Budget Update October The Economics of Government Services California
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Budget Update October 7, 2008 The Economics of Government Services California provides more services to more people at a higher cost than other states – except in two areas – K-12 education and transportation Transportation is catching up – Proposition 42 and federal funding actions have bolstered California’s commitment to transportation systems Education is falling further behind ● In an essentially flat education budget, while costs are growing and other states are increasing funding guarantees, we fall further behind ● But expectations for our children continue to grow ● And 41st place, or worse, will not improve our Program Improvement (PI) schools and districts There is no will to tax more or spend less, so the problem gets worse More people, more services, stagnant revenues – how do we break the cycle? The Political Landscape We argue that California does not have a Budget problem – it has a political structural deficit that leads to bankrupt fiscal policy and causes repetitive Budget problems ● During good years, we overspend and make long-term commitments ● During bad years, we use stop-gap measures and borrowing to get through a year at a time until we get another good year Education costs do not add to the Budget problem – they rise proportionately to new revenues ● But failure to educate California’s children handicaps and impedes all future economic growth No new revenue + increased costs = yet another Budget crisis The Budget problem is a subset of the political problem, and they get solved together or neither gets solved The Long Road Traveled Look at the road we have traveled this year ● The January Budget suspends Proposition 98 and takes $4 billion from education ● The May Revision withdraws suspension, but still cuts education by nearly $3 billion ● The current Budget, AB 1781, still cuts education by about $2.5 billion ● And yet none of these proposed Budgets is balanced in the longer term – nor do they deal with the structural causes of the deficit Every one of these Budgets is balanced using assumptions for revenues that do not yet exist – hope is not a plan The Long and Short of Budget Solutions In the short term, the Budget is balanced by: ● Budget cuts ● Closing tax loopholes ● Using one-time dollars and solutions ● Slowing cash flow to schools to reduce borrowing costs Longer-term issues are addressed by: ● A plan for securitizing Lottery revenues ● Enhancing the Budget Stabilization Fund The real hope for long-term stability is that we have all good years –starting soon The Education Budget Protecting funding for education was one of the rare areas that the two parties agreed upon during Budget negotiations ● Education flew under the radar, while debates raged over taxes and cuts to noneducation programs But it’s hard to feel unharmed when one considers that this Budget reinforces California’s position at the top of some lists and the bottom of others: ● Spending per student lags most other states in the country We’re no better than 47th when regional cost differences are considered ● California has more schools and districts in Program Improvement (PI) than any other state (as a percentage of all and in total numbers) Managing in a Tough Year Management is simply defined as applying resources to missions to optimize output ● It is harder to manage unknown or limited resources ● Options are taken away when resources are volatile ● The dollars just don’t go as far as they would if planning time and adequate funding were allowed All of the normal processes become more difficult ● Cash flow management ● Collective bargaining ● Health and welfare benefit management Good management becomes tougher, but is even more important Budget Reform – Mid-Year Cuts The Legislature’s Budget plan authorizes the Governor to make midyear reductions to certain state programs ● Reductions can occur when either revenues or expenditures “substantially” deviate from the budgeted level ● Local assistance funding, including K-14 support, is exempt from midyear reductions under this authority But this authority was not required for the midyear cuts in the past ● Higher education and state operations may be cut up to 7% Cost-of-living adjustments (COLAs) may be suspended in order to mitigate the conditions of a fiscal emergency ● The COLA suspension does not apply to revenue limit funding for K-12 districts or county offices of education (COE) Securitization of the California Lottery Securitization of the California Lottery continues to be a key Budget balancing technique Lottery revenues are assumed to double with the increase used to service long-term debt The impact on education: ● Short term: Lottery revenues would no longer go to public education Beginning in 2009-10, they would be capped at 2008-09 levels and replaced with General Fund dollars, increased by the COLA each year Proposition 98 would be re-based to make the proposal neutral ● Long term: Education no longer shares in growth in Lottery revenues, which would be pledged to bondholders Must be approved by voters Proposition 98 At the May Revision, the Governor proposed $56.8 billion for Proposition 98 in 2008-09, the minimum guarantee This funding level was insufficient to fund the COLA and required cuts to categorical programs of 6.5% except for special education However, January cuts to revenue limit and special education were restored The Legislature’s Budget increased the minimum guarantee to $58.1 billion Rejection of the Governor’s Lottery securitization proposal for 2008-09 and the addition of accelerated tax payments resulted in a higher guarantee The additional education funding was used to eliminate the categorical program cuts and fund a small .68% COLA Test 3B funding in 2008-09 also results in a $1.9 billion Maintenance Factor obligation Revenue Limit COLA No equalization aid funding is provided in the budget No additional funding is provided for declining enrollment districts Districts still have the ability to use the greater of current or prior-year ADA – some adjustments may be necessary Dollar Increase Statutory COLA District Type from .68% Undeficited Funded COLA All Elementary Districts $315 $38 All High School Districts $379 $46 All Unified Districts $329 $40 State Mandates The Legislature’s Budget plan deletes $150 million for deferred mandate reimbursements These funds were included in the Governor’s January Budget and the May Revision, but were deleted in the “August Revision” These funds were appropriated in the 2004 Budget Act as part of the “settle up” of prior-year amounts owed under Proposition 98 K-12 districts and COEs are owed more than $1.1 billion for deferred mandate payments ● Includes $92 million in interest and $451 million for never-funded mandates, according to the State Controller State Categorical Programs No COLA, but the 6.5% categorical program cuts proposed at May Revision are replenished in AB 1781 But there are plenty of reasons to be cautious Should midyear or future Budget cuts be necessary, state categorical programs will likely come before the revenue limit Furthermore, while flexibility proposals are on hold for now, they may reemerge if cuts are necessary in the future Ending balances provide a source of cash for the future and potential options to shore up reserves if transfer flexibility is made available It’s always easier to add money back later than to take it away again Federal Funding Update 2007-08 2008-09 President’s Actual Estimate Difference 2009-10 Proposal* Title IV (Safe and Drug Free $41 million $35 million <14.6%> $12 million Schools) Title V – Part A – Innovative $12 million $0 <100%> $0 Programs Title V – Part B – 21st Century $127 million $132 million <3.4%> $92 million Learning Centers Career and Technical Ed Grants $129 million $128 million <0.8%> $0 Special Education $1.150 billion $1.165 billion 1.3% $1.198 billion *Congress is crafting its version of the 2009-10 Budget, which likely won’t be finalized until after the November election Source: United States Department of Education, updated September 2008 The Use of Multiyear Projections Multiyear projections are required by AB 1200/AB 2756 Recognize that they are projections, not forecasts Projections are expected to change as various factors change – they are not predictions Projections are the mathematical result of today’s decisions based on a given set of assumptions Forecasts are predictions of the future – there is a higher implied reliability factor than for projections Projections will change any time the underlying factors change – plan accordingly, but do plan! Additional Cash Deferrals The state’s cash problems have hit local agencies in past years with the deferral of the June Apportionment from June to July Tough economic times have again pushed the state’s cash issues to local educational agencies (LEAs) in 2008 ABX3 4 deferred the majority of the Advanced Apportionment from July to September – for 2008-09 only AB 1781 includes language that will defer a portion of the February 2009 Principal Apportionment payment and K-3 Class-Size Reduction to April 50% will be received in February and the remaining 50% after April 20, 2009 Exceptions will be considered by the DOF for hardship if requests and documentation are provided by November 1, 2008 The Structural Budget Gap Nothing that was done in this year’s Budget will help avoid serious cuts in next year’s Budget The Lottery securitization plan is a long way from being a done deal Over the past several years, all of the one-time solutions have been used up – and yet the structural deficit remains We see 2009-10 as being more difficult than 2008-09 Revenues will remain relatively flat Expenditures continue their inexorable march upward Borrowing will be difficult and expensive There will be political fallout from this year In the past, we have had structural problems year after year until we have gotten lucky and the economy has turned around What Are the Budget Risks? If everything goes as planned in 2008-09, Budget writers acknowledge a $1.5 billion shortfall in 2009-10 What could possibly go wrong? The economy slips into recession A mere 3% shortfall in revenues could take away $3 billion The Lottery securitization plan is rejected by voters, eliminating $5 billion in 2009-10 A court orders the state to pay $3 billion for prisoner medical care facilities The bottom line: The State Budget faces huge downside risks Long-Term Economic Woes The state economy continues to weaken California’s jobless rate increased to 7.7% in August, trailing only Rhode Island and Michigan, and the state lost 7,700 jobs State revenues were short $124 million in August Not much, but short nevertheless Home prices are down 40% from one year ago The national economy suffers from the subprime mortgage debacle, high oil prices, the collapse of major national financial institutions, and an ongoing war Will the Fed’s recent action to buy out troubled companies to stem this collapse be successful? Major economic uncertainties lie ahead and the California State Budget is not prepared What Does it Mean for Our District? Budget Changes Revenue 75 ADA increase $418,405 .68 % Funded COLA 225,960 Total $644,365 Expenses 5 Teachers $328,346 5 Special Education Teachers 300,775 1 Autism Specialist (est. partial year) 71,013 .5 Psychologist (est. partial year) 39,665 NPS/NPA Services -200,000 Special Education Legal -65,000 .68% Salary Settlement 262,465 Total $737,264 Current Budget MYP 2008/2009 2009/2010 2010/2011 Beginning Balance July 1: 7,175,210 3,154,197 1,629,212 Revenues: 49,639,650 49,137,437 49,963,129 Expenditures: 53,660,662 51,112,422 52,245,728 Budget Reductions* -450,000 -2,300,000 Projected Ending Balance June 30: 3,154,197 1,629,212 1,646,613 Reserved Amount/Stores: 35,000 35,000 35,000 3% Economic Uncertainties: 1,609,820 1,519,873 1,498,372 UNDESIGNATED: 1,509,377 74,339 113,241 Current Budget MYP 2008/2009 2009/2010 2010/2011 Budget Reductions* 0 -450,000 -2,300,000 2008/2009 ongoing -450,000 -450,000 2009/2010 close school site -450,000 2009/2010 ongoing -1,400,000 *Board Agenda Item S-20-07/08, April 15, 2008 Questions?