California s Economy A-4

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1 California s Economy A-4 The performance of the economy and state tax revenues have always shaped the State Budget However, for there is a direct link between revenues and midyear trigger cuts The state economy continues to improve Even though the state s unemployment rate is among the highest in the nation at 11.7% for May, it has declined from 12.4% one year ago Sales of the existing, single-family homes are up 5% from one year ago, the strongest gain since August 2009 Home building permits were up 12% for March and April 2011 compared to the same period last year UCLA forecasts personal income growth of 4.1% in 2011 and 5.3% in 2012, while Beacon Economics is more optimistic at 5.2% and 6.9%, respectively

2 California s Education Spending Continues to Lag A-5

3 Major Changes from May Revision to the Final State Budget A-16 May Revision: Proposes $2.5 billion to pay down Proposition 98 deferrals Final Budget: Defers approximately $2.1 billion of payments to schools May Revision: Counts on $9.6 billion in temporary taxes Final Budget: Assumes $4 billion more in General Fund revenues above May forecast May Revision: Funds Proposition 98 at the minimum, without suspension Final Budget: Takes away $2.1 billion from K-12 education through a sales tax shift and reallocates those funds to other areas of the Budget without suspension

4 Major Changes from May Revision to the Final State Budget A-17 May Revision: Did not include trigger cuts to education, just the threat of additional cuts State Budget: Puts K-12 education at risk of losing $1.9 billion by triggering a cut if revenues fall short of projections May Revision: Contains no language that restricts local budgeting practices and fiscal oversight safeguards State Budget: Places several requirements on the funding level school agencies must budget and staffing levels that must be met in , and suspends various AB 1200 provisions May Revision: Contains no additional flexibility provisions Final Budget: Allows automatic reductions in the school year if triggered cuts are made however, would still be subject to collective bargaining

5 Proposition 98 B-2 Proposition 98 was intended to establish a constitutional minimum funding guarantee for K-14 education, based on changes in workload (ADA) and inflation (either the change in per-capita General Fund revenues or per-capita personal income) The Legislature is authorized to appropriate less than the minimum guarantee, provided that two-thirds of the members of each house vote for suspension Proposition 98 has been rarely suspended since its adoption in 1988 In enacting the State Budget, the Legislature for the first time funded K-14 education below the minimum guarantee without voting to suspend Proposition 98 This action sets a terrible precedent for the future of Proposition 98 as a meaningful measure of the state s commitment to public education

6 Proposition 98 Manipulations B-3 The Proposition 98 minimum guarantee was manipulated in several ways, which ultimately lowered the amount that should have been provided to K-14 education by at least $3.2 billion Child care funding was taken out of Proposition 98, reducing the guarantee by $1.1 billion $5.1 billion in General Fund revenues were redirected to the realignment of programs from the state to local governments, resulting in a loss of $2.1 billion to Proposition 98 The Budget Trailer Bill also reduced the minimum guarantee by an additional $1.7 billion related to the shift of redevelopment agency property tax revenues to schools This manipulation allowed the state to capture these savings The change, however, lowers the threshold for funding under Test 1 The bottom line is that the Legislature s disregard for the Proposition 98 guarantee and the suspension process renders the measure meaningless

7 Proposition 98 May Revision vs. Budget Act B-6

8 Trigger Reductions B-7 By December 15, 2011, the Director of Finance is required to determine whether revenues are coming in as forecast or are falling short Uses the higher of either the LAO s November 2011 forecast or the Department of Finance s December forecast If the revenues are not as strong as expected, automatic spending reductions are triggered in the following order as of January 1, 2012: Less than $1 billion below forecast no changes are required Between $1 billion and $2 billion below forecast $23 million across-the-board cut to child care $30 million reduction to community colleges, accompanied by a $10 increase to student enrollment fees Reductions to other state-funded programs, including higher education, totaling $548 million

9 Trigger Reductions B-8 More than $2 billion below forecast, all previous cuts are implemented, plus... Up to 4% reduction to revenue limits $1.5 billion 4% if revenues fall $4 billion or more; proportionately less if revenue loss is $2 billion to $4 billion $248 million cut to school transportation $72 million reduction to community colleges If revenues fall short by more than $2 billion, authorizes reduction in the school year of up to seven days, in addition to the five days authorized by current law Goes into effect on February 1, 2012 A shorter school year is subject to collective bargaining and must be implemented by the end of the school year in order to capture the savings

10 Realignment and Sales Tax Transfer B-9 State/local realignment means that local governments assume financial responsibility for a variety of state-funded programs, including lower-level offenders, parole violators, public safety, mental health, substance abuse, foster care, child welfare, and adult protective services Shift in responsibility funded through $5.1 billion ( cents) redirection of state sales tax and $453 million in Vehicle License Fee (VLF) revenues to county government Shift of sales tax revenue reduces state revenues by $5.1 billion, and reduces the base for Proposition 98 Without a corresponding adjustment to Test 1 (which is based on a percentage of the General Fund), Proposition 98 falls by $2.1 billion

11 Should Proposition 98 be Rebenched? B Budget reflects rebenching to account for a variety of changes Failing to adjust Proposition 98 to account for a shift in financial responsibility and funding would clearly violate the intent of Proposition 98 Instead of adjusting Proposition 98, the Budget takes a different approach it provides a promise to pay: A ballot measure must be approved by voters no later than November 17, 2012, to affirm that the shifted sales tax revenues do not count toward Proposition 98, and to provide funding for schools and community colleges in an amount equal to the loss due to the shift If the measure is not approved, adjustment will be made to restore Proposition 98 as if the sales tax shift had not occurred A schedule is established to repay the amount of funding that would have been provided in equal installments over a five-year period, for the following priorities: deferral reduction, mandate payments, and other onetime costs

12 The Education Wall of Debt B-14 The education wall of debt will challenge the state to make things right before the next economic downturn hits California Ongoing restorations Almost 20% deficit factor: $7.7 billion Sales tax shift obligation: $2.1 billion One-time costs Deferral reduction: more than $9.0 billion Proposition 98 settle up funding: $1.2 billion Proposition 98 Maintenance Factor is at least $9.9 billion today; phased in when: Robust state revenue growth returns Proposition 98 manipulation stops These will be needed to bring school funding back in line with statutory obligations

13 Trigger Reduction Exposure B-15 The Budget Act provides for an automatic reduction to state appropriations, including funding for schools, if state revenues fall short of projections The K-12 reductions are directed at revenue limits ($1.5 billion) and Home-to-School Transportation ($248 million) School districts, however, are prohibited from budgeting for these reductions The level of the reduction is linked to the amount of the shortfall in the State Budget revenues and could range from zero to 4% of the undeficited revenue limit If the full revenue limit reduction is implemented, the average maximum cut would be about $260 per ADA for unified school districts $300 per ADA for high school districts $250 per ADA for elementary school districts

14 Revenue Limits B-16 The May Revision and the enacted State Budget acknowledge a statutory cost-of living adjustment (COLA) for revenue limits of 2.24%, but the COLA is not funded The Deficit Factor for school districts and charter schools is % The Deficit Factor in the Governor s January Budget was too high, resulting in an average cut of $19 per ADA in The enacted State Budget corrects this error and the per-pupil revenue limit funding will be flat

15 Revenue Limit Deficit Factors B-18

16 Budget Act Funding vs Funding for Average Unified District The Budget Act does not fund the 2.24% statutory COLA ($143 for unified districts) for The funded base revenue limit is flat between and B School Services of California, Inc.

17 Funding Per ADA Actual vs. Statutory Level 2-12 B-21

18 Special Education Mental Health Services B-34 Several streams of funding: $218.7 million to SELPAs allocated on a per-ada basis to provide mental health-related services, including out-of-home residential services $3 million to establish an extraordinary cost pool for necessary small SELPAs $31 million in one-time funding allocated to SELPAs on a per-ada basis exclusively for mental health-related services, including residential services $69 million from federal Individuals with Disabilities Education Act (IDEA) funds allocated to SELPAs using California Special Education Management Information System (CASEMIS) data In , intent is that the appropriation will be allocated on a per-ada basis $520,000 one-time funding for professional development

19 A Survival Guide for C-2 Operation of school agencies will be as complicated as ever AB 114 (Chapter 43/2011) dictates how school boards will budget revenues and expenses It also dictates program and staffing levels Further, it prohibits districts from budgeting for any potential midyear cut as a result of slower than planned revenue growth And AB 1200 oversight is dramatically reduced Decision making will be more difficult because of uncertainty District finances will be much riskier as a result of loss of local control The long-term implications are substantial

20 The Gutting of AB 1200 AB 114 suspends majority of fiscal oversight for C-7 For the fiscal year, the County Superintendent shall not: Require a school district to project a lower level of revenue per unit of ADA than it received in as a condition of budget approval Require the school district to demonstrate that it is able to meet its financial obligations for the two subsequent years AB 114 directs school districts how to budget for For the fiscal year, the school district shall: Project the same level of revenue per ADA as it received in and shall maintain staffing and program levels commensurate with that level School districts are not required to demonstrate the ability to meet financial obligations for the two subsequent fiscal years

21 The Gutting of AB 1200 C-8 AB 114 clearly states that the SPI shall not require a COE to demonstrate that it is able to meet its financial obligations for the two subsequent years for all reporting (i.e., adopted budget and interim reports) For school districts, AB 114 only specified that the MYPs shall not be considered by the COE in its approval of the adopted budget By now, almost all districts have already submitted their adopted budget, along with MYPs, to the COEs For the First Interim reporting period in October 2011, MYPs are still required to be submitted by districts and evaluated by the COEs

22 The Gutting of AB 1200 C-10 AB 114 requires school districts and COEs to maintain staffing and program levels commensurate with flat state funding If you adopted your budget based on our recommendations at the May Revision with flat funding, you may have already met this requirement You are allowed to include inflation (i.e., step and column costs, increased health and welfare benefits, etc.) in meeting this requirement You are allowed to count the loss of federal funds, loss of revenues due to declining enrollment, etc., in meeting this requirement

23 Impact on COE Responsibilities C-14 How does AB 114 impact the COE s review of collective bargaining disclosures? Government Code (G.C.) Section requires a district with a qualified or negative certification to give the COE at least 10 working days to review and comment on a proposed collective bargaining settlement The COE can... require all information relevant to yield an understanding of the financial impact of that agreement. Which usually includes a MYP showing the impact AB 114 did not change this provision Therefore, COEs still have this authority and responsibility

24 Our Advice... C-18 Here are some words of advice from us in this particular area: Prepare your MYPs as you normally would Your LEA will need to be a going concern beyond Prepare a scenario reflecting the potential midyear cuts Just because you are prevented from budgeting for the potential cut, it does not mean you cannot prepare a contingency plan

25 Our Advice... C-19 Use those MYPs to make local budget decisions and take Board action as necessary to stay solvent in a multiyear context Nobody else will be doing that for you even with AB 114 it is still your Board s responsibility to maintain fiscal solvency Give your COE an early heads up if you foresee financial issues Your COE can provide assistance if you need it The earlier, the better financial problems get worse, not better, over time

26 Categorical Funding Updates D-2 Categorical funding remains largely unchanged in No growth, except for new charter schools No COLA The Budget eliminates funding for the California Longitudinal Teacher Integrated Data Education System While categorical funding seems stable for , the way in which such resources are used has changed in response to how LEAs have defined core

27 Flexibility Continues D-3 SB 70 (Chapter 7/2011) was signed into law in March and extends these existing flexibility options by two additional years to : Tier III categorical flexibility Delaying compliance with most recent instructional material adoptions Eliminating required RRMA and DMP contributions Allowing for shortening the instructional year by up to five days (from 180 days to 175 days)

28 K-3 CSR Program Flexibility D-5 K-3 Class-Size Reduction (CSR) penalty relaxation is extended through Graduated penalties are 5% to 30% Penalty begins when class averages more than students, and graduates up to a 30% penalty when class averages students or more Revised CSR Graduated Penalties Class Size to Up to No penalty to % penalty to % penalty to % penalty to % penalty or more 30% penalty

29 Interference with Local Control E-3 The provisions in AB 114 appear to override local decision making authority by directing LEAs to use particular assumptions in preparing for their revenue and expenditure budgets However, the Governor clarified in his signing letter for AB 114 that school boards should take all reasonable steps to balance their budgets and to maintain positive cash balances Although in AB 114 the state directs school districts and COEs to base their budget estimate of revenues on the amount of per pupil revenues received in , the Governor s signing message clarifies that: Revenues means only state per pupil revenues We appreciate that clarification!

30 Expenditures Staffing and Program Levels E-6 AB 114 requires districts to develop a staffing and program budget that is commensurate with the state s level of per ADA funding (i.e., flat funding) However, if flat funding requires you to make cuts to balance the budget, this bill does not require you to spend more For example, a district may have made budget cuts due to: Health and welfare premium increases Step and column increases Other operating costs going up It also does not dictate that you reduce reserves to the minimum, or to any other level judged unwise by the local Board of Education

31 Credibility and the MYP F-6 MYPs are essential to good financial planning For only, the COE can only consider the first year for budget approval That is not an excuse for the district not to consider the out years as well The world is not going to end on June 30, 2012 don t budget as if it will If the MYP, prepared using valid assumptions, shows out-year problems, don t make them worse by over spending in the first year That is not how we protect our people and programs over the longer term Well run districts do not need the threat of COE intervention to make good fiscal decisions

32 Cost Increases and Loss of Federal Funds F-12 Even with flat state funding, most districts will need to make budget cuts to cover cost increases and loss of federal funds By September 30, 2011, all ARRA funds must be expended By September 30, 2012, all one-time federal jobs funds must be expended Increases in the cost of health and welfare benefits, step and column, and fuel, along with past deficit spending, all put pressure on the budget Negotiations will be difficult for both sides until the state economy recovers and districts receive higher funding Sharing accurate financial information is important However, developing positive communications and relationships is far more important

33 The Seven-Day Option F-13 AB 114 provides authority for LEAs to shorten the school year by seven days if the revenue shortfall trigger is pulled The seven days are in addition to the five days already provided for in current law While an LEA may be able to reduce the school year to 168 days without penalty, a reduction in the work year of employees must be negotiated Waiting until the trigger is pulled may not leave LEAs enough time to successfully negotiate an agreement that would reduce the work year for LEAs should begin discussing the revenue shortfall trigger with employee groups now, as well as the need for reductions should the trigger be pulled

34 The Seven-Day Option F-14 Under current law (AB 1651 [Chapter 574/2010]), earnable compensation and service credit for PERS members subject to mandatory furloughs are kept at pre-furlough levels, so that there is no impact on retirement benefits PERS members who may agree to further reductions in their work year will be held harmless, but the same cannot be said for STRS members E.C establishes the following minimum number of workdays/hours for certificated employees to earn a full year of service credit Pre Kindergarten-Grade 12 Teachers = 175 days, or 1,050 hours/year Principals and Program Managers = 195 days, or 1,520 hours/year District and County Office Administrators = 215 days, or 1,720 hours/year Without a bill similar to AB 1651 that would hold certificated employees harmless where service credit is concerned, it is unlikely that teachers will agree to reduce the work year below 175 days

35 Structural Budget Deficit G-6 Source: May Revision, p. 2; State Budget Summary, p. 5