February 26, 2010

Mixed News in LAO Recommendations for 2009-10 and 2010-11 State Education Budget

First the good news:  Based on current law, if there were no changes, the state would owe Proposition 98 an additional $2.2 billion in 2009-10 and an additional $3.2 billion in 2010-11 compared to the Governor’s budget proposed funding level.

Now the rest of the news: The Legislative Analyst’s Office (LAO) believes the Governor’s budget proposal has significant legal risk and, consequently, believes the policy and legal foundation should not be adopted by the Legislature. Instead, the LAO presents two options: 1) suspend Proposition 98 which would avoid all of the legal risks; or 2) increase state revenues by $6 billion and provide almost all of those funds to Proposition 98, or make program cuts equal to $3.2 billion in other parts of the State Budget, or a combination of revenue increases and other program expenditure cuts.

Undoubtedly there are other choices; however, in framing the issue with these two options, the LAO essentially pushes a recommendation to suspend the Proposition 98 requirement in both 2009-10 and 2010-11. 

A Proposition 98 suspension appears to be a more probable choice for the Legislature because there are not sufficient votes for a $6 billion tax increase, nor does there appear to be sufficient votes to cut $3.2 billion more in other parts of the State Budget as already proposed by the Governor.

The LAO, while providing the Proposition 98 suspension option, does not indicate what level of Proposition 98 funding ought to be provided after suspension.  They do make the following recommendations:

• The LAO recommends that the Governor’s proposed $1.5 billion in school revenue limit cuts, targeted to administration and presumed savings from contracting out, not be adopted. 
• The LAO recommends that there be $800 million in targeted reductions for K-12 and additional targeted reductions for community colleges for a total of approximately $1 billion in targeted reductions.
• If the Legislature proposes to reduce beyond that level then the LAO suggests those reductions be made as general revenue limit reductions and/or additional reductions to the categorical flexibility program adopted through 2012-13.

The LAO also makes a series of additional recommendations, some of which would be operative in the budget year, some in subsequent fiscal years.

Budget Year

For the budget year, the LAO recommends Home-to-School Transportation and K-3 Class Size Reduction be incorporated into the categorical flexibility item.

The LAO also recommends creating a new school improvement program using the federal school improvement grant funds coordinated with existing Proposition 98 settle-up funds used for the Quality Education Investment Act for 2011-2013.  The program would provide approximately $900 per pupil for students in the lowest 10% of schools in the state as defined by academic achievement and dropout rates.  Incorporated within this recommendation is the suggestion that, in 2013-14, saved Proposition 98 settle-up funds (approximately $1 billion) would be used to fund currently unfunded state mandates. 

After Budget Year

The LAO recommends changing the Kindergarten age for enrollment to be age 5 on September 1 commencing 2012. 

Child Care and Development  

The Governor’s Budget proposal for child care and development programs included $316 million in savings ($147 in Proposition 98 and $169 million in federal funds) from reimbursement rate cuts, reduction in funded slots and various fund swaps.

The Legislative Analyst’s Office (LAO) proposes $217 million in savings ($68 million in Proposition 98 and $149 million in federal funds) from reimbursement rate reductions and fund swaps.  The LAO recommends that the proposed 18,000 reduction in service slots should be rejected.  The other major differences are: 1) to use more recent data to reduce reimbursement rates; and 2) reduce non-CalWORKs child care eligibility ($115 million savings) and redirect some ($55 million) to other program waiting lists for serving more children from lower income families.

Summary 

The LAO report is used to begin the State Budget hearing process.  Normally, the LAO report works within the budget structure proposed in the Governor’s Budget.  In a break from this tradition, the LAO recommends the Legislature reject the Proposition 98 budget structure proposed in the Governor’s Budget.  This break then allows the LAO to essentially recommend an alternative budget based on the Proposition 98 suspension.  Rather than make recommendations to change specific budget proposals and include Proposition 98 suspension as an option the Legislature should consider, the LAO report essentially tells the Legislature they have no choice but to suspend Proposition 98.

While the LAO has not released updated state revenue projections, the released increase in the Proposition 98 minimum guarantee indicates that the LAO will release projections that are equal to or greater than the state revenues projected in the Governor’s Budget.  Because of how Proposition 98 works, it is possible almost all of the new revenue would be owed to schools and would not be available for other state programs.  The Proposition 98 suspension would allow more of the revenues to be used for other programs.

With the LAO’s recommendation and the proposed budget cuts to health and social services programs, I expect Proposition 98 suspension will be the central K-12 state budget fight. The following are my initial thoughts on some of the dynamics that could lead to suspension and some of the dynamics that could lead to suspension rejection.

• Factors Leading to Suspension
• Fewer new federal funds for health and welfare.
• New federal funds for school employment (stimulus 2010).
• Enough state money to fund 2009-10 Budget level for both 2009-10 and 2010-11 without new revenue limit and categorical cuts.
• Deal made with education groups.
• Factors Leading Away from Suspension
• This is an Election Year.
• Can always finagle guarantee lower and accept legal risk.
• Deal made with education groups to under-appropriate.

~Dave Walrath