September 26, 2008

TO:           ACSA Leaders and interested parties

FROM:     Adonai Mack, Legislative Advocate
                Brett McFadden, Management Services Exec.

RE:           Budget advisory: Analysis of final 2008-09 K-adult budget -- Overview and commentary

This year's budget saga finally came to end.  Unfortunately, the final 2008-09 State Budget merely "kicks the can down the road," and does very little to address the fundamental causes of the state's structural deficit and nagging fiscal issues.  It is likely the worst state budget we have witnessed in our careers.  The budget document was out of whack the moment it was signed and sets us up for incredible challenges in the years to come.  Education leaders are advised to prepare for difficult fiscal conditions going well into 2010-11.

Budget politics 

On September 23, the governor signed the final 2008-09 state budget and the longest budget impasse in the history of California finally came to end. This year's impasse highlighted the many problems with the existing legislative process for passing the state budget.  Partisan politics played an overriding role in the delay and struggle to come to a resolution. On one end, Democratic leadership believed that the state needed permanent revenue increases to solve the budget deficit and resisted spending cuts to state services.  Further, Democrats resisted any type of budget reform, whether a spending cap or restrictive "rainy day" reserve, that would tie the hands of the Legislature.   Conversely, Republican leaders believed that tax increases would harm the economy and that the state needed to reign in spending by putting a cap on spending with an automatic savings mechanism to use during down times.

The ongoing budget battle produced an unheard of August budget compromise or "August Revise" from the governor; several iterations of the budget conference committee; a proposal from the Senate Republican Caucus and an attempt to increase the tax withholdings from employee paychecks.  All of this posturing eventually led to an agreement in the form of a budget that failed to solve the state's structural budget problems, relied mainly on borrowing, deferrals, and accounting gimmicks, and provided minimal revenues to close a $15 billion budget deficit.  Many describe this budget as a "get out of town budget," one that allows the Legislature to leave the Capitol and pass the mess on to next year. 

Overall state budget

The overall state budget maintains a flat spending level from 2007-08 to 2008-09.  The total expenditures for 2008-09 total $103.4 billion which is $68 billion more than the 2007-08 Budget Act.  The budget also contains a reserve of $1.7 billion, a significant decline from the 2007 Budget Act reserve of $3.1 billion.  Further, this budget projects a $1.5 billion deficit for fiscal year 2009-10. 

The budget includes $24.0 billion of "solutions," including $10.3 billion in spending cuts, $9.6 billion in revenue-related provisions, and $4.0 billion in borrowing.  Borrowing includes an estimated $10 billion or more over two years that would be repaid out of future lottery proceeds to address future years' budget shortfalls. 

Budget reform

In order to sign the budget, the governor required that it include a strengthened Budget Stabilization Fund (BSF).  The BSF was originally created by Proposition 58 in 2004.  The version passed initially by the Legislature failed to include the governor's demands prompting the governor to state that he would veto the entire budget if his demands were not met.  After going back to the negotiating table, the Legislature met the governor's demands and passed budget reform with the following components:   

• Increases the target size of the Budget Stabilization Fund (BSF) from five percent of General Fund (GF) revenues to 12.5 percent of General Fund revenues.
• Limits use of the BSF to bad revenue years. Commencing in 2010-11, transfers from the BSF to the GF are prohibited unless revenues are insufficient to meet the current level of funding for existing services.  The Legislature would be required to pass a stand alone statute authorizing a transfer from the BSF to the GF. 
• Limits the use of "April surprise" revenues.  Unanticipated revenue growth from the time of the January Governor's budget to the May Revision must be directed to first meet Proposition 98 constitutional obligations and then the remainder be transferred to the BSF. 
• Governor receives stronger authority to make mid-year reductions to state spending in years when expenditures exceed available resources.  The Governor would be allowed to reduce state operations (does not include K-adult programs) by up to 7 percent.  
• The Governor also has the authority to suspend cost-of-living adjustments (COLAs) and rate increases provided in the Budget Act by up to 120 days.  COLAs for general purpose appropriations for public schools - revenue limits - could not be suspended. Beginning in 2009-10, the Budget Act would be required to include a list of COLAs and rate increases that could be suspended under the new provision.

K-Adult education budget

The 2008-09 Budget fully funds the Proposition 98 minimum guarantee at $58.1 billion.  This is $1.3 billion higher than the May Revise, but provides a flat budget from the 2007-08 state budget.  It also incorporates a slight decline in average daily attendance in public schools.  For 2008-09, statewide K-12 ADA will decrease by an additional 31,000 to 5,916,000.  The budget also includes a funded cost-of-living adjustment (COLA) of 0.68% to school district and 1.02% to COE revenue limits only.  The statutory COLA is 5.66%.  Categorical programs do not receive the COLA.  The tables below outline COLA funding and deficit amounts.

Funded COLA and deficit amounts

 District COLA funding per ADA

 
The following are key provisions of the budget pertaining to K-adult programs:

• Defers a statutory appropriation of $150 million in 2008-09 for purposes of providing payment of prior year Proposition 98 "settle-up".
• Provides $25.4 million to support the development of the California Longitudinal Pupil Achievement Data System (CALPADS) and $1.2 million in federal funds to support development of the California Teacher Integrated Data System.
• Continues the deferral of annual mandate payments for K-12 education in 2008-09, estimated to cost $180 million annually.
• Includes $402 million to continue the Quality Education Investment Act of 2006.
• Eliminates the STAR norm-referenced test currently administered to students in grades 3 and 7 for a savings of $2.5 million.
• Adopts trailer bill language that basically would treat the After School Education and Safety Program (Proposition 49) similar to other categorical programs, subject to annual legislative appropriations.  This would be subject to voter approval.
• No additional program and/or fiscal flexibility.

NCLB Corrective Action 

The budget includes funding for school districts that are entering corrective action and funding for a new school improvement grants as follows: 

• $1,630,796,000 - ESEA - Title I Appropriation ($19,252,000 million in one-time carryover)
• $101,872,000 - Title I Set Aside for LEAs in Corrective Action ($47 million in one-time carryover funds)
• $78,082,000 - School Improvement Grants, Corrective Action ($16,620,000 million in one-time carryover funds)
• $10,000,000 - Statewide System of School Support

The budget trailer bill contains additional direction in the area of NCLB Corrective Action including the criteria for the allocation of funding for corrective action purposes under Title I.  An LEA identified for corrective action, and subject to one or more of the seven corrective action sanctions identified in state and federal law, may apply for a one-year, nonrenewable grant of federal improvement funding to assist in its improvement process.  These funds are to be expended over the time period allowable under federal law.  The Superintendent may recommend, and the State Board may approve, an LEA in corrective action contract with a DAIT or other provider. This section of statute was amended to include "other provider" but this is not defined.  The funding cannot be used to pay the cost of a trustee or a receiver if one is assigned to an LEA. No language is included that limits the powers of a trustee. AB 519 does not expand the authority of DAITs or authorize multiple or continuous sanctions to be imposed by the State Board. Essentially current law prevails in these three areas. 

The amount of the grant to an LEA shall be allocated as follows:

1. Severe Category -     $150,000 for each school identified for program improvement
2. Moderate Category - $100,000 for each school identified for program improvement
3. Minor Category -       $50,000 for each school identified for program improvement

The three categories will be determined based on an objective criteria approved by the State Board. Currently, that criteria is the LEA Priority Index of which each of the first 97 LEAs were assigned to one of three categories; "Intensive, Moderate and Light." ACSA is assuming the LEA Priority Index will continue to be used for the next cohort of LEAs who just entered Year 3 of Program Improvement. The assignment of corrective actions for the next cohort will occur during the State Board's November meeting.

The Statewide System of School Support (known as the S-4's) will add the role of DAITs and other technical assistance providers to the S-4 system. DAITs and "other providers" when assigned by the State Board of Education, shall conduct a needs assessment and complete a report of their findings. ACSA is assuming this will allow for the continuation of both county offices of education DAIT providers as well as State Board approved private providers (e.g. WestEd, Springboard, etc.).

Child Care and Development

The 2008-09 budget and related legislation freeze the income eligibility limit for child care services at the 2007-08 level in 2008-09 and do not provide a COLA for child care and development programs in 2008-09.  The budget also includes the following components to the child development budget: 

• Provides full funding of Stage 3 CalWORKs child care.
• Restores Governor's proposed across-the-board reductions to various child care programs.
• Adjusts child care provider reimbursement rates, pursuant to the new Regional Market Rate survey, effective March 1, 2009.

California State Lottery Modernization and Securitization

The budget package includes changes to the operation of the California State Lottery.  Under this plan K-adult education is removed from the payouts of the state lottery and the funding from the lottery is included in the Proposition 98 minimum guarantee.  The effect of this is to build the Proposition 98 minimum funding level by an estimated $1.1 billion in 2009-10, which will grow over time based on the Proposition 98 growth factors.

The budget assumes that the changes to the lottery will generate $5 billion in 2009-10 and $5 billion in 2010-11.  This agreement requires that the changes to the lottery be submitted as a ballot measure to the voters in order to modify lottery operations and authorize the state to issue bonds that would be repaid out of future lottery proceeds. 

Governor's Line Item vetoes

The governor's line item vetoes include:

• A $16.4 million cut to CalWORKs Stage 2 child care funding, which the Legislature added to ensure that the state would be able to meet the child care needs of current and former CalWORKs families in 2008-09.
• Deletion of a budget bill provision that would have exempted families who receive child care services from paying fees if their incomes are less than 40 percent of the state's median income, adjusted for family size.
• $6.0 million for non-Title I schools subject to sanctions for failing to make progress under the No Child Left Behind Act (NCLB) or the state's accountability system.
• $1.8 million in federal funds allocated to schools whose English learners are failing to make annual progress under NCLB.
• Reducing support for child nutrition programs that provide meals in schools and child care programs by $862,000.
• $253,000 for public libraries that provide literacy instruction to adults and children.

Management recommendations

The final 2008-09 budget will create significant fiscal challenges for LEAs going into 2009-10.  Projected declines in state revenues associated with sluggish national and state economic conditions will make 2009-10 just as difficult, if not more so, as 2008-09.  LEAs are entering a protracted state of fiscal uncertainly that is likely to remain well into the 2010-11 fiscal year.  We recommend education leaders consider the following when revising their budgets and making multi-year projections:

1. Build your reserves
   • If possible, set aside the amount you budgeted for the May Revision 6.5% reduction to categoricals in your June budgets
2. Hold major expenditures until post January
3. Hold off on settling 08-09 labor contracts until governor's January budget proposal
4. Manage categoricals and closely watch spending / cash flow
5. Use existing flexibility where you can
   • AB 825 block grant
   • Mega Item

6.     Build your fund balance

7.     Run worst case scenarios in your multiyear projections and prepare contingency plans

8.     Stay in contact with your COE

9.     Communicate your situation to stakeholders and community

10. Protect your core - students and academic achievement

We will continue to provide budget advisories and recommendations as information becomes available.  In the meantime, please contact us for additional information and/or assistance.  Good luck!