Generally, categorical aid is meant to provide services for students with special needs, to improve instruction and curriculum, or to support social and health programs. Some categorical funds are distributed to schools and school districts based on the number of students eligible for a program or the total number of students. Others are grant programs, some of which go to local schools automatically and some for which they must qualify. Still others reimburse districts for specific costs, such as home-to-school transportation.

This March 1997 report provides a more complete explanation of how these special funds are allocated in California and the issues related to the policy decision to earmark school funding in a state-controlled school finance system. (See below.)

 

 

A Guide to Categorical Aid

March 1997

 

Each year the Legislature and governor can express their priorities for K–12 education by directing dollars to specific categories of children, to a particular activity or educational program, or for a special purpose.

The historical reasons for earmarking allocations are to:

• Remedy inequities among students
• Ensure that all students are served, especially the hardest to educate
• Support current priorities, particularly when there are extra funds
  

Targeted financial support is commonly called "categorical aid" — and it is a 100-year tradition for federal and state governments in funding public schools.

Categorical Funding is Big Business
California earmarks funds for more than 50 separate categorical programs, depending on how widely or narrowly "program" is defined. This number changes as new needs and mandates are born, develop, and (rarely) die. In 1996–97, California designated more than $6.7 billion for specific purposes.

For many years the federal government has provided about 8% of the education budget — $2.6 billion in 1996–97 — mostly for categorical programs that supplement or complement those also funded by the state of California. State categorical funds have grown considerably over 15 years, particularly for services to students with disabilities. Despite a legislative schedule of review and sometimes discontinuation of regulations, most categorical programs have strong staying power.

The ratio of general to special purpose support has also changed considerably during that period: earmarked money has increased steadily from about 25% of state education funds in 1981–82 to nearly 40% in 1996–97.

The System is Complex
Because of the absence of an integrated structure, the system of earmarked funding is extremely complex. It seems scattered because of the many different purposes and various funding and accountability schemes.

The Impact on Districts Varies
Categorical aid is not intended to affect school districts equally. Some get very little, while others acquire more than 40% of their revenues from earmarked funds. A few programs reach virtually all of the state's 5.5 million schoolchildren, while others are allocated more narrowly.

In some cases, the allocation is automatic, requiring little or no effort on the part of a school district. In other instances, districts must complete an application, compete for a grant, or otherwise indicate their intention to participate.

Some categorical programs are voluntary, often with financial incentives to encourage a district to address a particular need. Others are services that courts or legislators have declared must be offered.

Sometimes districts must use local general purpose revenues for a special purpose program that is not fully supported by categorical funds. This is often called "encroachment." When particular services are required, such as Special Education, districts must pay the full costs no matter how much or how little money they receive for that purpose. In voluntary programs, such as Transportation, districts choose to provide the service knowing they are not guaranteed full reimbursement for the costs. Incentive funds (for example, establishing a year-round calendar to relieve enrollment pressures or participating in the class size reduction program) are not necessarily supposed to cover all costs, which can vary district by district.

Recommendations for Change
The nonpartisan Legislative Analyst's Office (LAO) believes that California should streamline and evaluate its system of categorical support. Its proposal, supported by a number of education organizations and policy groups, includes these steps:

• Identify the impact on students and establish standards and outcome measures
• Consolidate programs with similar goals and anticipated results
• Use incentives rather than prescribed programs or mandates
• Evaluate high priority programs to determine what works best for students
  

The LAO review of research on the common components of effective schools concludes that focusing decision making and much of the funding at each school is a key component for success.

Who Should Decide?
The core issue is what kinds of decisions should be made at which level, centrally or locally, and what kind of accountability the state and federal governments need or require. Is there an optimal combination of state safeguards and local options, of state standards and local flexibility?

The context of education finance and governance — to say nothing of the demographic profile of the state — has changed rapidly since categorical funding started to grow in the 1960s. The time is right for a new look at the philosophy behind the proliferation of earmarked funds and of priority-setting at the state level.