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Governor Signs 2014-15 State Budget, Analysts Offer Differing Views Regarding the Details

July 7, 2014

Governor Jerry Brown signed the 2014-15 State Budget on June 20. The Governor’s Press Office issued a statement that said (in part):

"This on-time budget provides for today and saves for the future," said Governor Brown. "We're paying off the state's credit card, saving for the next rainy day and fixing the broken teachers' retirement system."

The budget includes a plan of shared responsibility among the state, school districts and teachers to shore up the State Teachers' Retirement System (STRS). The first year's contributions from all three entities total approximately $276 million, growing in subsequent years to more than $5 billion annually. This is projected to eliminate the unfunded liability in the system by 2046.

The budget also directs $1.6 billion into the state Rainy Day Fund – the first deposit into the fund since 2007. The fund is expected to grow to $4.6 billion by 2017-18, if voters approve of the measure on the November ballot that was proposed by the Governor and passed by the Legislature.

The Association of California School Administrators – which had been highly critical of language limiting school district budget reserves that had been inserted at the 11th hour in a budget trailer bill – responded with a detailed budget analysis, which said (in part):

The best gift a father could ever receive is the passage of a state budget on Father’s Day. On Father’s Day, the June 15th Constitutional deadline for passing a state budget, the Assembly and Senate each took the floor to pass the State Budget Act of 2014. Now that California no longer requires a “Supermajority” (i.e. Republican votes) to pass the state budget, there is very little drama about passing the budget at the last minute. The most dramatic event to occur during the 2014 budget vote was the concern from ACSA and other school management groups on budget trailer bill language that highlights local budget reserves and caps these reserves when the state makes a contribution to the Public School System Stabilization Account (i.e. proposed Proposition 98 reserve account). While the Legislature negotiated a budget that met many of their needs such as increases in preschool investments and expanding health care services, Governor Brown received a budget very similar to his proposals in January and May. The revenue package is significantly closer to the governor’s estimates and many of the policy objectives proposed by the administration were adopted.

District Budgetary Reserves for Economic Uncertainty and Ending Balances

The most controversial aspect of the budget is the correlation between the state’s Rainy Day Fund for public education and local district reserves. It is important to note that there are two separate requirements. One requirement applies to school district budgets adopted on or before July 1, 2015 for 2015-16 fiscal year, and another that will apply only in some future year if certain conditions related to the Public School System Stabilization Account (also known as the Proposition 98 “rainy day” reserve) are met.

The first requirement relates to the public hearing at which school district budgets are adopted by governing boards. In addition to existing requirements, commencing with budgets adopted for the 2015-16 fiscal year, any governing board that proposes to adopt a budget that includes a reserve greater than the minimum recommended reserve for economic uncertainties must provide the following for public review and discussion:

  1. The minimum recommended reserve for economic uncertainties for that fiscal year;
  2. The combined assigned and unassigned ending fund balances that are in excess of the minimum recommended reserve in the budget proposed to be adopted for that fiscal year; and,
  3. A statement of reasons that substantiates the need for an assigned and unassigned ending fund balance that is in excess of the minimum recommended reserve.
    The requirement for 2015-16 school district budgets does not include a cap on reserves, but it does require school district governing boards to publically discuss and defend proposed reserve amounts above the minimum recommended reserve for economic uncertainties.

The second requirement contained in the budget attempts to create a cap on budget reserves. This provision is only triggered if a transfer is made into the Proposition 98 reserve. Therefore, the provision will not become effective unless the “Rainy Day” initiative (placed on the ballot by enactment of ACA 1) is passed by California voters in November 2014. Assuming the initiative passes, the specific provisions for a transfer to the Proposition 98 reserve must be met before the trailer bill “cap” on budget reserves is effective. As a reminder:

  1. There is no transfer to the Prop. 98 reserve until after the maintenance factor for all fiscal years prior to 2014-15 is paid off.
  2. There is no transfer to the Prop. 98 reserve unless we are in a “Test 1” year, meaning the amount calculated under Article XVI, section 8(b)(1) [Test 1]is greater than the amount calculated under section 8(b)(2)[Test 2].
  3. There is also no transfer to the Prop. 98 reserve in any year in which maintenance factor is created, or if Prop. 98 is suspended.
  4. Assuming the above conditions are met, then in the fiscal year following the year of a transfer into the Proposition 98 reserve, there is a cap on school district budget reserves as follows:
  5. For districts with less than 400,000 ADA (everyone but LAUSD), the proposed adopted budget may not have a combined assigned and unassigned ending fund balance that exceeds twice the amount of the minimum recommended reserve for economic uncertainties.
  6. For districts with more than 400,000 ADA, the cap is three times the minimum recommended reserve.

A district that wishes to exceed this cap must request an exemption from the county superintendent of schools, who may grant the exemption for up to two consecutive years within a three year period, if the district provides documentation of extraordinary fiscal circumstances that includes:

  1. A statement that substantiates the need for a reserve in excess of the “cap”;
  2. Identification of the funding amounts associated with the extraordinary fiscal circumstances;
  3. Documentation that no other fiscal resources are available to fund the extraordinary circumstances.

To read the complete ACSA analysis of the 2014-15 state budget, click here.

The California Budget Project also offered an analysis of the new budget, taking the view that the budget represents “a missed opportunity” in terms of restoring programs serving families.

Signed into law on June 20, 2014, the 2014-15 budget package places a heavy emphasis on fiscal austerity – prioritizing paying down debt and saving for a rainy day – with only modest progress made in reinvesting in a variety of core public systems and services that were battered by cuts in prior years. The budget package – which has $156.4 billion in total state spending ($108.0 billion General Fund) – includes plans both to reduce budgetary debt (the so-called “Wall of Debt”) by up to $10.7 billion in 2014-15 and to begin paying down unfunded liabilities in the California State Teachers’ Retirement System. The budget also includes a $1.6 billion transfer to the state’s rainy day fund, the Budget Stabilization Account.

Yet despite increased revenues and an improving state fiscal outlook, the 2014-15 spending plan takes only a small step toward boosting support for public services and systems that are operating at severely diminished levels of funding in the aftermath of the Great Recession, including child care, higher education, and safety-net services for low-income seniors and people with disabilities.

Although the budget agreement includes funding to expand access to the state preschool program and slightly increases cash grants for families in the CalWORKs welfare-to-work program, it does not include several legislative proposals that would have further boosted critical support for low income families. At the same time, the enacted spending plan continues the persistent trend of higher state corrections spending.

The 2014-15 budget agreement represents a missed opportunity to reinvest in California’s families and communities and help foster broadly shared prosperity. New revenues, coupled with an improving economy, provided an opportunity for policymakers to strike a better balance among paying down debts and liabilities, saving for a rainy day, and ensuring that the state’s budget is working for Californians still struggling to make ends meet in the aftermath of the worst economic downturn in generations. With poverty rates and long-term unemployment still high, widening income inequality, and a safety net severely weakened by years of funding cuts, the budget agreement reflects a choice of austerity over prosperity, leaving many California families and communities, once again, waiting for next year.

To read the complete California Budget Project analysis of the budget, click here.

The California Teachers Association issued a press release saying the CTA is pleased with the budget – including the budget reserve language that drew strong objections from ACSA and the California School Boards Association. The press release said:

(The CTA is) encouraged by the 2014-2015 budget that lawmakers approved (June 15). The spending plan increases per-pupil funding, places new transparency and accountability regulations on local district reserves, and sets in motion a 32-year plan to strengthen the California State Teachers’ Retirement System (CalSTRS) where districts, the state, and employees will collaboratively bear the costs of funding the retirement system’s unfunded liability.

“Our students and our schools will benefit greatly from the new spending plan,” said CTA President Dean E. Vogel. “It continues the process of restoring funding to schools that were devastated by more than $20 billion in cuts in recent years. It will help our schools attract and retain our highly qualified educators by shoring up CalSTRS and keeping the promise made to our dedicated school staff that they will have a secure retirement after a lifetime of devoted service to our students.”

The trailer bill will channel more dollars to the classroom by capping the amounts districts are able to hold back in budget reserves when the state’s own education rainy day fund—the Proposition 98 reserve—provisions are triggered.

“Our children have endured years of devastating budget cuts, and Californians overwhelmingly voted to pass Proposition 30 to keep the cuts from happening. It is unacceptable for districts to sit on up to 30 percent budget reserves when California ranks 50th in per pupil expenditures nationwide,” Vogel said. “Transparency is in order and the time is now.”

The Oakland-based Education Trust – West issued a statement by Valerie Cuevas, Interim Executive Director, following Governor Brown’s signing of the 2014-2015 state budget today:

“We commend the Governor and the Legislature for accelerating the implementation of the Local Control Funding Formula (LCFF) by providing an additional $4.7 billion in the 2014-15 budget. This additional funding will strengthen the work of school districts to serve our neediest students and close achievement gaps. Unfortunately, we remain concerned about two issues. The Governor and the Legislature chose not to designate additional funding for implementation of the Common Core State Standards. All students will be subject to more rigorous state standards and assessments, but not all students will have access to fully prepared teachers, and adequate technology and instructional materials. As a result, opportunity and achievement gaps could be exacerbated rather than narrowed. Furthermore, the plan for increasing employer contributions to the California State Teachers Retirement System (CalSTRS) will double the cost of retirement benefits for school districts without a plan for funding the increased contributions. Without a plan for additional funding, the increased contributions to CalSTRS will be paid at the expense of funding for the LCFF, including supplemental and concentration funding for needy students.”

Sources:  EdBrief staff, Governor’s Press Office, Association of California School Administrators, California Budget Project, California Teachers Association, Education Trust – West