Big midyear hit for Prop 98 likely
LAO foresees $3.7 billion state shortfall
The first shoe fell with a thud Wednesday, when the Legislative Analyst’s Office predicted that a $3.7 billion state revenue shortfall this year would result in $2 billion in midyear “trigger” cuts, including $1.5 billion in Proposition 98 funding and $100 million each to the University of California and California State University.
The other shoe will drop next month when the state Dept. of Finance issues its own revenue estimates and then sets the midyear cuts based on the rosier of the two projections.
The LAO is predicting a $13 billion state deficit next year, even after $2 billion in midear cuts this year, declining gradually over five years. Click to enlarge.
The expected cuts, which will bite into services for the disabled as well, follow dreary revenue reports for the first four months of the fiscal year, and so should come as no shock. The repercussions were felt immediately Wednesday, with CSU trustees approving a 9 percent tuition increase for next year unless the state increases funding by at least $138 million next year. The $100 million midyear cut will put CSU that much more in a hole and wipe out the system’s reserves.
Under the budget passed last year, the shortfall also will lead to a $10 per credit community college fee increase, and will compound problems for K-12 districts, especially those that, hoping against hope, didn’t build in sufficient reserves or don’t have contingencies for negotiating additional staff furlough days this spring. Under the worst-case scenario, some of those districts, the LAO said, may run right out of cash by year-end and have to seek a state emergency loan.
The $1.5 billion in Prop 98 cuts would include the $248 million in home and school transportation payments – more than half of funding for the program – and $1.1 billion in standard revenue limit funding for districts. The latter equals a cut of $180 per student, about 3 percent of state tuition payments.
The transportation cuts, an average of $41.60 per student, will disproportionately affect rural and poor urban students, according to a breakdown by Stephen Rhoads, a lobbyist with Strategic Education Services in Sacramento. In rural Humboldt County, the cut amounts to $113 per student; in Mariposa County, $346 per student; for low-income students, the cut would average $49 per child, compared with $23 in wealthier districts. If students stop attending school regularly after bus routes are cut, districts would see a further erosion in revenue.
The Legislature made contingencies for cuts when it shifted $2 billion in sales tax revenue from Prop 98 to pay for transferring prisoners to county and local jails. Rather than immediately cut education, the Legislature assumed that the state would take in an extra $4 billion in revenue – a deal it cut with the California Teachers Association that in the end turned sour.
CTA President Dean Vogel, commenting on the LAO report, called for fixing the state’s “unfair tax structure and corporate tax breaks” in order not to shortchange education.
“It’s time to put a fair and equitable tax system in place so that our students and the most vulnerable Californians don’t have to continue to do without,” he said.
Looking ahead to a sluggish economy and an unemployment rate that will likely remain above 8 percent for another five years, the LAO assumes that the midyear cuts won’t be restored for years. Even with the midyear cuts, the LAO is predicting that the state will end this year $3 billion in the red, and the deficit will grow to $13 billion next year, and will remain above $5 billion per year through 2016-17.
If there’s good news for schools, it’s in the LAO’s projection that the funding obligation for K-12 and community colleges will rise $4 billion next year. But more than half of that will be simply part of what the state owes the schools: restoring Prop 98 to the level before the $2 billion in sales tax money was diverted and then partially repaying for the lost $2 billion this year ($400 million per year for five years).
With unemployment beginning to drop next year, per capita income will rise 4 percent, resulting in an increase of nearly $1 billion in the Prop 98 obligation. But, with the Prop 98 increase contributing to the $13 billion deficit, the LAO suggested that the Legislature would have to consider suspending Prop 98 – and how to do it.
It added two more cautionary notes: Even though an upsurge in revenue may enable the state to fund Prop 98 an average of $2.5 billion a year beyond the minimum guarantee from 2013-14 to 2016-17, it will still end up owing education $10 billion in past obligations. And it will not have begun to pay down CalSTRS’ unfunded pension liability. “Addressing the unfunded liabilities of just the teachers’ retirement fund probably will require billions of dollars of additional payments annually over the coming decades,” the report said.
On the transportation funding, it’s our district’s understanding that if transportation services are cut in response, that money will be lost permanently.
Our district is rural and the bus service is pretty essential to getting kids to school. In addition, for the community as a whole, bus service is very efficient – that is, even if they were willing and able to drive their kids to school, the cost to parents in time and gas, the additional traffic, and the additional pollution are all substantial community drawbacks.
The midyear cut for this year is deeply painful. But the assumption that that cut will need to be extended indefinitely into future budgets is the crushing blow.
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I’m in Humboldt County, and the transportation cuts will be a blow, especially to the southhum districts. Having said that, since moving up here, I have been stunned by the inefficiencies in the bus system, and continue to think that a sliding scale should always have been a part of the system. This crisis has not been without well-versed prophets, and watching it all play out without any attempt to create alternative solutions that could, at the very least, protect those who CANNOT pay, is beyond frustrating. Either that, or we need an alternative way for growers to pay their share.
I realize this will be unpopular, but all schools should be forced to have an open, stakeholder rich, budget committee that meets every month. As I have peeled away the opaque layers at my kids’ school, I have been stunned where the money has gone. There is so much posturing by administrators, and parents who are asking the questions – we are educated, educators/professors/businessmen and women – are made to feel as if they are battering the school. No. We are trying to focus resources on the primary task of educating our children, and if districts are unable to manage money well, and/or cannot formulate creative solutions, then it’s time to make changes. Too many administrators have barely stepped out of a school in their lives, have not travelled, do not read finance and leadership research, etc. If I were an administrator, I would set up a budget committee ASAP, because I would know that my training did not scrape the tip of what is necessary to preside over a multi-million dollar budget. I also advocate open and transparent leadership, so would have to walk my talk! The formation of myriad small charter districts with ineffective oversight from the local county has not helped. Believe me, I’ve attended meetings and it’s shocking how little so many of the principal/superintendents know.
But first of all – how to get so much of the garbage out of the Ed. Code?
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This is actually a bit of a rosy scenario. The assumption of gradually increasing employment is subject to the what is happening in the Euro-zone. Followers of that mess know that the entire industrialized world is looking into the abyss hoping Germany and the European Central Bank will do the right thing (and soon) or the Great Recession will turn into the Great Depression II. So far, the ECB and Germany have NOT been doing the right thing and if that continues, we will have to confront the retirement funding issues sooner rather than later. CA’s 12% unemployment is the second worst in the US but in many European countries we are seeing 20% unemployment going on for years.
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The cuts in funding for the state Home-to-School Transportation should come as no surprise to anyone familiar with this program; it has long been state policy to reduce and gradually eliminate spending on H-T-S Transportation. The issue has only been how quickly it does so.
1) Transportation is Not Required. School districts are not required to provide transportation services (except pursuant to a special education pupil’s IEP) and are authorized to charge fees (not to exceed actual cost minus state aid, if any) if they do.
2) Eligibility For Funding is Limited. School districts are eligible to receive H-T-S Transportation funding only if they received it in the prior year. New districts can become eligible to receive funding only through special legislation.
3) Funding Formula Squeezes District Entitlements. Because a district’s funding entitlement is equal to the lesser of its prior year’s entitlement or its prior year’s actual costs, its funding cannot increase; it can only stay the same or ”ratchet down.”
With some districts eligible for funding and others not, and with percentages of actual costs covered by state aid varying widely among districts, the current program is clearly inequitable. Program advocates’ solution is to fund 100% of every district’s costs. The state’s solution also achieves equity by funding the same proportion of every district’s costs: 0%.
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“… the $3.7 billion state revenue shortfall this year… will compound problems for K-12 districts, especially those that, hoping against hope, didn’t build in sufficient reserves or don’t have contingencies for negotiating additional staff furlough days this spring.”
Any problems experienced by districts that failed to budget responsibly can be laid at the doorstep of the CTA, which required them to do so. Amendments to AB 114, inserted at the behest of CTA, were pushed through the Legislature with no hearing, in the dead of night on the last day of session.
The CTA amendments require all school districts (1) to prepare their current-year budgets based on the assumption (fantasy) that they will receive the same revenue per ADA as in 2010-11 and (2) to maintain staffing and program levels based on this (fictititous) funding level. They gutted the fiscal accountability requirements that were established by AB 1200 in the wake of the Richmond USD bankruptcy, eliminating the requirement that districts demonstrate the ability to meet their financial obligations in 2012-13 and 2013-14 and prohibiting county superintendents of schools from requiring them to do so. Finally, they prohibited county superintendents of schools from requiring districts to project a lower level of revenue per ADA than they received in 2010-11.
Given these outrageous requirements, districts faced a Sophie’s choice: budget responsibly and break the law or comply with the law and possibly bankrupt the district. With employee compensation previously accounting for an average 85 percent of a district’s budget, and with salaries and benefits locked in at unsustainable levels, and with any changes contingent on the unions’ voluntarily returning to the bargaining table and re-opening existing contracts, districts already face a dire situation. The consequences of an additional 3 percent cut to revenue limits are unimaginable.
But not to worry… it’s for the kids.
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Budget committees I think are hugely helpful, because they get eyes from all the various corners involved and educated about where the money goes and how it comes in and what sections are earmarked and what sections are flexible.
Also, the bigger the budget, the harder it is to really understand what’s in all of the buckets. I’m not sure I would concur with your distress of small districts with county oversight.
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You may want to ask the LAO if they really ran the Proposition 98 Guarantee data to see if they can cut what is proposed to be cut and be in complete fulfilment of Proposition 98. I think not
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The LAO report made it sound like K-14 education would get this large $4 billion increase in year to year prop 98 growth – possibly more than the state could afford. But, let’s put than number into some context. The first $1.5 billion of that growth would basically restore the mid-year trigger cuts that will happen in Jan. So, that would get schools back to poor level of funding they currently have. The next issue is that there is an additional $2.2 billion in funding deferrals in the 2011-12 budget. So, again to just keep school at the spending level they currently have, the state would have to spend $2.3 billion to not have deferrals grow further. To be clear this would still keep total outstanding deferrals at around $10 billion, it would just keep deferrals from growing to $12 billion. You can see this in the LAO report on page 28, figure 3 described as “backfill of one-time actions”. It shows that for 2012-13, the growth in Prop 98 would be $1.1 billion short of funding the current program and growth and COLA. Even if you assume no COLA, there is still not enough funding in the $4 billion in year to year growth to maintain the current program. That is a very different take than the headlines that schools may see more funding in the budget year.
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Saw this place on a face book friend post, I drive a big rig and am all about fuel maeilge just one mpg for me can be a 20,000 dollar savings or loss in a year, I average 58-62 my big rig sweet spot for best fuel maeilge. My truck is gov. at 72 mph so i have the speed if need to pass slow people. Not only are you saving gas but also wear and tear on your oil, tires, suspension, and engine. when it all adds up your saving a mint.
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Following from Rob Manwaring’s post, what of the districts already committed to pay increases, including STEP increases? There are 140+ districts in California in dire financial straits (many of them small and/or rural), yet all districts are committed to the contractual increases, as well as for any promised pay raises – like San Diego Unified School District. (Emily Alpert at VOSD covers this well.) Even without a trigger mid-year, I just don’t see anything but more financial chaos. We can project approximate ADA loss per child, but that does not translate easily into “what will happen at each school” because funding is so complicated, and lacking in openness as I mentioned in an earlier post.
Then there is the recent $4 billion projection to keep CALSTRS afloat.
AB 114 compounded the damage caused by the fiscal irresponsibility of lawmakers … yet we are still talking about Common Core, NCLB waiver costs … As a bystander, I just don’t see Sacramento accountancy as existing in hard reality.
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Budget committees are hugely useful — if they are involved in the budget process. In this case, they weren’t. (If they were, the hearing wasn’t announced and was merely perfunctory.) Instead, these amendments were inserted at the last minute, jammed through the Legislature, and sent to the Governor for his signature.
I’m not talking about small districts with county oversight — I’m talking about the fiscal accountability process established in AB 1200 (Eastin) which applies to all districts. The AB 1200 process requires all school districts to prepare multi-year budgets (the current year and the two succeeding years) demonstrating that they will remain solvent during each fiscal year, and end each year with a state-mandated reserve (3% for large districts).
AB 1200 requires the county office of education to review all its districts’ budgets for accuracy and reasonableness of the assumptions on which it is based. Based on this review, the county office assigns each district’s budget a grade of positive (will be able to meet its financial obligations during the three years covered by the budget), qualified (may not be able to meet its financial obligations), or negative (will not be able to meet its financial obligations). “Qualified” or “negative” budgets are returned to the district, which must cut expenditures (or, rarely, raise revenues) to bring all three years’ budgets into balance (including the mandated reserve).
Districts that are unable to do so are subject to increasingly stringent sanctions. In the worst case, the district receives a state loan which must be repaid (with interest) over a 20-year period; the school board is stripped of all power and becomes advisory only; and the state appoints a trustee with full authority to do whatever is necessary to bring the district back to solvency.
In short, the fiscal irresponsibility of a single year can visit budgetary pain on the district’s students and teachers for the next 20 years. If you don’t believe me, ask the administrators of the West Contra Costa (formerly Richmond) District, which is only now on the verge of discharging a $28.5 million loan (plus interest) it received in 1992.
This is why the CTA’s amendments to AB 114 are so offensive and self-serving. In a nutshell, they hamstring districts by(1) requiring them to assume a revenue level guaranteed to exceed the amount they’ll actually receive and (2) prohibiting them from reducing spending on their largest item of expenditure: staff compensation. Finally, as if this weren’t enough, the amendments prohibit county offices of education from scrutinizing districts’ budgets to determine if, in fact, they will be solvent.
Well, you can’t stop a fire by silencing the fire alarm. School districts can’t spend more money than they have. If CTA thinks their game of chicken will cause the legislature to blink (to mix metaphors) and provide districts the revenues the Legislature forced them to assume, they’re sadly mistaken.
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@Sue, doesn’t each district have their own separate union contract?
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@edfundwonk, my original comment about budget committees was a response to @Sue, written before your comment had posted to my copy. I think local budget committees can be very helpful in getting everyone to look at the three year picture, to see where money is being spent and isn’t, and to buy in on where cuts need to be made.
I would agree completely that those last minute amendments to pretend you’ll be funded and don’t lay anyone off were incredibly inappropriate. That said, that the cuts were coming weren’t a surprise and ideally budgets should have already been done with them assumed.
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el – yes, they do. But to my knowledge the STEP and Column increases to a specific number of years of service are common to contracts. Because these are negotiated in Closed Session it is difficult to really find out the salary requirements when looking at a school budget. Further, some teachers will receive additional stipends for responsibilities, and these vary even within districts. Even though some headway has been made, through SARC for example, the reporting is still spotty. In the years I worked as a teacher in the US, I found it puzzling how stipends, specially created jobs, etc., were rewarded within the contract constraints. I also discovered how often money meant for one position had been “rolled” into anther fund … this was common in Athletics.
I was trying to figure out some financial “certainties” in my kids’ school last year when parents were needed to raise funds to keep several programs, and what I found was that in addition to the contractual salary, were a variety of additional sums for responsibilities that in my experience in another district were just part of the job! I am not in favour of some “one size fits all” contract because California is so diverse compared to many countries, let alone states, but there does need to be some standardization because this is a publicly funded enterprise. Further, I find that there are many thousands of dollars spent on aides for playground duty, etc. Yet in other places, and countries, such responsibilities are part of contract. In my doctoral research where I looked at decision-making, the “random-ness” of much that was determined in schools was surprising, and all of that makes it very difficult to determine “what is effective” and “why is it effective” – and I like to at least make an effort to determine outcomes.
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