2008-09 Budget Update provided by: B. Teri Burns, Director of Legislative Advocacy School Innovations & Advocacy February 2008
Introduction:Challenging time ahead 2008-09 will be an extremely challenging year for K-12 finance K-12 will be significantly affected by the state’s fiscal crisis As a result, we’ve gone from the “year of education reform” to the “year of the budget” Genuine dialogue intended to enact comprehensive reforms is likely not to occur Base revenue limit funding is at risk The Proposition 98 guarantee has dropped in the current and budget years Year-to-year Proposition 98 growth is not enough to fully cover prior-year base funding plus COLA and enrollment growth This exposes K-12 to mid-year reductions and a possible suspension of Proposition 98 in 2008-09
Overview:Politics will play a role It’s an even numbered year! Election year politics generally help schools…the question is how much will it help this year? Line in the sand on no new revenues will push Democrats our direction on opposing Prop 98 Suspension. If Proposition 93 (term limits) fails – new leaders will tend to be strong allies given their need to consolidate core constituencies. Early media buys have the potential of replicating the politics of 2005 Special Election. Public support for the Gov dropped like a rock. Governor’s efforts are again characterized by taking on multiple battles simultaneously …déjà vu all over again?
Observations:The economy • Economic outcomes will influence budget debates: • Sub-par economic growth (below 3.0%) • Job growth is weak, but positive • Unemployment expected to grow slightly • Inflation is a concern but remains in check • But uncertainty about economy/credit crunch remains The $64,000 question: Will turmoil in the housing market tip the economy into recession?
Observations:LEA challenges In addition to Proposition 98 funding challenges, LEAs are also contending with: Collective bargaining: How LEAs approach upcoming negotiations in light of decreased revenues will be critical to long term financial and academic success Employee benefits: Health and welfare costs and scope continue to be a top priority Declining enrollment: More than half of all LEAs continue to suffer the impacts of multi-year declining ADA Fiscal solvency: Utilization of reserves and long term fiscal viability will be critical issues to consider Accountability: Meeting federal and state accountability requirements will become increasingly difficult
Themes for this budget Shared pain – The administration proposes equal pain across all budget areas. But, is that the case? Equal cuts in education – Almost all education programs sustain significant budget year reductions Cut now, restore later – Reductions would be in place for one or two fiscal years, and potentially restored when Proposition 98 goes back up (i.e. the Test 1 factor) Precedent setting reductions – Largest reductions to K-12 ever proposed
The budget process:Things to keep in mind The governor’s January proposal is the start of a long deliberation between many parties It reflects the Administration’s general policy intent for the fiscal year But it is by no means a final deal The Legislature’s role is to respond and develop the budget And it still takes a 2/3rds majority to get a budget passed! A lot can change between now, May Revision, and budget enactment – fiscally, socially, and politically Outside and unforeseen factors can (and will) significantly influence the final 2008-09 state budget
The many stakeholders in the K-12 budget process Assembly Democrats Governor Dept. of Finance Senate Democrats Proposition 98 CDE Republican Caucuses Education Unions* • Other stakeholders • Facility advocates • Nutrition advocates • Preschool • Children Now • K-12 Retirement coalition • PTA • Special education Education Management* Secretary of Education State Board of Education * These two entities will often advocate together via the K-12 Education Coalition. The coalition includes ACSA, CSBA, CCSESA, CASBO, CTA, CFT, CSEA, SEIU, and PTA
What we’ll cover Section one: A look back Section two: The State’s Fiscal Condition and Proposition 98 Section three: The Governor’s Proposals Section four: K-12 Management Issues and Perspectives Section five: Outlooks and Policy Predictions
Section one: A Look Back: The K-12 Fiscal Rollercoaster
A volatile decade The last eight years have resembled the plot line for Tolstoy’s “War and Peace” • 2001 – 2005: Five years of funding upheaval – program reductions, mid-year cuts, apportionment deferrals, and a suspension • 2005: A special election and political war to save Proposition 98 • 2006 – 2007: Proposition 98 gets paid back plus $6.7 billion in additional revenues resulting in record COLA, equalization, EIA, new programs, discretionary dollars • 2008 – 2009: Another fiscal crisis
2001-02 to 2004-05: Cuts, deferrals, suspensions Revenue Limit Cuts Defer State Funding $1.526 billion $1.1 billion Proposition 98 Suspension $2.0 billion Failure To Pay State Mandates $1.5 billion Proposition 98 Categorical Cuts Under funding $2.128 billion $1.502 billion
K-14 COLA history:Statutory and funded Note: In 2003-04 K-14 experienced a negative COLA of -1.2% due to budget conditions. The unfunded statutory COLA that year was 1.8% thereby creating a 3.0% COLA deficit factor. That amount was restored back into the Proposition 98 base from 2004-05 to 2006-07. Deficit factor repayments for those years are not reflected on this chart.
Section two The State’s Fiscal Condition and Proposition 98
The economy is in flux • Signs of Strength: • Consumer spending remains steady • Non-energy & non-housing markets show modest growth • Gross state product & personal income growth steady @ 1-2% • Signs of Weakness: • Lower consumer confidence • Rising energy prices • Housing market decline • Housing credit market meltdown • Rising unemployment • Economic signals are mixed – O.K. on one side, not good on another • Forecasts point toward sluggish growth in 2008 and 2009 • But we could easily tilt into recession – in fact some forecasters argue that we are already in one
Revenues and Proposition 98 California’s revenue structure is highly progressive – the more you make, the more you pay in state income taxes The largest state General Fund tax is personal income The Proposition 98 guarantee is calculated off of state General Fund revenues Therefore, revenues and the Proposition 98 minimum guarantee are directly linked When revenues fall below projections, Proposition 98 is often affected
State revenue sources:2007-08 projected Source: Legislative Analyst’s Office
Budgeting:Why the big ups and down? With a highly progressive tax system, the state’s revenue streams have developed rollercoaster characteristics • The top 1.5% of income earners pay almost half of state income taxes • Stock options and capital gains are a large percentage of state income taxes • Small differences in actual rates for these revenue sources can generate significant revenue swings • On top of that, stock options and capitol gains are very difficult to predict
What Proposition 98 is doing • A brief sketch of what’s happening: • 2007-08 Budget Act assumed “Test 2” funding level • But even with Test 2, Prop. 98 funding fell short of fully providing for COLA and growth across all programs • In response, the Legislature funded Prop. 98 partly by using one-time funds • November LAO forecast revealed a drop in revenues, triggering Test 3 for 2007-08 – i.e. lowering the minimum funding guarantee. • The Governor’s budget assumes Test 3 for both 2007-08 and 2008-09. • The lower guarantee makes as much as $1.4 billion of the budget act funding for schools vulnerable for recapture via mid-year reductions
Proposal to suspend Proposition 98 The governor proposes to suspend Proposition 98 to secure $4.4 billion in reductions for 2008-09. Prop 98 Maintenance Factor contains totals that are reduced in both years for restoration in the future. Restoration is triggered to begin when Test 3 no longer applies and general fund revenue is not lagging per capita personal income growth by more than one-half of one percent. Suspension requires a two-thirds vote in each house taken as a separate and distinct vote from the budget act. Republican leaders reluctantly supporting the Governor Democrats have not dubbed the suspension as DOA See Appendix for Proposition 98 narrative
Section 3 Governor’s 2007-08 mid-year and 2008-09 budget year proposals
Declaration of a “fiscal emergency” Per Proposition 58, the governor may declare “fiscal emergency” if: General Fund revenues are substantially below estimates General Fund expenditures are substantially above estimates Or both The governor must propose legislation to address the fiscal imbalance: Requires Legislature to assemble in special session to address fiscal emergency Legislature must send a bill to the governor within 45 days of the proclamation and may not act on other legislation until that bill(s) passes both houses of the Legislature and is sent to the governor No requirement for legislation to be “enacted” If the governor vetoes the legislation, he may declare another “fiscal emergency” - essentially starting the process over with the same rules
K-12 mid-year reductions The Administration proposes a 2007-08 mid-year reduction Proposition 98 guarantee is over appropriated by $1.4 billion in the current year The Governor proposes to reduce current-year education spending by $400 million. $360 million reduction directed at K-12 $40 million at community colleges Reduction will likely come from “sweeping up” unspent categorical funds Not likely to impact K-12 people and/or programs
Delay in P2 apportionment The Administration proposes to further delay the Second Principal Apportionment (P2) Current law delays P2 from June to July Governor proposes to extend the delay until September This would result in a $1.3 billion savings for the state Would increase the state’s cash reserves during the lowest cash balances This would likely have a negative impact on LEAs Likely increase in the interest payments on amounts school districts would have to borrow to meet obligations Create further cash flow problems for education agencies Basically it’s a loan to the state, but with no benefit to K-14
Governor's proposed 2008-09 reductions Most programs are subject to significant reductions Administration proposes an across-the-board methodology: 10.89% on categorical programs Calculated off of each program’s “Workload” budget
The rationale for this approach The Administration argues that across-the-board reductions = protection for essential services + spreading cuts evenly No individual program takes a severe or disproportionate reduction Governor argues that all state programs are taking a 10% hit – but that isn’t completely accurate
Governor's proposed reductions Some state programs are exempt from reductions Program reductions that would be unconstitutional Proposition 42 transportation programs Retirement allocations Homeowner exemptions Retiree health and dental benefits Reductions the Administration argues would be inappropriate or inhumane Medi-cal payments to long term care facilities Cal Grants Juvenile justice Inmate health care
Across-the-board Categorical reductions:How they propose to do it for K-12 2007-08 Funding (per categorical program) ____##___ Increase by 4.94% cost-of-living adjustment ____##___ Increase (decrease) by projected ADA growth (decline) ____##___ = Workload budget ____##___ Decrease State General Fund share of workload budget by 10.89%* ____##___ Proposed budget for 2008-09 ____##___
Detailed program cuts Proposed Budget Reductions $2.6 billion - Cost of Living Adjustments and Revenue Limits Eliminates the 4.94% COLA and reduces revenue limit apportionments by ~ 2% Creates a deficit factor of 6.99% $357.9 million - Special Education Elimination of COLA Reduction would have to be backfilled by local LEAs $198.9 million - Child Development programs No COLA or growth Eliminates 8000 existing slots. Administration believes that natural attrition rates will prevent any child from losing an existing slot in a program $59.6 million - Before and Afterschool Programs Proposed amendment to Proposition 49 to achieve these savings
Detailed program cuts $1.095 billion - Categorical programs 10.9% reduction No COLA for any categorical program No program is exempt from these cuts including programs such as Class Size Reduction, Instructional Materials, Supplemental Instruction, Home-to-School Transportation, Supplemental School Counseling and the Charter School Categorical Block Grant Adult Education and the Charter School Block Grant receive increases of $18 million and $46.1 million, respectively because of increases in enrollment These increases are calculated prior to the proposed cuts $14.2 million - Child Nutrition Program Achieved by cutting the free and reduced price meal reimbursement rate by $.02 down from the overall 2007-08 increase of $.06. $5.6 million - California Department of Education Program support services provided by CDE $9.2 million - State Special Schools Unallocated funds
Detailed program cuts • CBET • 07-08 $50 million No COLA No enrollment change -10.89% ($5.44 million –BBR) Governor’s Proposal $44.55 million Reduces per pupil funding $32.44 to $29.00
Detailed program cuts • Adult Education • 07-08 $753.71 million + 38.16 million (COLA) + 18.84 million (enrollment growth) Workload Budget: $810.72 - $88.33 million (10.89%-BBR) 2008-09 Proposal: $722.40 million
Special education:Added challenges to LEAs The Governor’s proposed 10.89% reduction to special education ends up being a triple whammy to districts and county offices: LEAs have to sustain a sizable cut to a mandated program – approximately $30 per ADA in SELPA local plan area funding – unclear if this cut is implemented via a deficit factor on base funding or a negative COLA The cut is calculated off an already lowered amount due to the bifurcated COLA LEAs will still be mandated to provide services – thereby increasing encroachment on LEAs’ general funds NOTE: With this proposal, the state could be in violation of federal maintenance-of-effort requirements thereby jeopardizing federal aid
Special education funding:Misc. Out-of-Home-Care Funding Model SELPAs entitled to an increase are recommended to not budget for an increase SELPA receiving less in 2008-09 compared to 2007-08 will lose 33% of the difference per current law Special Disability Adjustment Calculated pursuant to current law – no proposed change
Supplemental instruction The Supplemental Instruction program would take a proportionate 10.89% reduction per the governor’s budget In addition to eliminating the COLA, Depart of Finance projects that reimbursement rates for hourly discretionary programs could reduce the rate from $4.08 to $2.00 per hour Mandatory services: Remedial Instruction for Grades 7-12 Retained or Recommended for Retention Grades 2-9 Discretionary services: Low-STAR for Grades 2-6 Core Instruction
COLA index change The budget proposes to change the K-14 COLA factor from the State and Local Implicit Deflator to the Consumer Price Index for Wage Earners and Clerical Workers The Administration argues that this more appropriately reflects inflationary increases for education agencies since most expenditures go to salaries This index change would result in a COLA reduction from 4.94% to 3.65% for 2008-09 (In out years, CPI-W could be higher than the implicit deflator Changing the existing formula will be a difficult undertaking – from both political and constitutional standpoints
Data delivery and accessibility CALPADS/ CalTIDES Proposes continued investment in the collection of quality data $8.1 million - $2.2 million General Fund and $5.9 million special and federal fund – to fully fund the recently approved contract to develop systems CALPADS $1.8 million in one-time federal funds for related staff at the CDE and the Commission on Teacher Credentialing Education Data Commission 9 member panel to make policy recommendations to Governor for development of an education data system California School Finder Website Website created by state in partnership with Microsoft and Google that allows users to compare schools side-by-side
“Mega-Item” funding flexibility The Administration will propose broader flexibility with the Mega-Item (Control Section 12.40) New in /out percentages would be: 60% out of and 65% into any categorical program contained with Control Section 12.40 Budget bill language was not available, so exact details remain sketchy – will be flushed out during budget hearings NOTE: This is the only program / policy flexibility the Administration is proposing. However, DOF staff stated that they would be “open” to other proposals
Mega-Item programs Current law allows for fund transfers of 10% out of and 15% into specific Mega-Item programs (not to exceed 115% of appropriated funding per year) Those programs include: Home-to-School Transportation Sp. Ed. Transportation Gifted and Talented Education Year-Round Education Grants Peer Assistance and Review Education Technology NOTE: Economic Impact Aid was removed from the Mega-Item per the 2007-08 budget Intent of the Mega-Item is to provide an element funding flexibility within K-12 categoricals A significant percentage of fund shifts within the Mega-Item go to backfill Home-to-School Transportation encroachment
Other items not in the budget No revenue limit equalization:No additional funding for RL equalization. Approximately $100 million would be required to level up the base revenue limit for all school agencies to the 90th percentile target for each type and size district (elementary small or large, secondary small or large, unified small or large). No funding to address declining enrollment:see next section, existing law allowing districts to use prior-year ADA remains for 2008-09 No new one-time discretionary dollars:One-time dollars from 2006-07 are gone with no additional discretionary appropriations in sight No major categorical program expansions:Most categorical programs receive reductions based off the 2007-08 levels, with little program changes proposed
No Child Left Behind:Accountability proposal “Architecture of Accountability” Focused on 98 LEAs in NCLB Corrective Action (PI Year 3) Four Interventions Proposed: DAIT “Extra Strength” State Board of Education assigns a District Assistance and Intervention Team (DAIT). DAIT recommends a federal corrective action. State Board acts to impose sanction (e.g. appoint trustee, restructure district, new curriculum, remove staff, etc.) DAIT “Plus” DAIT team is required but LEA chooses “in consultation with county superintendent.” DAIT given authority to require LEA to implement DAIT plan for reform Targeted Assistance LEA chooses a state-approved provider to develop a tailored technical assistance plan to assist LEA to meet federal targets Revise and Implement LEA Plan LEAs narrowly missing targets revise their LEA plans
No Child Left Behind:Accountability proposal Governor’s Plan to Expend the $29 million in Title I Set-Aside Funds State will allocate a higher percentage of funds to LEAs that are identified at a greater intervention/sanctions level. It is unclear who falls into this category Rewarding High Performing Districts LEAs given the opportunity to apply for State Board waivers from provisions of Education Code. LEAs already have this authority. Unclear what will be different under proposal
No Child Left Behind:Accountability proposal What’s the Problem with This Plan? $29 Million in Title I Set-Aside will not cover all costs of this proposal No current agreement between the Governor’s Office and State Superintendent No methodology proposed for each category of intervention Sanctions are serious and will impose future unfunded mandates Eventually all school districts will be in NCLB Corrective Action – What Then? Federal 6th Circuit Court Ruled “NCLB is an unfunded mandate.” Inherent flaws in NCLB (e.g. 100 percent proficiency of all students at one point in time). NCLB not supported in Congress and likely to change with new president.
Stabilizing California’s Budget Governor says problems are driven by two factors Spending all the new funding that materializes in high revenue years without regard to the sustainability of the funding. State has not been able to slow spending growth due to constitutional and statutory formulas that currently force spending of $600 Million per month more than the state takes in. Other Key Factors Include: Vehicle License Fee Cut - $4 Billion Restricting Reductions to Counties – Prop 1A Spending New Revenues in 2006-07 – Election Year
Solving the Problem “Once and for all” California Recovery Plan of 2003 Agreement with the Education Coalition in late 2003 Constitutional Amendment to Limit Budget Spending Economic Recovery Bonds Proposition 57 & 58 $15 Billion of Economic Recovery Bonds California Balanced Budget Act Fiscal Emergency provisions he has used this year Prohibits most future borrowing to cover budget deficits Proposition 76 Would have gutted Prop 98, undermined the K-14 funding base and allowing mid-year cuts up to three times per year. Failed by nearly three-to-one margin. Prop 1A – Protection of Local Government Revenues Better protection than Prop 98 provides schools
Budget Stabilization Act Establishes Revenue Stabilization Fund (RSF) Savings account for excess revenues taken in by the state. Excess defined as revenues that exceed the state average increase in revenues over the prior ten year period. When triggered, the excess revenues deposited into the RSF will not count toward calculation of the Proposition 98 minimum guarantee. Years when tax revenues are below average and state is unable to meet fiscal obligations, RSF transfers will be made to the general fund. Years when transfers are made to the general fund, dollars will count toward the calculation of Proposition 98.
Budget Stabilization Act Budget Stabilization Act will allow mid-year spending reductions beyond provisions added by Prop 58. Under Prop 58, declaration of a fiscal emergency and a special session of the Legislature can and will result in mid-year cuts. Automatic reductions will be triggered by the Governor if Department of Finance predicts a year-end deficit. Calculation to be made three times per year (November, January, June) If projected deficit is one percent or less, 2 percent across-the-board cuts would be implemented. If projected deficit is greater than one percent, 5 percent across-the-board cuts would be implemented.