California School Finance andManagement Conference 2013-14

California School Finance andManagement Conference 2013-14

Presented BySong Chin-Bendib

Associate Superintendent, Business & Operations

Board MeetingBoard MeetingAugust 13, 2013August 13, 2013

San Leandro Unified School DistrictSan Leandro Unified School District

Themes for the Budget – 2013-2014

This is going to be a good year for schools!

Passage of Proposition 30 ensures no cuts to education

The State Budget is legitimately balanced for the first time since 2002The structural deficit has been eliminated for the duration of Proposition 30New tax rates on highest-income earners – married tax payers at $500,000 or above beginning in 2012 through 2018 (7 years)Increases state’s sales tax rate by one-quarter cent beginning this year through 2016 (4 years)

Common Core Standards (CCSS) have been adopted

Local Control Funding Formula (LCFF) is the cornerstone of the Governor’s budget

The Governor is on a rollHe has stabilized the state’s budgetHe enjoys a two-thirds majority in the LegislatureHe has the support of the voters 2

The National Economy

Pluses:The U.S. economy is continuing its “slow-jam” recoveryHistorically low interest rates; housing recovery well underwayOptimism is building as personal consumption rates improve

Challenges:Recovery is fragile

While imports have increased, driven primarily by consumer spending, exports have slowed:

Recessions in Europe and JapanSlower growth in China

First quarter Gross Domestic Product (GDP) growth revised downward from 2.4% to 1.8%

Federal sequestration in both 2012-13 and particularly in 2013-14 has reduced spending and investment

Higher payroll and income taxes and Affordable Care Act (ACA) have left many consumers uncertain about the future

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The California Economy

California has followed an uneven path to economic recoverMedian home prices have increased 22.5% last yearUnemployment rate is expected to fall to 8.1% (1% higher than the 2014 projected U.S. rate)Strong Revenue performance in May and June 2013

Bifurcated path of the state economyThe inland regions are characterized by continuing high unemployment and ailing housing marketsThe coastal regions enjoy relatively low unemployment, improving housing markets, and higher average incomes

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Budget Risks Are Few in 2013-2014

Compared to prior years, the proposed 2013-14 State Budget faces considerably less risk

Unlike the 2012-13 spending plan, it is not dependent upon voter approval of a major tax initiativeUnlike the 2011-12 State Budget, it is not dependent upon an unrealistic revenue projectionThe plan does not rely on an infusion of federal funds to maintain programs

E.g. Federal Stimulus money; Jobs BillYet, the Governor’s May Revision (ultimately became the final 2013-14 State Budget Act) lowered the revenue outlook for 2013-14 by $1.3 billion because of expected drag that federal budget policy would have on the economy

Sequestration cuts would reduce federal spendingHigher tax rates for high –income earners and expiration of the federal payroll tax holiday would depress consumer spending

The LAO’s revenues were forecast to exceed the May Revision by $3.2 billion

Note: Thus far, May and June state revenues exceeded forecast

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Is the Administration and Department of Finance’s Forecast Reasonable?

In order to assess the risks of the DOF’s revenue forecast, not just for 2013-14 but through 2016-17, School Services of California, Inc., (SSC) commissioned Capitol Matrix Consulting (CMC) to perform an independent analysis of the DOF forecast

Brad Williams, a partner with CMC, served as the LAO’s senior economist for 12 years and was recognized by the Wall Street Journal as the most accurate California forecaster of the 1990s

The SSC/CMC analysis finds that the DOF forecast is reasonable, with greater upside potential than downside risks

We assume that:

The U.S. expansion will continue at a moderate pace for several years

California personal income will rise from 3.4% in 2013-14 to an annual average pace of 5.5% through 2016-17

Payroll jobs will grow at an annual average rate of about 2.2%6

Confidence Intervals and the Forecasts

Source: General Fund Revenues and Proposition 98 Forecast, CMC, July 2013 7

Conclusions About the DOF Forecast

Based on the independent analysis conducted by CMC, the DOF forecast is reasonable and falls within the +/- 1 SD confidence interval

There is more upside potential that actual revenues exceed the Administration’s forecast than downside risks that revenues will fall short

The Administration’s General Fund revenue forecast, therefore, provides a reasonable basis to project Proposition 98 revenues

The Proposition 98 projections, therefore, provide a reasonable basis to project revenues available to fund the LCFF

Revenues available to fund the LCFF allow districts to estimate revenues for purposes of their multiyear budget projections

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Proposition 98 Forecast

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Proposition 98

Proposition 98 sets the minimum funding level for K-12 education and community colleges

Adopted by state voters in 1988, this is a constitutional guaranteeThe measure specifies only the minimum funding level, it does NOT determine what programs will be funded

The State Budget implemented several changes from the May Revision

State Budget Act May Revision

1 $2.1 B LCFF in 2013-2014 Was $1.9 B

2 $1.25 B for one-time costs of CCSS Was $1 B

3 $250 M for CTE pathways Grant Program

4 $217 M K-12 Mandate Block Grant (MBG) Was $267 M

5 $1.6 B for deferral buybacks in 2012-2013 and $242 M for 2013-2014 Down by $658 M

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Proposition 98 and LCFF

Proposition 98:

It is important to remember that Proposition 98 establishes the minimum funding level for K-14 education

The Legislature and the Governor decide on an annual basis at what level to fund the various education programs

Local Control Funding Formula (LCFF): 8-year implementation phase until 2020-21

The LCFF is the model by which state funds are allocated to school districts, charter schools, and county offices of education (COEs)

Unlike revenue limits and Tier III categorical programs, there are no state statues that specify an annual appropriation to support the LCFFThis makes multiyear planning very difficultA district’s annual LCFF entitlement will be determined by “any available appropriations” (Education Code Section [E.C.] 42238.03[b][3]

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Proposition 98 and LCFFcontinued…

The eight-year (2013-14 to 2020-21) implementation phase is not set in statute and can be longer or shorter than eight years, depending upon the annual LCFF appropriationThe different demographic composition of student populations will result in vastly different revenues (significant revenue volatility will be imposed on districts with high proportions of students eligible for supplemental/concentration grants)The statutory COLA no longer determines out-year funding increases (individual districts are not guaranteed a funding increase equivalent to the COLA adjustment)

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Differential Risks Under the LCFF

School districts will face vastly different levels of risk during the implementation phase of the LCFF

School districts experiencing significant annual funding gains can face major declines as well

While the statutory COLA is forecast to average 2.3% between 2013-14 and 2016-17, some districts could see gains under the LCFF of 6% to 8% annually

Multiyear contracts that assume high annual increases in LCFF revenues could fall out of balance when/if state LCFF appropriations fall

In 6 years over the last 20, the state either provided no increase to fund the statutory COLA or cut funding levels due to downturns in the economy and revenues

It is simply a matter of time when the next downturn occurs13

Differential Risks – An Example

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Conclusions About Multiyear Budgeting

Because of the differential risks under the LCFF, all school districts, but especially high-funded districts, will have to make prudent out-year revenue assumptions

There is no longer a statewide standard for expected revenue growth in the form of an expected inflationary adjustment

Each district will have to carefully assess its demographic projections

The total projected ADA

The demographic composition of the ADA, i.e., low-income students, English learners, and foster youth

State Budget priorities can change from year to year with no guarantee that LCFF growth will be provided or that the LCFF will be fully funded

The statutory protection of annual COLAs is eliminated

Local conditions and budget decisions will be more important than ever in maintaining each district’s solvency

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LCFF

The Governor’s policy goals to reform the state’s school finance when he unveiled the Weighted Student Formula in January 2012, the precursor to the LCFF

Increase transparency and reduce complexityReduce administrative burdenImprove funding equity across school districtsImprove local accountability

To attain these goals, the LCFFEliminates revenue limits and almost all categorical programs, except those established by state initiative, federal statutes, or court orders or settlementsEstablishes base grants for four grade spansEstablishes supplemental & concentration grants to provide supplemental services to low income and English learner students

In general, a school district is better off under the LCFF if:Its base year funding is below the statewide averageThe proportion of students qualifying for supplement/concentration grants is above the statewide averageThe state provides a significant amount for LCFF growth in a given year

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Elements of the Formula

Base grant targets:

K-3 CSR: add-ons equal to 10.4% of base grant24-student average must be reached at full implementation of the LCFF (planned for 2020-21)During the intervening years, districts are to meet intermediate targetsA district’s failure to meet the target at one school site would result in the loss of all K-3 CSR funds districtwide

CTE: 2.6% for grades -12

20% supplemental grant

50% concentration grant (for eligible students exceeding 55% of enrollment)

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LCFF – K-3 CSR and CTE Adjustments

Factors K-3 4-6 7-8 9-12

Base grants – 2013-14 $6,952 $7,056 $7,266 $8,419

Adjustment percentage 10.4% CSR - - 2.6% CTE

Adjustment amount $723 - - $219

Adjusted grant per ADA $7,675 $7,056 $7,266 $8,638

20% supplemental grant $1,535 $1,411 $1,453 $1,728

50% concentration grant (for eligible students exceeding 55% of enrollment)

$3,838 $3,528 $3,633 $4,319

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Common Core State Standards (CCSS)

CCSS is a nationwide initiative to establish a single set of standards for K-12 education in English language arts and mathematics to ensure college and career readinessThe State Budget provides $1.25 billion in one-time funds from 2012-13 for the implementation

Funds will be allocated based on prior-year enrollment Estimated to be about $200 per student (about $1.7 M for SLUSD)Funds will be apportioned in July 2013 (50%) and August 2013 (50%)LEAs can encumber funds any time during the 2013-14 and 2014-15 school yearsFunds can be spent on:

1. Professional developmentFor teachers, administrators, and paraprofessional educators or other

classified employees involved in the direct instruction of pupils that is aligned to the CCSS academic content standards

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Common Core State Standards (CCSS)continued…

2.Instructional and supplemental instructional materials

3.TechnologyIntegration of the content standards through technology-based instruction for the purposes of improving the academic performance of pupils including but not limited to: the administration of computer-based assessments and providing internet connectivity to support computer-based assessments

Develop and adopt an expenditure plan detailing how the funds shall be spent; a public hearing must be held on the plan

On or before July 1, 2015, a detailed expenditure report to CDE

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Other Programs

Special EducationThe Governor vetoed a $30 million augmentation for special education equalization:

The veto message noted that implementing special education would reduce available funds to implement the LCFF and pay off deferrals in the out yearsSeveral changes to AB 602 funding formula

Adult EducationAdult Education is an important program that has been jerked all over the planet!It is part of the LCFFAllowed school districts to continue existing education programs for two yearsThe Enacted State Budget is far more prescriptive, requiring LEAs maintain the same

level of Adult Education expenditure in 2013-14 and 2014-15 as were expended in 2012-13

$30 million in 2013-14 for two-year planning and implementation grants

Regional Occupation Centers/ProgramsIt is part of the LCFF

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Balances, Reserves, and Planning

The LCFF revenue model leads to an entirely new way of thinking about revenues, reserves, balances, and planning for the future

Gone are the anchors of the past: base revenue limit, deficit factor, current-year COLA, etc.They are replaced with a “commitment” by the state to make a contribution to “closing the gap” each year

But there is no statutory calculation for how much the state will contribute – and no obligation to fund any certain amount

This has huge implications for districtsMany districts will need to maintain much larger reservesMuch of the “new money” will still be tied to expenditures for specific programs

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There is No Such Thing as a Good Budget That Does Not Have an Adequate Reserve!

Good budgets have good reserves; but how much is really needed?

Under revenue limits, the State Board of Education (SBE) set reserve levels as a percentage of expenditures based on district size – that won’t work anymore

Some districts will have much more risk and volatility than similar-sized districts – they may need ten times the amount of the state’s recommended reserves

All state-recommended reserve levels will now be too low

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Volatility Increases Reserve Requirements

Under the old rules, all districts could plan for similar changes in revenue limits – not so under the LCFF

Every district has its own starting point and its own unique goal

Some districts will project very large increases and others very modest increases

And while the percentage contributed by the state toward the goal is said to be consistent, the actual dollar differences are huge

A good year, with a very high percentage contribution, will drive expenditures higher

But what happens when times are not so good and there is no increase or even another cut?

By the way – this just in – there will be another recession!

Districts will need a larger buffer to provide time to make ongoing budget adjustments

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Things to Do

Get your 2013-14 budget squared away

Update your projections using the SSC Dartboard, the SSC Simulator, and your own MYP

Budget for the CCSS one-time revenues, and start planning smart expenditures

Bring stakeholders along; help them to understand the new system

Get ready for negotiations

Be prepared to spend time training on both sides of the table

Create clear, concise, and transparent displays of financial information

Both parties need to spend a lot of time listening and developing trust

Get out into the school communities

The Local Control Accountability Plan (LCAP) requires community involvement

Start those processes now25

Things to Do

Review your cash flowThe decisions on deferrals for 2012-13 came too late, but we should see the results of continued buy downs and less need for borrowing

Plan for implementation of CCSSTwo-year period for use of one-time fundsTechnology, instructional materials, and professional development all need to be addressed

Plan a balanced recovery for your district; deal with:Structural budget deficitsHigher need for reservesRestoration of compensation and positionsDon’t try to do it all at once, but get started

Re-think instructional delivery at your lowest performing schoolsYou will have more money for that purposeBut remember, you have an obligation to all students!

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AppendixAppendix

LCAP

May Revision . . . •Local goals focused on improved student outcomes•Goals aligned with annual spending plan•Adopted every five years and updated annually

The Local Control Accountability Plan (LCAP) Then and Now

Enacted State Budget . . .•Annual goals and specific actions based on state priority areas for the district and each school in the district•Description of expenditures implementing specific actions•Adopted every three years and updated annually

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County and State Superintendent Oversight

May Revision. . . •Technical assistance•Approval and disapproval of local plans•Review data on eligible student counts•Stay and rescind actions of a local governing board

Oversight Responsibilities Then and Now

Enacted State Budget . . .•Technical assistance•Approval and disapproval of local plans based on adherence to SBE-adopted template and sufficiency of funds allocated for implementation of Local Control Accountability Plan (LCAP)•COE approval of plans and posting of plans for each district and each school in each district or a link to each plan on the COE website•Stay and rescind authority granted solely to Superintendent of Public Instruction (SPI) upon approval of the SBE

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State Requirements

May Revision . . . •Performance expectations•Expenditure requirements•Proportionality rule•MOE requirement until full implementation of LCFF

State Requirements Then and Now

Enacted State Budget . . .•State priority areas explicitly stated•SBE will update standards and criteria for local budget adoption and make changes to API based on the LCFF•Proportionality rule less rigid allowing for schoolwide and districtwide expenditures subject to regulations to be adopted by the SBE•No mention of an MOE requirement

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What Do I Have to Do and When Do I Have to Do It?

On or before July 1, 2014, and every three years thereafter, LEAs must adopt the LCAP using the template adopted by the SBE

The LCAP must include a description of the following:

Annual Goals

Based on state priorities for all students and “numerically significant subgroups”

Numerically significant: defined as 30 students with valid test scores at the school or school district – with the following exceptions

Foster youth – 15 or more students

Schools or districts with 11 to 99 students – defined by the superintendent with approval of the SBE

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What Do I Have to Do and When Do I Have to Do It?

Specific Actions

What steps the LEA will take to accomplish the annual goals

Districtwide actions and actions by school site

Description of Expenditures

For each fiscal year of the plan, list and describe expenditures implementing specific actions included in the LCAP

List and describe expenditures serving “unduplicated” students and students re-designated as fluent English proficient

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Adopting and Updating the LCAP

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Present for review and comment to:•Parent advisory committee•English learner parent advisory committee•The superintendent must respond in writing to comments received

Opportunity for public input:•Notice of the opportunity to submit written comment•Public hearing •The superintendent must respond in writing to comments received

Adoption of the plan:•Adopted concurrent with the LEA’s budget•Submitted to COE for approval•Posted on district website•COE posts LCAP for each district/school or a link to the LCAP

Changes from the May Revision:

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