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Objections Raised to Last Minute Addition

State Budget Approved – Including Cap on Fiscal Reserves Vehemently Opposed by ACSA, CSBA

June 19, 2014

The California Legislature approved a new $156 billion state budget last Sunday, meeting its mandated deadline to produce a budget no later than June 15 with a few hours to spare.

But the budget process turned controversial during its closing hours, with the Association of California School Administrators (ACSA) and the California School Boards Association (CSBA) strenuously criticizing the last minute insertion of language in a budget trailer bill, which would cap the local financial reserves that school districts can maintain under many circumstances.

ACSA Executive Director Wes Smith and CSBA Executive Director Vernon Billy penned an 11th hour op-ed piece in which they stressed they “vehemently oppose this fiscally irresponsible proposal.” They continued:

It is inconsistent with the principle of subsidiarity – a key principle of the state’s new funding formula (LCFF). It also discounts the critical role that prudent budget reserves play in the ability of local educational agencies to maintain education programs during economic downturns.

The intrusive requirements… would force districts to spend down budget reserve balances that are twice the state minimum standard: 6 percent in nearly every school district. Should the (proposed) State Rainy Day Fund ballot measure (ACA 1) be approved in November, this proposal forces districts to spend down reserves when the state deposits money into its own state level school reserve, effectively imposing an absolute cap on the amount a school district would be allowed to maintain for economic uncertainties.

To enact these provisions is fiscally irresponsible and in conflict with the principles articulated by the Legislature in placing ACA 1 on the ballot. For most of the last two decades, California worked to prevent school district bankruptcies by enacting laws requiring multiyear projections, enforcement of strict fiscal standards by county offices of education, early intervention, and even the authority to override the spending decisions of local governing boards. It is therefore ironic that, at the very time an initiative has been placed on the statewide ballot to strengthen the state's rainy day fund, the Legislature would consider statutory changes eviscerating provisions at the local school district level based on the same premise of fiscal prudence and responsibility. The creation of a state Proposition 98 reserve does not eliminate the need for prudent local reserves.

The proposal fails to recognize the critical role that prudent budget reserves play in the ability of school districts to maintain fiscal solvency. For most districts, a 3 percent reserve requirement represents only six to eight days of payroll. This proposal would allow for a 6 percent reserve, which equals three weeks of payroll. Districts at the minimum level of reserves are vulnerable to any unanticipated financial developments, such as those currently facing districts in the form of increased contributions to CalSTRS and CalPERS, an rising healthcare costs due to the Affordable Care Act.

The Governor’s proposed increases in CalSTRS alone will phase in higher employer contribution rates for the next seven years: going from 8 percent to 19 percent, equating to $60 per pupil starting in the 2014-15 fiscal year. This is more than the increased level of funding many districts will receive via the new funding formula and will have major implications as boards are finalizing budgets and LCAPs. With last-minute surprises like this, it is essential that districts have tools at their disposal to effectively manage their budgets in the short and long term.

The proposal ignores recent history. Simply put, many school districts were able to survive the great recession only through prudent management of budget reserves. Prudent reserves allowed districts to avoid having to make even greater cuts to educational programs and reductions to certificated and classified staff due to budget reductions and deferrals.

This year the Governor and the leaders of the Senate and Assembly have eloquently articulated the need for California to strengthen its rainy day fund. As they have all noted, California revenues are volatile and, in many years, uncertain. Those uncertainties inevitably trickle down to school districts, and it is unclear why the state would propose a reserve policy for school districts that is entirely counter to the one being considered for the state. 

Last, we object to the process by which this language is being considered. This language was not proposed in the Governor’s January budget or the May Revision, and has not been discussed in any public hearing in either legislative house. The proposed language represents a permanent, significant fiscal and policy shift in education finance which should be publicly vetted before the language is voted on by the Legislature.

However, the arguments by Smith and Billy (as well as school district superintendents around the state) did not move Democratic legislators to remove the cap on school district financial reserves from the budget trailer bill.

The last minute insertion of the cap on fiscal reserves – and its swift approval by the Legislature, with virtually no debate – was also criticized in a number of newspaper editorials. The Los Angeles Times described the move as:

…An ill-considered mandate that could force local school districts to spend down most of their reserves in one fell swoop. Lawmakers should reconsider that requirement before it has the chance to scramble local school budgets. The proposal surfaced last week and had no formal public hearings.

The main advocates for the cap were Brown and the California Teachers Assn., which accused local districts of "holding back" dollars instead of spending them on students. And there is a certain logic to questioning how much state aid local districts should keep in reserve if voters approve an expanded state backup fund in November. But the measure lawmakers adopted is flawed in both letter and spirit. It would require districts to spend down any reserves above the cap – including amounts held for future textbook or technology purchases, as well as funds raised from local parcel taxes – the year after the state starts building its new rainy-day fund for schools, regardless of how little that fund may hold. Proponents note that the cap on local reserves is two to three times the minimum amount the state requires districts to keep, but that generally translates into only a few weeks' worth of payroll.

One ostensible purpose of the measure is to require districts to disclose more information about the money they're not spending. But the real rationale seems to be to stop districts from being cautious about the state's boom-and-bust revenues and from saving money before they spend it. It pushes the state in exactly the opposite direction of the Brown administration's laudable efforts to take fewer fiscal risks and to transfer decision-making authority from the state to the local school boards chosen by voters. The Legislature should undo this mischief the first chance it gets.

Other aspects of the new budget were less controversial. Outgoing Senate President Pro Tem Darrell Steinberg (D-Sacramento) expressed satisfaction that the budget bill includes state funding to support pre-kindergarten programs for California four-year-olds from lower-income households. Steinberg’s pre-K program is narrower in scope than his original proposal for the state to fund universal access to transitional kindergarten for all California four-year-olds – but that proposal drew a cool reaction from Governor Brown. As Steinberg noted in an interview with Capital Public Radio in Sacramento on the day after the budget vote, the best deal he could get (working with a popular incumbent governor) was funding to provide pre-kindergarten programs for lower-income students, so Steinberg said he was pleased to have taken the concept at least halfway fulfillment.

Steinberg is termed out; this week the California Senate elected Sen. Kevin de León (D-Los Angeles) as the next Senate President Pro Tem. De León will assume his new position in October, he will be the first Latino legislator to serve as Senate President Pro Tem in over 100 years.

In general, the newly approved state budget follows the contours of the Governors May Budget Revision. The budget includes $250 million to support Career Technical Education programs in schools, as well as $170 million to support student success and support programs at the community college level.

The newly approved budget now awaits the Governor’s signature, he is expected to sign the bill soon.

Source:  EdBrief staff