California School Districts Use Budget Flexibility to Balance Budgets, Avoid Layoffs

Most California school districts with new flexibility about how to spend $4.5 billion in education funds opted to move most of the money into their general funds to balance budgets and avoid teacher layoffs, according to a new report from RAND Corporation and the University of California.

Some local school districts drew on this experiment with fiscal deregulation — initially advanced in 2008 by then-Gov. Arnold Schwarzenegger — to focus resources in new ways on improving the quality of teaching and instruction. Recent efforts by Gov. Jerry Brown to expand deregulation have met with strong opposition.

"Yet, even with their new funding flexibility, most local districts did not use the funds for new initiatives," said Brian Stecher, a RAND senior social scientist and a co-author of the study. "In an era of repeated budget cuts, most districts' top priorities were preserving fiscal solvency, retaining staff and maintaining existing instructional programs."

The study recommends Brown and the state legislature ease confusion at the local level by clearly stating the purpose of the fiscal flexibility granted to districts, particularly if they have preferences regarding which education programs should receive the funds and who will make the funding decisions.

In 2007, about 40 percent of California's state funds for K-12 education were allocated through "categorical aid" programs that restricted how the money could be spent. The following year, the state removed most restrictions from 40 of the categorical aid programs, ranging from textbooks to gifted and talented education to adult education, while at the same time reducing the funding by 20 percent.

Researchers found that districts receive more categorical aid funds if they served low-performing students, had many students from low-income families and had a high proportion of students who were learning English. However, these school districts were not disproportionately affected by the new spending rules because they faced budget cuts that were in-line with the cuts imposed on other districts.

"The unrelenting rounds of cuts for California's schools meant that this experiment in fiscal deregulation was utilized to keep school districts solvent," said study co-author Bruce Fuller, director of the Policy Analysis for California Education (PACE), an independent policy research center based at UC Berkeley, the University of Southern California and Stanford University. "Hopes of some advocates that local control would spur widespread innovation or a new focus on classroom improvements simply proved unrealistic."

In 2010, researchers from RAND, UC Berkeley, UC Davis and San Diego State University examined how districts used the new fiscal freedom, particularly how resource allocations are made at the district level and what specific changes districts have made in allocations.

Researchers found that most categorical aid money was reallocated by local districts into general funds, decreasing funding for some programs while making more available to others. Two large programs — those focusing on teacher professional development and offering general purpose school improvement funding — were most frequently reallocated to the general fund.

Most major categorical aid funding decisions were made by the district office staff and superintendents, not by school principals, who did not gain additional discretion from the spending reform.

An earlier report from the RAND-PACE research team showed that state funding for public schools has fallen by about 18 percent since the onset of the economic recession.

"Categorical aid flexibility allowed districts to respond more nimbly to changing fiscal conditions during a budget crisis, which was probably a good thing," Fuller said. "However, this experience does not tell us how they would use flexibility under other circumstances."

Among the study's other key recommendations:

• State officials should explicitly outline priorities for improving the performance of low-achieving students or advancing specific reforms.
• Educators should be given clear guidance for addressing other policy changes, including a proposed new formula to calculate funding per student.
• State policymakers should require districts to evaluate the flexibility provisions to determine which students, schools and programs benefit, and which do not. These evaluations should examine the future of programs most likely to lose funding, such as art and music.

"This study suggests that districts used flexibility in different ways depending on their local circumstances," said Thomas Timar, director of the UC Davis Center for Applied Policy in Education. "If the legislature decides to experiment with additional flexibility, they should require monitoring or evaluation so we can learn how that flexibility is used and why."

The report, "Deregulating School Aid in California: How Districts Responded to Flexibility in Tier 3 Categorical Funds in 2010–2011," is available at www.rand.org. The volume is the second by RAND Education on California's deregulated school spending program. The research is supported by the William and Flora Hewlett Foundation, the Dirk and Charlene Kabcenell Foundation, and the Stuart Foundation.

The project is a joint effort of RAND Education, UC Berkeley, UC Davis and San Diego State University, and it is being published jointly by RAND and Policy Analysis for California Education, a research center based at UC Berkeley, the University of Southern California and Stanford University.

RAND Education is a leader in providing objective, high-quality research and analysis on educational challenges that is used to improve educational access, quality and outcomes in the United States and throughout the world.