LAO: No need for $5.5 billion cut

LAO, Brown disagree over Prop 98 owed

The Legislative Analyst’s Office is suggesting an alternative to the massive cut to K-12 schools and community colleges that Gov. Jerry Brown is proposing if his tax initiative fails in November. Instead of a real spending cut of $2.8 billion, or $415 per K-12 student, districts and community colleges would be cut $1 billion, or only $162 per K-12 student, under the LAO plan.

The LAO detailed its alternative in an analysis of Brown’s May budget revision, which the nonpartisan, independent agency released on Friday (see pages 21-22 in the pdf version). The difference is the size of the Proposition 98 spending obligation that is calculated for this year and next year, separate from the tax increase.

The LAO assumes a more conservative approach, which would leave the K-12 schools and community colleges with $1.7 billion less than the governor has calculated and that districts will argue they are owed; that’s the downside for districts. The paradoxical upside is that, without a higher Proposition 98 base, they would feel less pain if the tax increase failed. Since most school districts are budgeting assuming the worst case, they could plan now for a smaller cut in the LAO proposal.

Brown is also proposing a new, major manipulation of Proposition 98, with long-term implications to school funding, if the tax increase fails – a scheme that the LAO alternative would avoid.

For districts, it comes down to which bitter pill to swallow.

Proposition 98 was written so that schools receive significant increases when the economy is good and personal incomes throughout the state are rising. When the economy slows, IOUs to schools and community colleges accumulate; the sum is known as the maintenance factor, and, over the past four years, it’s become big – about $10 billion, or 20 percent of the Proposition 98 obligation (see this explanation).

The repayment of debt owed to schools is based on the change from year to year in state revenues. Usually, the change reflects an economic recovery. Not this year. Revenues have deteriorated, regardless of the projected increase from 2011-12 to 2012-13. The LAO argues that Brown is calculating the maintenance factor as if it were a good year, technically known as a Test 2 year under Prop 98. When it’s a bad year, known as Test 1, with K-12 and community colleges getting a set percentage of a shrunken budget – about 40 percent – there’s no obligation to calculate the maintenance factor at the expense of other parts of the budget, the LAO argues. (This point has never been litigated. But John Mockler, the author of Proposition 98 and and adviser to the California Teachers Association, says that the LAO is wrong: The law does not distinguish between Test 1 and Test 2 years in terms of repayment; nothing under the law lets the state off the hook.)

The $1.7 billion savings that the LAO envisions includes a $500 million maintenance factor repayment this year and $1.2 billion in 2012-13, under Brown’s budget. Brown is proposing to use a chunk of it to speed up repayment of deferrals, the chronically late state payments that have forced cash-strapped districts to borrow short-term money. Since Brown’s not proposing to increase programmatic spending for schools anyway, school operations won’t be affected next year by not receiving the maintenance factor, the LAO says. However, Brown and the Legislature will be able to spend the $1.7 billion on other areas of the state budget that are hurting.

Cramming more into Prop 98

Now shift to November. Brown is proposing to raise the sales tax 1/4 percentage point and the income tax on the wealthy between 1 and 3 percentage points, and he has built his budget assuming the increase would pass. If it fails, he would cut K-12 schools and community colleges $5.5 billion: 90 percent of the total $6.1 billion cut.

About half of the $5.5 billion cut would be the postponement of repaying deferrals. The LAO and Brown agree this would be necessary. But Brown would then cut $2.8 billion in real dollars to schools by further manipulating the Prop 98 formula. He would shift $2.8 billion of expenses that had been funded outside of Prop 98 into it, forcing a corresponding cut to per-student funding. The two expenses are repayment of state bonds for school construction ($2.6 billion) and the Early Start early education program ($238 million).

The tactic of moving items in and out of Prop 98 is called rebenching. There are two ways to do this, and Brown is using both as it suits him, a “heads I win, tails you (schools) lose” approach. As the LAO diplomatically notes, “Using different rebenching methods within the same budget plan (as well as changing rebenching methods across years) at least creates the perception that the state likely is selecting the method that always works to its maximum benefit.” (Go here for an explanation of a lawsuit brought by education groups against Brown over rebenching in last year’s budget.)

By excluding the $1.7 billion maintenance factor and lowering the Prop 98 obligation for 2012-13, the LAO would not require as big a cut or the Prop 98 deception. (The LAO also recommends cutting $100 million in disputed money for the Quality Education Investment Act, a program for low-performing schools championed by the California Teachers Assn.)

All of this is dense stuff that is nearly indecipherable. It offers further evidence for the failure of how California finances state government and schools in particular.

But which method of calculating Prop 98 has consequences? On the one hand, it will determine whether districts get $1.7 billion owed them next year or later; on the other, it will determine whether, failing passage of a tax increase, schools face a cut of $415 or $162 per student; the $253 difference is equal to almost two weeks of school.

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  1. Just to complicate the picture a little more, the state made a deal with CTA in last year’s budget around revenues used to support realignment (AB 114 as I recall). Basically, the state agreed to either pass an initiative to pay back schools for lost funding, or if an initiative is not passed, the state would pay schools back roughly $2 billion (the amount schools were shorted in 2011-12) over 5 years, and would restore the $2 billion in funding starting in 2012-13.  It appears that the Governor has forgotten about this deal, and is choosing to ignore it. There has not been a proposal yet to either honor that deal, or repeal it and replace it with something else ???? Since I have not heard anyone talking about this deal around the different Trigger options, I thought I would bring it to others attention.

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  2. Hi Rob,
    how could the governor make such a deal? did the legislature approve it as well, or was it just a “handshake deal”? After all, the governor does not have unilateral power over the budget…
    PS — John — thank your for this post which made it much easier to understand the portion of the LAO report that discusses rebenching. It was total Greek to me before I read your explanation.

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  3. The governor is holding our students hostage so he can pass an initiative that will not bring any additional money to our schools.
    All the governor has to offer are more gimmicks and not nearly enough funding for our students.  CA is 47th in the state in what we spend per pupil.  CA has the highest student to teacher, student to counselor and student to administrator ratios — in the nation.  We’ve lost art, music, drama, counselors, school nurses, librarians, libraries, computer labs, after school programs, athletics.  The past four years have been a bloodbath in staff and programs.  It’s time to actually fund our students in an amount that can cover what the state has set as their standards.  Its time to invest in our students, rather than chip away at our schools, year after year after year.  No more cuts.  No more deferrals. No more gimmicks.
    Our schools, which get 40% of the budget, will absorb 90% of the cuts if the governor’s initiative doesn’t pass.  This is what is called blackmail.

    The PTA/Molly Munger initiative is the only initiative that will start to restore our schools.  Many of our school districts are hanging by a thread and the governor’s siphoning away more money last year due to his realignment plan, his initiative that only pays money that has already been taken from schools (maybe) and now his proposed Weighted Student Formula will further damage school districts that are already compromised.  PTAs and educational foundations can not fill in the huge gap that has been created.  Many districts don’t even have the resources for PTA fundraising and educational foundations — and so the gap widens even further for some -creating varying degrees of inequity, again – in an overall compromised system.

    The PTA/Molly Munger, Our Children, Our Future initiative relies on a broad based, sliding scale tax, after deductions. It sends money directly to our schools, NOT the Sacramento black hole!  It mandates parent input into how the money is spent and mandates strict accountability.  The initiative also makes it a felony to misuse the funds.  Got it Gov.?

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  4. Linus, given this statement you make:
    “CA has the highest student to teacher, student to counselor and student to administrator ratios — in the nation.”

    Aren’t you concerned that the Munger initiative prevents money from being spent on administration, even if that’s what local parents/communities would choose?

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