

RB-8013 (1996)

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