October 7, 2008

More Challenges Ahead

Just Passed 2008 Budget At-Risk

As the national and state economic situation continues to deteriorate, it becomes more obvious that the revenue and expenditure assumptions used for the 2008-09 State Budget are overly optimistic. Because the Proposition 98 guarantee is based on the proceeds of General Fund tax revenues for 2008-09, if revenues are down, the guarantee will be down. 

I recommend that school districts not commit any of the anticipated revenue from the 0.68% revenue limit Cost-of-Living-Adjustment (COLA) that was part of the 2008-09 State Budget agreement.  I believe the COLA is at serious risk of reduction to 0% in a January mid-year cut.   I also believe the deferred school mandate settle-up funds may be used to maintain the 2007-08 school expenditure level into 2008-09.   Unless the housing market stabilizes prior to January 1, 2009 and the economic downturn bottoms tomorrow, there is no realistic expectation that the current budget revenue and expenditure estimates will materialize as anticipated. 

State New Construction Matching Funds Rapidly Disappearing

After the September 24 State Allocation Board (SAB) meeting, approximately $865 million remained in unreserved state matching funds for new construction apportionments.  At the same time, the Office of Public School Construction (OPSC) new construction workload list was approximately $494 million.  This means once the workload list is apportioned, less than $400 million will remain available for matching new construction applications until the next available school bond election date of June 2010.  The following is my burn rate analysis and the state’s options to increase the amount of uncommitted new construction matching funds.

New Construction

Funds Remaining 09/2008 (excludes seismic)                                                    $865 million

Potential Transfer from COS (can be done by SAB action)                                 +$400 million

                                                                                           Total             $1,265 million

Monthly rate ($80 M for two SAB meetings in 2008)                                          -$160 million

(New construction always slows at the end of the year waiting for January grant adjustment (2008 average at $180 M per month))

Remaining 01/01/09                                                                                      $1,105 million

Monthly rate ($180 million for 2009)                                                              -$1,980 million

(New construction backlog gets liquidated in first four months of year

and grant increase)

Deficit for 2009                                                                                         -$875 million

Effectively out of funds in August 2009 with COS transfer

Effectively out of funds in June 2009 if no COS transfer

Options:

1.  Transfer unclaimed or returned Proposition 55 COS                                       $400 million

(adds enough money through October 2009) (can be done by SAB)                          Estimate

2.  Transfer unused severely overcrowded relief grants (takes statute)                 $600 million

2010 burn rates of $180 million per month reflecting grant increases.

(adds enough money to go to February 2010)

3.  Make no transfers