Budget advisory:

1

• Budget advisory
• Summary of final 2007-08 K-12 budget

ACSA Governmental Affairs Brett McFadden, Mgt.
Services Executive August 30, 2007
2
The 2007-08 State BudgetOverview

• After several years of steady of growth, the
  states economic engine begins to slow in the
  second half of 2007 (and projected for 2008)
• The decline in revenues associated with
  difficulties in the states housing market
  significantly impacts budget and policy
  development in FY 2007-08
• The final budget package is therefore a much more
  austere spending plan when compared against the
  governors January proposal and two previous
  final budgets

3
OverviewEarly predictions were wrong

• Nevertheless, early predictions were that the
  budget would be on time based on
• Lower revenues would stymie development of new
  policy initiatives
• A pending initiative to reform term limits would
  be an incentive to look good and get it done on
  time
• Some of last years so-called bi-partisan
  sentiments would trickle over to this year
• But we didnt factor that 14 Senate Republicans
• would hold up the process

4
OverviewImpasse breaks

• The impasse finally broke and the budget
• was signed on August 24
• 55 days into the 07-08 FY
• Third latest budget in state history
• But not much different than what the Assembly
  passed in late July
• Didnt address the states structural deficit and
  other fiscal challenges

5
State General Fund condition

• - 2007-08 GF revenues -101.2 billion
• - Estimated GF expenditures - 102.3 billion
• - Total available reserve - 4.1 billion
• Governor keeps his promise and line-item
• vetoes an additional 703 million upon signing
• But structural deficits remain LAO projects
• approx. 5 billion ongoing shortfalls for
  2008-09
• and 2009-10

6
2007-08 projected revenues(budgeted)
Source Dept. of Finance
7
2007-08 budgeted expenditures
Source Dept of Finance
8
Proposition 98 overview

• The final 2007-08 K-12 budget is a stark contrast
  to 2006-07
• Year-to-year Proposition 98 growth was minimal
  barely enough to cover COLA and growth
• Limited program enhancements and/or funding
  expansions
• No additional one-time revenues like last year

9
Proposition 98

• Final budget essentially funds the minimum
  guarantee
• COLA Fully funds COLA at 4.53 on school
  district and COE revenue limits and most all
  Prop. 98 categorical programs
• Enrollment Fully funds enrollment growth (for
  those that are experiencing it)
• 2.1 billion increase in Prop. 98 General Fund
  funding over 2006-07 1.4 increase
• LEAs wont immediately feel it but the final
  budget did contain reductions for K-12 (see next
  slides)

10
Proposition 98Policy changes

• Home-to-school transportation (HTST)
• Governors January proposal to fund HTST with
  629 million from the Public Transit Account and
  rebench Prop. 98 downward by a like amount was
  rejected
• Instead HTST is funded in part with 99 million
  of PTA funds at 629 million (including full
  COLA)
• Prop. 98 is not rebenched downward by 99 million
• CalWorks Stage II Child Care
• Stage II is again funded by Prop. 98 creating a
  269 million reduction of funds available for
  other K-12 programs
• Stage II was previously funded with non-98 money
• Education community views this as an overall
  reduction

11
Proposition 98Funding adjustments

• Governors May Revision proposed an increase in
  2006-07 Prop. 98 funding based on optimistic
  revenue projections
• Legislature rejected these projections fearing
  possible shortfalls in 2007-08 and into budget
  year 1
• Instead the final budget redirects 427 million
  in prior year unspent Prop. 98 funds for savings
  to the state General Fund scored for 2007-08

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Proposition 98One-time dollars for ongoing
purposes

• Due to budget actions and lower overall
  Proposition 98 growth, the 2007-08 guarantee
  didnt increase sufficiently to cover COLA and
  continued funding for most ongoing programs
• To address this, the 2007-08 K-12 budget uses
  approx. 500 million in one-time funds to meet
  ongoing Prop. 98 purposes
• Proposition 98 Reversion Account - 217m
• Williams School Facilities Emergency Repair
  Account - 250m
• Public Transportation Account - 99 million
• As a result, the development of the 2008-09 K-12
  budget will start in the hole when it comes to
  filling ongoing program funding

13
Proposition 98Programs funded with one-time
dollars
The following ongoing programs are supported in
part with one time dollars

• HTST - 250m one-time Williams and 99m PTA
• Deferred maintenance - 115m one-time
• Prop. 98 reversion
• High Priority Schools Grant - 102m
• one-time Prop. 98 reversion

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Proposition 98Big picture comparison

• Overall Proposition 98 2007-08 GF expenditures
  increase by about 1.4 compared to 2006-07
• But when you subtract 269m for the child care
  shift, the actual increase is 0.8
• The overall increase for the entire state budget
  is 1.3
• When you split Prop. 98 0.5 overall increase
  for K-12 and 3.5 for Community Colleges
• These figures should be weighed against the
  political rhetoric
• Source Michael Hulsizer, Kern County Supt. of
  Schools

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Misc. unrestricted

• Mandates
• Budget restarts the deferral of mandate
  reimbursements
• Payment for 2007-08 claims deferred indefinitely
• In addition to the deferral of most claims for
  2006-07
• Revenue limit equalization
• Contains no funding for equalization
• Approx. 130 million in additional
• ongoing is necessary to fully
• equalize revenue limit funding
• But trailer bill language (AB 193) has
• intent language to fully fund equalization and
• mandates (after COLA and growth) in 2008-09
• Language will be tough to enforce its only
  intent

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Categorical programs

• The budget contains only two categorical funding
  increases
• Most others are funded at prior-year levels plus
  full COLA except special education (see next
  slide)
• Program expansions include
• Child nutrition
• 24.9m increase to provide a 4.7 cent increase
  for school meals to 21.3 cents per student
• Statutory language coincides with this increase,
  but further amendments are needed to address
  drafting errors
• Community Day Schools
• 4.1 million additional to address for prior-year
  shortfalls

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Special educationContinued COLA problem

• Current statute of having the state pay for COLA
  on only the state and local share, and not the
  federal, continues
• Impact is that special education gets less than a
  full 4.53 COLA
• COLA on the state share is estimated at 20.17
  per ADA
• 15m of the 19m increase in federal funding is
  allocated to SELPAs per ADA estimated at 2.50
  per ADA
• This equates to an approx. 3.58 COLA for average
  SELPAs
• Source School Services of California, Inc.

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Policy issues

• Budgets almost always contain policy issues
• For 2007-08 they include
• 2nd Grade STAR testing Budget provides 2.1m to
  continue funding testing for 2nd graders per
  current procedures. Also includes trailer bill
  language authorizing 2nd grade testing through
  July 1, 2011 (authorization would have ended July
  1, 2007)

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Policy issues (cont.)

• School districts of choice This was an
  important issue to Republican members. Earlier
  in the year, AB 270 (Huff) was held which would
  have reauthorized existing school district of
  choice statutes. The primary education trailer
  bill (AB 80) reauthorized the program with the
  following requirements
• School districts of choice must modify record
  keeping requirement for local districts
• Participation is limited to those that
  participated in the past
• The law is extended until July 1, 2009
• CDE is required to submit a report by Nov. 1,
  2008 on the matter

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Policy issues (cont.)CalPADs

• The California Longitudinal Pupil Achievement
  Data System (CalPADs) continues to a high
  priority of the SPI and legislators
• In the end, however, no funding was appropriated
  for local assistance
• Budget trailer bill language was adopted
  instructing the CDE to report on FERPA compliance
  and other implementation issues

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Policy issues (cont.)Battle over charter schools

• The battle over establishment and governance of
  statewide benefit charters continued in the
  budget deliberations
• Assembly Democratic leadership inserted trailer
  bill language restricting state authorization of
  statewide benefit charters to three years (AB 92)
  but this measure was held per threat of veto
• Nevertheless, Democrats managed to strip all 18m
  from charter school facilities grants setting
  up a fight for next year

22
Governors vetoes

• The governor has the authority to line-item
  individual appropriations from the budget prior
  to his signature this is typically referred to
  as the blue pencil
• Governors K-12 vetoes totaled 17.1 million
• That funding reverts back to Proposition 98
  pending new legislation to allocate it for a
  prescribed purpose or into the Prop. 98
  reversion account
• Controversial vetoes included

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Governors vetoesDistrict assistance and
intervention teams

• The governor vetoed 7.1m in federal Title I
  set-aside funds for District Assistance and
  Intervention Teams (DAITs) facing sanction under
  NCLB
• The administration argued that this funding was
  premature since an evaluation of DAITs is
  underway
• Administration stated that it recognized the
  problem of a growing number of LEAs and schools
• immediately facing corrective action
• But this creates significant challenges

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Veto of DAIT fundingPolicy challenges

• The governors veto of DAIT funding creates
  considerable policy challenges
• Approx. 100 districts will go before the State
  Board of Education in November 07 for corrective
  action under NCLB
• Corrective action is the final stage in the
  process and can be draconian removal of
  district/site leadership, reconstituting school
  sites and/or districts, instituting new
  curriculum, appointing a trustee, etc.
• In addition, CDE is not authorized to release the
  existing 28 million for direct support for LEAs
  in corrective action - dollars are earmarked, but
  not authorized for release to LEAs
• To make matters worse, the administration also
  vetoed 350,000 for CDE staff augmentations for
  LEA local assistance with this issue
• So at this time, the issue is on hold with no
  clear sense of what the next steps will be

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Governors vetoesPreschool and childcare wrap
around

• The governor vetoed 5m from preschool programs
  and eliminated language that would have expanded
  the use of these funds for wrap-around child care
  for children participating in the state preschool
  programs
• This created concern in the field since many
  programs believed they would get this funding and
  made plans accordingly
• CDE has announced that they intend to utilize
  existing childcare carryover funds as a stop gap
  to backfill the 5m veto for 07-08
• They intend seek statutory change to include
  wrap-
• around authorization for 08-09 and the future
• pending legislation

Source Chelsea Kelley, SDUSD Lobbyist
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Unresolved issues

• A number of fiscal and policy issues remain
• Hourly supplemental programs continue to face
  significant deficits
• Special educations reduced COLA
• Mandate reimbursement funding deferred again
• No funding for CalPADs local assistance and
  implementation
• Veto of DAIT funding and lockup of federal
  set-aside dollars for corrective action
  assistance
• Shift of Child Care Stage II responsibilities
  into Prop. 98
• Enhanced policy assistance for declining
  enrollment
• Appropriate policy for statewide benefit charter
  schools

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In summary

• In the end, the 2007-08 K-12 budget isnt hard to
  explain
• Prior-year Prop. 98 base, plus
• 4.53 COLA on revenue limits and Prop. 98
  categoricals
• Enrollment growth (for LEAs experiencing it)
• No additional revenue limit dollars (i.e.
  equalization)
• No additional one-time dollars
• No new categorical programs
• Only two categorical expansions

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Future outlookStatewide enrollment dropping
The Dept. of Finance estimates that ADA will
continue to decrease for the remainder of the
decade ADA for 2007-08 is projected to decline
by 0.48 - coinciding with previous declines in
recent years Approx. half of all LEAs are
experiencing multi-year declining enrollment
Source Dept. of Finance
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Future outlookHealth care reform

• The chance for major health care reform
  legislation this year is dimming
• But much attention (and noise) will be paid to
  this issue in the final weeks of the session
• It is possible that health care for uninsured
  children could be expanded this year
• LEAs should keep an eye on it, but likely
• no immediate budgetary impacts for 07-08

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Future outlookA weather advisory

• ACSAs earlier projections called for a slow down
  in the states economy for 2007 and much of 2008
  but no recession
• Past indicators showed that other sectors
  (technology, entertainment, finance, etc.) were
  strong and holding up the overall economy
• The wild cards, however, were the housing and
  energy markets
• Revised projections There is a higher
  likelihood of recessionary characteristics
  developing in the second half of 2007 and lasting
  throughout 2008
• State revenues are likely to continue their
  decline throughout 2007-08 and into 2008-09
  thereby impacting current and budget year
  Proposition 98 funding

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Weather advisorySigns and indications

• National Assoc. of Realtors has declared that
  this is the worst housing market in 16 years
• Sub prime market collapse is impacting credit
  markets tighter restrictions on credit creating
  barriers to other economic activity
• Foreclosure projections have increase
  significantly
• Home Depot and Wal-Mart posting significant
  declines citing decline in home sales as the
  primary culprit
• Macys reporting revenue declines in 41 states
• It has become the talk in the financial world
  and general media could impact consumer
  confidence levels

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Weather advisoryImpact on states finances

• State revenues have declined noticeably since the
  governors January budget proposal
• Revenues for May, June, and July 07 are 1.1
  billion below projections
• State revenue and economic indicators point to
  increased fiscal challenges throughout the
  current year and into 2008-09
• Predictions are that the 2008-09 state budget
  will be more challenging than 2007-08
• Source Dept of Finance

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LEA budgetingRecommendations

• Predicting state revenues and their overall
  impact on Prop. 98 funding is a difficult
  endeavor
• Revenues are subject to wild up and down
  fluctuations
• At this point, we recommend that LEAs
• Be prudent with reserves and financial
  assumptions
• Carefully analyze short and long-term financial
  impacts of 2006-07 and 07-08 bargaining contracts
• Move out of qualified and/or negative
  certifications as quick as possible
• Closely analyze enrollment trends and figures
• Keep a close eye on state revenues and economic
  projections
• We will have a better picture in November when
  the Legislative Analysts Office releases their
  annual forecast

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Where to reach us

• Thank you and good luck
• For more information on K-12 finance or other
  policy matters, please contact
• ACSA Governmental Relations
• 916-444-3216
• www.acsa.org
• Brett W. McFadden
• Mgt. Services Executive / Legislative Advocate
• bmcfadden_at_acsa.org