Budget Update October The Economics of Government Services California

							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?