Governors Proposals for the 200809 State Budget and K12 Education

1
Governors Proposals for the2008-09 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

2
Introduction
i

• This is a year of contrasts
• The State-of-the-State message emphasizes the
  positives
• The Governors 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?

3
Introduction
ii

• Californias budget has two parts revenues and
  expenditures
• 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

4
Introduction
iv

• Contrary to the Governors assertion, we do have
  a revenue problem
• 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

5
Introduction
v

• Cuts to all government services education,
  parks, prisons, and health and welfare make
  voters mad
• 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?

6
Overview of theState Budget and the State Economy
7
Is This a Good Education Budget?
A-1

• In a word No!
• This is the year all past sins come to the fore
• The Governor says we dont 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 Governors proposals go beyond reducing
  Proposition 98 to the floor
• The Governors cuts to K-12 education total 4.4
  billion in 2008-09
• And the losses dont stop there

• The Governor proposes suspension of Proposition
  98

8
Mid-Year Actions Under Proposition 58
A-3

• The Governor has declared a fiscal emergency
  under Proposition 58, triggering the following
• 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

9
Governors Approach to 2008-09
A-7

• The effect of the suspension working from the
  revised 2007-08 base revenue limit
• COLA is declared at 4.94, but not funded
• Revenue limit deficit is imposed at 6.99 of new
  base revenue limit
• The overall reduction to revenue limits for
  2008-09 is about 2.4
• 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

10
Governors Approach to 2008-09
A-8

• Special education is especially hard hit
• No COLA
• Cuts from prior-year levels
• Increased costs
• No help from the feds
• Education loses more than 4 billion

11
Budget Summary
A-27

• Compared with full funding for COLA and growth
  for programs in 2008-09, the Governors proposal
  cuts K-12 education by 4.4 billion
• These cuts average about 740 per ADA from
  2008-09 full funding levels

• Saying it another way . . .
• Governors 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!

12
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

13
Long-Term Solution
A-33

• Governor again proposes spending limits
• Budget Stabilization Account
• Transfer of Budget reduction authority to the
  Governor
• Limit expenditure growth torevenue growth

14
4.94 Statutory COLA
B-7

• In most years, the statutory COLA is a key number
  in the Governors Budget Proposal
• 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

15
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

See CD-ROM for the Revenue Limit worksheets
showing where the 6.99 deficit gets applied
16
Revenue Limits Hourly Programs
B-16

• Funding for the hourly programs is increased by
  the 4.94 COLA, but then cut by 10.9
• 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

17
State Mandate Reimbursements
B-17

• The Governors 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

18
The Education Budget andChallenges Ahead
19
Special Education
C-1

• Like with virtually all other programs, the state
  share of special education is increased by the
  4.94 COLA, but then cut by 10.9
• 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

20
Categorical Program Reductions
C-5

• Categorical programs are expected to share the
  pain in 2008-09
• 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

21
Child Nutrition Programs
C-11

• After several years of increases in child
  nutrition, reductions look to be part of the
  across-the-board cuts
• 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

22
Categorical Flexibility
C-13

• Budget proposes to offer additional categorical
  transfer flexibility by increasing Mega-Item
  funding shift
• 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

23
Categorical Flexibility Options
C-15

• AB 825 transfers are allowed and may be used in
  addition to other flexibility options
• But, AB 825 Block Grants are included in 2008-09
  reductions
• Federal Flexibility

24
NCLB Reauthorization
C-16

• NCLB is up for reauthorization, but delays are
  expected
• When planning 2008-09, assume it is as it is now
• And dont expect reauthorization to overturn NCLB
• Recent U.S. Court of Appeals ruling challenges
  NCLB as unfunded mandate no resolution yet
• Unlikely to solve Californias 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)
25
Federal Funding
C-17

• H.R. 2764 includes funding for federal education
  programs
• 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

26
Local Agency Operations andThe Budget
27
Local Agency Operations
E-1

• Categorical funding rates and issues
• County office considerations
• School facility fundingand programs
• Declining enrollment
• Cash flow
• Health benefits
• Negotiations
• Preparing the next district budget

28
Instructional Materials
E-5

• The current adoption cycle is as follows
• Remember, new texts must be available to students
  within 24 months of adoption by the State Board
  of Education
• Subject Adoption
• History/Social Science 2005
• Science 2006
• Mathematics 2007
• English Language Arts 2008

29
Medical Reimbursement Update
E-8

• Centers for Medicare and Medicaid Services
  recently issued federal 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

30
Declining Enrollment
E-39

• Every year requires proactive steps to stay
  solvent when enrollment declines
• 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

31
Managing Cash Flow
E-41

• The Governor proposes turning the P-2 shift into
  the P-2 shaft
• 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
• With the proposed cuts, along with this deferred
  deferral, managing cash flow will become more
  challenging

32
Cash Flow Options
E-42

• Option 1 Internal Borrowings, EC Section 42603
• 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

33
Cash Flow Options
E-43

• Option 2 External Borrowings
• 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

34
Cash Flow Options
E-44

• Option 3 Borrowing from County Treasurer
• 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
35
Developing Budget Assumptions
E-70

• Developing reasonable assumptions will be harder
  than ever and more important
• 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
• Our advice on the revenue side
• Governor wins Budget debates most of the time
• Budget as if the Governors proposals pass
• Economics dictate that the final Budget will
  still be bad even if cuts are re-cast a bit

36
Preparing the Second Interim
E-71

• Now is not the time to fool yourself
• Prepare the Second Interim Report using the
  Governors 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
• You will not be alone many other districts will
  also be in trouble
• 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 dont know
• It is not in the states interest to make
  emergency loans to dozens of districts

37
Politics, Policy, and the Future
38
Californias Economic Outlook
F-1

• The Governors Budget acknowledges that the
  economy is slowing
• The states 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
• However, a recession is not expected
• 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

39
Long-Term Forecast
F-2

• The Legislative Analysts Office (LAO) has not
  revised its November 2007 forecast
• 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
• Major Conclusions
• The Proposed Budget presented by the Governor
  does not specify any priority for how state
  dollars should be spent it simply makes
  across-the-board cuts
• Are all areas really of equal priority?
• Leadership means making tough choices and it will
  take strong leadership to sort out the states
  priorities

40
Political Considerations
F-3

• Once again, the Governor is in a difficult
  situation by trying to solve the states
  structural gap by primarily making
  across-the-board cuts and not proposing
  substantial new revenues
• The proposed suspension of Proposition 98 raises
  major concerns by the entire education community
• Going below the minimum is likely to be the
  third rail for legislators and theeducation
  community
• We dont want suspension ofProposition 98 to
  become a routinetool for blurring bad budgets

41
Political Considerations
F-4

• First test will be whether special session can
  result in agreement on proposed mid-year cuts
• 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

42
Political Considerations
F-5

• Other Political Considerations
• Tradeoffs surrounding acceptance of the
  Governors Proposed Budget Stabilization Act
• Revised tax revenues
• Stabilization of the residential housing market
  resulting from recent agreement between
  theGovernor and the mortgage industry
• Government workload projections

43
Political Considerations Next Steps
F-6

• Watch the special session that addresses mid-year
  cuts
• It will set the tone for the 2008-09 Budget
  debate
• Look for LAOs 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

44
Questions???