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October 2010 California State Budget and Impact on Dublin Unified School District

October 2010 California State Budget and Impact on Dublin Unified School District. The Economy. INTRO-2. The economy is the key to financial recovery for the state as a whole and for public agencies Unemployment is key and remains higher than the rest of the nation

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October 2010 California State Budget and Impact on Dublin Unified School District

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  1. October 2010 California State Budget and Impact on Dublin Unified School District

  2. The Economy INTRO-2 • The economy is the key to financial recovery for the state as a whole and for public agencies • Unemployment is key and remains higher than the rest of the nation • Predictions of an early recovery in the spring of 2010 proved to be overly optimistic • Recovery is slow at best and realistically nearly nonexistent • Most projections are that the economy will remain sluggish until at least 2012 • Still, not all the news is bad • Things are not getting worse • No “double-dip” recession – at least not yet • The ugly real estate and construction markets are economy killers • The keys to recovery? • Improvement in the construction industry • Improvement in employment

  3. The State Budget INTRO-3 • What are the provisions of the new State Budget? • Much improved from the May Revision • Reverses 3.85% cut and negative cost-of-living adjustment (COLA) • Restores child care cuts • No supplanting with Federal Jobs Bill funding • Several other positive surprises • Actual numbers, tables, etc., follow later in the presentation • Still, there are concerns: • Will there be midyear cuts? • Loss of Tier III and class-size reduction (CSR) flexibility will cut into the gains • Longer term, we need real Budget reform • We need more dollars, and a more stable source of funding • We are still at the bottom of the ranking in education spending

  4. Proposition 98: Now and Later INTRO-4 • Once again, Proposition 98 remains relevant in that it forces all parties to invite education to the table • This Budget requires a suspension of Proposition 98 now, with restoration amounts fully recognized • The Maintenance Factor continues to grow • But the Budget specifies exactly what is owed • Restoration clearly isn’t “automatic” anymore – we need to be vigilant and prepared to fight for it every year • The Budget also provides additional funding outside Proposition 98 for Quality Education Investment Act (QEIA) and other purposes

  5. Federal Funding INTRO-5 • American Recovery and Reinvestment Act (ARRA) issues • State Fiscal Stabilization Fund (SFSF) true up on the way, about 10% • Audits still planned, need to prepare • Assurances regarding supplanting made by the state to the feds appear to be intact in the Budget deal • The Education Jobs Bill • Basic rules relate to saving public sector jobs • Creative uses include splitting the funding for use over two years • Assurances agreed to by the state appear to be honored • Audits and record keeping are necessary • Prospects for additional federal funding as planned by the Governor are very speculative • Remember: Appropriate use of one-time dollars is important

  6. Categoricals: Now and Later INTRO-6 • Five years is almost up • K-3 CSR flexibility goes away for 2012-13 in the Multiyear Projection (MYP) • All the rest goes away for the June 2013 district budget • Proposed end dates are causing deeper cuts now • Will they be extended? • Current law requires that all programs revert to preflexibility provisions • Will programs really revert? • We don’t think so, but when will we know more? • What can districts plan for? • Active management of categorical programs is very critical

  7. National Economic Outlook A-1 • THE RECESSION IS OVER?!? • The recession began in December 2007 • It was declared over in June 2009 • The National Bureau of Economic Research (NBER) made the official call in September 2010 • At 18 months, it is the longest recession since World War II • The average downturn lasts ten months • Many economic indicators remain weak • U.S. unemployment is at 9.6% • It spiked at 10.1% • Gross Domestic Product (GDP) has slipped • Housing remains sluggish

  8. 2008 2009 2010 Economic Outlook A-2 Source: U.S. Bureau of Economic Analysis, August 2010

  9. California’s Economic Outlook A-3 • California’s economy remains weak • The state unemployment rate is 12.4%, among the highest in the country • Home sales slowed in August, down 2.7% from July and down 14.0% from August 2009 • Home foreclosures made up more than one-third of the existing homes sold in August • UCLA forecasts some improvement in 2011 • Employment will rise 1.90% after three years of decline • Personal income is expected to increase 3.70% • But the unemployment rate will remain high at 11.0% in 2011

  10. California’s Spending Lags the Nation A-5

  11. California’s Spending Lags the Nation A-6 -$2,580 per student

  12. A “Double-Dip” Recession? A-7 • The general public does not believe that the recession is over • By definition, the declaration rules out a “double-dip” recession • Another downturn will be considered a new recession • Nevertheless, people are still struggling and state and federal deficits continue to soar “At least half of them excoriate us for saying that the recession is over. But we are only saying that things started to get better in June 2009, not that times are good.” – Robert Hall, Stanford Professor Member of NBER Panel

  13. General Fund Revenues A-11 Source: 2010-11 May Revision, page 56; Budget Conference Committee Report, October 6, 2010

  14. Court Validates Budget Reductions A-12 • The 2009-10 adopted Budget contained many risks, including legal challenges to the Governor’s authority to cut spending • Unpaid furlough days for state workers • Veto authority for bills other than the Budget Bill • The State Supreme Court unanimously upheld the Governor’s action on the 2009-10 Budget • The unpaid furloughs were found legal because the Legislature provided the authority when it passed the Budget • There is no difference in appropriations contained in a Budget Bill or any other spending bill intended to reduce a prior Budget appropriation • These decisions strengthen and clarify the Governor’s authority to shape Budgets

  15. Risks to the State Budget A-13 • Higher revenues: Assumes the Legislative Analyst’s Office’s $1.4 billion higher revenue estimate, on top of the 5.7% revenue increase projected in the May Revision • July and August revenues are tracking the May Revision forecast, not exceeding it • Federal funds: $5 billion are assumed, which would offset General Fund expenditures, $1.6 billion more than the May Revision • Expenditure cuts: $7.5 billion are assumed • However, one-third of the fiscal year has already elapsed without these reductions • The economy: Assumes personal income growth of 3.2% in 2010 and 4.5% in 2011 • UCLA forecasts weaker growth: 1.9% in 2010 and 3.7% in 2011

  16. Comparing the Forecasts – Income A-14 Sources: UCLA Anderson Forecast, September 2010; 2010-11 May Revision, May 2010

  17. Per-ADA Revenue Volatility A-15 • As in the past, we continue to havevery high volatility in revenuesdirected toward education • 2010-11 continues the roller-coasterride for revenues • The 2010-11 level is a cumulative10.08% reduction from the 2007-08 funding level • California needs to provide a more stablerevenue stream for schools

  18. Per-ADA Revenue Volatility A-16

  19. The Value of Education A-17 • Education, especially K-12, is critical to the economic success of individuals and our state as a whole • Personal income accounts for more than half of state General Fund revenues • Educational attainment affects earnings Source: U.S. Census, Education Attainment in the United States, 2009

  20. Unemployment Rate by Levels of Highest Education A-18 All Education Levels 9.6% Bachelor’s or Higher Degree High School Completed, No College Some College, No Degree No High School Diploma Source: U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey – September 2010

  21. The Education Budget

  22. Proposition 98 B-1 • Proposition 98 was designed to establish a constitutional minimum funding guarantee for K-14 education • Over the years, Proposition 98 has been subject to manipulation • In 2009-10, the Legislature and the Governor recaptured a $1.6 billion “overappropriation” of the 2008-09 minimum guarantee after the fiscal year had closed • The Governor’s May Revision for 2010-11 had proposed to rebench the guarantee downward by $1.45 billion related to his proposal to eliminate child care • The Legislature rejected the child care cut

  23. Proposition 98 B-2 • For 2010-11, the Legislature suspended Proposition 98, establishing the minimum funding level at $49.7 billion • The minimum funding level with no suspension would have been closer to $54.0 billion, $4.3 billion more than the suspension level • The long-term Proposition 98 target of $54 billion is higher than the May Revision because: • The final Budget includes $2.5 billion in additional revenues, which increases the guarantee • The Governor’s proposal to rebench the guarantee downward, per his proposed child care cut, was rejected • The $4.3 billion is added to the Maintenance Factor, resulting in an asserted outstanding Maintenance Factor of $9.5 billion at the end of 2010-11 – this assertion needs to be tested further

  24. Actual K-12 Spending B-3 • Spending to support K-14 education in 2010-11 will exceed the suspended level of Proposition 98 by an estimated $2.8 billion, reaching $52.5 billion • Appropriations that do not count toward Proposition 98, but will be available for expenditure include: • $1.9 billion K-14 apportionment deferral • $420 million from QEIA • $300 million from Proposition 98 prior-year settle up • $240 million in other one-time funds • These one-time sources will have to be replaced in order to maintain program levels in 2011-12

  25. Proposition 98 B-4 $52.5 Additional Actual Spending Proposition 98 After Suspension

  26. Major Changes from May Revisionto the Final Budget B-5 • May Revision: Reduced revenue limits by $1.5 billion • Final Budget: Fully restores revenue limit cut • May Revision: “Fully funded” negative 0.39% COLA • Final Budget: Holds school agencies harmless from negative COLA • May Revision: No funding for prior-year mandates • Final Budget: $300 million in one-time mandate funds, of which$100 million is for 2010-11 claims and $200 million is for prior-year claims allocated on a per-ADA basis • May Revision: Eliminated child care programs • Final Budget: Funding fully restored for licensed care providers • May Revision: Suspended existing AB 3632 special education county mental health mandate • Final Budget: No suspension of mandate to county mental health

  27. Revenue Limit Funding B-6 • The Budget agreement continues to recognize the negative statutory COLA of 0.39% • However, the effects of the negative COLA are eliminated through a lower deficit factor

  28. Revenue Limit Deficit Factors B-7

  29. Revenue Limit Funding B-8 • The Budget agreement rejects the Governor’s proposed $1.5 billion cut to revenue limits • This cut was targeted to district administration in the January Governor’s Budget and was amended at the May Revision to be unallocated • The Department of Finance (DOF) had estimated the impact to be approximately a 3.85% reduction based on the total undeficited base revenue limit • The elimination of this cut increases district’s funding above the May Revision

  30. Revenue Limit – Without Deficit B-9 • In order to determine your district’s funded revenue limit per ADA, you must first determine the undeficited revenue limit, i.e., the revenue limit including the statutory COLA, whether positive or negative • The appropriate dollar amount must be reduced from your 2009-10 base revenue limit to determine your undeficited base revenue limit per ADA in 2010-11

  31. Undeficited Revenue Limit – Example B-10 $6,411

  32. Revenue Limit After Deficit Factor B-11 • Apply the 2010-11 deficit factor of 17.963% to the undeficited 2010-11 revenue limit per ADA $1,147 (17.963%) Example for AverageUnified District = $6,386 x (1.0 - 0.17963) = $6,386 x 0.82037 = $5,239 $5,239 2010-11 Revenue Limit Before Deficit 2010-11 Revenue Limit After Deficit

  33. 2010-11 Final Budget vs. May Revision B-12 • The Budget agreement did not include the $1.5 billion revenue limit reduction, estimated to be 3.85% on the total undeficited base revenue limit • The Budget agreement eliminated the effect of the negative COLA with the lower deficit factor -$1,172 for 18.355% deficit

  34. 2010-11 Final Budget vs. 2009-10 Funding B-13 • 2009-10 revenue limits were reduced by the 18.355% deficit and the $253 per-ADA one-time reduction • Note: The $253 per-ADA reduction was related to the recapture of the 2008-09 “overappropriation” of Proposition 98

  35. 2010-11 K-12 Revenue Limits – Example B-14

  36. 2010-11 K-12 Revenue Limit – Your District B-15 • To calculate your district’s net funded revenue limit for 2010-11, go to the SSC website: http://www.sscal.com • Click on “Tools and Resources” • Click on “Base Revenue Limit Calculator” • Or use the following link: http://sscal.com/brl_calc.cfm

  37. Projected Statutory Revenue Limit COLAs B-16 • The statutory COLA for 2010-11 demonstrates a downward trend at negative 0.39% compared to 4.25% from last year • Projected out-year COLAs are not continuing the trend downward, but we would recommend caution in the use of the projected COLAs

  38. Apportionment Schedule B-17 • SBX4 16 (Chapter 23/2009) changed the statutory apportionment schedules, reducing the monthly distribution to LEAs in the beginning of the fiscal year to the 5-5-9 schedule • Does this mean that you will receive your apportionment as prescribed in the statute? Answer: No! • In the absence of a 2010-11 fiscal year Budget, the Advance Apportionment provides: • Revenue limits for school districts and county offices of education (COEs) • General-purpose entitlement for charter schools • Other continuously appropriated programs • The Advance Apportionment, without a State Budget, does not include an application of the deficit factor, or the May Revision’s proposed 3.85% reduction to the base revenue limit

  39. Deferrals 2010-11 B-18 * Inclusive of categorical funds Note: An additional deferral for K-12 of $1.7 billion from 2010-11 into 2011-12 fiscal year

  40. 2010-11 Apportionment Deferrals B-19 • Apportionment deferrals for LEAs continue to be the state’s solution to its own cash flow problems – making these problems worse for LEAs • The State Budget includes additional deferrals: • Permanent deferral in the amount of $1.7 billion with timing proposed for April/May 2011 to July 2011 • One-time deferral from October 2010 to November 2010 with the dollar amount to be determined • Remember the Generally Accepted Accounting Principles address the accounting treatment of deferrals that cross fiscal years • Verify with your audit firm before recording on your books

  41. Mandate Reimbursements B-20 • The Governor’s May Revision proposed to fund only two education mandates for 2010-11 (Interdistrict and Intradistrict Attendance, and the California High School Exit Exam) • The Budget agreement provides $300 million for mandate reimbursement claims • $200 million for prior-years claims paid on an equal amount per ADA with the oldest claims paid first • $100 million for claims in 2010-11 • This is good news!

  42. Mandate Reimbursements B-21 • Now, for the bad news • There are provisions in the Budget that attempt to void the state’s constitutional obligation to reimburse LEAs for their costs associated with two mandates • Behavioral Intervention Plans (BIP) – BIP language states that, if activities are state reimbursable mandates then state funding provided for purposes of special education in the annual Budget Act shall first be used to directly offset any mandate costs • Science Graduation Requirements (SGR) – SGR language states costs related to the salaries and benefits of teachers incurred by a school district shall be offset by the amount of state funding apportioned to the district in the annual Budget Act • Expect litigation to fight these provisions

  43. Schools Win Mandate Litigation B-22 • In the Clovis v. Westlycase, the Third District Court of Appeal ruled in the petitioner’s favor • The Court ruled that the State Controller’s Office (SCO) “Contemporaneous Source Document Rule” (CSDR) was an invalid underground regulation • As a result, SCO audits in four specific programs are overturned: • School District of Choice Program • Emergency Procedures, Earthquake Procedures, and Disasters Program • Intradistrict Attendance Program • Collective Bargaining Program • The SCO’s audits are invalidated for the period 1998 to 2003 • The SCO, however, can reaudit the claims as long as they do not apply the CSDR

  44. Mandate Suspensions B-23 • In addition to the BIP and SGR provisions, the Budget suspends eight education mandates in 2010-11 • For mandates that are suspended, LEAs are under no state requirement to provide the service and will receive no reimbursements even if they elect to continue the mandated program

  45. Special Education B-24 • Special education continues to be included in the Tier I state categorical program category – no cuts and no flexibility to transfer funds • The negative COLA of 0.38% has been restored for special education (AB 602) on the state share of funding • Growth is funded at $465.44 per ADA • ARRA funds may still be available if they have not been exhausted • There are differences between special education local plan areas (SELPAs) regarding how the funds were distributed

  46. SB 1381 – Kindergarten Entry Age B-29 • One of the byproducts of the State Budget crisis is that few significant bills impacting education have been signed into law • SB 1381 (Chapter 705/2010) is an exception • Changes the date for students starting kindergarten – they must turn five on or before: • December 2 for the 2011-12 school year • November 1 for the 2012-13 school year • October 1 for the 2013-14 school year • September 1 for the 2014-15 school year and each school year thereafter • Requires school districts to offer a transitional kindergarten program, which is phased in over three years beginning in 2012-13 • Defines transitional kindergarten as the first year of a two-year kindergarten program • Uses curriculum that is age and developmentally appropriate

  47. Categorical Flexibility andFederal Funding

  48. The World of Categorical Funding: Changes Big and Small C-1 • There do not appear to be any major changes to state programs for 2010-11 • Flexibility continues through 2012-13 with an uncertain future ahead • Federal funding increased, but it remains one time in nature • $1.2 billion in Federal Education Jobs money – new for 2010-11 • More than $9 billion in ARRA funding received to date, which must be fully expended by September 30, 2011 • About $415 million has been awarded in School Improvement Grants • Given the ongoing nature of state funding cuts, while categorical funding seems stable for 2010-11, the way in which such resources are viewed may necessitate change

  49. Flexibility Options Continue with the End in Sight C-2 • Past Budget Acts have included several coping strategies for districts including, but not limited to, categorical flexibility and school-year length • The options remain available for 2010-11, but the end is in sight and no clear plan for the future is yet known

  50. Flexibility Options Continue with the End in Sight C-3

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