Our review of the State's process for identifying, assessing, and overseeing education-related categorical programs concludes that:
Education funds are generally one of two types: general purpose or categorical. General purpose funds can be spent on paying everything from teacher salaries to utilities. On the other hand, categorical funds must be spent for specific purposes such as special education or teacher training. For purposes of this audit, we defined the term "categorical funding" broadly so that we could identify allocations made by the California Department of Education (CDE) and the State Controller's Office (SCO) for programs providing funding over and above the basic funding provided to local education agencies (LEAs), typically referred to as revenue limit funding. Categorical funding is far-reaching. For fiscal year 2001-02, CDE and the SCO disbursed roughly $17 billion to various recipients of 113 categorical programs. However, for five of these categorical programs, the State delayed CDE's authority to allocate funding totaling $867 million until fiscal year 2002-03. Historically, categorical programs have been designed to remedy inequities among student populations; ensure that all students, especially those who need the most assistance, are served; and provide extra support for the State's current education priorities.
Critics argue that categorical programs create unnecessary layers of administration and that government regulation of these programs stunts local creativity and flexibility. In turn, supporters maintain that the law intends equal opportunity, not equal funds for each student, and that categorical programs change students' lives. Legislation enacted in September 2000, aimed at categorical reform, required CDE to establish the Pilot Project for Categorical Education Program Flexibility (pilot project). The purpose of the pilot project was to allow school districts to focus on their particular program needs rather than spending funds according to the various categorical programs' guidelines. Originally, only five school districts applied for and were approved to participate in the pilot project, but CDE did not give them guidance or direction. Further, CDE did not take sufficient steps to implement the pilot project, failing to follow recommendations of the project's advisory group and of state law. Having abandoned the pilot project, the State has lost valuable information to guide its reform of categorical programs.
The governor, the Legislative Analyst's Office, and two members of the Legislature have all offered proposals for reforming categorical programs. These reform proposals typically call for consolidating a group of categorical programs into block grants, which give school districts greater spending flexibility than the categorical programs allow. However, as of the last day for each house to pass bills, September 12, 2003, California has not implemented any of these recent block grant proposals.
Having yet to reform its system of categorical programs, California has ample opportunity to learn from the federal government's previous efforts to consolidate categorical programs into block grants. Reporting on the federal government's experience, the U.S. General Accounting Office suggests that block grant proposals should include specific accountability provisions; clarify the financial and program relationship between the issuing and receiving entities; and use an equitable method to allocate funds that is based on need, identifies differences in the costs of providing services, and clarifies the recipients' ability to contribute to program costs. Also, we believe that any future reform proposals that call for consolidating categorical programs into block grants should consider whether there are any legal restraints on consolidating programs. Moreover, block grants should be structured in a manner that ensures that the State continues to meet its obligations under both state and federal constitutions and federal law.
Further, CDE's allocation of categorical program funding needs improvement. For three of the 12 categorical programs we reviewed, CDE may not have accurately calculated allocation amounts in accordance with state law, partly because state law does not specifically define the average daily attendance (ADA) figures CDE should use. However, for another program, CDE did not include the required academic performance data in its calculation of how many reading specialists to allocate to applicants, thus not following state law in defining underperforming school districts having priority for funding. Also, by not adhering to state law to reallocate unused reading specialist positions, CDE did not reallocate 54 unused positions and allowed 28 school districts to retain them rather than making them available to other districts that need them.
Despite concerns the Bureau of State Audits (bureau) raised in January 2000 about CDE's oversight methods, CDE has yet to implement fully the bureau's recommendations aimed at strengthening the department's oversight. CDE stated that budget cutbacks have taken their toll on oversight, with obvious consequences. Of the 25 categorical programs we reviewed, which provided more than $100 million to recipients for fiscal year 2001-02, CDE's Coordinated Compliance Review teams conduct on-site validation reviews for 15. However, for a few categorical programs, such as the Lottery Education Fund program, CDE does nothing to ensure recipients' compliance with applicable spending requirements. CDE provided differing reasons for the lack of oversight, including its belief that one program was not a categorical program and did not require oversight. CDE does, however, plan to propose changes to the SCO's Standards and Procedures for Audits of California K-12 Local Education Agencies (K-12 Audit Guide) to determine whether lottery funds are spent for the purchase of instructional materials.
The State receives some assurance that participants in CDE's major categorical programs that use federal funds comply with federal requirements. Specifically, the federal Single Audit Act of 1984 and its subsequent amendments in 1996 establish requirements for audits of state, local, and Indian tribal governments that administer federal financial assistance programs, including categorical programs. Further, under the accountability requirements of the federal No Child Left Behind Act of 2001, CDE has established starting points for evaluating California students' yearly progress.
To implement the pilot project as state law requires, CDE should do the following:
When the Legislature considers future reform proposals calling for the consolidation of categorical programs into block grants, it should do the following:
To ensure that CDE accurately calculates allocations for certain programs, the Legislature should clarify or add definitions relating to CDE's use of ADA figures.
To improve its oversight of categorical programs, CDE should do the following:
Our report contains recommendations that we direct toward either the CDE or the Legislature. CDE indicated that it would take the steps necessary to address our recommendations.