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Governor Releases 2009-10 Proposed Budget, Political Quagmire Intensifies

By Tahir Ahad and Vernon Billy - January 9, 2009

"I'll be back" is the Governor's well-known one liner from the movie Terminator.  Well, he's back participating in this real life, but surreal budget battle and he's once again proposing another budget that calls for major funding reductions, particularly in education.

To his credit the Governor's New Years Eve budget continues to utilize a balanced approach to patch together a budget that can get the state through a few more months without going completely over the proverbial cliff.  Specifically, the Governor's budget proposes a temporary 1.5 cent sales tax increase, a broadening of the sales tax, borrowing, increasing vehicle registration fees, fund shifts and cash deferrals and major budget reductions across various state operations and programs.

Unfortunately, the political quagmire between legislative Democrats, Republicans and the Governor continues with no resolution in sight as of this writing.  The Republicans no tax pledge and Democrats desires to protect education, the elderly and low-income families continues to create significant challenges in reaching a budget deal.  And while these philosophical and budget differences may be legitimate, time is running extremely short before California runs completely out of cash in March and begins to issues I.O.U. to vendors, state workers and taxpayers.

As the Governor's office formally releases his entire state budget proposal today, the general expectation is that there will not be a major shift in his overall proposal to solve the budget crisis.  In the meantime, we have outlined some of the major proposals of the Governor's New Years Eve budget with our commentary.

In the current fiscal year, the Governor projects a deficit of approximately $14.8 billion and proposes to fund Proposition 98 at the minimum guarantee of $51.5 billion.

 

Governor's 2009-10 Education Budget – Proposed Current Year (2008-09) Reductions
(Note: Not all of the Governor's proposals are reflected below)


Proposal

Commentary

COLA - Eliminates the 08-09 COLA saving the State $247.1 million.

The elimination of the COLA mid-year may be problematic for some districts as they may have already adjusted employee salaries as a part of collective bargaining agreements.

Revenue Limit Deferral - A $2.6 billion multi-year deferral of school district & county office of education revenue limits & K-3 CSR payments from April to July.

This proposal has the potential to create major cash flow issues for many districts.  This proposal is designed to help the State solve its own cash flow problems.

Settle Up Funds - Counts $1.1 billion as prior-year Proposition 98 settle up funds.

This proposal essential allows the State to escape paying an additional $1.1 billion of prior year funds owed to schools due to updated Prop 98 data for those prior years.

 

In the budget year, the Governor proposes to fund the minimum guarantee at $55.9 billion and assumes his other budget proposals are adopted.

 

Governor's 2009-10 Education Budget  – Proposed 2009-10 Reductions & Flexibility
(Note: Not all of the Governor’s proposals are reflected below)

Proposal

Commentary

COLA - Provides a zero COLA for K-12, saving $2.5 billion.

Given the budget situation, this is no surprise.  The lack of a COLA will only compound districts' efforts to pay for ongoing costs.

Revenue Limits - $1.1 billion K-12 revenue limit reduction while allowing school districts to eliminate five days of instruction.

The critical point to note with this proposal is that is a "cut" first and the decision to whether reduce the school year up to five days to mitigate the cut is up to the school district.  Furthermore, for many districts, local collective bargaining agreements would prohibit such a reduction unless these agreements are renegotiated.

Mandates - Defers $150 million in mandate settle-up funds scheduled for 2009-10.

This funds were a part of an agreement to pay prior year unpaid mandates.  Due to the budget crisis, the Governor proposes to delay payment to school districts for mandated activities that were carried out approximately a decade ago.

Mandates - Suspends all K-12 mandates except for interdistrict and intradistrict mandates and the California High School Exit Exam mandate.

In light of a recent court ruling barring the state from deferring mandate payments, the Administration has taken a new approach to circumvent paying mandates by "suspending" the mandates.  This too is problematic as districts will continue to implement many of the suspended mandates such as collective bargaining.

Flexibility - Proposes major flexibility to school districts on reserve requirements and eliminates requirements for all categorical programs.  Specifically, the flexibility proposals include permitting school districts to do the following:

  1. Utilize categorical funds for any purpose after local public hearings.
  2. Reduce the K-12 local Routine Restricted Maintenance Account (RRMA) set-aside requirement from 3% of General Fund expenditures to 1%.
  3. Eliminate the K-12 Deferred Maintenance match.
  4. Reduce the state-required level of K-12 unrestricted General Fund reserves to half.

The most significant aspect of the Governor's flexibility proposal is the call to completely eliminate the statutory requirements associated with each of the categoricals.  Given the competing interest groups associated with many categorical programs and the varied impact each categorical has on individual districts, these proposals will surely receive significant debate in the legislature.

In addition, reduction in the RRMA set-aside may only provide limited help to districts as most districts use these funds to pay salaries for classified maintenance staff.  Thus, this proposal’s value to individual districts will vary significantly.

 

Other 2009-10 Education Budget Highlights

  1. $152.7 million reduction in K-12 funding due to the projected decrease in K-12 enrollment.
  2. $114.2 million cut that eliminates the High Priority School Grant Program.
  3. $268.2 million to backfill property tax revenues. 
  4. $83.2 million in growth for K-12 Adult Education, Child Nutrition, Charter School Categorical Block Grants, K-3 CSR, and the Teacher Credentialing Block Grant.
  5. $35.5 million increase for K-12 Deferred Maintenance.
  6. $398.5 million shifted from Public Transportation Account and Mass Transportation Fund resources to K-12 home-to-school transportation, maintaining $618.7 million in funding for this program from all sources.
  7. $287.5 million increase in CalWORKs child care funding, plus $18.9 million (1.23%) increase due to age four and under statutory growth.
  8. Shift $1.06 billion from the General Fund to K-14 education to replace Lottery revenues due to the securitization proposal.

In the end, there continues to be little progress in achieving a bi-partisan deal in the legislature that also has the support of the Governor and it appears as if the budget quagmire will continue for some time. This ongoing political stalemate is coming ahead as the state will run out of money in March, school districts must issue certificated layoff notices in March as they develop their budgets, the national credit markets remain tight as local governments look to external borrowing, and state and national revenues drop.

At this point, it is clear education funding will be cut in the current and budget years.  About the best thing the state can do for school districts and county offices of education in this environment is to reach a budget deal sooner rather than later so local education agencies can appropriately plan.  But, we won't hold our breath.

Maybe it's time for voters to decide the fate of the state's fiscal crisis as the state's Legislative Analyst's Office (LAO) suggested yesterday in its review of the Governor's budget.  Sounds good to us….the voters can do no worse.

Editor's Note: Tahir Ahad is President of educational consulting firm Total School Solutions, and Vernon Billy is President of Governmental Solutions Group, LLC,a policy consulting and legislative advocacy firm.