EUSD BUDGET UPDATE

THE GOVERNOR’S EIGHTEEN-MONTH BUDGET

2008-09 MID-YEAR CUTS 2009-10 GOVERNOR’S BUDGET

FEBRUARY 12, 2009

HOW DID THE STATE GET INTO THIS MESS?

• IT ALL STARTED WITH PROPOSITION 13 (1978)– PROPOSITION 13 LIMITED THE STATE’S ABILITY TO RAISE REVENUE FROM A STABLE SOURCE – PROPERTY TAXES

– MADE THE STATE DEPENDENT ON MORE VOLATILE SALES AND INCOME TAX SOURCES

– SHIFTED CONTROL AND ACCOUNTABILITY FROM LOCAL GOVERNMENTS TO THE STATE

• STATE’S BALLOT INITIATIVE PROCESS HAS RESULTED IN CONSIDERABLE MANDATED STATE SPENDING – REDUCING THE LEGISLATURE’S BUDGET FLEXIBILITY

HOW DID THE STATE GET INTO THIS MESS?

• TERM LIMITS CONTRIBUTE TO A LACK OF EXPERIENCE AND ACCOUNTABILITY IN THE LEGISLATURE

• IDEOLOGICAL GRIDLOCK IS A FACTOR• THESE INGREDIENTS HAVE CREATED A PREDICTABLE SITUATION – OVERSPENDING IN GOOD YEARS, AND BUDGET CRISES IN BAD YEARS

HOW DID THE STATE GET INTO THIS MESS?

• MUCH OF THE CURRENT CIRCUMSTANCES CAN BE TRACED TO PAST BUDGET PRACTICES– FROM 2002 THROUGH 2007, CALIFORNIA’S ECONOMY WAS STRONG•BUT, WE HAD A BUDGET CRISIS EVERY YEAR•STATE SPENDING EXCEEDED THE REVENUES PRODUCED EVERY YEAR

– A SERIES OF ONE-TIME DOLLARS, CREATIVE ACCOUNTING GIMMICKS, BORROWING, AND DELAYED APPORTIONMENTS ALLOWED THE STATE TO AVOID DEALING WITH THE PROBLEM

HOW DID THE STATE GET INTO THIS MESS?• THE ARRIVAL OF THE WORLDWIDE RECESSION HIT THE STATE VERY HARD– ALREADY WEAKENED BY PAST BUDGETS, THE PRECIPITOUS DROP IN REVENUES WAS DEVESTATING

– MOST OF THE BUDGETING TOOLS HAD ALREADY BEEN USED

– CALIFORNIA HAS ONE OF THE LOWEST CREDIT RATING OF ANY STATE – THUS, EVEN ITS BORROWING ABILITY IS LIMITED

GENERAL FUND REVENUE COLLAPSE

$103.0$102.6 $102.6

$87.5

$102.6

$86.3

$75.0

$80.0

$85.0

$90.0

$95.0

$100.0

$105.0

2007-08 2008-09 2009-10

Baseline Revenue Projections 1

(In Billions)2008-09 Budget Act2009-10 Governor's Budget

1 Excludes new tax proposalsSource: 2009-10 Governor's Budget

THREE-YEAR SHORTFALL - $31.3 BILLION

HOW DID THE STATE GET INTO THIS MESS?

• THIS BUDGET CRISIS HAS BEEN GREATLY EXACERBATED BY THE RECESSION, JOB LOSSES, WORLDWIDE CREDIT CRISIS, AND HOUSING MELTDOWN

• “EXPERTS” ARE PREDICTING THAT THIS RECESSION WILL LAST TWO TO THREE YEARS

• IT’S A MULTI-YEAR, $42 BILLION PROBLEM – WHICH IS WHY THE GOVERNOR HAS PROPOSED AN 18-MONTH SOLUTION THIS TIME

THE GOVERNOR’S SOLUTIONS

• THE GOVERNOR PROPOSES TO CUT EXPENSES, RAISE TAXES, TEMPORARILY BORROW MONEY (RAW), AND BORROW AGAINST FUTURE STATE LOTTERY EARNINGS– CUTS ARE TO ALL AREAS OF THE BUDGET– SALES TAX RATES WOULD BE INCREASED AND THE SALES TAX BASE WOULD BE BROADENED

– CERTAIN FEES WOULD BE INCREASED– AN INCOME TAX SURCHARGE WOULD BE IMPOSED

General Fund Revenues (In Billions )

$102.0 $102.0

$97.7

$91.1

$82

$86

$90

$94

$98

$102

$106

2008-09 2009-10

2008 Budget Act Governor's Budget

Governor'sRevenueProposals

Governor'sRevenueProposals

BaselineEstimate

BaselineEstimate

$87.5$86.3

THE GOVERNOR’S SOLUTIONS• THE SECURITIZATION OF THE STATE LOTTERY WOULD BORROW $5 BILLION, AND WOULD:– NEED TO BE APPROVED BY VOTERS– COULD BE CHALLENGED IN COURT– ELIMINATE LOTTERY FUNDING FOR SCHOOLS – BY REDIRECTING THAT FUNDING STREAM TO OTHER STATE USES

– BUT, REBENCHING THE PROPOSITION 98 GUARANTEE TO REPLACE THE LOST DOLLARS WITH GENERAL FUND DOLLARS

– EDUCATION WOULD NO LONGER SHARE IN ANY LOTTERY GROWTH FUNDING

CALIFORNIA’S EDUCATION CRISIS• WITHIN THREE YEARS OF THE PASSAGE OF PROPOSITION 13 – CALIFORNIA DROPPED FROM THE TOP 5 TO THE BOTTOM 10 STATES FOR PER-STUDENT FUNDING – WHERE IT HAS MOSTLY STAYED

• CALIFORNIA HAS AMONG THE HIGHEST ACHIEVEMENT STANDARDS IN THE NATION – WE’RE ALREADY DOING MORE WITH LESS

• OUR INABILITY OR UNWILLINGNESS TO PROVIDE WORLD-CLASS EDUCATION FUNDING IS HURTING THE STATE’S ABILITY TO COMPETE IN A GLOBAL ECONOMY

CALIFORNIA’S EDUCATION CRISIS• THIS IS A DISASTEROUS EDUCATION BUDGET

• COMPARED TO THE REST OF THE BUDGET, EDUCATION IS ESPECIALLY HARD-HIT– WE WILL CONTINUE TO FALL FURTHER BEHIND OTHER STATES

– THE PROPOSED CUMULATIVE DEFICIT FACTOR (TWO YEARS) ON DISTRICT REVENUE LIMITS IS IN EXCESS OF 16%

– ADDITIONAL REVENUES ARE PROPOSED FOR DEFERRAL – AS THE STATE DEALS WITH ITS CONCURRENT CASH FLOW CRISIS

PROPOSITION 98• THE PRECIPITOUS DROP IN STATE REVENUES (TAX COLLECTIONS) HAS CAUSED THE PROPOSITION 98 MINIMUM FUNDING GUARANTEE TO DROP $7.9 BILLION – THAT IS, THIS LEVEL OF CUTS CAN BE MADE TO EDUCATION – WITHOUT THE LEGISLATURE ACTING TO SUSPEND THE GUARANTEE!

• THE GOVERNOR HAS PROPOSED $6.3 BILLION IN CUTS FOR 2008-09, AND A TOTAL CUT OF $7.5 BILLION OVER THE EIGHTEEN-MONTH PERIOD THROUGH 2009-10

2008-09 MID-YEAR CUTS• THE SPEED OF THE ECONOMIC COLLASPE LAST FALL TOOK MANY ECONOMISTS BY SURPRISE– THE DEPARTMENT OF FINANCE, LEGISLATIVE ANALYST’S OFFICE, AND THE UCLA ECONOMIC FORECASTERS ALL MISSED PREDICTING THE RECESSION

• THE RAPID DETERIORATION OF ECONOMIC CONDITIONS CONTINUES:– THE GOVERNOR’S MID-YEAR CUT PROPOSAL IN NOVEMBER 2008 ESTIMATED THE DEFICIT AT $27.8 BILLION WITH PROPOSED CUTS TO EDUCATION AT $2.5 BILLION

– HIS JANUARY 2009 PROPOSAL ESTIMATES THE DEFICIT AT $41.7 BILLION, WITH PROPOSED CUTS TO EDUCATION AT $6.3 BILLION

2008-09 MID-YEAR CUTS• GOVERNOR’S PROPOSAL MAKES MAJOR CUTS TO THE REVENUE LIMIT (UNRESTRICTED FUNDING) – AND PROVIDES FLEXIBILITY FOR MOST STATE CATEGORICAL PROGRAMS TO HELP AMELIORATE THE CUTS– THE LEGISLATURE DID NOT SUPPORT THIS PROPOSAL DURING THE FIRST SPECIAL SESSION IN NOVEMBER (SBX1)

• THE LEGISLATURE’S ATTEMPT TO CLOSE THE BUDGET GAP RELIED ON MAJOR CUTS TO CATEGORICAL PROGRAMS AND ELIMINATION OF THE .68 PERCENT REVENUE LIMIT COLA– THIS BILL WAS VETOED BY THE GOVERNOR (SBX1 4)

2008-09 MID-YEAR CUTS• THE GOVERNOR’S PROPOSAL REDUCES REVENUE LIMITS BY THE .68 PERCENT COLA – PLUS A WHOPPING 4.5 PERCENT MORE!– THE DISTRICT LOSES $5.1 MILLION ON REVENUE LIMITS THIS YEAR!

• CATEGORICAL FLEXIBILITY IS INCLUDED• DISTRICT DEFERRED MAINTENANCE MATCH IS OPTIONAL

• 3% RRM IS REDUCED TO 1% - BUT NOT FOR DISTRICTS PARTICIPATING IN THE EMERGENCY REPAIR PROGRAM (ERP)

2008-09 MID-YEAR CUTS• THE GOVERNOR’S PROPOSAL WOULD ALLOW DISTRICTS TO REDUCE BY HALF THEIR REQUIRED RESERVE FOR ECONOMIC UNCERTAINTY – THIS WOULD HAVE TO BE MADE UP IN 2010-11

• THE GOVERNOR’S MID-YEAR PROPOSAL CONTAINS ANOTHER $2.8 BILLION IN DEFERRED PAYMENTS

• $1.1 BILLION IN 2008-09 PAYMENTS ARE TO BE RECHARACTERIZED AS “PROPOSITION 98 SETTLE-UP PAYMENTS,” THUS WIPING THIS AMOUNT OFF THE STATE’S BOOKS THAT WOULD OTHERWISE BE OWED TO EDUCATION

2008-09 PROPOSITION 98 GUARANTEE

$50

$55

$60

($ in Billions)

2008 Budget Act 2009-10 Governor's Budget

$58.1 $58.1

MinimumGuarantee

No COLA$1.6 billion revenue limit cut

April deferralSpecial fund shift“Settle up” redesignation

MinimumGuarantee

$56.1 billion

$51.5 billion

Real Cut

Actual Spending

2009-10 PROPOSITION 98 GUARANTEE• UNDER THE PROPOSITION 98 FORMULA A “MAINTENANCE FACTOR” IS ESTABLISHED WHEN THE FUNDING LEVEL IS DETERMINED BY “TEST 3,” RATHER THAN “TEST 2”

• THIS YEAR’S FUNDING IS TO BE ESTABLISHED BY “TEST 1” – WHICH HAS ONLY HAPPENED ONE OTHER TIME – 1988-89

• DEPARTMENT OF FINANCE HAS TAKEN THE POSITION THAT MAINTENANCE FACTOR DOES NOT APPLY TO “TEST 1” PROPOSITION 98 CALCULATIONS

• NOT YET CLEAR HOW THIS CONTROVERSY WILL BE RESOLVED

COPING WITH THE 2008-09 MID-YEAR CUTS

• TO COPE WITH THE LOSS OF REVENUE LIMIT DOLLARS IN 2008-09, THE DISTRICT IS:– INCREASING IT’S USE OF RESERVES FROM $1.6 MILLION (10-31-08) TO ALMOST $5.9 MILLION (1-31-09)

– A BUDGET “FREEZE” HAS BEEN IMPLEMENTED – WHICH REQUIRES SCRUTINIZING ALL EXPENDITURES FOR NECESSITY AND APPROPRIATENESS – INCLUDING FILLING OF VACANT POSITIONS, EXTRA HOURS, AND SUBSTITUTE EMPLOYEES

A BNOTE: DEFICIT SPENDING = UNRESTRICTED UNRESTRICTED USE OF RESERVES 10/31/2008 % 1/31/2009 %

BEGINNING BALANCE 21,983,419 21,983,419

REVENUE LIMIT 96,018,187$ 90,863,729$ OTHER REVENUES 13,320,620$ 13,211,587$

TOTAL REVENUES 109,338,807$ 104,075,316$

EXPENSES 102,755,644$ 102,057,445$

REVENUES OVEREXPENDITURES 6,583,163$ 2,017,871$

OTHER SOURCES/USES (8,212,167)$ (7,884,224)$

DEFICIT SPENDING AMOUNT (1,629,004)$ (5,866,353)$

END. BALANCE (RESERVES) 20,354,415$ 12.50% 16,117,066$ 9.90%

GOVERNOR'S MID-YEAR CUT PROPOSAL

COPING WITH THE 2008-09 MID-YEAR CUTS

• THE DISTRICT HAS RECEIVED ERP DOLLARS THIS YEAR- MISSION CANOPY REPLACEMENT– IF IT IS DETERMINED THAT THIS PROJECT WILL MOVE FORWARD, WE CANNOT REDUCE THE MAINTENANCE (RRM - 3%) BUDGET

– IF THE DISTRICT FUNDS THE RRM BUDGET FULLY, THERE WON’T BE ANY SAVINGS IN REDUCING OR ELIMINATING THE DEFERRED MAINTENANCE TRANSFER

– WE WON’T KNOW WHAT, IF ANY, CATEGORIAL FLEXIBLITY IS AVAILABLE UNTIL A BUDGET BILL IS PASSED

THE 2009-10 BUDGET PROPOSAL

• THE PROPOSITION 98 GUARANTEE LEVEL IS $55.9 BILLION, AN INCREASE OF $4.4 BILLION OVER THE REVISED 2008-09 AMOUNT– BUT, THIS INCREASE IS LARGELY ACCOUNTED FOR BY THE 2008-09 DEFERRALS AND BACKFILLING ONE-TIME AMOUNTS AND PROPERTY TAX SHORTFALLS

– THERE IS NO NEW MONEY

2009-10 BUDGET PROPOSAL• DISTRICT REVENUE LIMITS WILL ABSORB A DEFICIT OF OVER 16 PERCENT – THIS IS NECESSARY TO OFFSET TWO YEARS OF COLAS AND ACCOMPLISH A NET REDUCTION IN 2009-10– LOSS IN 2008-09 IS $1.6 BILLION (4.565%)

– LOSS IN 2009-10 IS $1.1 BILLION (2.515%)

• AS A MEANS TO COPE WITH THESE LOSSES, GOVERNOR PROPOSES TO REDUCE THE SCHOOL CALENDAR BY 5 DAYS (NEGOTIABLE)

2008-09 Budget Act 2008-09 Proposed Governor's Budget 2009-10 Proposed Governor's Budget

Funded

Funded

Funded

4.565%

5.02%

5.66%

4.565%

2.515%

5.66%

0.68%

5.66%

Cut

COLACOLA

2009-10 COLA

2008-09 COLA

2008-09 Cut

2009-10 Cut

2008-09 AND 2009-10 K-12 REVENUE LIMITS

EUSD - 2008-09 & 2009-10 UNRESTRICTED REVENUE LIMIT

$90.9$86.9

$5.2$9.2

$96.1

$81

$84

$87

$90

$93

$96

$99

2008-09Budget Act

2008-09 Mid-Yr Cuts

2009-10Proposed

REVENUE LIMIT (millions)

UNFUNDED

FUNDED

EUSD WOULD LOSE IN EXCESS OF $14 MILLION OF REVENUE LIMIT DOLLARS OVER TWO YEARS

2009-10 BUDGET PROPOSAL

• THE GOVERNOR’S PROPOSAL CARRIES FORWARD MOST OF THE 2008-09 PROPOSALS INTO 2009-10

• HE ENVISIONS CATEGORICAL FLEXIBILITY WOULD COME ABOUT BY SUSPENDING STATUTORY REQUIREMENTS OF MOST PROGRAMS – INCLUDING CLASS SIZE REDUCTION– DISTRICTS COULD BACKFILL LOST UNRESTRICTED DOLLARS BY USING CATEGORICAL FUNDS AS NEEDED

2009-10 BUDGET PROPOSAL• GOVERNOR’S PROPOSAL ALSO CALLS FOR REORGANIZING MOST STATE CATEGORICAL PROGRAMS INTO BLOCK GRANTS– MODEL WOULD BE SIMILAR TO AB 825– BLOCK GRANTS WOULD BE PERMANENT CHANGE

– EXCLUDED PROGRAMS INCLUDE FEDERAL, VOTER-APPROVED, AND LEGAL SETTLEMENTS

• PROPOSAL ELIMINATES THE HIGH PRIORITY SCHOOLS GRANT PROGRAM

• SCHOOL READINESS PROGRAMS WOULD BE REDUCED AND PROPOSITION 10 COMMISSION WOULD BE ELIMINATED

2009-10 BUDGET PROPOSAL• IN THE LONG BATTLE OVER MANDATES, THE GOVERNOR’S PROPOSAL WOULD SUSPEND ALL BUT THREE:– SUSPENSION WOULD MEAN DISTRICTS NOT RESPONSIBLE FOR CARRYING OUT UNFUNDED MANDATES

– LEGISLATURE COULD REINSTATE– DECEMBER 2008 COURT CASE RULED THAT IT’S UNCONSTITUTIONAL TO REQUIRE MANDATED SERVICES WITHOUT REIMBURSING COSTS – STATE OWES $1.1 BILLION FROM PRIOR YEARS

– STATE’S PRACTICE OF DEFERRING MANDATE PAYMENTS NO LONGER CONSTITUTIONAL

THE STATE’S CASH CRISIS• THE STATE’S CASH CRISIS IS REAL AND AFFECTING ALL CALIFORNIANS

• STATE CONTROLLER HAS ALREADY CUT OFF SOME VENDOR PAYMENTS, AND THE ADMINISTRATION HAS ORDERED FURLOUGH DAYS FOR STATE WORKERS

• DEFERRALS OF EDUCATION REVENUES WERE INTRODUCED DURING THE 2003-04 BUDGET CRISIS – AND HAVE REMAINED– $2.8 BILLION OF NEW DEFERRALS FOR 2008-09

– $1.5 BILLION PROPOSED DEFERRAL FOR 2009-10

FEDERAL FISCAL STIMULUS BILL• AT THIS TIME, CONGRESS IS DEBATING THE FEDERAL FISCAL STIMULUS BILL – WHICH PROMISES SOME RELIEF TO CASH-STRAPPED STATES

• HOUSE AND SENATE LEADERS REPORTEDLY WORKED OUT A FINAL BILL WITH THE PRESIDENT YESTERDAY

• GOVERNOR HAS TAKEN THE POSITION THAT, WHILE HELPFUL, THIS STIMULUS PLAN WILL NOT TAKE THE PLACE OF A PERMANENT, STATE SOLUTION TO CALIFORNIA’S BUDGET PROBLEMS

FEDERAL FISCAL STIMULUS BILL

• AUGMENTATIONS ARE PROPOSED FOR TITLE I, TITLE I SCHOOL IMPROVEMENT GRANTS, AND FEDERAL EDUCATIONAL TECHNOLOGY

• FEDERAL SPECIAL EDUCATION FUNDING IS INCLUDED

• STATE FISCAL STABILIZATION FUNDING IS PROPOSED – UNKNOWN JUST HOW STATE WILL USE – BUT SOME OF FUNDING MUST BE PASSED TO LEAs

• SOME FUNDING IS INCLUDED FOR SCHOOL CONSTRUCTION

WHERE DO WE GO FROM HERE?• BUDGET NEGOTIATIONS IN SACRAMENTO CONTINUE– “BIG 5” HAVE NEGOTIATED FINAL DETAILS IN UNPRECEDENTED SECRECY•TAX INCREASES A DEFINITE – TIED TO A SPENDING CAP THAT WOULD NEED VOTER APPROVAL

– BOTH SENATE PRO TEM DARRELL STEINBERG AND ASSEMBLY SPEAKER KAREN BASS HAVE PROMISED FLOOR VOTES THIS WEEK – BOTH BRIEFED THEIR CAUCAUSES TUESDAY

– REPUBLICAN SUPPORT LEVEL IS UNKNOWN

WHERE DO WE GO FROM HERE?

• CURRENTLY, THE GOVERNOR DOES NOT PLAN ON A TRADITIONAL “MAY REVISE,” HOWEVER, THIS COULD CHANGE IF:– NO AGREEMENT IS REACHED IN TIME TO AFFECT THE TAX INCREASES FOR 2008-09

– THE ECONOMIC CONDITIONS DETERIORATE FURTHER, RESULTING IN A GAP LARGER THAN $42 BILLION

– THE ADMINISTRATION DETERMINES THERE IS A NEED FOR A MAY REVISION

WHERE DO WE GO FROM HERE?• THE DISTRICT IS STILL IN THE PROCESS OF DETERMINING WHAT LEVEL OF REDUCTIONS WILL BE NEEDED TO CRAFT A RESPONSIBLE DISTRICT BUDGET FOR 2009-10:– CABINET HAS BEEN ENGAGED IN THIS WORK FOR THE PAST MONTH

– 2ND INTERIM WORK IS PROGRESSING – AND IT MUST INCLUDE THE ASSUMPTIONS PROPOSED IN THE GOVERNOR’S BUDGET – WE HOPE THIS IS THE WORST CASE WE’LL BE CALLED UPON TO CONSIDER

– WE ARE NOT COUNTING ON HAVING MUCH INFORMATION ON THE FEDERAL STIMULUS PROVISIONS BEFORE BUDGET ADOPTION