Governor�s Proposals for the 2008-09 State Budget and K-12

Governor’s Proposals for the 2008-09 State Budget and K-12 Education And the Potential Impact to Stanislaus Union School District 2007/2008 and Forward Wayne Brown, Superintendent Dawn D. Riccoboni, Chief Business Official Introduction  This is a year of contrasts   i The State-of-the-State message emphasizes the positives The Governor’s Budget Proposals slash and burn  Over the past five years, the fundamental economics have been either good or great  But the State Budget has been difficult every year – why? Introduction  California’s budget has two parts: revenues and expenditures ii  Expenditures have moved predictably higher  No political will to cut anything  Revenues are beyond the control of the state – almost random  The Budget looks good when revenue forecasts are high and bad when they are low Unanticipated revenue windfalls have rescued the Budget ● This year, weaker-than-forecast revenues sink it   Revenues are clearly the independent variable in the equation  And forecasts have often missed the mark by a mile Introduction  Contrary to the Governor’s assertion, we do have a revenue problem  iv The cost of government services does not go down when revenues are weak California and the United States clearly operate on a growth model   A reasonable solution to the Budget crisis would consider both revenues and expenditures  The Governor has not done this Introduction  Cuts to all government services – education, parks, prisons, and health and welfare – make voters mad  v As they should  We hope the Legislature will negotiate a more balanced solution to this crisis  This problem was created in Sacramento  Is there a will to solve it there? Overview of the State Budget and the State Economy Is This a Good Education Budget?  In a word – No! A-1  This is the year all past sins come to the fore  The Governor says we don’t have a revenue problem, but the revenue budget has dropped like a rock  As a result, Proposition 98 is overfunded in the current year and does not have enough growth to fund COLA in the budget year  But the Governor’s proposals go beyond reducing Proposition 98 to the floor  The Governor proposes suspension of Proposition 98  The Governor’s cuts to K-12 education total $4.4 billion in 2008-09  And the losses don’t stop there Mid-Year Actions Under Proposition 58 triggering the following:  A-3  The Governor has declared a “fiscal emergency” under Proposition 58, The Legislature is now called into Special Session to deal with the Budget crisis The Governor must submit a plan to address the Budget imbalance   The Legislature must adopt a plan to address the problem by March 15 (that is, within 45 days of the declaration) otherwise it may not act on any other legislation and it may not adjourn ● The plan must be adopted by a two-thirds vote of the Legislature, allowing the savings to take effect immediately Governor’s Approach to 2008-09  The effect of the suspension working from the revised 2007-08 base revenue limit:   A-7 COLA is declared at 4.94%, but not funded Revenue limit deficit is imposed at 6.99% of new base revenue limit The 2.4% revenue limit reduction is from the 2007-08 base before mid-year cuts Most categorical programs have a net loss of about 6.5% from the 2007-08 pre-mid-year cuts base  The overall reduction to revenue limits for 2008-09 is about 2.4%   Governor’s Approach to 2008-09  Special education is especially hard hit    A-8 No COLA Cuts from prior-year levels Increased costs  No help from the feds  Education loses more than $4 billion Budget Summary the Governor’s proposal cuts K-12 education by $4.4 billion  A-27  Compared with full funding for COLA and growth for programs in 2008-09, These cuts average about $740 per ADA from 2008-09 full funding levels Saying it another way . . . Governor’s proposal is for 2008-09 funding to be about $1.8 billion less than current year, equal to average cuts of:  $129 per ADA from Revenue Limits  $30 per ADA from Special Education  $146 per ADA from Categoricals  Total loss of about $305 per ADA from current year levels! Potential Impact to Stanislaus Union  2007/2008  Mid-Year Reduction to Revenue Limit of .5% = $87,000 less  2008/2009    Including deficited Revenue Limit and Declining Enrollment, the impact is roughly $553,000 less Special Ed revenues roughly $76,000 less Other Categoricals roughly $223,000 less Long-Term Solution  Governor again proposes spending limits A-33  Budget Stabilization Account  Transfer of Budget reduction authority to the Governor  Limit expenditure growth to revenue growth 4.94% Statutory COLA  In most years, the statutory COLA is a key number in the Governor’s Budget Proposal B-7  But for 2008-09, since the COLA is more than offset by the proposed across-the-board cut, the COLA is essentially irrelevant in the Budget year  The 2008-09 statutory COLA is estimated to be 4.94%  But if the final COLA announced in May is higher or lower, the deficit factor will be adjusted to offset that change, yielding no net change ● Unless the May Revise shows a very different fiscal picture Revenue Limits – COLA and Deficits B-10  Governor proposes to allocate the 4.94% estimated COLA, but then cut revenue limits by 6.99%  6.99% deficit reflects 10.9% cut on state share of revenue limits and no cut on property taxes  Net result is a 2.40% cut for the average district, but cut will vary by district Start calculating revenue limits by increasing the base revenue limit by:  All Elementary Districts All High School Districts All Unified Districts $275 $330 $288 See CD-ROM for the Revenue Limit worksheets showing where the 6.99% deficit gets applied Revenue Limits – Hourly Programs cut by 10.9% B-16  Funding for the hourly programs is increased by the 4.94% COLA, but then  Resulting hourly rate is estimated to be $3.81 – down from $4.08 in 2007-08  Plus – chronic shortfalls in funding for the hourly programs are expected to continue, so plan on further deficits as follows (all of which are the same as our current estimates of deficits in 2007-08):    K-12 Core Academic Program – 12% Grade 2-9 Remedial Program – 14% Grade 2-6 Remedial Program – 28% State Mandate Reimbursements B-17  The Governor’s Proposed Budget defers funding for state mandates again  The 38 mandates still are required because of the $1,000 per mandate in the Budget Proposal  $38,000 in Budget as compared to an estimated $160 million in new claims projected in 2008-09  The Budget also proposes $150 million for both 2007-08 and 2008-09 for deferred mandate claims  These funds are provided pursuant to the “Deal” on the 2004-05 Budget This addresses Proposition 98 “settle up” requirements from 2002-03 and 2003-04  The Education Budget and Challenges Ahead Special Education is increased by the 4.94% COLA, but then cut by 10.9%  C-1  Like with virtually all other programs, the state share of special education Proposed cut of $358 million exceeds $169 million needed to fund COLA, for net cut of $189 million  Net impact is cut of some $30 per ADA  Unclear at this time how the cut will be implemented – as a deficit to base funding, as a negative COLA, or some other way  No change is proposed to the Special Disability Adjustment formula Categorical Program Reductions  Categorical programs are expected to share the pain in 2008-09    C-5 No COLA No growth And a rollback in funding of approximately 6.5% from 2007-08 Budget levels  Almost all categorical programs will be affected by proposed cuts  Proposed reductions total $1.7 billion, of which just over $700 million is attributable to COLA, which leaves around $1 billion in rollbacks  Average reduction of 6.5% from 2007-08 budgeted level  Some effort is made to soften the blow, but the hit will still hurt Child Nutrition Programs part of the across-the-board cuts C-11  After several years of increases in child nutrition, reductions look to be  Specific proposal to reduce free and reduced-price meal reimbursement rate by approximately 2¢ per meal  Fruit and vegetable incentive program appears to remain intact, but at a reduced funding level Categorical Flexibility  Budget proposes to offer additional categorical transfer flexibility by increasing Mega-Item funding shift  C-13 Governor proposes to allow transfer of up to 50% out of Mega-Item programs and augmentations of up to 55% into any of the programs listed on the next slide While this is somewhat helpful, the dropping of the AB 825 Block Grant program and Economic Impact Aid from the Mega-Item has reduced options ● It does not appear that the Governor is in favor of expanding the list of programs included in the Mega-Item  Categorical Flexibility Options  AB 825 transfers are allowed and may be used in addition to other flexibility options  C-15 But, AB 825 Block Grants are included in 2008-09 reductions  Federal Flexibility 50% for Non-PI Districts and 30% for PI Districts Improving Teacher Quality (4035) Enhancing Education through Technology (4045) Safe and Drug-Free Schools (4110) Innovative Schools (4110) Transfer In Yes Yes Yes Yes Transfer Out Yes Yes Yes Yes Title I, Part A (3010) Yes No NCLB Reauthorization  NCLB is up for reauthorization, but delays are expected   C-16 When planning 2008-09, assume it is as it is now And don’t expect reauthorization to overturn NCLB  Recent U.S. Court of Appeals ruling* challenges NCLB as unfunded mandate – no resolution yet  Unlikely to solve California’s Budget woes * School District of the City of Pontiac, et al. v. Secretary of the U.S. Department of Education (http://www.ca6.uscourts.gov/opinions.pdf/08a0006p-06.pdf) Federal Funding  H.R. 2764 includes funding for federal education programs  C-17 FY 2008 includes few increases and 1.74% (est.) across-the-board cut  On average, California receives 10% of the federal appropriations (except for competitive grants)  Estimates of selected programs prepared by the U.S. Department of Education for California have been found to contain errors ● New estimates will be posted later this month on the U.S. Department of Education website: www.ed.gov/about/overview/budget/statetables/index.html  The California Department of Education reports that funding for Title I and special education will increase – however, funding for Reading First grants, Title II Part D, Title IV, and Title V may decrease significantly Local Agency Operations and The Budget Local Agency Operations  Categorical funding rates and issues  County office considerations  School facility funding and programs E-1  Declining enrollment  Cash flow  Health benefits  Negotiations  Preparing the next district budget Instructional Materials  The current adoption cycle is as follows:  E-5 Remember, new texts must be available to students within 24 months of adoption by the State Board of Education: Subject Adoption 2005 2006 2007 2008 History/Social Science Science Mathematics English Language Arts     Medical Reimbursement Update  Centers for Medicare and Medicaid Services recently issued federal E-8 regulations that eliminate reimbursement for school-based administrative claiming and transportation services to students with disabilities  However, legislation adopted by Congress and signed into law places a six-month moratorium on the enactment of such regulations  Regulations would become operative in September 2008, unless legislation is adopted that continues the moratorium or prohibits regulations ● Without relief, school agencies stand to lose an estimated $130 million annually in reimbursements Declining Enrollment  Every year requires proactive steps to stay solvent when enrollment declines  E-39 Needless to say, 2008-09 will be a steeper uphill battle  Things to do now:   Bolster current year ending fund balance Estimate the range of your decline in enrollment ● Hire staff based upon the largest anticipated decline ● Budget for staff based upon the smallest anticipated decline  This will result in the budget having room to add staff if the decline is smaller than anticipated Managing Cash Flow  The Governor proposes turning the P-2 shift into the P-2 shaft   E-41 Previously, to help the state appear fiscally healthier than it really was, the June apportionment was moved to July of the following fiscal year This year the Governor proposes moving the June 2008 apportionment to September Result: Cash Flow Interest Earnings State Good   Bad School Agency Good Bad    With the proposed cuts, along with this deferred deferral, managing cash flow will become more challenging Cash Flow Options  Option #1: Internal Borrowings, EC Section 42603  E-42 Provides that money in other funds may be temporarily transferred to another fund for payment of obligations Limitations: ● Shall be repaid in same year, or following year if borrowing takes place within 120 days of fiscal year end ● No more than 75% of money held in any fund during the current fiscal year may be transferred   Borrowing fund must earn enough income during the current fiscal year to repay the amount transferred Cash Flow Options  Option #2: External Borrowings  E-43 Tax and Revenue Anticipation Notes (TRANs) ● Short-term, interest-bearing notes issued by a district in anticipation of taxes and other revenues ● Note that TRANs are usually available within a fiscal year, rather than across fiscal years  County Office of Education (COE) ● EC Sections 42621 and 42622 allow COEs to loan funds to districts ● These loans are discretionary and are subject to availability of funds at the COE level Cash Flow Options  Option #3: Borrowing from County Treasurer  E-44 EC Section 42620 requires county treasurers to loan money to school districts District must be lacking sufficient money to meet current expenses Amount transferred shall not exceed 85% of direct taxes levied on behalf of the district State Constitution* requires that the transfer must be made prior to the last Monday in April of the current fiscal year     Repayment must be made from the first monies received by the district before any other obligation is paid *Section 6 of Article XVI of the California Constitution Developing Budget Assumptions important E-70  Developing reasonable assumptions will be harder than ever – and more  The revenue side of the budget will be flaky – get the expense side right    Enrollment projections need to be close Staffing must be precise – no dollars for overstaffing Estimates for benefits, fuel, etc., need to be made carefully Governor wins Budget debates most of the time ● Economics dictate that the final Budget will still be bad even if cuts are re-cast a bit  Our advice on the revenue side   Budget as if the Governor’s proposals pass Preparing the Second Interim  Now is not the time to fool yourself  E-71 Prepare the Second Interim Report using the Governor’s proposals ● For 2008-09, plan for a COLA reduction of .50% per SSC Dartboard Many districts will show qualified or negative projections Follow the guidance of your county office of education We usually get at least some relief – such as more flexibility – during bad years ● There are indications that we will this year Will it be enough? We don’t know    You will not be alone – many other districts will also be in trouble    It is not in the state’s interest to make emergency loans to dozens of districts Politics, Policy, and the Future California’s Economic Outlook  The Governor’s Budget acknowledges that the economy is slowing  F-1 The state’s unemployment rate is rising ● For the month of November it was 5.6%, up from 4.7% one year ago   Income growth is slowing Interest rates are expected to rise later in the year The national economy is expected to grow 1.9% in 2008, 2.9% in 2009 California housing is expected to turn around in 2009, with new units increasing 9.5%  However, a recession is not expected   Long-Term Forecast forecast F-2  The Legislative Analyst’s Office (LAO) has not revised its November 2007  According to the DOF, Proposition 98 is expected to be in Test 1 in both 2009-10 and 2010-11  Caution: state revenue growth will need to improve in order to fund the Proposition 98 formula – Test 1 could be a pipe dream The Proposed Budget presented by the Governor does not specify any priority for how state dollars should be spent; it simply makes acrossthe-board cuts ● Are all areas really of equal priority? Leadership means making tough choices and it will take strong leadership to sort out the state’s priorities  Major Conclusions   Political Considerations F-3  Once again, the Governor is in a difficult situation by trying to solve the state’s structural gap by primarily making across-the-board cuts and not proposing substantial new revenues entire education community   The proposed suspension of Proposition 98 raises major concerns by the Going below the minimum is likely to be the third rail for legislators and the education community We don’t want suspension of Proposition 98 to become a routine tool for blurring bad budgets  Political Considerations  First test will be whether special session can result in agreement on proposed mid-year cuts  F-4 Mid-year cuts to education, only if achieved through using unallocated and unbudgeted revenues, seem less onerous ● Proposed cuts in other areas of the Budget are likely to generate major opposition from interest groups  Legislature has 45 business days to act on a bill to address the fiscal emergency as declared by the Governor ● If no action is taken, the Legislature is precluded from acting on any other business or adjourning Political Considerations  Other Political Considerations  F-5 Tradeoffs surrounding acceptance of the Governor’s Proposed Budget Stabilization Act Revised tax revenues   Stabilization of the residential housing market resulting from recent agreement between the Governor and the mortgage industry Government workload projections  Political Considerations – Next Steps  Watch the special session that addresses mid-year cuts   F-6 It will set the tone for the 2008-09 Budget debate Look for LAO’s detailed analysis of the proposed Budget release in mid-February ● It will contain recommendations to the Legislature and include an updated state revenue forecast  May Revision revenue forecast could change landscape Questions???