Executive director’s note: This year’s budget crisis: Does anyone know the end game? 

By the time you are reading this issue’s column, the Legislature will have taken the first step toward meeting
Gov. Arnold Schwarzenegger’s stated goal of closing California’s budget deficit. This will have been achieved by enacting a series of midyear budget cuts that attempt to solve the state’s immediate cash flow problem and by reducing the base budget for next year.

The good news is that the governor was responsive to the concerns raised by CSBA and our partners in the Education Coalition to minimize the impact on schools in the current year. Our point all along had been that midyear budget cuts—such as those visited upon us by former governor Gray Davis in the early part of the decade—are extremely problematic when we are over halfway through the school year and the teachers are teaching, the bus drivers are driving and the kids are in already in
their seats!

As a result, the state was able to capture over $500 million in unobligated and unencumbered funds for education that had not yet been distributed to schools or were otherwise available, without any net impact on school operations in the current year. The consequence, of course, is that now the Legislature and the governor will have harder work to do in trying to find all of the cuts they need to achieve without suspending the Proposition 98 school funding guarantee for 2008–09.

In fact, the governor’s proposal would result in the first year-to-year cut in education funding in a generation—the kind of thing that used to happen back in the 1980s and led to the voters’ 1988 enactment of Proposition 98 in the
first place!

I have worried for some time that, as the years went by—especially in a “term limits” environment—the “constituency” within the Legislature that felt obligated to protect Proposition 98 would begin to dissipate, and we are starting to see those signs with every passing day. In other words, as it gets “easier” for our elected officials to suspend Proposition 98, the education funding guarantee begins to lose its status as one of the so-called “third rails” of politics that legislators and governors are loathe to touch.

All of you are familiar with the story by now: The state’s projected deficit for 2008–09 is pegged at over $14.5 billion (and by the time you read this, it will probably be higher), and the governor has proposed what is essentially a 10 percent across-the-board cut in state-supported programs. When it comes to schools, the Department of Finance calculated the so-called work-load budget by running the Proposition 98 formula for next year, and then making the 10 percent cut. The result? An approximately 3 percent net reduction in funding for schools from 2007–08 to 2008–09. The reason? Because the Proposition 98 formula for next year doesn’t generate enough funding to fully cover COLA and growth, primarily due to a series of manipulations of the guarantee by the governor and the Legislature in past years that we have written about before. The bottom line? It bears repeating: We end up with a net reduction, year over year,

Now, from a purely objective point of view, one could agree that it might be desirable to solve the upcoming year’s deficit with cuts only, wipe the slate clean on the state’s structural deficit, and then create some kind of momentum for the governor’s other goal, which is to create a budget-balancing amendment to “smooth out” these feast and famine cycles in state funding and expenses.

Unfortunately, those of us in the school business can’t afford the luxury of this kind of simplistic thinking about the state’s problems. None of this is the schools’ fault. It is not our fault that in the last decade, governors and legislatures have enacted tax breaks or spending plans that failed to recognize that the state’s tax system is as volatile as it is. It is not our fault that even with the protection of Proposition 98’s minimum funding guarantee, we are still near the bottom of the country in per-pupil spending—while still trying to meet the highest academic standards in the nation.

The California Budget Project report,
“Two Steps Back: Should California Cut Its Way to a Balanced Budget?” contains some interesting facts:

• Tax cuts enacted between 1993 and 2006 will cost the state $12 billion in lost revenue this year. (About half of that is from the Vehicle License Fee reduction. In the state budget this shows up as a spending increase, because the state backfills the local revenue loss from that reduction.)

• Corporate income taxes have declined since 1981 as a share of total general fund revenues and as a share of corporate profits. If corporations had paid the same share of their profits in taxes in 2005 as they did in 1981, tax collections would have been $7.3 billion higher.

• The shift from a manufacturing to a service economy has reduced the yield from sales taxes and has reduced the amount of sales taxes paid as a percent of personal income. If taxable purchases accounted for the same share of personal income in 2008–09 as they did in 1966–67, state sales tax revenues would be $15.9 billion higher.

• The phase-out of the federal estate tax costs more than $1 billion per year. The tax is scheduled to be reinstated in 2011, but President Bush has proposed to make the repeal permanent.

Adding to the overall confusion are the mixed signals we are getting from the governor himself. It has been reported that, in recent newspaper editorial board meetings about the budget, the governor has dropped hints that proposals he has made—such as the huge cut to education, the early release of nonviolent prisoners and the closing of nearly 50 state parks—were designed to rattle people’s cages in an attempt, perhaps, to shock legislators (particularly Republicans?) into considering increased revenues as part of the short-term solution to the budget mess and to set the stage for a different long-term solution.

It might well be the thinking that some or all of these tax increases would be temporary, as was the proposal put forward by former governor Pete Wilson to meet the deficits of the early 1990s, and coupled with substantial cuts. It should be noted that Wilson now says his plan was a “mistake,” and Gov. Schwarzenegger denies that is his intent, asserting time and again that he won’t support tax increases.

So, here we are again, caught in the middle of a fiscal crisis certainly not of our causing, with the no-tax advocates on one side and the no-cuts advocates on the other. All of which is occurring with the backdrop of the 2007 “Getting Down to Facts” studies, which concluded that public school funding in California is at least 40 percent below what we should be getting in order to meet the requirements of the state’s accountability system and the federal No Child Left Behind Act.

Is the governor setting up a high stakes gambit? Are we playing chicken? Does anyone know the end game? Does anyone know how to make a deal? So much for “the Year of Education.”

At this point, our job is twofold: We must ensure that no member of the Legislature can, with a straight face, vote to suspend Proposition 98 and enact major cuts in our funding by asserting that we can get by with a little less money.

Further, we must ensure that the elected officials we send to Sacramento stop taking their options off the table by doing things like signing no-tax pledges. We didn’t send them to the capital to not consider the entire spectrum of their responsibilities—from revenues to expenses and everything in between.