Volume I, No. 22

May 13, 2009

More Deferrals on Horizon?

By Dave Walrath

The state budget picture is not brightening and will most likely get worse.  Whether Propositions 1A, 1B and 1C pass or fail at the May 19th special election, schools should anticipate more cuts and deferrals.

Deferrals

As reported by the Legislative Analyst, the state cash flow position is deteriorating which can lead to more 2009-10 revenue limit and categorical aid apportionment deferrals.  Also expect continued suspension of new apportionments for school construction and modernization projects by the State Allocation Board (SAB).  This picture was confirmed by the May state revenue report released by the State Controller on May 8, 2009.

Apportionment Deferrals

Schools should expect that the already passed July 2009 and August 2009 apportionment deferrals to October could be extended to November 2009 or December 2009.  Additionally, if schools are cut more for 2009-10, the state could choose to increase the dollar amount of already passed deferrals from February 2010 to July 2010.  Increasing the dollar amount of the deferrals would effectively reduce state General Fund expenditures for 2009-10 if the Test 1 guarantee declines.

Cuts for 2009-10 If Test 1 Declines

If the state does not increase deferrals as a means to address a Test 1 decline and instead chooses cuts, then expect a continuation of revenue limit and categorical aid reductions as was done in February.

Capital Outlay Deferrals

The prior to December 10, 2008 already approved and apportionment projects are experiencing three to four month delays in state fund releases for their projects.  The fund release situation is expected to continue until the state has a truly balanced budget with adequate cash flow. 

The SAB has started unfunded approvals for school construction and modernization projects.  The unfunded approvals could continue indefinitely for new projects submitted to the Office of Public School Construction and the SAB.  It is possible that currently unfunded approvals will be converted to funded approvals while new projects are continued as unfunded.  Schools should not expect a return to the funding schedule that was in place prior to 2009.  I do not expect a change to occur until 2010 at the earliest.

Test 1 and Property Tax

The 2009-10 Proposition 98 minimum guarantee could further decline if the state General Fund revenue from the proceeds of taxes continues to decline and schools stay on the Test 1 calculation.  Additionally, under Test 1 there is no automatic backfill for property tax revenue loss.  Consequently, if residential real estate value continue to decline and there is no significant new commercial and industrial construction to prop up property tax revenue, then schools could face even further declines in revenue.

Since Proposition 13 in 1978, California has never had an absolute statewide decline in property assessed valuation between any two years.  While statewide growth may have been minimal, there was growth.  While some counties may have had absolute decline in countywide property value, growth in other counties offset the decline in some counties.

Next year (2009-10) could be the first year of absolute statewide assessed valuation decline.  Even if there is not absolute decline, if property tax growth is less than estimated, that will result in real school revenue loss.

Suggestions Repeated

We again suggest school districts consider the following actions:

• Use new federal funds for local cash flow to protect against further deferrals.
• Consider new federal funds as one-time revenue and use for one-time expenditures that will save future costs.
• Review Tier III categorical aid programs for reduction or elimination to use funds for General Fund purposes.
• Review 2009-10 and 2010-11 expenditures to determine which can be accomplished with the new federal funds.
• Review Education Code Section 44955.5 and work with your attorney to decide if you want to use the authority for a second round of certificated employee layoffs.