1. The Storm It’s Here—How It Looks and What To Do Inland Personnel Council Meeting January 30, 2009 • Joel Montero • Chief Executive Officer • Fiscal Crisis and Management Assistance Team

2. Overview • Looking Back To Look Forward • The Current Status • How To Survive the Short and Long Term • Budget Certifications and Their Impact • Collective Bargaining • Question & Answers

3. Beginning with Basic Economics • The National Economy and Budget • Lack of Consumer Confidence • A Correction in the Housing Market • Construction and Unemployment • Proposition 93 and CA Politics • Is it Revenue or Expense? • The Perfect Storm???

4. What’s The Status? • There is a economic crisis • Our state has a structural deficit that is growing • Unemployment is at 9+% and growing • Housing continues to correct • The Legislature is in emergency session • Education is going to be dramatically impacted

5. Inquiring Minds Seem to Want to Know • Will there be a Depression? • Is the Stock Market at the bottom? • When will Recovery begin? • What about Mid-Year Reductions? • Will there be COLAs—ever again? • What’s next?

6. As Goes California, So Goes…. • The recession is deep and may be of long duration • Credit • Unemployment • The Feds • Housing • Depression?

7. State Budget Deficit Grows Despite Mid-Year Reductions ($1.0) July 2007 November January 2008 February May 2008 December 2008 2007 2008 ($6.1) ($10.0) ($9.8) ($14.5) ($16.0) ($17.2) ($20.0) ($24.3) ($30.0) ($40.0) ($41.6) ($50.0) Source: Department of Finance and Legislative Analyst’s Office

8. Governor’s Budget Proposals $41.8 Billion in Solutions • Expenditure Reductions - $17.4 billion (42%) • K-14 Education - $7.7 billion (44% of all cuts) • New Taxes and Fees - $14.3 billion (34%) • Borrowing - $10 billion (24%)

9. Governor’s Budget Proposals $5.44 billion in K-12 Core Revenue Reductions Current Year 2008-09 • Eliminates .68% COLA on Revenue Limits • $247 million ($41 per student) • Reduces Revenue Limits by 4.5% • $1.6 billion ($270 per student)

10. Governor’s Budget Proposals $5.44 billion in K-12 Core Revenue Reductions Budget Year 2009-10 • Eliminates 5.02% Statutory COLA on Revenue Limits • $2.5 billion ($400 per student) • Reduces Revenue Limits by 2.5% • $1.1 billion ($180 per student)

11. Governor’s Budget ProposalsAdditional Reductions Current Year 2008-09 • $4.3 billion reduction of Proposition 98 spending level • $2.8 billion deferral of February apportionment (cash) to July 2009 • $1.1 billion in settle up dollars used to backfill costs • $618.7 million in Public Transportation Accounts funds to fund home to school transportation

12. Governor’s Budget ProposalsAdditional Reductions Current Year 2009-10 • $152.7 million decrease to revenue limit due to declining enrollment • Elimination of High Priority School Grants ($114.2 million in savings) • Suspension of National Board Certification Incentives for new teachers ($1 million in savings) • Suspension of all K-12 mandates with three exceptions: • Interdistrict and intradistrict transfers • California High School Exit Exam • State Special Schools • $398.5 million PTA funds for home to school transportation

13. Governor’s Budget ProposalsLocal Flexibility • Allows school districts to transfer prior-year categorical ending fund balances to the general fund unrestricted • Allows districts to transfer state categoricals to general fund unrestricted • Eliminates the deferred maintenance match • Reduces Routine Restricted Maintenance from 3% to 1% • Reduces the Reserve for Economic Uncertainty by 50% • Would allow districts to reduce the length of the school year by up to 5 days

14. K-14 Education Spending and the Budget Shortfall Comparison of State General Fund Revenue and Expenditure Increases to Increases in K-14 (Prop. 98) Guarantee1998-99 Through 2009-10 1Legislative Analyst’s Office. State spending Plan: 1998-99. October 1998, Page 4, Revenues & Expenditures; p. 26 Proposition 98 2Departemnt of Finance. Overview of the Governor’s Budget: 2009-10. January 2009 (assumed all proposed budget solutions) 3 Adjusted for Local Property Tax Transfers per VLF Transfer and Triple Flip (LAO, Jan. 2009 est.)

15. K-14 Education Spending and the Budget Shortfall Comparison of Major General Fund Expenditure Areas1998-99 through 2009-10 1Legislative Analyst’s Office. State spending Plan: 1998-99. October 1998, Page 4, Revenues & Expenditures; p. 26 Proposition 98 2Departemnt of Finance. Overview of the Governor’s Budget: 2009-10. January 2009 (assumed all proposed budget solutions)

16. What Can Districts Do Now in Anticipation of an Uncertain Fiscal Environment • Plan—Current plus Two Years + • Review your Assumptions regarding Interest Income • Spend Restricted Dollars First and Conserve Cash • Stay Current With Enrollment and Staffing • Build Reserves/Fund Balance If Possible • Be Careful About Debt including OPEB Bonds • Manage Cash • Forego Big/Expensive Budget Decision Where Possible Remember, This Is a Multi-Year Issue!

17. What Can Districts Do Now in Anticipation of an Uncertain Fiscal Environment You Must Do These Things Now • Eliminate the .68% COLA in the current year • Reduce the Revenue Limit by 4.5% • Set aside unallocated state categorical funds • Prepare for the worst case scenario re: RIF • Freeze expenditures conserve cash

18. What Can Districts Do Now in Anticipation of an Uncertain Cash Environment • Have a system in place to analyze and monitor cash flow—all funds • Report cash flow status and projection to the board on a regular basis • Conserve cash when possible—all funds • Build Reserves/Fund Balance—all funds • Consider creating spending plans to manage available cash • Consider options for dry period financing (borrowing) • Don’t run out!

19. The Basics of AB 1200/2756What does this mean to you? • County Office Review at a Minimum of Three Specific Data Collection Points • Budget Approval • First and Second Interim Reporting • Positive, Qualified and Negative Certifications • COE Must Assess Solvency for the Current Plus One or Two Years • Disclosures

21. The Basics of AB 1200/2756What does this mean to you? • Possible Actions Under a Qualified Certification (Budget) • Fiscal Expert Assignment • Budget Analysis and New Financial Projections • Approval of New Debt Issuance • Longer Period of Review for Collective Bargaining Agreements • Encumber all Contracts and Other Obligations • Withhold Compensation from Superintendent and Governing Board

22. How Do Districts Assess What They Can Afford in the Collective Bargaining Process? • Big Picture • Estimate Next Year’s Income or Lack Of • Enrollment (ADA) • Revenue Limit and deficits • Lottery • Special Purpose Funds • Local Income • Special Education • Plan Next Year’s Expense • Actual Salary of Each Employee • Actual Benefit Cost of Each Employee • New Programs • Assumptions re: utilities, insurance, capital and equipment, etc. • Legal Costs • What’s is the Balance?

23. How Do Districts Assess What They Can Afford in the Collective Bargaining Process? • The More Granular View (typical year) • COLA 5.00%?? • Deficit Factor (0%?) • Total Net Impact 5.00% • Step and Column (~1.5%) • Health and Welfare (1.5%??) • Enrollment Adjustment (0%) • Other Fiscal Impacts (0%) • Total Available (absent change) 2%

24. How Do Districts Assess What They Can Afford in the Collective Bargaining Process? • The More Granular View—2008-09 • COLA 5.66% • Deficit Factor (9.865%) • Total Net Impact (4.57%) • Step and Column (~1.5%) • Health and Welfare (1.5%??) • Enrollment Adjustment (?%) • Other Fiscal Impacts (?%) • Total Available (absent change) (7.57%)

25. More Collective Bargaining • There will be no new money in 2009-10 and probably beyond (total RL deficit 16.161%--SSC Dartboard) • Categorical flexibility will be volatile—consider as one-time money • Costs for health benefits will continue to rise • Shortened school year?? • Salary rollbacks?

26. Summary • The fiscal situation for the state has deteriorated since last year • Recession-yes, Depression-hopefully not • The state’s deficit is growing exponentially for lack of action • Education growth for a 10 year period is less than other parts of the budget • Governor/Legislature proposals for solution have much in common • LEA planning is more critical than ever • AB 1200 will indicate growing problems through the certification process • Collective bargaining will be challenging

27. Questions?