The State Budget:Where Are We Now?The State Budget:

Where Are We Now?

Presented by

Robert MiyashiroVice President

School Services of California, Inc.

2The State Budget: Where Are We Now?

The State Economy

The Political Environment

Policy Choices

3The State Economy

0

10

20

30

40

50

60

70

80

1987-88

1988-89

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

Fiscal Year

Day

s

?Number of Days the State Budget is Late

4State Economy

State Unemployment Rate(Percent Unemployed)

7.3%

5.9%

5.3%

4.8%

4.0%

5.0%

6.0%

7.0%

8.0%

12/06 6/07 12/07 7/08

Source: Department of Finance

5State Economy

California Employment(Jobs in Thousands)

15,213

15,172 15,171

15,117

15,100

15,150

15,200

15,250

12/06 6/07 12/07 7/08

Jobs

Source: Department of Finance

6Budget Gap

The ongoing demands of state programs, the loss of one-time prior-year Budget solutions, and weak revenues from a slowing economy have resulted in a $15.2 billion Budget gap

This estimate, however, is now four months old Some of the Budget solutions are foregone The economic outlook appears weaker

January 2008 Budget Gap -$ 14.5 billion

May Revision Adjustment -$ 7.7 billion

Special Session Solutions $ 7.0 billion

Remaining Budget Gap -$ 15.2 billion

7Political Environment

The Budget requires a two-thirds vote in both houses to pass

54 aye votes in the Assembly (there are 48 Democrats and32 Republicans)

27 aye votes in the Senate (there are 25 Democrats and 15 Republicans)

Legislative districts have been drawn to create safe Democratic and Republican seats making it more difficult to compromise

Term limits have shortened the time for Legislators to understand the issues and know their colleagues

The “Big 5” process forces many issues to leaders who are themselves new to their position

8Proposed Budget Solutions

The Governor has proposed No new revenues and across-the-board cuts in January Borrowing against Lottery growth, with a stand-by sales tax increase

in May A three-year 1¢ sales tax increase and a permanent ¼ ¢ reduction in

August Democrats Conference Committee Budget includes:

Higher revenues from increases in the income tax and corporation tax Restoration of cuts to K-12 programs, plus a 2% cost-of-living

adjustment (COLA) Restoration of Governor’s proposed cuts to other state programs

Republicans in the Legislature have proposed Borrowing from local governments and transportation funds Securitization of Lottery revenues Fund shift from redevelopment agencies

9The Education Budget

Legislators of both parties and the Governor have narrowed their differences on funding for K-12 education Year-over-year cuts to revenue limits and categorical programs have

been rejected Proposition 98 funding of $57.8 billion, but potentially higher if taxes are

increased Major unresolved K-12 issues

COLA 2% in Conference Committee Budget, but this assumes billions in

new ongoing revenues 0.0% in the Governor’s “August Revise,” the Senate’s Budget

proposal, and the Republican plan Lottery securitization and Proposition 98 base funding adjustments Local flexibility options

10How Will This End?

Financially complex and legally questionable Budget solutions often emerge when Budget stalemates continue. Recall:

“Off book loans” from Proposition 98 in the early 1990s

Borrowing from the PERS system earlier this decade

The “triple flip,” involving local sales tax, schools’ share of the property tax, and the state’s backfill to schools

In the end, all parties will have to compromise, but this is very difficult because the State Budget is not simply an accounting document, it is a reflection of our collective values

Management in theFace of UncertaintyManagement in theFace of Uncertainty

Presented by

Sheila VickersVice President

School Services of California, Inc.

12Management in the Face of Uncertainty

To understand where we might be headed, we need to revisit past state fiscal crises

Several years in the early 1990s of underfunded or no COLA

Deficit factor was invented, and eventually made whole ten years later

But not retroactively – the funding was lost in the intervening years

In the current decade, we have already seen cuts, no COLAs, deficit factors, and even mid-year cuts

Might we be headed for more of the same in the current state fiscal crisis?

What can you pull from your toolbox to cope with this if it happens again?

13Budget Update With No State Budget

Most districts have closed the books on 2007-08 School has begun and enrollment numbers are coming in for the current year Staffing decisions are solidifying for the current year

Recommendations: Update your beginning balance for 2008-09 to the actual ending balance

for 2007-08 Revise your estimated ADA for 2008-09 based upon latest enrollment

information Update 2008-09 and beyond for revised enrollment and ADA estimates:

Projected revenues Staffing budget

If declining in enrollment and had staffing reserve in place, evaluate usage of staffing reserve and possible redirection to other purposes –or the ending balance

14Categoricals With No State Budget

Governor’s May Revision contained a 6.5% cut for 2008-09

Conference Committee and others propose not to cut

The risk is that you could be spending dollars that may not be there in the end

Recommendations:

If books are still open for 2007-08, book Mega-Item and AB 825 Block Grant transfers where possible and appropriate

Continue to budget based upon SSC’s May Revision Dartboard (no COLA, 6.5% cut)

Delay and reduce spending where possible

Use SSC’s CATWizard to maximize use of funding available to you

Funding rates will be updated for all programs once State Budget is signed

15Flexibility With No State Budget

Flexibility may or may not be in the end game of the State Budget

If there is no COLA, flexibility proposals probably survive

If there is any amount of COLA, don’t count on flexibility too

Recommendations:

If books still open for 2007-08, manage program balances during closing to maximize ability to take advantage of proposed flexibility for 2008-09

If flexibility has been planned on in your 2008-09 budget, have a fallback plan if that flexibility is eliminated

If flexibility is in the end game – particularly in the transfer of restricted balances – plan to make the maximum transfer

You can always transfer it back if you need to

16Multiyear Projections

Multiyear projections are only as good as the assumptions behind them A funded COLA in 2009-10 and 2010-11 are as uncertain as ever

Economic projections change every day, but one thing remains constant Education is a big target when there is a huge gap in the State Budget

And the Governor’s 2009-10 January Proposal is less than four months away Recommendations: Take your updated 2008-09 budget and, using SSC’s Dartboard, rebuild

your multiyear projections as a “base projection” Then do a variety of “what if” scenarios and determine whether your

district will be in trouble if there are mid-year cuts in 2008-09 or unfunded COLAs in the out years

Have a backup plan if these scenarios come to fruition – do not wait until January

Have seniority lists ready before January in case the Governor’s January news is as bad as or worse than last January

17Cash Management With No State Budget

July 2008 Advance Apportionment will be received this month Significant apportionment funds are not being received due to the lack of a

State Budget: adult education, instructional materials, block grants, special education, etc.

K-3 Class-Size Reduction and Principal Apportionment funding for 2008-09 is to be deferred from February to April

Districts are receiving the statutory COLA of 5.66% in apportionment funding, when no COLA in the State Budget will require it to be paid back

And through all this your district is expected to make payroll and vendor payments on time Recommendations: Closely monitor cash flow Update cash flow actuals and projections as soon as the prior month

closes and inflows, outflows, and balance are known Evaluate whether internal or external borrowing is needed If you have issued TRANs, will that be enough?

18Collective Bargaining With No State Budget

Successful bargaining is about problem solving But it’s hard to solve problems that are undefined

What we don’t know: This year’s COLA or lack thereof This year’s categorical funding cuts – or not This year’s flexibility options – or not Whether next year’s COLA will be funded or not Whether there will be mid-year cuts this year Whether the Governor will propose in January cuts to 2009-10

Neither party to an agreement can count on new revenues

Recommendations: Talk to bargaining units about waiting until after January 2009 before

settling the current year If you must settle now, have a fallback plan if things get worse

Thank youThank you