I. SUMMARY OF THE 2002 BUDGET

President Bush signaled his intention to make education his top priority when he announced No Child Left Behind — his framework for strengthening elementary and secondary educationófour days after his inauguration. The President's commitment to improving education grew out of his own very personal conviction that for too long our education system has tolerated an unacceptable achievement gap between disadvantaged and minority students and their more advantaged peers.

For example, on the latest National Assessment of Educational Progress in 4^th grade reading, 73 percent of white students performed at or above the basic level, compared with just 40 percent of Hispanic students and only 36 percent of African American students. These figures suggest that America's system of elementary and secondary education is failing to do its job for too many of our childrenóa failure that threatens the future of our Nation, and a failure that the American people will no longer tolerate.

It is just as clear that Federal education policy is not accomplishing its goals, despite the investment of more than $130 billion in the Elementary and Secondary Education Act and the creation of hundreds of categorical programs over the past three decades. In fact, it is often this bewildering array of Federal programs, regulations, and paperwork that gets in the way of promising reforms at the State and local levels. These bureaucratic controls promote a culture of compliance, not real accountability measured by improved student achievement.

President Bush believes it is time to stop funding failure and start building a culture of achievement in our education system. To do this we need to learn from States and school districts across the country that have made remarkable progress in turning around failing schools, raising student achievement, and closing the achievement gap. We need to bring to Federal education programs many of the strategies that have worked so well at the State and local levels: increased accountability for student performance, a focus on research-based practices, reduced bureaucracy and greater flexibility, and better information and choices to empower parents.

In particular, No Child Left Behind outlines a comprehensive approach to accountability involving annual testing in reading and math of all students in grades 3-8, regular reporting of test results to parents and the public, extra help for low-performing schools, and greater choices for students in chronically failing schools. States are free to develop their own systems of accountability based on their own standards and assessments. Once those systems are in place, however, States will be rewarded for improving student performance and closing achievement gaps or risk losing a portion of Federal administrative funds if they fail to make sufficient progress.

The President's 2002 budget request makes a solid down payment on delivering the resources needed to implement these accountability measures as well other changes proposed in No Child Left Behind.

Major increases in the 2002 request include $1 billion for Special Education Grants to States, $1 billion for Pell Grants, $614 million for the Reading First State Grants initiative, $459 million for Title I Grants to Local Educational Agenciesóof which $175 million will expand State and local assistance to low-performing schools, $375 million for the State Grants for Improving Teacher Quality proposal, $320 million to help States develop and implement annual reading and math tests for all students in grades 3-8, and $175 million for a new Charter School Homestead Fund to help increase public school choice for parents and students.

Total Department of Education Appropriations
(program level, in billions of dollars)

Mandatory programs include Vocational Rehabilitation State Grants and the student loan programs. Mandatory costs fluctuate from year to year due to changes in interest rates and other factors affecting the costs of operating the student loan programs.

The Department's 2002 request is complemented by significant non-discretionary investments in education, such as raising the allowable annual contribution to tax-free Education Savings Accounts from $500 to $5,000 and permitting tax-free withdrawals to pay educational expenses from kindergarten through college. The request also would allow teachers to deduct out-of-pocket classroom expenses, permit States to issue tax-exempt private activity bonds for school construction, and provide a full tax exemption for all qualified higher education pre-paid tuition and savings plans.

The combination of discretionary and non-discretionary resources in the President's budget is targeted to the following areas:

The Federal government can, and must, help close the achievement gap between disadvantaged students and their peers through stronger accountability, help for failing schools, and more choices for parents. One of the primary means of closing the achievement gap is to spend the Federal investment in Title I more effectively and with greater accountability. The following support the strengthened accountability and school improvement requirements of No Child Left Behind:

• $9.1 billion for Title I Grants to Local Educational Agencies, an increase of $459 million to give States and school districts additional resources to turn around failing schools, improve teacher quality, and ensure that all students achieve to the standards at their grade levels before advancing to the next level. The request would focus these additional resources on high-poverty school districts by allocating the entire increase through the Targeted Grants formula. The request also provides, within the $9.1 billion total, $400 million for State and local technical assistance to help turn around low-performing schools.

• $900 million for a new Reading First program to help States and local educational agencies (LEAs) implement comprehensive reading instruction grounded in scientifically-based reading research for children in kindergarten through third grade. This proposal builds on and replaces the Reading and Literacy Grants program, and would more than triple funding for reading instructionófrom $286 million in 2001 to $900 million in 2002.

• $846 million for 21^st Century Community Learning Centers to support a State formula program that provides high-quality extended learning opportunities, after school and during the summer, for children in low-performing schools, including drug- and violence-prevention activities and character education.

• $320 million to help States develop and implement annual reading and math assessments for all students in grades 3-8. States would be permitted to select and design their own new assessments, which must be in place by the 2004-2005 school year, so long as they are aligned with State standards and student achievement results are comparable from year to year.

• $75 million for Early Reading First, an initiative that would complement Reading First State Grants by supporting model programs to develop the academic readiness of preschool-aged children. Activities would support scientifically based strategies to enhance pre-reading skills and school readiness for children in Head Start and other preschool programs.

• $30 million for Transition to Teaching to support the effective Department of Defense Troops to Teachers program by providing quality teachers for more students in poor school districts. In addition, the Secretary of Education would have the authority to build on this program to recruit, prepare, and support a wide range of talented career-changing professionals as teachers, particularly in high-poverty schools and in high-need subject areas.

President Bush believes that one of the best ways to improve accountability in our schools is to give parents the information and options needed to make the right choices for their children's education. This is why, for example, the accountability proposals in No Child Left Behind include school-by-school report cards and give students in failing schools the option of transferring to a better school. In addition, the 2002 budget request includes the following:

• $200 million for Charter Schools, an increase of $10 million, to stimulate continued growth in the number of charter schools, an important element of the Administration's proposal to increase choice for students and parents. This request, combined with funds released because a number of projects will conclude their 3-year funding cycle, would support approximately 1,780 new and existing charter schools that offer enhanced public school choice and have the flexibility to offer innovative educational programs in exchange for greater accountability for student achievement.

• $175 million for a new Charter Schools Homestead Fund, as part of the President's strategy for expanding school choice. This new initiative builds on the fiscal year 2001 $25 million Charter School Facility Financing Demonstration Grants initiative by providing grants to leverage funds to construct, lease, purchase, or renovate academic facilities for use by charter schools.

• Increase the annual contribution limit for education savings accounts from $500 to $5,000. The higher contribution limit would be phased in over 5 years, increasing to $1,000 in 2002 and by an additional $1,000 per year through 2006. The Administration also proposes to expand education savings accounts to allow tax-free and penalty-free distributions for certain elementary, secondary, and after-school program expenses. Expenses for both public and private educational institutions would qualify.

The Administration believes that it is possible to achieve better results by reducing regulations, paperwork, and bureaucracy and giving States and communities the flexibility to create their own solutions to problems in areas like education, health care, and protecting the environment. The President's budget would expand efforts to consolidate and streamline existing education programs, reduce paperwork and regulatory burdens, give States and school districts the flexibility to use Federal funds to address their own priorities, and ensure accountability through performance-based grants. Major proposals include the following:

• $2.6 billion for State grants for improving teacher quality, a new formula grant program that would combine funding from several existing education programs, including the Class Size Reduction and Eisenhower Professional Development State Grants programs, into performance-based grants. The proposal would provide a $375 million or 17 percent increase over the antecedent programs to help States and local educational agencies (LEAs) fund their own needs and priorities in developing and supporting a high-quality teaching force.

• $817 million for Educational Technology State grants, a proposal to consolidate all of the Department's current educational technology programs into a single, performance-based grant program to ensure that schools use technology effectively to improve teaching and learning.

• $472 million for Choice and Innovation State grants, a new initiative that consolidates small and duplicative programs into one flexible grant program to help States and school districts implement their own innovative strategies, including school choice, for improving student achievement.

• $7.3 billion for the Special Education Grants to States program, an increase of $1 billion or 15.8 percent over the 2001 level. This level of funding would provide an estimated $1,133 for each child with a disability, an amount equal to about 17 percent of the national average per pupil expenditure. This would be the highest level of Federal support ever provided to educate children with disabilities.

• $644 million for Safe and Drug-Free Schools State grants to more effectively provide students with drug- and violence-prevention programs and to implement strategies to improve school safety.

• Allow States to issue tax-exempt private activity bonds for school construction. The Administration proposes to provide States with annual authority of $10 per resident (or $5 million, if greater) to issue tax-exempt, private activity bonds for constructing and equipping public elementary and secondary schools. Current law does not exclude from income the interest on such bonds used to finance school construction or equipment. Private entities would construct the schools and own the schools while the bonds are outstanding; ownership would revert to the school district when the bonds are retired.

• Allow teachers to deduct out-of-pocket classroom expenses. The Administration proposes to allow teachers and other elementary and secondary school professionals to treat up to $400 in qualified out-of-pocket classroom expenses as a non-itemized deduction (above-the-line deduction), effective for expenses incurred in taxable years beginning after December 31, 2001. Expenditures for books, supplies and equipment related to classroom instruction and for professional training programs would qualify for this deduction.

The President's 2002 request would expand support for Federal programs that help prepare low-income and minority students for postsecondary education, student financial aid programs that help students and families pay rising college costs, and programs that strengthen postsecondary institutions serving large proportions of minority students. The budget request also includes tax proposals designed to lessen the burden of paying for postsecondary education.

• Funding for the Pell Grant maximum would increase by $1 billion to $9.8 billion to improve access to postsecondary education for students from the neediest families. The request would support a maximum grant of $3,850, the highest ever. More than 4 million students would receive Pell grants.

• Student financial aid available, excluding the consolidation of existing student loans, would expand to $49.4 billion, an increase of $2.2 billion or 4.6 percent over the 2001 level. The total number of recipients of grant, loan, and work-study assistance would grow by 46,000 to 8.2 million students and parents.

• Tax-free distributions from Qualified State Tuition Plans (QSTPs) would be permitted for qualified higher education expenses, including room and board, tuition and fees, and certain expenses for books, supplies, and equipment. The Administration also proposes to allow private educational institutions to establish qualified prepaid tuition plans, provided the institution is eligible to participate in Federal financial aid programs under Title IV of the Higher Education Act of 1965.

• The request would expand loan forgiveness for math and science teachers serving low-income communities from $5,000 to a maximum of $17,500. Schools in those communities are often forced to hire teachers who lack certification in these subjects or to assign teachers who are teaching "out-of-field." This proposal would help these schools recruit and retain qualified math and science teachers.

• The Exclusion for Employer Provided Education Assistance would be extended. Under current law, employees may exclude from their gross income up to $5,250 per year of employer-provided educational assistance for undergraduate courses beginning before January 1, 2002. The Administration proposes to extend this exclusion to undergraduate courses beginning before January 1, 2003.

• A $15 million increase for the Aid for Institutional Development (Title III) programs demonstrates the Administration's commitment to assisting institutions that enroll a large proportion of minority and disadvantaged students. The request includes a $12 million increase for Strengthening Historically Black Colleges and Universities and a $3 million increase for Strengthening Historically Black Graduate Institutions.

• A $4 million increase for Developing Hispanic-Serving Institutions would expand and enhance support to postsecondary education institutions that serve large percentages of Hispanic students. This program is part of the Department efforts to increase academic achievement, high school graduation, post-secondary participation, and life-long learning among Hispanic Americans.

• A $50 million increase for TRIO would support substantial increases for the Talent Search and Educational Opportunity Centers programs to increase the number of projects and improve the level of outreach and support services designed to help low-income students enroll in and complete a college education.

The Department of Education has long suffered from deficiencies in financial management, particularly in its student financial aid programs. Despite considerable progress in recent years to address problems identified by independent audit firms, the General Accounting Office, and the Inspector General, more work is needed to better protect taxpayer resources and improve customer service. The 2002 budget would support the following improvements:

• Strengthen financial management to address audit deficiencies. The Department has received only one clean audit opinion since independent audits were first required in 1996. Investment in updated financial reporting systems, a new general ledger system, and asset-tracking software will increase the reliability of financial data needed to support a clean opinion and prevent the improper use of government resources.

• Modernize student aid delivery and management. The Department will continue efforts to use technology to simplify business processes and improve coordination with its school and lending partners to ensure the timely and financially responsible delivery of $60 billion in annual postsecondary student financial assistance.

• Reduce default costs. While the Department has slashed the postsecondary student loan default from 22.4 percent to 6.8 percent over the past several years, rapid growth in loan volume has nevertheless doubled default costs over the past 8 years, from $12 billion to $25 billion. The Department will work to reduce these costs through earlier identification of problem loans and implementation of loan management "best practices."