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November 14, 2007 TO: ACSA Leadership and Members, Interested parties
FROM: Adonai Mack, Legislative Advocate RE: Budget advisory: LAO release annual Five-year Forecast Earlier today the Legislative Analyst’s Office released their annual Fiscal Outlook: 2007-08 through 2012-13. Release of the report serves as a prelude to the annual budget deliberation process that begins every January with the release of the Governor’s January Budget Proposal. The following is ACSA’s analysis and perspective on this matter. Background – the LAO and this report The Legislative Analyst’s Office (LAO) is a non-partisan, independent arm of the California Legislature. Elizabeth Hill is the appointed Legislative Analyst for the legislative branch of state government. Serving her are a cadre of budget and program analysts divided up into various topic and program units. They are very talented, highly competent, and put out strong, independent analyses on behalf of all legislative members. Since the passage of term limits, their primary area of responsibility is fiscal and budget analysis. However, LAO staff will also conduct policy analyses when requested by members of the Legislature. The annual Fiscal Outlook provides analysis and projections as to the state’s overall revenues, expenditures, and fiscal health during a five-year forecast period. The report utilizes the latest data available pertaining to economic conditions, state revenues, and projected expenditures. However, it is important to remember that the report is a projection. It does not dictate final policy decisions and/or outcomes. In this regard, we utilize the report to gauge what the big picture could look like next year and develop appropriate advocacy strategies reflective of that environment. The complete report is available at www.lao.ca.gov/. State’s budget outlook As predicted, the LAO is forecasting difficult budget conditions for the entire forecast period. Recent developments and out-year projections once again pose significant challenges to Proposition 98 and the K-12 community’s ability to meet federal and state accountability requirements. Current year – 2007-08: The enacted 2007-08 Budget included a $4.1 billion reserve and attempted to close the ongoing gap between revenues and expenditures with one-time solutions and several overly optimistic assumptions. Since August, the state’s current year budget condition has deteriorated considerably due to a combination of factors:
With the significant decline in prior and current year projected tax revenues, the state’s 2007-08 budget condition has worsened by almost $6 billion. As a result, instead of having a $4.1 billion reserve in 2007-08, the LAO projects the state will face a year-end deficit of $1.9 billion. Budget year – 2008-09: The LAO forecasts tougher problems in 2008-09. Due to factors described above, the state is projected to start the 2008-09 budget year with a $1.9 billion negative reserve. The LAO projects that 2008-09 revenues will grow by 4.6 percent, but projected expenditures (absent corrective action by the Governor and Legislature) will increase by 7 percent. Using current-law projections, the LAO estimates that the state General Fund would be left with a 2008-09 year-end deficit of $9.8 billion absent corrective actions. Roughly $8 billion of this amount would come from the gap between 2008-09 revenues and expenditures. Long term forecast: The LAO projects the state will continue to face budgetary challenges throughout the forecast period. The state is projected to have an operating shortfall of $8 billion in 2009-10. After that, the operating shortfall would decrease to about $3 billion the following three fiscal years. The sharp drop in the operating shortfall is associated with the state paying off its deficit-financing bonds from 2004. The LAO’s forecast attempts to capture their best estimates regarding the state’s fiscal condition. In addition to these, the state faces a number of other risks and uncertainties that could negatively impact its bottom line. One of the largest of these is the lawsuit challenging the state’s use of transportation funds to balance the General Fund. The state was sued in September by public transit advocates arguing that the 2007-08 budget’s redirection of $1.3 billion in transportation funds over to the General Fund was illegal. If the state were to lose this lawsuit, the 2007-08 budget would be an additional $1.3 billion in the hole. In addition, $400 million in ongoing funding from the General Fund would have to be shifted back to transportation funds. Economic and revenue conditions As we predicted, the primary culprits behind the recent drops in state revenues can be attributed to sharp declines in housing related markets and a spike in energy prices. Both of these elements will create a considerable drag on the U.S. economy. These effects will be particularly hard felt in the California economy where a higher percentage of risky home loans were issued in the past five years. Stockton and Sacramento, for instance, rank in the top ten of metropolitan areas experiencing high rates of mortgage foreclosures. Stockton ranks number one in the nation with 1 in 33 homes in foreclosure during 2007. Consequently, the state’s economic growth is projected to decrease but remain positive through 2008 and into 2009. This mirrors the rest of the nation, but California will feel the effects of the housing and mortgage market corrections in a more pronounced manner. Other segments of the economy are projected to experience modest growth thereby alleviating negative impacts associated with declines in various real estate-related industries. But the housing and energy markets will continue to be areas of uncertainty and risk to the state’s overall economic and fiscal health. The LAO has subsequently lowered their overall state revenue estimates for fiscal years 2006-07 through 2007-08. Although revenue gains remain positive, they have fallen below budgeted estimates thereby worsening the state’s operating and ending year deficits. The LAO projects that revenues will accelerate modestly in 2009-10 and throughout the remainder of the forecast period. Proposition 98 impacts All of this creates considerable challenges to Proposition 98 and K-12 programs next year. The decline in 2007-08 revenues alters the Proposition 98 guarantee from a “Test 2” condition to a “Test 3,” and thus reduces the minimum guarantee for K-14 by roughly $400 million in this fiscal year. As a result, Proposition 98 has been “over appropriated” in the current year. Readers may recall that a similar situation occurred in 2001-02 and 2002-03. In those years, the Governor and Legislature initiated mid-year reductions to achieve budgetary savings to the General Fund. See below for our perspective on this matter. Proposition 98 and COLA: The LAO projects the 2008-09 Proposition 98 guarantee to be approximately $59.2 billion. This is $2.1 billion (3.6 percent) higher than the 2007-08 amount. The LAO believes that the increase in the guarantee will not be sufficient to fully cover COLA adjustments for K-14 education. The LAO estimates that the statutory COLA for K-14 will be 4.8 percent, up .5 percent from earlier estimates. LAO COLA estimates show a significant increase in 2008-09 with a sharp decrease and leveling off in the forecast period. Below are the LAO’s five-year K-14 COLA estimates:
Out-year predictions: Like last year, the LAO continues to project that Proposition 98 will enter a “Test 1” condition in 2010-11. They argue that this will create substantial K-12 revenues above baseline costs. Estimates are that this amount could be as high as $1.1 billion in 2010-11 and $2.8 billion in 2011-12. However, we caution that these projections are a long way off. Policy makers and K-14 advocates should be cautious regarding any policy decisions related to this possible K-14 funding surplus. Proposed budget reduction actions: The LAO is suggesting that the Legislature seek a variety of options to address the budgetary shortfalls in the current and budget years. These suggestions include reducing the Proposition 98 Guarantee for the current year by $400 million; suspending or reducing growth and COLA for 2008-09; making reductions to base programs (possible mid year cuts or budget year cuts); identifying non- Proposition 98 funding sources; or raising additional resources (i.e. tax increases). ACSA perspective The LAO’s forecast foreshadows what is likely to be another difficult year for K-12 financing. Fiscal conditions are similar to what we faced in the early part of this decade, but it is much too early to make any solid predictions as to what will or will not occur. In addition to uncertain fiscal and economic factors, a number of political factors remain unclear and will likely influence Sacramento policy and budget making. In light of these, we provide the following perspective:
Conclusion The LAO provides an overall picture and framework for the upcoming budget discussions and is by no means a final opinion on the budget. While the LAO’s prediction provides a grim outlook for the upcoming year, ACSA is committed to ensuring that adequate resources are provided to our K-Adult education programs. This report will certainly spur additional rumors and fears regarding possible policy actions in 2008, but we have a long way to go before final budget adoption. We will continue to provide additional advisories and alerts as appropriate. Should you have questions or require assistance with this matter, please contact either of us at:
Adonai Mack, ACSA Brett McFadden,
ACSA
Addendum: 2008 Budget Perspective Workshops
ACSA, along with School Innovations & Advocacy, and the Small School Districts Association, will once again host a series of Budget Perspectives 2008 workshops around the state. These workshops will be held in various locations on January 14 and 15. Date and locations include:
January 14: 12:30 p.m. – 4:00 p.m.
January 15: 9:00 a.m. – 12:00 p.m.
For more information and how to register go to:
http://www.clueupdate/com/workshops.html
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