Budget Highlights 2011-12

CAEAA Annual ConferenceLong Beach January 28, 2011

Teri Burns, School Innovations & Advocacy

Budget Themes• Acknowledges K-12 Sacrifices - taking the

“brunt” of cuts over the last several years• Balance – Cuts & Revenue• Something for everyone to hate - Billions in

deep cuts to all programs, even K-12 not spared• Dramatic, complex realignment is a centerpiece

to the overall plan• Local control and flexibility are “in”• Linkage to special election & tax revenue -

leaves K-12 and all state funded programs hanging until June

2

Initial Thoughts• Effort to minimize school cuts to this extent would

not have been predicted by anyone• Extreme caution continues to be an important

approach for local school agencies. There will be nothing certain about this budget until the fate of a ballot measure is determined - first in the Legislature and second at a statewide election

• School funding is the key to voter sentiment – Gov. chooses not to slash schools as an election strategy. $1.7 billion deferral served as fiscal insulation to much deeper cuts

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Economic Outlook

Economic Outlook• California is 18 months into an economic

recovery that is painfully slow• For California, income and job growth will likely

be modest for the foreseeable future• Personal income is projected to grow 3.8 percent

in 2011, 4.0 percent in 2012, and 5.1 percent in 2013

• This is a definite improvement from the 2.4 percent decline suffered in 2009, but weak compared to the 5.1 percent average annual growth rate achieved from 1989 to 2009

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Source: Department of Finance

Personal Income in California Declined in 2009

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Source: Legislative Analyst’s Office

Budget Basics

Where do State General Funds come from?

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Source: Legislative Analyst Office 2011-12

Recession Devastated State Revenues

-35

-30

-25

-20

-15

-10

-5

0Personal Income Sales Corporate Total "Big 3" Taxes

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Percent Reduction in Baseline RevenuesNovember 2010 Estimates Compared to January 2008 Estimates

Source: Legislative Analyst’s Office

Where do State General Funds go?

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Source: Legislative Analyst Office 2011-12

Education Funding 2009-10 Inflation-Adjusted Dollars

Source: Legislative Analyst’s Office

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Source: Department of Finance

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Source: EdSource

Governor’s 2011-12 Proposal

The Budget Gap$25.4 Billion Problem

$ 8.2 Billion Current Year$17.2 Billion Budget Year$25.4 Billion

+$ 1.0 Billion Reserve

– Revised from $28 Billion due to different Economic forecast and lower debt service costs anticipated from the lack of a Spring bond

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The State Faces an Enormous Budget Problem

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Source: Department of Finance

Budget Takes A Balanced Approach

Source: Department of Finance

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MAJOR REVENUE PROPOSALS: GENERAL FUND

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2010-11 2011-12Maintain Personal Income Tax 0.25-percent Surcharge

$1,187 $2,077

Maintain Level of Dependent Exemption Credit

725 1,248

Mandatory Single Sales Factor Apportionment

468 942

Eliminate Enterprise Zones and Similar Tax Benefits

343 581

Tax Shelter Amnesty 270 -50Franchise Tax Boars Financial Institution Record Match

10 30

Franchise Tax Board Costs of Amnesty and FIRM

0 -2

Revenue Driven Increase in Proposition 98 Expenditures

0 -1,990

Total General Fund Revenues

3,003 2,836

Dollars in Millions

Major Revenue Proposal: Local Revenue Fund

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2010-11 2011-12Maintain Sales Tax Rate of 6 percent

$0 $4,549

Maintain Vehicle License Fee Rate of 1.15 percent

0 1,382

Total Local Fund Revenues $0 $5,931

Dollars in Millions

2010-11 2011-12Extend the Hospital Fee for Medi-Cal to June 30, 2011

$160 $0

Continue Managed Care Organization Taxes for Medical and Healthy Families

0 97

Total all Funds $3,163 $8,864

Other Special Fund Revenues that Offset General Fund Costs

Major Cuts Are Necessary to Reduce Spending

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Source: Department of Finance

With Proposed Solutions, Budget Balances In Each Future Year

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Source: Department of Finance

Looking Cheap – Being Cheap• Governor’s transition and inaugural• Eliminating 48,000 cell phones• Cutting back on cars and trucks• Reducing his security detail – walks through

Oakland• Cutting Governor’s office budget by 25 percent• Eliminating the Office of the Secretary of

Education and Office of Inspector General for ARRA

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Key Education Components • Maintains programmatic funding at 2010-11 levels

• Deferrals of K-12 funding increased to total of nearly $9 billion annually• $1.7 billion payment essentially vanishes with deferral shell game• All existing flexibility provisions extended two years• $2 billion estimated drop in Prop 98 funding and corresponding cut in

budget averted by proposed extension of temporary taxes subject to voter approval

• No funding for 1.67 percent COLA amounting to a loss of $964.5 million in funding this coming year

• Enrollment growth funding provided at $81.4 for 2010-11 and $357.5 million for 2011-12

• Backfill of Schwarzenegger vetoes• Ongoing mandate funding returns with $89.9 million in 2011-12 budget

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Proposition 98

Prop 98 – The Basics• Prop 98 sets a minimum funding guarantee for K-14 education• Prop 98 does not guarantee what programs are to be funded

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Prop 98 can be suspended by a two-thirds vote of the LegislatureProp 98 can be suspended by a two-thirds vote of the Legislature

What Establishes the Funding Guarantee?

Test Factors

1 Fixed percentage of General Fund expenditures plus statewide K-14 property taxes

2 Statewide ADA and per capita personal income

3 Statewide ADA and per capita General Fund revenues

See Resource Section for additional explanation of Proposition 98

Proposition 98• Governor’s proposed extension of temporary

taxes sustains Prop 98 in 2011-12 at higher level than LAO forecast. Schools stay nearly even with funding to be received in 2010-11 at $49.3 billion

• Budget assumes $2 billion for K-12 if voters approve extension

• Governor indicates that schools would lose $2 billion and Prop. 98 suspension might be necessary if voters reject measures

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Under Current Law, Proposition 98 Funding Would Decline in 2011-22

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Source: Department of Finance

Maintaining Existing Taxes Helps Stabilize K-12 Education Funding

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Source: Department of Finance

Maintenance Factor

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• Like 2008-09, Maintenance Factor (MF) issue raised again for 2011-12 – Test 1 Impact

• Brown Likely to validate MF obligation in Test 1 and reject Schwarzenegger approach

• 2010-11 - $9.9 Billion (adjusted for PCPI)

• 2011-12 - $1.8 Billion• Total MF Balance - $11.7 billion

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Source: EdSource

The Special Election• Two ballot measures being proposed– Extension of existing temporary taxes for five years– A measure that would authorize use of $1 billion in

Proposition 10 funds to fund Medi Cal services for ‑children through age five

• Gov’s key message: neither raises nor lowers taxes from where we are today

• Major campaign will received the public support of major political players across California on both sides

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The Special Election• Action on a ballot measures required by the

Legislature and Governor by March, 2011• Must secure two-thirds vote to place a measure on the

ballot. Governor would not discuss rumored majority vote approach

• Governor calls for all spending cuts and planned revenues to be concluded prior to special election

• Points to 2009 early budget action with follow up budget work in the summer as example of his intentions this year

• Post election budget act would conform final action with voter intent

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Revenue Limits and Other Impacts

COLA

• COLA Adjustment = 1.67%

• Deficit factor for 2011-12 is increased to offset COLA: School Districts 19.608%

County Offices of Education 19.892%

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Categorical Funding • COLA not applied

• “Tier III” flexibility extended two years; through 2014-15

• K-3 CSR revised penalty structure extended two years; through 2013-14

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Mandates – Reimbursement • Proposes $80 million for current K-12

mandate reimbursement claims– Described as “ongoing” funding at same level as

provided in 2010-11– Renewed commitment to on-going funding by

governor

• Mandates suspended in 2010-11 Budget remain suspended through 2012-13 under current law

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Big Changes for Child Care• 2010-11 Stage 3 Veto delayed by courts • Legislature funded until Dec with one-time

funds• Working to fund the Jan-March gap with one-

time funds• Stage 3 funded April-June 2011 - new rules

start early for them• New Rules kick in for all child care programs

for 2011-2012

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Child Care Funding

Total 2010-11 $2.3 billionTotal 2011-12 $1.6 billion

Expected to serve 45,000 fewer children

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Child Care Rule Changes 2011-12• Eliminate services for 11 and 12-year-olds• Reduce eligibility to 60% of the State Median

Income• Reduce the level of subsidies across the board• Restore one-time excess contract reserves to

programs from last year: General Child Care, State Preschool, Migrant Child Care and Allowance for Handicapped

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Local Government Realignment• Governor proposes to “untangle the knot” of

state and local responsibilities• Main goal is to reduce duplication and create

efficiencies at the local level• To be phased-in over three years• Will affect roughly $10 billion in wide array of

current services

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Realignment – Phase 1• Affects public safety programs– Fire and emergency response activities– Court security– Vehicle license fee public safety– Local jurisdiction for lower-level parole violators– Realign adult parole to the counties– Realign remaining juvenile justice programs– Mental health services– Substance abuse treatment– Foster care and child welfare services

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Realignment – Phase 1 funding• Assumes two sources of funding– Voters extend current tax rates for five years

(June)– Legislature amends Prop 63 (2/3 vote) to fund

some mental health services – rather than state general fund (March)

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Realignment – Phase 2• Proposal linked to implementation of national

health care reform• Local governments are better suited to provide

services (California Children’s Services and In-home Supportive Services, CalWORKs, food stamp administration, and child support)

• Eliminate state investment in Redevelopment Agencies

• Create new option for funding local redevelopment with Constitutional amendment to raise local revenue with 55% vote

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Realignment – Phase 2• Legislation would phase out existing

redevelopment agencies beginning in 2011-12• Current contracts would be honored, but no

new contracts could be made• 2011-12 – funds freed up for GF budget relief• 2012-13 – $900 million freed up for local

priorities (with similar amount going to education)

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Realignment – Questions

• County line barriers to moving funds around the state

• Redevelopment winners and losers? Equity issues

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EXTENSIVE USE OF REDEVELOPMENT BY LOCAL AGENCIES IN SOME COUNTIES

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•If a city or county creates a redevelopment project area to address urban blight, its redevelopment agency receives the future growth in property taxes from the area. (Absent redevelopment, schools and other local agencies receive these tax revenues)

•Redevelopment projects range from 2 acres to over 46,000 acres. Some agencies have placed so much property under redevelopment that as much as one–fifth of their countywide assessed property value is under redevelopment

•Statewide, redevelopment agencies receive 12 percent of property taxes paid by property owners, but this percentage varies significantly at the local level. The City of Fontana’s redevelopment agency receives more than 75 percent of property taxes paid in the city`

Property Taxes to Redevelopment

Selected CountiesSan Bernardino 31%

Riverside 26

Butte 20

Solano 20

Selected Other CountiesLos Angeles 12%

Sacramento 5

San Francisco 1

Statewide Totals 12%

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Use of Redevelopment in Some Counties

Source: Legislative Analyst’s Office

New State Board of Education• Brown appoints establishes majority control

of the eleven member State Board of Education by appointing seven new members

• Originally Appoints former State Superintendent Bill Honig

• Decades old legal troubles lead to Honig’s decision to withdraw his name

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New State Board of Education• Dr. Michael Kirst, a professor emeritus at Stanford University and a former

president of the State Board of Education under Brown in the 1970s• Dr. Carl Cohn, a professor at Claremont Graduate University and superintendent

of Long Beach Unified from 1992 until 2002 and credited for initiating many of the reforms and successes the district has become internationally recognized for and well known as a critic of Sacramento

• Pat Rucker, a legislative advocate for the CTA since 2008• Trish Williams is executive director of EdSource, a respected nonpartisan policy

group• James Ramos, is chairman of the San Manuel Band of Indians based in San

Bernardino and a key supporter of both the former state’s schools chief and newly elected SPI Tom Torlakson

• Aida Molina, director of academic improvement and accountability for the Bakersfield city schools

• Ilene Straus, an assistant superintendent in the Beverly Hills Unified School District

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Federal Funding

State Fiscal Stabilization Funds (SFSF)• CDE expected to release last 10% of SFSF late January

2011, about $40-$50 per ADA• Distribution based on revenue limit cuts and “fair

share” reduction to basic aid districts• Reminder---All ARRA and SFSF must be spent by

September 30, 2011– Cannot have beginning balance or revenue for 2012-13

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Jobs Bill - Funding• $1.2 billion one-time funds, which is about $200 per ADA• All LEAs receive funding, 90% issued in September– Entitlements will be adjusted after the 2010-11 Second Principal

apportionment is calculated in June 2011– Automatic for LEAs who applied for SFSF– LEAs who never applied for SFSF must complete SFSF application to get Federal

Education Jobs funds• Funds may be spent for expenses incurred as of, but not before,

August 10, 2010• Funds must be spent by September 30, 2012• Track funds using Resource Code 3205• Funds subject to audit and ARRA Accountability & Reporting– Maintain documentation, including decisions made for use of funds

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Jobs Bill - Allowable Uses• Funds must be used only for

– compensation, – benefits, and – other expenses, such as support services

• necessary to– Retain existing employees– Recall or rehire former employees, and– Hire new employees

• in order to provide early childhood, elementary, or secondary school-level educational and related services

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Jobs Bill - Prohibitions• The statute prohibits the use of Jobs Bill funds for:

– General administrative purposes– Equipment, utilities, renovations, transportation, and like

expenditures– Indirect costs– District-level support services– Outside contractors

• Exception: LEA that contracts with another LEA to provide school-level educational and related services may use Jobs Bill funds to pay that portion of the contract associated with the salaries and benefits of the employees of the LEA providing the services

– Rainy day funds– Any expenses incurred prior to August 10, 2010

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Watch the Cashflow

Cash is King!

Cash Flow Issues: K-12 Apportionment Deferrals• Deferrals and more deferrals are now the new norm• Permanent deferral of $1.7 billion added to existing inter-

year deferrals as part of October, 2010-11 Budget Act• Payment of $1.7 Billion due in July – May be delayed• New ongoing deferral of $2.1 billion included in

Governor’s proposed 2011-12 Budget to move apportionment payment(s) to 2012-13– Timing and specific appropriations for deferral TBD

• Impact of new deferral equates to a one-time cut of $2 billion

• Total deferrals now amount to $9 billion annually!

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Source: Orange County Dept. of Education

Cash Flow - Fiscal Tools to Manage Delays

• Internal borrowing by temporarily moving cash from one district fund to another, e.g. to make payroll– Cannot exceed 75% of any one account and law requires

repayment in the same year or following year if borrowing occurs within 120 days of fiscal year end

• External borrowing from outside source, e.g. from local county office of education and/or county treasury

• Issue tax and revenue anticipation notes (TRANs)

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Multi-Year Projections: Challenges• County Office guidance requires districts to – reflect the current State-Adopted Budget in their local

budgets– identify ongoing budget reductions for 2011-12 by the 2nd

interim

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LAO’s previous analysis indicates $1.7 Billion deferred until 2011-12 may not materialize. Governor’s proposed 2011-12 Budget is risky. It assumes

passage of two ballot measures that voters previously rejected.

SI&A Recommendation: Reserve the proposed new revenue to avoid risk and a roller coaster budget

Multi-Year Projections Challenges: Flexibility

• Most districts have capitalized on temporary flexibility

• Governor’s proposed 2011-12 budget includes extension of all existing flexibility options for two more years

• Flexibility to be subject of early budget discussions to allow districts to plan

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Multi-Year Projections Challenges: Flexibility Options Expiration Now & Proposed

• Flexibility Options Continue This Year But Expire in Upcoming Years:• Expires January 1, 2012 (Proposal would extend to January 1, 2014)

– Surplus property - Utilize proceeds from sale of surplus property (purchased with local funds) for one-time General Fund expenditures.

• Expires June 30, 2012 (Proposal would extend to June 30, 2014)– K-3 CSR – Reduced penalty structures for classes over 20– REU- Reduction of statutory minimum reserve requirement

• Expires June 30, 2013 (Proposal would extend to June 30, 2015)– State Tier 3 Categorical Program Flexibility– ADA-Funded Flexibility Programs– Reduction of instructional year and/or annual minutes by 5 school days– Routine restricted maintenance - Minimum contributions lowered from 3% to 1%– Suspension of deferred maintenance match– Instructional materials – Process delayed until 2013-14, as long as you have sufficient

standards-aligned materials• Related public hearing requirements are still in effect

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What now?• Look to other funding

sources• Support the ballot

measure• Work closely with your

district for funding• Keep good records to

show data driven results

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