California State Budget Update

Using the majority vote authority approved by voters, both the Senate and Assembly approved California’s State Budget. The package was publicly endorsed by the Governor, and he signed it into law shortly thereafter.

The Governor was unable to secure the necessary Republican votes to continue the temporary taxes. As a result, revenue figures dropped due to the expiration of those temporary increases on June 30. Fortunately, increased economic activity has resulted in state revenues coming in higher than was projected in the Governor's May Revision. Revenues were reported to come in about $1.2 billion above projection for May and June of this year. This improved situation allowed the Governor and Democratic legislative leadership to agree to assume that revenues for 2011-12 will come in approximately $4 billion higher than had been projected in earlier versions of the budget.

In order to honor his commitment to enact a balanced budget, the Governor has agreed to a plan that includes a "trigger" to impose various cuts if state revenues are actually lower than the amounts projected with the $4 billion increase. That "trigger" calculation must be made by December 15, 2011, which is why school leaders will not actually know their funding level until December. Here are the major components:

  • Regardless of the outcome on the $4 billion, the 2011-12 state budget does include:
    The deferral of about $2.1 billion in funding for K-12 education that was approved through legislation in March
    Funding for K-12 education mandates ($80.355 million)
    A shift to K-12 education of the mandate to provide mental health services to students with disabilities (repeal the AB 3632 mandate)
    Restoration of funding for CALPADs that the Governor proposed to eliminate in May
  • If state revenues are determined to be $2 billion or more (rather than $4 billion) above the May Revision projections, schools will not have to make the reductions that most of them had planned (it appears most districts planned budgets based on a $349/ADA reduction). It is important to note that while the entire state budget is based on anticipated revenues that are $4 billion higher than the May Revision, funding for K-12 education is dependent on an increase of only $2 billion. Administration officials indicate they are confident that revenues will be at least $2 billion higher than the May Revision. Unfortunately, given the uncertainty about the condition of the economic recovery, we recommend that districts remain cautious for now. The language in the budget package says the Director of Finance must determine no later than December 15, 2011, whether the so-called "trigger" cuts will be implemented.

What happens if State Revenues aren't $2 billion higher?
If the Director of Finance determines that state revenues are not at least $2 billion higher than was projected in May, there are two major cuts to K-12 education.
  • Funding for home-to-school transportation is reduced by $248 million, which we are told is a 50% reduction, reflecting the fact that the school year will be half over when the decision is made.
  • School district, county office of education and charter school revenue limits would be reduced by 4%, or some smaller percentage, depending on the amount of increase in state revenues. First, we are told that a 4% reduction represents $1.5 billion, or about $250/ADA. The $349/ADA represented a little more than $2 billion, so the potential reduction (on average) is less than most districts had planned.

Finally, the bill (AB 114) says the percentage reduction will be proportional to the shortfall in state revenues. For example, if none of the anticipated state revenues materialize, schools will lose 4% based on the $2 billion state shortfall. If the state is short only $1billion, however, the cut to schools would be proportional-- or 2% (half of 4% is proportional to half of $2 billion). Phrased differently, any increase in state revenues above the May Revision will reduce the 4% reduction to revenue limits. If the state revenues are $2 billion higher than the May Revision, the potential 4% reduction to revenue limits is avoided.

Adopting and Planning a Budget
The budget package includes language that:

"For the 2011-12 fiscal year, notwithstanding any of the standards and criteria adopted by the state board pursuant to Section 33127, each school district budget shall project the same level of revenue per unit of average daily attendance as it received in the 2010-11 fiscal year and shall maintain staffing and program levels commensurate with that level.

"For the 2011-12 fiscal year, the school district shall not be required to demonstrate that it is able to meet its financial obligations for the two subsequent fiscal years."

Further, the budget package suspends the August 15 lay-off option.

Comment: This language will likely be the most problematic for many districts as it will result in pressure at the local level to restore staff positions that were reduced based on the projections of a $349/ADA cut. We urge caution in restoring those positions. First, a district must calculate the actual risk to the district of the proportional reduction to revenue limits of 4% and the 50% cut to home-to-school transportation. For most districts we expect this will be a smaller number than the $349/ADA. Since the 4% reduction and the home-to-school cut is the worst case scenario, districts can make decisions based on any cuts they had planned beyond that worst case figure. Second, school districts need to remain prepared to operate under this new "worst case" scenario. Given the interaction of state revenues, local budget reserves, use of one-time federal funds, and other factors, including legitimate financial risks in the 2011-12 fiscal year, school districts still have local discretion over staffing and program levels.

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