Is a budget deal close? What would it mean for schools?

Analysis from CSBA's Governmental Relations Department

Legislative leaders and the Governor Schwarzenegger met over the weekend and then took Monday off while staff penciled out some of the proposals that had been discussed. After a few fits and starts, talks resumed Tuesday and continued until late Wednesday night.

After the weekend meetings, all sides reported that, while a deal had not been struck, much progress had been made. That led many Capitol observers to conclude that a deal could be reached by the end of this week or by the weekend, with floor votes next week.

Over the past 24-48 hours, it has become increasingly clear that the final stumbling point is school funding. The concern is not how much to cut—there seems to be agreement on that. Rather, it’s can school funding be cut without suspending Proposition 98 and should last year’s cuts be restored? (More on this later.)

Democratic leaders tried to pass a package of bills prior to the end of the 2008-09 fiscal year (June 30) that would have reduced the Proposition 98 base for that year, resulting in a lower base for 2009-10. At the time, Democrats argued that it was necessary to enact these bills prior to the close of the fiscal year to make the K-12 cuts without suspending Proposition 98. These bills passed with overwhelming bipartisan support in the Assembly, but failed in the Senate, where they failed to get the needed two-thirds vote. All Senate Republicans either abstained or voted no. In any event, the governor had declared that he would veto the bills, if they had passed.

Now, Democrats are saying that they have found a way to retroactively reduce the 2008-09 Proposition 98 guarantee, so they can make the K-12 cuts without suspension. Details of this plan have not been released, so we cannot comment on the plan directly. However, we can note that a prior attempt to retroactively “unappropriate” Proposition 98 appropriations after the close of a fiscal year was declared unconstitutional by the courts. The fact that leaders are contemplating an approach that is legally “iffy” at best may be an indication that they cannot get the two-thirds vote needed for suspension.

As mentioned, leaders have already decided how much to cut school funding. Their concern is how to make the cuts without suspending Proposition 98. If they are successful in doing this, then they can—once again—take (fictitious) credit for “protecting” Proposition 98 and, therefore, protecting school funding.

This is why CSBA has focused on opposing the cuts themselves, regardless of the mechanism used to achieve them. We have been active in reminding legislative leaders of the impact of cuts already made and the likely consequences on students of even further cuts.

A related issue is whether a Proposition 98 maintenance factor was created in 2008-09. A maintenance factor is created in years when Proposition 98 funding is temporarily reduced as a result of economic conditions. It’s a complicated issue, but suffice it to say that the Department of Finance has been arguing that a maintenance factor was not created last year. CSBA disputes that conclusion and has joined a lawsuit filed by the California Federation of Teachers to challenge it.

For complex reasons, the Department of Finance’s interpretation of the maintenance factor requirement was contingent on enactment of one of the previously mentioned bills that failed on June 30. So, on July 1, the governor held a press conference where he (1) criticized Democrats for proposing only “partial solutions” to the budget problem, and (2) acknowledged that a $9-12 billion (depending on whom you ask) maintenance factor was created and (3) proposed to suspend Proposition 98.

A maintenance factor is the difference between the temporarily low level of funding for Proposition 98 and the level of funding that would be provided if no cuts were made. Among other things, a maintenance factor is a legal that the level of funding is, in fact, temporarily low, and that full funding must be restored over time. (It’s important to note that funding that is lost in any maintenance factor year is never repaid. For example, schools will never see the $9 billion from last year’s maintenance factor. Instead, the Proposition 98 base is gradually increased over time, so the minimum guarantee gets restored to where it would have been if the cuts that created the maintenance factor had never been made.)

In responding to questions regarding the maintenance factor during his July 1 press conference, the governor said, “I see it as—I think that when you take that much money from education, I think it’s important that we pay it back. And I wish that we could do this with a lot of different things. But I think that we have taken the hugest amount of cuts from education and so I think, therefore—which is $10 billion plus—so I think that they should get their money back, yes.”

Now, 15 days later, conditions have changed, and the Department of Finance, using new revenue estimates for 2008-09, is saying that a maintenance factor was not created last year after all. This led Democrats to propose legislation to statutorily create a maintenance factor for last year, which would be restored over time. Democrats see this as one “win” they can get on behalf of schools, in exchange for agreeing to massive cuts.

Notwithstanding his July 1 comment that “schools should get their money back,” the governor is opposing this proposal, as are Republicans. This seems to be the main point of contention. There is general agreement on how much to cut schools and on the desirability of making the cuts without suspending Proposition 98 (if not the political need to do so). But there is no agreement, yet, on whether school funding should be eventually restored to its “pre-cut” 2008-09 level.

So, at the 10:00 p.m. conclusion to Wednesday’s meeting, Assembly Speaker Karen Bass announced that “we’re stalled over education.” Meanwhile, Assembly Republican leader Sam Blakeslee scheduled an Assembly Republican caucus meeting for noon today to “meet as a caucus and review everything we understand will be in the deal to ensure we can deliver the votes prior to making any public announcement that the deal is done.”