Governor’s budget still underfunds K-12 workload

Analysis from CSBA’s Governmental Relations Department

Editor’s note: California governors draw up budget proposals in January and then revise them in May to reflect updated revenue projections and other conditions. The state constitution requires the Assembly and Senate to pass a balanced budget by June 15 each year, and the governor then has until June 30—the day before the start of the new fiscal year—to sign the budget. There is no constitutional penalty for missing the deadlines, however.

Gov. Arnold Schwarzenegger released the May revision to his January budget on May 14, opening his press conference by announcing that the general fund gap had reached a staggering $24.3 billion. However, as a result of midyear actions already taken by the Legislature and governor during the special legislative session earlier this year, this gap has been reduced to $17.2 billion.

K-12 workload funding: year-to-year reduction

For K-12 education, the governor now calculates that, due to changes in general fund revenue, the Proposition 98 guarantee next year will be lower than originally projected. Specifically, it is now expected to be $56.8 billion in 2008-09, which is down from the $59.6 billion originally projected. Accordingly, the governor now proposes to fully fund the new, lower guarantee next year, which would be a spending increase of $1.2 billion over his January proposal.

This would translate into an increase of $198 million over 2007-08, or about 39 cents per student. This is very misleading, however, because these numbers refer only to Proposition 98—and not to dollars actually received by schools. In the current year, Proposition 98 fell short of providing the revenues needed to sustain current school programs, so about $1 billion in one-time funds were used to support ongoing Proposition 98 programs. In other words, this year schools received Proposition 98 funding plus additional one-time funding (which was not added to the Proposition 98 base) to support current programs.

Next year, those one-time dollars will not be available, and schools will receive only Proposition 98 dollars. Thus, Proposition 98 funding would need to increase by $1 billion just to backfill for the absence of the one-time dollars and stay even with this year’s actual level of funding received by schools. Therefore, the Proposition 98 increase of $198 million actually represents a reduction of nearly $800 million in funding received by schools.

In addition, according to the Department of Finance, after factoring in a higher cost-of-living adjustment (5.66 percent) and a slightly higher enrollment projection, next year’s K-12 budget would still fall short of the workload budget (the amount needed just to maintain current programs) by $4 billion, a slight improvement on the $4.3 billion shortfall in the governor’s January budget. This amounts to nearly $700 per each student’s average daily attendance.

The governor proposes to maintain current-year funding for revenue limits and special education. That is, there would be neither an increase (for the COLA) nor a decrease. Instead, all of the K-12 funding cuts would be applied to the other categorical programs, subjecting some districts to bigger cuts than others. Specifically, districts that serve relatively large proportions of English language learners and economically disadvantaged students would get a larger percentage reduction. That’s because those districts receive more categorical funding on behalf of those students, which exposes them to deeper overall cuts when only categorical funding is cut.

The special education cut that was proposed in January would be restored by transferring $222.6 million from deferred maintenance funding to special education. This would leave only $39.6 million for deferred maintenance, which the governor proposes to reserve for hardship projects; in partial compensation for the reduced state funding, he would also suspend the local match requirement.

The May revision also proposes to provide districts with additional flexibility in the following areas:

• reduce reserve requirements under Assembly Bill 1200 for purposes of determining “negative” and “qualified”
  budget status
• reduce the required set-aside for routine maintenance from 3 percent to 2 percent
• increase categorical block grant flexibility from 15/20 percent to 20/25 percent—that is, AB 824’s 15 percent limit on transfers of funds from one categorical program within a block grant to another would be increased to 20 percent, and the total amount of spending in the other program could exceed state funding for that program by 25 percent, up from 20 percent now
• allow districts to move state categorical program carry-over or reserve funds from any prior year, and from most other programs, to the district’s unrestricted general fund, except where otherwise prohibited by state or federal law

The additional flexibility proposed in January remains in the May revision.

Other program areas

Many schoolchildren would also be affected by additional cuts proposed for other program areas. For example, the May revision calls for an additional $672 million cut to the Health and Human Services budget, which includes programs such as Healthy Families, foster care, Medi-Cal, and CalWorks. These proposed cuts would be in addition to the cuts already proposed in the January budget.

Budget Stabilization Act, lottery ‘securitization’

These proposals are interlinked and very, very complex. Basically, the Budget Stabilization Act would establish a cap on state spending. Under the cap, the year-to-year percentage increase in state spending could be no greater than the average year-to-year percentage increase in revenues for the prior 10 years. Revenues above the cap would flow into two “rainy day” funds—one for K-14 education would collect 40 percent of the overflow, and one for all other programs would collect the remaining 60 percent.

In years when revenues fall short of the allowable spending cap, funds could be transferred from the rainy day funds into the general fund for expenditure. The transfer could not exceed the amount needed to come up to the spending cap. Transfers would require a majority vote for the K-14 fund and a two-thirds vote for the other fund; both sorts of transfers would also require the governor’s signature.

The BSA also provides for automatic midyear budget cuts, which could occur up to three times a year under certain conditions. School funding would be subject to the midyear cuts.

“Securitization” of the state lottery, as the governor calls his plan to raise revenues by leasing out the games, is related to the BSA because it would provide revenue for the rainy day fund to ensure enough is available if needed. The governor expects the securitization to produce $15 billion of revenue over the next three years. Lottery revenue to schools would be locked in at the current level, and future increases would be paid to investors who buy lottery bonds.

The securitization and BSA proposal would both require voter approval. Legislation would provide that, if the voters reject the securitization proposal, then the Department of Finance would be authorized to impose a temporary 1-cent sales tax increase, if needed, to fund needed transfers from the rainy day fund.

No hope for adequate school funding

Details are not yet available on reported revisions to the BSA proposal, but our understanding is that the base year for determining the permanent spending cap would be 2008-09. This would effectively cap school spending at a level that is $4 billion below the amount needed just to maintain current programs—and far below schools’ real needs. In other words, there would be no hope to increase school funding to a level that even approaches adequate.

In short, the budget would still be an overall year-to-year decrease in school funding, resulting in massive layoffs and program cuts. And, if the BSA is adopted, those cuts would become permanent. The May revision just confirms CSBA’s position that a cuts-only budget is bad for schools and bad for California.

Sample legislative reaction

With two-thirds approval of the governor’s budget proposal required in both the Assembly and the state Senate, votes from both Republican and Democratic legislators are essential. A sampling of early reactions is instructive:

Senate President Pro Tem Don Perata, D-Oakland: “This is a budget beneath a governor of this great state. It’s telling our citizens: ‘This is it. Our best years are behind us.’ … Under this plan, schools will lay off teachers and increase class sizes, and we will abandon children and the elderly. It’s shameful.”

Senate Republican leader Dave Cogdill, R-Fresno: “I’m pleased that the governor’s May budget revision prioritizes state spending and has moved away from across-the-board cuts. Despite a slowing economy, our state’s revenues are holding steady, which shows we still need to address the spending addiction in Sacramento. Budget reform will ensure the state spends no more than it takes in.”

Assembly Republican leader Mike Villines, R-Clovis: “I applaud the governor for fully funding education at the minimum guarantee. I am also pleased that the ‘May Revise’ includes some positive improvements over the January budget proposal, including eliminating a previous early [prisoner] release plan, keeping our state parks open and reducing spending in one of the fastest growing areas of government.”

Assemblyman John Laird, D-Santa Cruz, chair of the Assembly Budget Committee: “The governor’s ‘May Revise’ proposals are not the right answer for California and are not a real fix. They’re bad for our economy, lay off teachers and are based on risky assumptions.”