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Keeping Perspective

The Economic Outlook and Education Funding

April 21, 2010 - By Brett McFadden and Tahir Ahad

The recession of the past two years now has an official name.  Economists and historians will from now on refer to it as the “Great Recession.”   The impact of the downturn has been sweeping.  And when all is said and done, it will fundamentally reduce public sector services in a manner that could require over a decade to completely restore.

 

Multi-year Outlook

We know when the recession started – the fall of 2007.  But has it really ended?  That answer is still anybody’s guess, and remains the focus of considerable speculation among state fiscal experts and stakeholders.

There are signs of encouragement, though.  State General Fund revenues have come in above the projected levels over the past three months.  National economic figures indicate that we could finally be bottoming out.  But while stock market, housing, consumer spending and export indicators are up from where they were a year ago, job creation remains stagnant with unemployment at an all-time high in California (12.6%).   High unemployment affects income levels and subsequent income tax collections.

So while it is likely that the worst has passed, there remain a number of unpredictable variables that can greatly effect economic growth in California and throughout the nation.  These factors, and others, continue to inform our assumptions regarding the following:

  1. A sluggish recovery – Signs pointing to a vigorous recovery have not emerged so far.  Most economists believe the outlook for economic growth for the next three years is modest, at best.  Positive job growth (replacement of jobs lost during the recent recession and the subsequent new growth) is not likely to occur until sometime post 2011-12. 
  2. California will lag behind – As has been the case in the past, our state is likely to be slower to recover than the rest of the nation.  California was more severely impacted by the recession, due to over-reliance on the housing price bubble to fuel property tax revenue increases.  Since the home prices remain stagnant, the state revenues are not likely to return to the pre-recession levels until sometime around 2012-13.  Revenues may indeed be rising next year, but they will not be in the same vicinity as were seen in 2006-07 (the high water mark for this decade)
  3. Public sector revenues often lag behind – Economic recovery influences the private sector before it does the public sector.  As a result, Proposition 98 education funding will take a little longer to realize any sizable jump in revenues.  Things will likely bottom out, but don’t expect sizable restoration of lost funding from the past two years until sometime after 2011-12.
  4. We’re still vulnerable because of other factors – Remember that California doesn’t just suffer from a fiscal crisis.  It was just as much a governance crisis, as it was fiscal, that brought about many of K-14 education’s current challenges.  The state continues to experience sizable deficits and has accrued a number of non-education related fiscal obligations that may continue to challenge its ability to restore Proposition 98 funding for the next two fiscal years.  Stabilization of Proposition 98 funding and some modest gains are possible in 2010-11, but there are no indications that the state will be in a position to begin paying back what it owes to K-14 education for at least another year.

 

Recommendations

As you might have guessed, our recommendation is to stay your current course financially.  Your agency should continue to assume the cuts projected from the Governor’s January 2010-11 budget.  Most districts and county offices have already taken action to develop and adopt reductions in light of this scenario.

Continue to monitor your cash positions and maintain adequate balances and reserves, in case things suddenly “go south” again.  Some economists believe we could be vulnerable to a “double-dip” recession, should the recovery stall or be impacted by some other unexpected occurrence.

In addition, be cautious of trading collective bargaining language in lieu of money.  It has been at least three years since most of the bargaining units have seen any increases in their compensation packages.  We are aware of many instances where bargaining units have proposed contract language and other so-called “non-monetary” concessions for management to consider and adopt.

Employee unions may seek additional non-monetary benefits (more no tell days for example), propose “maintenance of standards” language, or seek greater involvement and authority in traditionally management-related matters.  Be very careful of the out-year financial implications of such language.  These changes could not only restrict management’s ability to operate effectively, but also end up costing you in the long run.  Remember that every questionable contract or contract clause was once agreed to and subsequently adopted by management.  Labor peace is important, but it has its price.  National and state academic accountability requirements aren’t going away – be mindful of your ability to allocate resources to meet those demands and direct your district or county office in an appropriate manner.

Finally, remember that all these challenges will one day pass.  But our employees, students and communities will forever remember how they were lead during this time.

Editor’s Note: Brett McFadden is Management Services Executive at Association of California School Administrators (ACSA)  and Tahir Ahad is President of educational consulting firm Total School Solutions (TSS).