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Bracing for Still More Cuts:

Education Budget Outlook Grows Dimmer

By Tahir Ahad (TSS), Adonai Mack and Brett McFadden (ACSA) - June 5, 2009

In what has become a nightmare situation for educators, additional developments occurred this week that essentially solidify the likelihood of another round of possible reductions in the state budget, and virtually assure more cuts in 2009-10.  These reductions will be in addition to those that were implemented this past February.   

The size of the cuts

The size of these additional reductions are enormous, especially when factored with the total reductions K-adult programs will incur over a two-year period.  Last February’s 2008-09 and 2009-10 reductions amounted to over $5.15 billion, or roughly $860 per student.  Now lawmakers are considering another round of reductions and further cuts in 2009-10.  The total for this second round could be $6 billion, or nearly $1,000 per student. (Note that the actually per ADA reduction felt by Local Educational Agencies, or LEAs, will be lower since this figure includes possible apportionment shifts).

What is driving this?

A number of factors are behind this latest round of education cuts:

Economic:  The state’s economic condition continues to worsen.  California has been disproportionately impacted by this recession.  While there is evidence that national economic conditions are beginning to bottom out, state economic forecasts at UCLA and UC Santa Barbara indicate that California’s economic situation will remain dim well into 2010-11.  Statewide unemployment is now slightly above 11% with many regions experiencing levels not seen since the Great Depression.  Some analysts predict that state unemployment levels will continue to increase before peaking at the end of 2009-10.

Political:  The fallout from the defeat of the May 19 ballot initiatives means that additional taxes (above that of the temporary two-year measures agreed to last February) are largely off the table.  The six Republican legislators that agreed to last February’s budget package have lost their leadership jobs and become persona-non-grata in their own party.  No remaining Republican lawmaker will vote for substantial tax increases.  Consequently, Democratic lawmakers have even changed their tune.  Legislative discussions are now focused on the cut side of the equation rather than on raising new revenues.  For the time being, conservatives appear to have won this round of the ideological “tax and spend” debate.

Revenues and Proposition 98:  Lower economic output results in lower tax revenues.  The state’s Department of Finance reports that overall state tax revenues are down more than 27% over a two-year period.  We have not seen this degree of revenue decline since the 1930s.  Since Proposition 98 is directly linked to state economic performance, the Minimum Guarantee continues to drop precipitously in both the current and budget years.  The Proposition 98 guarantee has dropped so fast, and at such a rate, that its decline has allowed state lawmakers and the governor to whack education at unprecedented amounts without having to suspend the Minimum Guarantee.

State’s cash flow:  The state’s cash condition is at emergency levels.  The State Controller estimates the state will run out of sufficient cash to meet obligations by the end of this month, perhaps early July.  The state’s borrowing capacity is even more restricted than it was earlier this year.  As a result, the cash flow situation will be the hammer that drives a June or early July budget revision adoption.

Federal MOE (Maintenance of Effort) question answered:  A final blow this week was the Obama administration’s approval of California’s revised application for federal stimulus money.  The revised application clears the way for the state to cut education spending by the amount outlined above without jeopardizing federal maintenance of effort requirements spelled out in the federal stimulus requirements.  Schwarzenegger finance officials stated several weeks ago that they made a mistake in assigning $2 billion in state education spending to 2005-06 when it should have supposedly been spent in 2006-07.  While timing of this mistake was suspiciously fortuitous for the governor, the federal Department of Education approved it, thereby clearing the way to reduce state education spending without losing federal stimulus money.

What’s going to happen?

Our crystal ball shattered many months ago.  But the general wisdom is that the state’s cash flow situation, along with political fallout associated with the recent defeat of the May 19 ballot initiatives, will pressure lawmakers and the governor to adopt a revised 2009-10 budget plan closer to July 1.  This is demonstrated by the quickness with which the Legislature is moving to address the current deficit.  This week the Joint Legislative Budget Conference Committee took up the education portion of the budget with the goal of closing the conference committee by next week.

As mentioned above, the budget conversation reflects the failure of the ballot initiatives and focuses solely on budget cuts.  There is no debate about taxes, or fee increases.  Consequently, the budget could include school district revenue limit reductions in the current year and additional cuts to school district revenue limits in the budget year.

Further, it is evident that legislative leaders agree with the governor’s proposal to massively reduce funding for the Home-to-School Transportation categorical program.  The governor’s administration has proposed a nearly 65% reduction to that program’s 2009-10 funding.

While there are several education policy issues that will be put off until later in the legislative session, there are a few that will be tied directly to budget negotiations.  These include shortening the school year up to 7.5 days, and the lowering the voter threshold for local parcel tax adoption.  It is unclear what the final resolution will be, but there is a continued discussion within the Capitol on those policy issues.  It is possible that additional policy flexibility will be added to what was enacted last February.  But with the majority of the proposed reductions being targeted to LEA revenue limits, additional categorical flexibility could be limited.

Alternatively, the speed with which the Legislature is acting on the deficit will likely leave several other policy issues unaddressed during the budget negotiations.  These policy issues include the treatment of the instructional materials adoption process and state mandated costs.  The situation is very fluid and subject to change overnight.  We will provide further updates and analysis as things progress.

Preparing for more reductions

Although we have been expecting “the other shoe to drop,” the magnitude of the expected reductions is more than anyone projected. These unusual times call for unusual measures – even ones that go against conventional wisdom.

Many districts and county offices are, if not already, in survival mode.  We do not have the luxury of choices; much has already been cut.  If there were ever any easier solutions, we have already implemented them and have gone way beyond our comfort zone.  But LEAs will still be required to educate their students.  Therefore, all budget, program, and personnel decisions should be executed cautiously in the context of your LEA’s core needs and long term fiscal viability.

We recommend, to the extent feasible, that you maximize available one-time resources, accompanied with all allowable categorical flexibility, to avoid reductions in critical instruction-related programs during the 2009-10 and 2010-11 school years.

You may also need to consider August 15 layoffs as a way to balance against revenue reductions and program survival during this two-year period.  (Click this link to read the August 15 layoff advisory:  http://www.educationmediagroup.com/hr090529_Aug15Layoffs.php).  

Your federal stimulus dollars will likely be the only lifeline you have to weather 2009-10 and 2010-11.  The intent of that money was to save vital programs and people during this time.  Budget decisions made in the next few weeks should be carefully deliberated knowing that we face two very challenging years with limited one-time funding.

The need for additional reductions is not likely to go away anytime soon.  But the timing of these additional current-year and 2009-10 cuts is such that LEAs will not have as many options as they have had in the past.

Editor's Note: Tahir Ahad is President of educational consulting firm Total School Solutions (TSS), Brett McFadden is Management Services Executive at Assocation of California School Administrators (ACSA) and Adonai Mack is a Legislative Advocate for ACSA.