Budget gouges Prop. 98, applies Band-Aid to state’s structural problems 

Analysis from CSBA's Governmental Relations Department

Four days after the initial announcement that a deal had been struck between the legislative leadership and Gov. Arnold Schwarzenegger, the Legislature pulled an all-nighter and met through the wee small hours of the morning, through the late morning and finally into the middle of the afternoon to pass a package of bills that addresses the state’s $24 billion deficit. By the time both houses had adjourned, approximately 30 bills had been approved. Some—including the education bills—were passed on a two-thirds vote, and will take effect upon the governor’s signature. Others were approved by a simple majority vote that delays implementation by 90 days.

The Senate wrapped up its action on the budget around 6:30 this morning, but it soon became clear that the Assembly would not follow suit. Assembly Republicans balked at two items in particular: the recognition of the maintenance factor for schools and the state’s borrowing of the gasoline excise tax (also known as the Highway User Transportation Account).

Ultimately, the Assembly and Senate approved the legislation regarding the maintenance factor, but the Assembly failed to approve the transfer of the HUTA funds. To make up for the loss of this revenue for the state, the general fund reserve is expected to drop from $921 million to zero and the governor will likely blue-pencil $100 million from the budget package. The Assembly expects the Legislature to rebuild the reserve in August.

The final budget provides $24.1 billion of “solutions” with no reserve. It includes:

• $15.3 billion in program reductions and cuts
• $4 billion in revenue accelerations and fees
• $0.5 billion in fund shifts
• $2.1 billion in borrowing (mostly from local government under Proposition 1A)
• $1.2 billion in other one-time savings
  

The $15.3 billion in cuts include:

• $5.7 billion from K-14 education
• $2.8 billion from higher education
• $1.2 billion from human services
• $2.0 billion from health
• $2.0 billion from transportation
• $0.5 billion from resources
• $1.1 billion from public safety

Total general fund spending in 2009-10 will be more than $84 billion, down from nearly $91.7 billion in 2008-09 and nearly $103 billion in 2007-08. That represents a reduction of nearly $18.9 billion (18.3 percent) in just two years.

Proposition 98 cut by $5.7 billion

The total cuts to Proposition 98 approved by the Legislature for the 2008-09 and 2009-10 budget years amount to $5.7 billion. They include:

• $1.6 billion in 2008-09 funding for schools that had been appropriated but not actually sent to districts and county offices
• $2.4 billion from 2009-10 general-purpose spending for local educational agencies
• $1.7 billion of 2009-10 payments that will be deferred into 2010-11

An additional $450 million in federal funds will be used to backfill a reduced appropriation for schools that receive funding under the Quality Education Investment Act, resulting in a further cut since that money will not be available to help high-priority schools.

2008-09 'recapture'

Assembly Bill x4 3, part of the budget package, reduces Proposition 98 funding for 2008-09 by $1.6 billion through a “recapture” of unallocated categorical funds that have not yet been sent out by the state controller to LEAs. From the Legislature and governor’s perspective, this is the only way to reduce funding for the fiscal year that ended June 30, thereby lowering the base for 2009-10.

There remains great concern about the impact that taking the entire cut from categorical programs will have on those districts and county offices that receive a greater portion of their funding through categoricals. To equalize the impact among all districts, the categorical cuts will be restored in 2009-10 and an equal amount will be reduced from revenue limits statewide. Each district will receive the same reduction (about $250 per unit of average daily attendance) from its revenue limit. This will be in addition to the $2.4 billion revenue limit cut that was already part of the budget proposal.

Maintenance factor established

ABx4 3 also statutorily certifies the Proposition 98 guarantee level for the fiscal years 2005-06 through 2008-09 and certifies that the maintenance factor owed in 2008-09 was $11.2 billion. This provision appears to settle the question of whether a maintenance factor was, in fact, created in 2008-09; CSBA had joined a lawsuit challenging the Department of Finance’s interpretation that a maintenance factor was not created.

The maintenance factor will be restored pursuant to existing statutory and constitutional provisions. Generally, these provisions tie maintenance factor restoration to an increase in general fund revenue. However, because of future revenue loss due to recently enacted corporate tax breaks and the pending expiration of temporary tax increases, general fund revenue will not increase enough to trigger restoration for the foreseeable future.

Additional 2009-10 cuts and deferrals

Another bill in the package, ABx4 2, reduces funding for Proposition 98 by an additional $2.4 billion in 2009-10. The bill specifically makes the cuts to district and county office revenue limits. This amounts to approximately $390 per student, and it increases the deficit factor for district revenue limits to 18.355 percent and for county offices to 18.621 percent. The bill also reduces categorical funding for basic aid school districts by $80 million, which cuts those districts proportionally to the cuts made to revenue limits.

In yet another turn at creative accounting, ABx4 2 swaps state general fund dollars for QEIA in 2009-10 with ongoing Proposition 98 funds. This results in a general fund savings to the state of $450 million but reduces available Proposition 98 funding. The bill does allow districts that are participating in QEIA to apply for federal Title I funds to backfill the reduction in Proposition 98 funds. The program is also extended for an additional year.

ABx4 2 makes the following additional changes:

• suspends the requirement that school districts purchase newly adopted instructional materials within 24 months of an adoption by the State Board of Education through 2012-13. The bill also suspends the regular adoption cycle for K-8 materials for the same period of time
• permits school districts to reduce the number of schools days (or the equivalent instructional minutes) by five days, to 175 days through 2012-13
• eliminates the required set-aside amount for routine restricted maintenance accounts as long as the district facilities are in good repair
• clarifies that districts in Program Improvement that have received a federal corrective action sanction from the State Board of Education are allowed to exercise the categorical flexibility allowed to districts not in program improvement
• allows school districts to sell surplus property not purchased with state funds and use the proceeds for general purposes for three years
• lowers the reserve requirement for economic uncertainty to one-third of the usual requirement
• suspends the requirement that students with disabilities pass the California High School Exit Exam in order to graduate from high school. The exemption will be in place until the State Board of Education decides whether to adopt regulations authorizing an alternative exam
• prohibits county superintendents and the state superintendent of public instruction from assigning a qualified or negative certification to a school district due to the end of federal stimulus funding in 2011-12 and 2012-13
• specifies that the deficiency funding for the charter school categorical block grant be limited to unanticipated increases in students and counts of students eligible for Economic Impact Aid funding through July 1, 2013. It further prohibits additional funding from being provided to restore the categorical program reductions
• changes the Charter School Facility Grant Program from a reimbursement program to a grant program

Additionally, ABx4 16 provides for the deferral of $1.678 billion in payments to local education agencies from April and May into August of the next fiscal year.

The governor’s approval

Absent a dramatic turn of events, Gov. Schwarzenegger is expected to sign the package of bills the Legislature sent to his desk without delay. When the floor sessions were gaveled down this morning, the legislators adjourned for the remaining three weeks of their summer break and will return on August 17. A deep breath is in order, as many in Sacramento believe revenues will continue to decline and another round of adjustments will be necessary within a few months.