Dems’ budget: Prop 98 with twist

Big cuts for education if revenues don't come

Giving K-12 and community colleges more money with one hand and taking it away with the other, Democratic leaders are proposing a balanced budget that would fund K-12 schools at last year’s level while meeting the state obligation to education under Proposition 98. They are doing this without $10 billion in temporary taxes that Republicans refuse to extend. No easy feat, this is budgeting with a twist – of the arm of education groups, which could sue over budget maneuvers (but probably won’t).

Nine days ago, Democratic lawmakers passed a state budget by majority vote, which Gov. Jerry Brown vetoed. Today they will try again, only with Brown’s full support. After months of stubbornly trying, Brown over the weekend gave up hope of persuading four Republicans to temporarily extend taxes in exchange for pension and environmental law changes and a cap on state spending.

Brown said the proposed budget would require up to $1.9 billion in midyear education cuts, including seven fewer school days, if rosy revenue estimates come up short. The budget will be balanced but will not solve the state’s structural deficit. That will take higher taxes, and he promised to propose them in an initiative on the November 2012 ballot.

Details were sketchy Monday on how Brown, House Speaker John Perez, and Senate President pro Tem Darrell Steinberg balanced the budget. Brown promised budget briefings after the Legislature approves the budget. (He actually said that in a press webcast.) But this is basically how they plan to square the circle:

  • Democrats are building in $5.2 billion more in revenue, including the optimistic projection of $4 billion in natural growth in taxes, mainly from high-income earners, beyond the $6.6 billion that Brown included in his May budget revision.
  • Since K-12 schools and community colleges are entitled to about 40 cents of every new dollar under Prop 98, they would get about an extra $2.1 billion of the $5 billion. Instead, Democratic leaders will nullify that by diverting 1.06 percent of the state sales tax to local governments to pay for realignment that shifts more state functions to cities and towns. That 1 percent will no longer count toward Prop 98.

According to John Mockler, the architect of Prop 98 and occasional consultant for the California Teachers Association, who was in on negotiations on Sunday, this will be a one-year deal, and groups in the Education Coalition will not sue over it. The November 2012 ballot initiative will call for permanently reimbursing schools to replace the loss of state sales tax revenue. (Update: Next year’s budget would be written so that schools would be compensated even if a budget initiative failed). “We’re supportive [of Brown’s plan for realignment] but not chumps,” Mockler said. (Rick Pratt, vice president of the California School Boards Association, said Mockler must have been speaking for the CTA, because CSBA hadn’t been consulted.)

  • About $1.5 billion in child care programs that have been included within Proposition 98 will be moved outside of it, further lowering the Proposition 98 guarantee. According to Mockler, a previous court ruling gives the Legislature authority to do this. But Pratt said it would be a “bad precedent” to move a program outside of the Prop 98 obligation just because the Legislature decides not to fund it.
  • If the projected revenue increases come up short, then in January Director of Finance Ana Matosantos could order up to $2.6 billion in cuts, starting with $700 million to higher education and social services, and then the rest to K-12 schools and community colleges. Midyear cuts are especially tough on districts, which set budgets by July 1. So the Legislature will approve cutting another seven days off the end of the school year – likely giving California the shortest school year in the United States, if not the developed world, at 168 days. It’s not clear whether the Legislature would mandate or simply permit a shorter year. (Update: Economist Chris Thornberg of Beacon Economics, a Los Angeles consulting firm, was asked whether Democrats should rely on $4 billion more in tax revenue this year “They’re out of their minds,” he told the Sacramento Bee.)
  • In his initial January budget, Brown had proposed delaying payment of an additional $2.1 billion owed to schools and community colleges in 2011-12 until the following year. In his May budget revision, which assumed Republicans would agree to extend taxes, Brown withdrew the deferral and even rescinded several hundred million dollars in past deferrals. But in the latest proposal, Democrats would reinstate Brown’s $2.1 billion deferral from January and add $700 million to it. This would bring the total of deferrals to more than $10 billion. In yesterday’s post, I pointed out potential dangers of doing this.

The bottom line is that K-14 schools will receive $48.3 billion in Prop 98 money next year, including $2.8 billion in new deferrals. Asked Monday how he could meet the Prop 98 obligation without tax extensions, Brown replied “very legally and creatively.”

“It is very creative,” Pratt said. “I don’t know about very legal.”

According to the Sacramento Bee, the latest budget will also include the following features in the Democrats’ budget that Brown vetoed last week:
  • $1.7 billion from eliminating redevelopment agencies;
  • $300 million from $12 per vehicle increase in DMV registration fee;
  • $200 million in enforcing an online tax of Amazon;
  • $150 million cut each to University of California, California State University;
  • $150 million cut to state courts.

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  1. The real question will soon be is this budget good enough to get paid! I have not read about it yet, but give it a couple of days, and Controller Chiang will be placed center stage again to bring ration to an irrational budget process. And this time, the Controller will have to earn his paycheck. As we all know, a couple weeks back Controller Chiang took a look at the budget the Legislature passed and pointed to the gaping holes in it, especially in the approach that it took for Proposition 98 funding. He made the right call and deemed that the budget did not meet the definition of a balanced budget, and as such the Legislature would continue to not get paid. While this may have been a difficult decision because it went against his fellow Democrats in the state Legislature, the fact that he was on the same side of the issue as Governor Brown who vetoed the bill made the decision easier. In his review of the budget, the Controller sited the underfunding of Prop 98 as one of the main factors that made that budget unbalanced.
    This time the Controller will stand alone when he makes his decision on whether this next iteration of a gimmick ridden budget is balanced. The Legislature will pass the budget, the Governor will sign it, and then all eyes will turn to the Controller. He may be able to look past the rosy revenue assumptions the budget makes because those assumptions are at least to some extent backstopped by additional cuts (although not completely from my read). But, once again, the Controller will have to face the many maneuvers that the budget proposes for Prop 98.  And while John Mockler and CTA may be able to look the other way on these moves in exchange for a 2012 education funding initiative, the Controller will not be able to take that future promise into his calculation. He will have to look at the proposed manipulation of Prop 98 through realignment and its handling of child care and determine whether these moves can support a “balanced” budget. It could be a while before this one is resolved and members get paid. Is the Controller ready to take this on? Time will tell.

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  2. It will be interesting to see how districts and their local chapters of CTA handle a conditional seven-day (roughly a 3.9 percent) reduction in the school year. Will they sign off on a contract that imposes a seven-day furlough (and a concomitant pay cut) based on whether finance director Matosantos finds in January – as she inevitably will – that the assumed $4 billion will not materialize? If a contract is already in place, will they agree to re-open it? If they will do neither, how will school districts accommodate the 3.9 percent reduction with half the school year already gone (effectively a 7.8 percent reduction in spending during the latter half of the school year)?

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  3. Thanks for your thoughts, Rob. Is the question whether the budget is “balanced” or whether the maneuvers violate the spirit/previous court rulings on Prop 98? If the latter, then it would probably take a lawsuit to sort out. And there will be others, starting with Redevelopment. So can Chiang do anything but send the paychecks now?

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  4. By appointing himself the arbiter of whether the budget is balanced, the Controller has grabbed the tar baby. If a budget is based on questionable legal assumptions, who is the Controller to essentially usurp the role of the legal system?  Whether a budget is balanced is more a political call than it is an “independent” toting up of figures.

    Consultants to legislative committees of both parties and both houses, as well as representatives of the Department of Finance and the Legislative Analyst’s Office, earn their keep by, among other things, “scoring” the fiscal impact of actions on the budget. If they agree that the budget is balanced, it’s balanced. Alternatively, representatives of the houses and parties may “agree to disagree.”  In 99.9 percent of the cases, however, these disagreements are based on ideology — not on whether the numbers add up.

    It is the Legislature’s duty to pass a balanced budget. It is the role of the Governor to agree, partially agree, or disagree with that assessment. Based on this evaluation, the Governor may sign the Budget Bill with no changes, sign it with changes made through his line-item veto power, or veto it in its entirety. It is by this process that a balanced budget emerges.

    I am reminded of a story of three umpires who are asked to explain how they the call a pitch a ball or a strike. The first umpire replies, “That’s easy. I call ‘em how I see ‘em.” The second umpire says, “I call ‘em the way they are.” The third declares “They ain’t nothing ’til I call ‘em.” In this dispute, Controller Chiang is playing the role of the first umpire; he thinks he’s the second; and he doesn’t realize that the Legislature and the Governor are the third — and they are all that matters.

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  5. On John Meyer’s KQED Capital Notes blog he says Chiang feels the Governor would have to veto the budget before he moves as he did last week. Here’s the link to the post:

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  6. 7 fewer school days.
    For those of you playing along at home, that’s 12 fewer from last year.
    For all the “no new taxes”, this is in fact transferring significant costs back to families, who will need to pay for 2 1/2 weeks of additional child care, and permanently lowering the achievement of a generation of kids. These kids only get one year in first grade, one sophomore year in high school, etc… and this is a substantial shortening. It’s also getting its “savings” by substantially cutting teacher pay, which in some places will mean that teachers will not be able to afford to stay in their jobs. They’ll also pay less in taxes and have less money to spend in the economy.
    I will ask the stupid question: if we have to cut 7 (!!!) days of school, can we cut the 4 days we spend on STAR testing? That would salvage quite a bit of the actual knowledge development time.
    I would assume that the 7 additional days would be a permission rather than a mandate, as was the case when districts were allowed to go to 175 from 180 this year. Our local district elected to stay with the 180 days for 2010-2011 and has scheduled 180 for 2011-2012.

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  7. John, you raise a good point. What is the threshold for “balanced” that the Controller will use. As the Controller described his role, “My job is not to substitute my policy judgment for that of the Legislature and the Governor, rather it is to be the honest-broker of the numbers.” Now I have not seen the details of the Prop 98 package yet, but it seems to me that if for example the realignment proposal would require schools to be reimbursed at some point in the future, as your discussion with John Mockler suggests, then could the Controller still conclude that the minimum guarantee will be met for 2011-12? And if the budget does meet the minimum guarantee, then why would there be any future reimbursement obligation? This is the question that an honest-broker of the numbers should consider. In the end either you meet the minimum guarantee or you don’t. You can’t meet the minimum guarantee, and then owe schools more later. Having a balanced budget without meeting the minimum guarantee and not suspending does not seem feasible. Maybe there is some creative way to do this. I look forward to seeing the details in the coming days.

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  8. I heard Chiang explain his actions on KPPC and if I understood him correctly he declined to assert any authority over budget gimmicks excepting that the budget can’t claim savings or revenue for things the legislature failed to do that are necessary in order that the budget projections used to not to be contradicted by law. So the k-12 savings would have been fine if the legislature had suspended Prop 98 so that those saving were possible under the constitution. Similarly the tax revenues assumed in the budget rejected by Chiang required legislation that actually enacted those taxes. Chiang set out the ways to avoid his intervention by simply making unrealistic assumptions that aren’t in contradiction to other, known legal facts, even if they are likely to be seen as specious by honest observers. And even that wouldn’t be necessary if the governor agrees to whatever budget fiction the legislature crafts by signing the budget bill. Under those circumstances Chiang said he wouldn’t act.

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  9. A mid-year reduction to the school year is going to be painful indeed. As edfundwonk points out, that’s effectively 7.8% cut.  How many districts will scramble in August to pre-negotiate furloughs?  If they wait for a January declaration, it’s going to be a master schedule nightmare, especially for high schools teaching AP courses that must cover a set curriculum prior to testing in May.
    I will have a high school junior and senior next year.  Their school is on the Excel schedule where they take 3 or 4 classes covering a year’s material in a single semester (vs. a traditional 6 period block). They are competing for AP results and college placements against students with 180 day school years.  If these furloughs are realized, they will be expected to cover the same courses in 82 days.
    Over the protests of the school administration, I excused my kids from the CSTs this year to give them back some time (we had a 5 day furlough-reduced school year) to complete culminating projects and prep for finals,  AP and SAT testing.  I fully appreciate the need to reach full participation and for high achieving kids to raise the school’s performance for NCLB benchmarks.  But when the legislature, district and federal policies aren’t looking out for my kids’ actual learning, I will.
    I sincerely hope those revenues materialize or that the legislature or our district uncover alternatives before January.

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  10. Thanks for widening the scope, Rob.  Your comment was informative and helpful!

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