January 14, 2008

State Budget Update

Governor Schwarzenegger released his 2008-09 Proposed State Budget today.  He proposes a suspension of Proposition 98 with a $4.4 billion K-12 cut for 2008-09.  The Governor is also proposing approximately $400 million in current year (mid-year) reductions; he provided no specifics, but indicated he will work with the education community on how to address the proposed reductions for 2008-09.

“The major reductions are described below:

• “$2.6 billion in 2008-09 for school district and county office of education revenue limit apportionments. This will eliminate the 4.94 percent COLA and reduce existing revenue limit levels, thereby creating a 6.99 percent deficit factor.

• “$357.9 million in 2008-09 for Special Education. No COLA will be provided and existing state funding for local schools’ special education costs will be reduced. Schools may have to backfill most of this reduction as the program is federally mandated.

• “$198.9 million in 2008-09 for Child Development programs. No COLA or growth will be provided for this program and, after accounting for normal program savings, approximately 8,000 existing slots will be reduced. Normal attrition rates in these programs should reduce the likelihood of a currently enrolled child losing their slot.

• “$59.6 million in 2008-09 for Before and Afterschool Programs. The Administration will propose a ballot initiative to amend Proposition 49 to achieve these savings. The impact of this reduction would be minimal because a number of recent grant recipients have not implemented the program or have not achieved the enrollment levels initially anticipated.

• “$14.2 million in 2008-09 for Child Nutrition Programs. This reduction will cut the free and reduced price meal reimbursement rate by approximately $0.02. However, the program received a $0.06 per meal augmentation in 2007-08.

• “$1,095.7 million in 2008-09 for other K-12 categorical programs. COLA adjustments will not be provided and proportional funding rate reductions will be applied to programs such as Class Size Reduction, the Charter School Categorical Block Grant, Instructional Materials, Supplemental Instruction, Home-to-School Transportation, Supplemental School Counseling and various Career Technical Education programs.

• “$5.6 million in 2008-09 for Department of Education administration and program support. The Superintendent of Public Instruction will have discretion to allocate this reduction.

• “$9.2 million in 2008-09 for the Department of Education State Special Schools. This reduction is unallocated to provide maximum flexibility to the Superintendent and the State Special Schools.

• “$5.1 million in 2008-09 for the California State Library. This will reduce state support to local libraries and reduce state reimbursement of the costs for inter and intra-library book loan programs.

“In addition to the reductions above, the Administration proposes to change the K-14 program COLA factor from the State and Local Implicit Deflator to the Consumer Price Index for Wage Earners and Clerical Workers (CPI-W). This will more appropriately reflect inflation for educational programs as the vast majority of educational expenditures are for wages and salaries, and the recent fluctuations in the State and Local Implicit Deflator do not appear to be related to costs which significantly affect schools. This will reduce the COLA from 4.94 percent to 3.65 percent. The savings that will result from this proposal are subsumed in the 10 percent reductions identified above.”

The Governor is proposing to provide all General Fund programs a 4.94% Cost-of-Living Adjustment (COLA) and whatever appropriate growth adjustment (such as adult education, Regional Occupational Program/Centers (ROP/C), Economic Impact Aid and other programs for a workload level).  The proposed budget then takes the resulting workload dollar amount and reduces it by 10.8%.  Because the revenue limit funding is a combination of General Fund and local property tax, the effect of the revenue limit reduction is to not be a 10.8% reduction against the adjusted 4.94% COLA.  Instead, it is a 6.99% deficit on the workload amount.

For special education, the workload calculation and deficit applied is only on the General Fund portion not on the federal fund portion.

The only program that does not appear to be affected by this across-the-board reduction is the Quality Education Improvement Act funding certain Decile 1 schools.

During meetings with the Department of Finance (DOF) and staff from the Secretary for Education, the comment was made that it is the Administration’s intent to restore any reductions when the state is fiscally able to restore such reductions.  The expectation is that Proposition 98 will move to Test 1 in 2009-10 and that full COLA will be provided in that year.  The expectation is there will be additional funds to start paying down the deficit factor that are proposed to be created in the Governor’s budget.  DOF staff indicated an expectation that school funding would be in Test 1 for 2009-10 and 2010-11.

2008 School Bond

The Governor’s budget proposes a new state school bond for 2008.  That bond would be for approximately $6.3 billion for K-12 and would be divided into four separate programs. 

• $4.430 billion New Construction

• $1.539 billion Modernization

• $1.0 billion Charter Schools

• $1.0 billion Career Technical Education (CTE) Facilities

• Reduction of New Construction State Grant Amount

The proposal includes a recommendation to reduce the state grant amount and create a 40% state and 60% local matching ratio.  That matching ratio, however, would not apply to charter schools or CTE, which are proposed to continue at 50/.50.

While the Governor has made a school bond proposal, it may not be favorably received in the legislative process because of the other issues related to debt.

Deferred Maintenance

The State Budget proposal makes no significant change to deferred maintenance; instead it’s treated like all other categorical programs.

The budget proposal does not make any recommendation regarding reducing the local district contribution to the major maintenance fund.

Recognizing the significant fiscal stress the budget proposal provides to school districts, the Administration proposes to increase mega-item flexibility where schools will be able to transfer up to 50% of any of the identified categorical out of that categorical and into another categorical up to 65% of the funds that had previously been in the other categorical.  For example, if there were three categoricals in the mega-item, each being funded at $1 million in the school district, the flexibility proposal would allow one of the categoricals to be reduced by 50%; another to be reduced by 15%; and a third increased by 65%.  This will provide significant flexibility; however, it is anticipated the Legislature may be cautious in providing this amount of flexibility to school districts for transferring funds among specified categorical programs.

This is the first part of a long budget dance.  The Legislature undoubtedly will be attempting to have better economic data before addressing all of the Governor’s recommendations and may defer consideration of his statutorily recommended provisions until later on in the budget process.  For example, the budget proposes to change the current calculation of statutory COLA from the Implicit Price Deflator for the purchase of goods and services by state and local governments and instead into a California-based index of the system:  Consumer Price Index for Wage Earners and Clerical Workers Average for Los Angeles and San Francisco.  This would effectively reduce the 2008-09 COLA from a 4.94% to a 3.65% COLA.

The next major budget actions will be the Legislature’s review of mid-year cuts and the Legislative Analyst’s Office (LAO) recommendations regarding those cuts and the Governor’s budget revenue and expenditure estimates.

Later, in the middle of February, the LAO will release her recommendations regarding the Governor’s budget proposal for 2008-09 .

Please contact me if you have any questions at 916.441.3300 or dwalrath@m-w-h.com.

~Dave Walrath