2008-09 Budget Update

provided by:

B. Teri Burns, Director of Legislative AdvocacySchool Innovations & Advocacy

February 2008

Introduction:Challenging time ahead

2008-09 will be an extremely challenging year for K-12 finance K-12 will be significantly affected by the state’s fiscal crisis As a result, we’ve gone from the “year of education reform” to the “year of

the budget” Genuine dialogue intended to enact comprehensive reforms is likely not to

occur

Base revenue limit funding is at risk The Proposition 98 guarantee has dropped in the current and budget years Year-to-year Proposition 98 growth is not enough to fully cover prior-year

base funding plus COLA and enrollment growth This exposes K-12 to mid-year reductions and a possible suspension of

Proposition 98 in 2008-09

Overview:Politics will play a role

It’s an even numbered year! • Election year politics generally help schools…the question is how much will it help this

year?• Line in the sand on no new revenues will push Democrats our direction on opposing

Prop 98 Suspension.• If Proposition 93 (term limits) fails – new leaders will tend to be strong allies given their

need to consolidate core constituencies.• Early media buys have the potential of replicating the politics of 2005 Special Election.

Public support for the Gov dropped like a rock.• Governor’s efforts are again characterized by taking on multiple battles simultaneously

…déjà vu all over again?

Observations:The economy

Economic outcomes will influence budget debates:• Sub-par economic growth (below 3.0%)• Job growth is weak, but positive• Unemployment expected to grow slightly• Inflation is a concern but remains in check• But uncertainty about economy/credit crunch remains

Economic outcomes will influence budget debates:• Sub-par economic growth (below 3.0%)• Job growth is weak, but positive• Unemployment expected to grow slightly• Inflation is a concern but remains in check• But uncertainty about economy/credit crunch remains

The $64,000 question: Will turmoil in the housing market tip the economy into recession?

Observations:LEA challenges

In addition to Proposition 98 funding challenges, LEAs are also contending with:

• Collective bargaining: How LEAs approach upcoming negotiations in light of decreased revenues will be critical to long term financial and academic success

• Employee benefits: Health and welfare costs and scope continue to be a top priority

• Declining enrollment: More than half of all LEAs continue to suffer the impacts of multi-year declining ADA

• Fiscal solvency: Utilization of reserves and long term fiscal viability will be critical issues to consider

• Accountability: Meeting federal and state accountability requirements will become increasingly difficult

Themes for this budget

• Shared pain – The administration proposes equal pain across all budget areas. But, is that the case?

• Equal cuts in education – Almost all education programs sustain significant budget year reductions

• Cut now, restore later – Reductions would be in place for one or two fiscal years, and potentially restored when Proposition 98 goes back up (i.e. the Test 1 factor)

• Precedent setting reductions – Largest reductions to K-12 ever proposed

The budget process:Things to keep in mind

• The governor’s January proposal is the start of a long deliberation between many parties

• It reflects the Administration’s general policy intent for the fiscal year• But it is by no means a final deal• The Legislature’s role is to respond and develop the budget

And it still takes a 2/3rds majority to get a budget passed! A lot can change between now, May Revision, and budget enactment –

fiscally, socially, and politically Outside and unforeseen factors can (and will) significantly influence the

final 2008-09 state budget

The many stakeholders in the K-12 budget process

Assembly Democrats

Senate Democrats

Republican Caucuses

Other stakeholders•Facility advocates

•Nutrition advocates

•Preschool

•Children Now

•K-12 Retirement coalition

•PTA

•Special education

Governor

Dept. of FinanceCDE

Education Unions*

Education Management*

State Board of Education

Secretary of Education

Proposition 98

* These two entities will often advocate together via the K-12 Education Coalition. The coalition includes ACSA, CSBA, CCSESA, CASBO, CTA, CFT, CSEA, SEIU, and PTA

What we’ll cover

Section one: A look back Section two: The State’s Fiscal Condition and Proposition 98 Section three: The Governor’s Proposals Section four: K-12 Management Issues and Perspectives Section five: Outlooks and Policy Predictions

Section one:

A Look Back:The K-12 Fiscal Rollercoaster

A volatile decade

The last eight years have resembled the plot line for Tolstoy’s “War and Peace”

• 2001 – 2005: Five years of funding upheaval – program reductions, mid-year cuts, apportionment deferrals, and a suspension

• 2005: A special election and political war to save Proposition 98• 2006 – 2007: Proposition 98 gets paid back plus $6.7 billion in

additional revenues resulting in record COLA, equalization, EIA, new programs, discretionary dollars

• 2008 – 2009: Another fiscal crisis

The last eight years have resembled the plot line for Tolstoy’s “War and Peace”

• 2001 – 2005: Five years of funding upheaval – program reductions, mid-year cuts, apportionment deferrals, and a suspension

• 2005: A special election and political war to save Proposition 98• 2006 – 2007: Proposition 98 gets paid back plus $6.7 billion in

additional revenues resulting in record COLA, equalization, EIA, new programs, discretionary dollars

• 2008 – 2009: Another fiscal crisis

2001-02 to 2004-05: Cuts, deferrals, suspensions

Failure To Pay State Mandates$1.5 billion

Defer State Funding $1.1 billion

Proposition 98 Suspension$2.0 billion

Revenue Limit Cuts$1.526 billion

Proposition 98 Under funding$1.502 billion

Categorical Cuts$2.128 billion

K-14 COLA history:Statutory and funded

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Statutory COLA 3.87% 1.66% 1.8% 2.41% 4.23% 5.92% 4.53%

Funded COLA 3.87% 2.00% -1.2% 2.41% 4.23% 5.92% 4.53%

Note: In 2003-04 K-14 experienced a negative COLA of -1.2% due to budget conditions. The unfunded statutory COLA that year was 1.8% thereby creating a 3.0% COLA deficit factor. That amount was restored back into the Proposition 98 base from 2004-05 to 2006-07. Deficit factor repayments for those years are not reflected on this chart.

Section two

The State’s Fiscal Condition and Proposition 98

The economy is in flux

Signs of Strength:

•Consumer spending remains steady

•Non-energy & non-housing markets show modest growth

•Gross state product & personal income growth steady @ 1-2%

Signs of Weakness:

•Lower consumer confidence

•Rising energy prices

•Housing market decline

•Housing credit market meltdown

•Rising unemployment

•Economic signals are mixed – O.K. on one side, not good on another

•Forecasts point toward sluggish growth in 2008 and 2009

•But we could easily tilt into recession – in fact some forecasters argue that we are already in one

Revenues and Proposition 98

• California’s revenue structure is highly progressive – the more you make, the more you pay in state income taxes

• The largest state General Fund tax is personal income• The Proposition 98 guarantee is calculated off of state General Fund revenues• Therefore, revenues and the Proposition 98 minimum guarantee are directly

linked• When revenues fall below projections, Proposition 98 is often affected

State revenue sources:2007-08 projected

Source: Legislative Analyst’s Office

Budgeting:Why the big ups and down?

With a highly progressive tax system, the state’s revenue streams have developed rollercoaster characteristics

The top 1.5% of income earners pay almost half of state income taxesStock options and capital gains are a large percentage of state income taxesSmall differences in actual rates for these revenue sources can generate significant revenue swingsOn top of that, stock options and capitol gains are very difficult to predict

What Proposition 98 is doing

A brief sketch of what’s happening:• 2007-08 Budget Act assumed “Test 2” funding level• But even with Test 2, Prop. 98 funding fell short of fully providing for COLA

and growth across all programs• In response, the Legislature funded Prop. 98 partly by using one-time funds• November LAO forecast revealed a drop in revenues, triggering Test 3 for

2007-08 – i.e. lowering the minimum funding guarantee.• The Governor’s budget assumes Test 3 for both 2007-08 and 2008-09.• The lower guarantee makes as much as $1.4 billion of the budget act funding

for schools vulnerable for recapture via mid-year reductions

A brief sketch of what’s happening:• 2007-08 Budget Act assumed “Test 2” funding level• But even with Test 2, Prop. 98 funding fell short of fully providing for COLA

and growth across all programs• In response, the Legislature funded Prop. 98 partly by using one-time funds• November LAO forecast revealed a drop in revenues, triggering Test 3 for

2007-08 – i.e. lowering the minimum funding guarantee.• The Governor’s budget assumes Test 3 for both 2007-08 and 2008-09.• The lower guarantee makes as much as $1.4 billion of the budget act funding

for schools vulnerable for recapture via mid-year reductions

Proposal to suspend Proposition 98

• The governor proposes to suspend Proposition 98 to secure $4.4 billion in reductions for 2008-09.

• Prop 98 Maintenance Factor contains totals that are reduced in both years for restoration in the future. Restoration is triggered to begin when Test 3 no longer applies and

general fund revenue is not lagging per capita personal income growth by more than one-half of one percent.

• Suspension requires a two-thirds vote in each house taken as a separate and distinct vote from the budget act. Republican leaders reluctantly supporting the Governor Democrats have not dubbed the suspension as DOA

See Appendix for Proposition 98 narrative

Section 3

Governor’s 2007-08 mid-year and

2008-09 budget year proposals

Declaration of a “fiscal emergency”

• Per Proposition 58, the governor may declare “fiscal emergency” if:1. General Fund revenues are substantially below estimates2. General Fund expenditures are substantially above estimates3. Or both

• The governor must propose legislation to address the fiscal imbalance: Requires Legislature to assemble in special session to address

fiscal emergency Legislature must send a bill to the governor within 45 days of the

proclamation and may not act on other legislation until that bill(s) passes both houses of the Legislature and is sent to the governor

• No requirement for legislation to be “enacted”• If the governor vetoes the legislation, he may declare another “fiscal emergency” -

essentially starting the process over with the same rules

K-12 mid-year reductions

The Administration proposes a 2007-08 mid-year reduction

• Proposition 98 guarantee is over appropriated by $1.4 billion in the current year

• The Governor proposes to reduce current-year education spending by $400 million.

$360 million reduction directed at K-12 $40 million at community colleges Reduction will likely come from “sweeping up” unspent categorical

funds Not likely to impact K-12 people and/or programs

Delay in P2 apportionment

• The Administration proposes to further delay the Second Principal Apportionment (P2) Current law delays P2 from June to July Governor proposes to extend the delay until September This would result in a $1.3 billion savings for the state Would increase the state’s cash reserves during the lowest cash

balances• This would likely have a negative impact on LEAs

Likely increase in the interest payments on amounts school districts would have to borrow to meet obligations

Create further cash flow problems for education agencies Basically it’s a loan to the state, but with no benefit to K-14

Governor's proposed 2008-09 reductions

Most programs are subject to significant reductions

Administration proposes an across-the-board methodology:

10.89% on categorical programs

Calculated off of each program’s “Workload” budget

The rationale for this approach

• The Administration argues that across-the-board reductions = protection for essential services + spreading cuts evenly No individual program takes a severe or disproportionate reduction

• Governor argues that all state programs are taking a 10% hit – but that isn’t completely accurate

Governor's proposed reductions

Some state programs are exempt from reductions

Program reductions that would be unconstitutional Proposition 42 transportation programs Retirement allocations Homeowner exemptions Retiree health and dental benefits

Reductions the Administration argues would be inappropriate or inhumane

Medi-cal payments to long term care facilities Cal Grants Juvenile justice Inmate health care

Across-the-board Categorical reductions:How they propose to do it for K-12

2007-08 Funding (per categorical program) ____##___

Increase by 4.94% cost-of-living adjustment ____##___

Increase (decrease) by projected ADA growth (decline) ____##___

= Workload budget ____##___

Decrease State General Fund shareof workload budget by 10.89%* ____##___

Proposed budget for 2008-09 ____##___

Across-the-board reductions:Another way to look at it

Statewide average base revenue limit(Per ADA)

2006-07 2007-08 2008-094.94%COLA 6.99% Deficit

Elementary $5,334 $5,576 $5852 $276 ($409)

High School $6,398 $6,688 $7019 $331 ($491)

Unified $5,562 $5,811 $6099 $288 ($426)

Ave. revenue limit reductions from current year funding

2008-09 Funded

(After Deficit)

Decrease 2008-09

from 2007-08

Elementary $5,443 ($133)

High School $6,528 ($160)

Unified $5,673 ($138)

Detailed program cuts

Proposed Budget Reductions $2.6 billion - Cost of Living Adjustments and Revenue Limits

Eliminates the 4.94% COLA and reduces revenue limit apportionments by ~ 2% Creates a deficit factor of 6.99%

$357.9 million - Special Education Elimination of COLA Reduction would have to be backfilled by local LEAs

$198.9 million - Child Development programs No COLA or growth Eliminates 8000 existing slots. Administration believes that natural attrition rates will prevent any child from losing an

existing slot in a program

$59.6 million - Before and Afterschool Programs Proposed amendment to Proposition 49 to achieve these savings

Detailed program cuts

$1.095 billion - Categorical programs 10.9% reduction No COLA for any categorical program No program is exempt from these cuts including programs such as Class Size

Reduction, Instructional Materials, Supplemental Instruction, Home-to-School Transportation, Supplemental School Counseling and the Charter School Categorical Block Grant

Adult Education and the Charter School Block Grant receive increases of $18 million and $46.1 million, respectively because of increases in enrollment

These increases are calculated prior to the proposed cuts $14.2 million - Child Nutrition Program

Achieved by cutting the free and reduced price meal reimbursement rate by $.02 down from the overall 2007-08 increase of $.06.

$5.6 million - California Department of Education Program support services provided by CDE

$9.2 million - State Special Schools Unallocated funds

Detailed program cuts

CBET 07-08$50 million

No COLA

No enrollment change

-10.89% ($5.44 million –BBR)

Governor’s Proposal

$44.55 million

Reduces per pupil funding $32.44 to $29.00

Detailed program cuts

Adult Education 07-08$753.71 million

+ 38.16 million (COLA)+ 18.84 million (enrollment

growth)Workload Budget:

$810.72- $88.33 million (10.89%-BBR)

2008-09 Proposal:$722.40 million

Special education:Added challenges to LEAs

• The Governor’s proposed 10.89% reduction to special education ends up being a triple whammy to districts and county offices:

1. LEAs have to sustain a sizable cut to a mandated program – approximately $30 per ADA in SELPA local plan area funding – unclear if this cut is implemented via a deficit factor on base funding or a negative COLA

2. The cut is calculated off an already lowered amount due to the bifurcated COLA

3. LEAs will still be mandated to provide services – thereby increasing encroachment on LEAs’ general funds

NOTE: With this proposal, the state could be in violation of federal maintenance-of-effort requirements thereby jeopardizing federal aid

Special education funding:Misc.

Out-of-Home-Care Funding Model• SELPAs entitled to an increase are recommended to not budget for an

increase• SELPA receiving less in 2008-09 compared to 2007-08 will lose 33% of the

difference per current law

Special Disability Adjustment• Calculated pursuant to current law – no proposed change

Supplemental instruction

• The Supplemental Instruction program would take a proportionate 10.89% reduction per the governor’s budget

• In addition to eliminating the COLA, Depart of Finance projects that reimbursement rates for hourly discretionary programs could reduce the rate from $4.08 to $2.00 per hour

Mandatory services:

Remedial Instruction for Grades 7-12

Retained or Recommended for Retention Grades 2-9

Discretionary services:

Low-STAR for Grades 2-6

Core Instruction

COLA index change

• The budget proposes to change the K-14 COLA factor from the State and Local Implicit Deflator to the Consumer Price Index for Wage Earners and Clerical Workers

• The Administration argues that this more appropriately reflects inflationary increases for education agencies since most expenditures go to salaries

• This index change would result in a COLA reduction from 4.94% to 3.65% for 2008-09 (In out years, CPI-W could be higher than the implicit deflator

• Changing the existing formula will be a difficult undertaking – from both political and constitutional standpoints

Data delivery and accessibility

• CALPADS/ CalTIDES Proposes continued investment in the collection of quality data $8.1 million - $2.2 million General Fund and $5.9 million special and federal fund – to

fully fund the recently approved contract to develop systems CALPADS $1.8 million in one-time federal funds for related staff at the CDE and the

Commission on Teacher Credentialing• Education Data Commission

9 member panel to make policy recommendations to Governor for development of an education data system

• California School Finder Website Website created by state in partnership with Microsoft and Google that allows users to

compare schools side-by-side

“Mega-Item” funding flexibility

• The Administration will propose broader flexibility with the Mega-Item (Control Section 12.40)

• New in /out percentages would be: 60% out of and 65% into any categorical program contained with Control

Section 12.40• Budget bill language was not available, so exact details remain sketchy – will

be flushed out during budget hearings

NOTE: This is the only program / policy flexibility the Administration is proposing. However, DOF staff stated that they would be “open” to other proposals

Mega-Item programs

Current law allows for fund transfers of 10% out of and 15% into specific Mega-Item programs (not to exceed 115% of appropriated funding per year)

Those programs include:

Home-to-School Transportation Sp. Ed. Transportation

Gifted and Talented EducationYear-Round Education Grants

Peer Assistance and Review Education Technology

NOTE: Economic Impact Aid was removed from the Mega-Item per the 2007-08 budget Intent of the Mega-Item is to provide an element funding flexibility within K-12 categoricals A significant percentage of fund shifts within the Mega-Item go to backfill Home-to-School

Transportation encroachment

Other items not in the budget

No revenue limit equalization: No additional funding for RL equalization. Approximately $100 million would be required to level up the base revenue limit for all school agencies to the 90th percentile target for each type and size district (elementary small or large, secondary small or large, unified small or large).

No funding to address declining enrollment: see next section, existing law allowing districts to use prior-year ADA remains for 2008-09

No new one-time discretionary dollars: One-time dollars from 2006-07 are gone with no additional discretionary appropriations in sight

No major categorical program expansions: Most categorical programs receive reductions based off the 2007-08 levels, with little program changes proposed

No Child Left Behind:Accountability proposal

“Architecture of Accountability” Focused on 98 LEAs in NCLB Corrective Action (PI Year 3)Four Interventions Proposed: DAIT “Extra Strength”

State Board of Education assigns a District Assistance and Intervention Team (DAIT). DAIT recommends a federal corrective action. State Board acts to impose sanction (e.g. appoint trustee, restructure district, new curriculum, remove staff, etc.)

DAIT “Plus”DAIT team is required but LEA chooses “in consultation with county superintendent.” DAIT given authority to require LEA to implement DAIT plan for reform

Targeted AssistanceLEA chooses a state-approved provider to develop a tailored technical assistance plan to assist LEA to meet federal targets

Revise and Implement LEA Plan LEAs narrowly missing targets revise their LEA plans

No Child Left Behind:Accountability proposal

Governor’s Plan to Expend the $29 million in Title I Set-Aside Funds

State will allocate a higher percentage of funds to LEAs that are identified at a greater intervention/sanctions level. It is unclear who falls into this category

Rewarding High Performing Districts

LEAs given the opportunity to apply for State Board waivers from provisions of Education Code. LEAs already have this authority. Unclear what will be different under proposal

No Child Left Behind:Accountability proposal

What’s the Problem with This Plan?• $29 Million in Title I Set-Aside will not cover all costs of this proposal• No current agreement between the Governor’s Office and State Superintendent• No methodology proposed for each category of intervention • Sanctions are serious and will impose future unfunded mandates• Eventually all school districts will be in NCLB Corrective Action – What Then?• Federal 6th Circuit Court Ruled “NCLB is an unfunded mandate.”• Inherent flaws in NCLB (e.g. 100 percent proficiency of all students at one point in

time). • NCLB not supported in Congress and likely to change with new president.

Stabilizing California’s Budget

• Governor says problems are driven by two factors• Spending all the new funding that materializes in high revenue

years without regard to the sustainability of the funding.• State has not been able to slow spending growth due to

constitutional and statutory formulas that currently force spending of $600 Million per month more than the state takes in.

• Other Key Factors Include:• Vehicle License Fee Cut - $4 Billion• Restricting Reductions to Counties – Prop 1A• Spending New Revenues in 2006-07 – Election Year

Solving the Problem “Once and for all”• California Recovery Plan of 2003

• Agreement with the Education Coalition in late 2003• Constitutional Amendment to Limit Budget Spending• Economic Recovery Bonds

• Proposition 57 & 58 • $15 Billion of Economic Recovery Bonds• California Balanced Budget Act• Fiscal Emergency provisions he has used this year• Prohibits most future borrowing to cover budget deficits

• Proposition 76• Would have gutted Prop 98, undermined the K-14 funding base and allowing mid-year

cuts up to three times per year.• Failed by nearly three-to-one margin.

• Prop 1A – Protection of Local Government Revenues• Better protection than Prop 98 provides schools

Budget Stabilization Act

• Establishes Revenue Stabilization Fund (RSF)• Savings account for excess revenues taken in by the state.

• Excess defined as revenues that exceed the state average increase in revenues over the prior ten year period.

• When triggered, the excess revenues deposited into the RSF will not count toward calculation of the Proposition 98 minimum guarantee.

• Years when tax revenues are below average and state is unable to meet fiscal obligations, RSF transfers will be made to the general fund.

• Years when transfers are made to the general fund, dollars will count toward the calculation of Proposition 98.

Budget Stabilization Act

• Budget Stabilization Act will allow mid-year spending reductions beyond provisions added by Prop 58.

• Under Prop 58, declaration of a fiscal emergency and a special session of the Legislature can and will result in mid-year cuts.

• Automatic reductions will be triggered by the Governor if Department of Finance predicts a year-end deficit. Calculation to be made three times per year (November, January, June)

• If projected deficit is one percent or less, 2 percent across-the-board cuts would be implemented.

• If projected deficit is greater than one percent, 5 percent across-the-board cuts would be implemented.

Budget Stabilization Act

• Proposed as a constitutional amendment that would go to voters on the June, 2008 ballot.

• Modeled after Arkansas - It’s been noted that Arkansas also has a majority vote budget.

• Language for the measure has not been written.• Administration officials have said the Governor will only pursue this as a

legislatively placed ballot measure and will not pursue a signature campaign to qualify it if Legislature rejects it.

Section four

Management Issues and Perspectives

Management perspectives:Overview

Consideration of the January budget proposal should be done against the backdrop of other K-12 management challenges:

K-12 funding characteristicsCategorical program managementDeclining enrollmentCollective bargainingMandate reimbursementsFiscal oversight and accountabilityProviding health and welfare benefitsFacility and operational issuesFederal and state accountabilityFederal funding

K-12 revenue sources

Total Prop 98 Funds – 73.7%

Total Revenue Estimate – $68.9 billion

Source: CDE, Ed Source (12/07)

Proposition 98 funding:Where it goes

• Revenue limits and the top ten K-12 categorical programs account for more than 90% of all Proposition 98 funding*

A majority of district revenue limit funding is dedicated to salaries and benefits via contract

The “top ten” categorical programs have federal and state maintenance-of-effort requirements, or have strong political considerations influencing their funding levels (for instance – Special ed, CSR, EIA, QEIA)

Bottom line: Most Proposition 98 funding is

“heavily committed,” making it difficult for LEAs to reduce funding during

tough budget times

* Source: Legislative Analyst’s Office

Prop 98 Dollars

Other K-12 Categoricals

Top 10 Categoricals

Revenue Limit Funding

Quality Education Investment Act

• The Administration proposes no change to current law or LEA / school eligibility requirements

• Funding schedule remains in place per statute• Program implementation might have been delayed; however, three political

considerations prevented that action:1. CTA’s sponsorship of the initiative2. The governor was the co-architect 3. Linkage to the Proposition 98 settle-up lawsuit – not legally

included in the lawsuit, but certainly politically connected

The Administration didn’t want this additional fight

Instructional materials:Current and upcoming adoptions

HEADS UP! LEAs have two expensive, back-to-back

adoptions (Math in ‘07 and RLA in ‘08) This cycle will be the last where math and RLA

are back to back New texts must be available within 24 months of

adoption by the state CDE estimates that the math adoption will cost

approximately $78 per pupil (est. $419.4 million statewide) and reading/ELA adoption will be approximately $125 per pupil (est. $787.5 million statewide)

Availability of materials hearings(E.C. Section 60119)

REMINDER: Most LEAs must hold a public hearing by the end of the eighth week from the first day

pupils attend school for purpose of determining (by resolution) sufficient instructional materials or textbooks (aligned to content standards) are available to all pupils.

For LEAs on multi-track calendars that deadline begins in Aug or Sept

Definition of sufficiency is in the code

Public notice requirement is 10 calendar days

IMF fundingFunding Source 2006-07 2007-08 Governor’s

2008-09 Proposal

IMFRP $403.5 $419.8 $390.5

Lottery (Proposition 20)

190.0 190.0 190*

English Learner(one-time

30.0 0 0

TOTAL $623.5 $609.8 $580.5

•The Lottery Commission has not yet made available the revenue estimates for 2008-09. The estimated per-ADA amount for Proposition 20 is $22.50•Estimated per pupil rate per the governor’s 2008-09 proposal would reduce from $69.52 to $64.67 per pupil

Instruction materials:Out year adoptions

Mathematics 2007

Reading / Language Arts / ELD 2008

Foreign Language 2011

History-Social Science 2011

Science 2012

Health 2012

Physical Education - The State Board does

not adopt instructional materials for P.E.

IMF 24-month rule waivers

State Board of Education has approved recent “24-Month” waivers• In 2007, the SBE approved four separate requests from school districts to waive

Education Code Section 60422(a), the “24-month rule” for purchase of instructional materials after the adoption of a new list by the SBE. Three of these waiver requests were for the history/social science adoption, one was for science (required by 2008)

• While the Board has not articulated a set policy or conditions for approving this type of waiver, the running themes have been two-fold:

1) The district is able to clearly explain the reasons for the needed extension

2) The requested extension is under a year, generally six months

Declining enrollment

• Declining enrollment continues to be a major problem for over 58% of LEAs• The overall decline in ADA is primarily a result of continued decreases in annual birth

rates• However, it is further exacerbated by the growth in charter school enrollment• Forecasts indicate negative growth the next couple of years

Source: LAO, November 2007

$6M

-0.5% -0.4% -0.3% 0.0% 0.2% 0.3%

07-08 08-09 09-10 10-11 11-12 12-13

Out Year ADA Growth Forecast

K-1

2 A

DA

Declining enrollment:The conundrum

Unfortunately for management, while funding is provided on an incremental, fixed basis – expenditures are not

For a growing district, the incremental increase in revenue generally exceeds the incremental increase in cost

New teachers on the schedule are cheaper than your average salary

For a declining district, the opposite is true - the incremental decrease in revenue generally exceeds the incremental decrease in cost

Newer teachers are generally laid off first. Thus our earlier gain is our present pain*

* Source: Damon Smith, Imperial COE

Declining enrollment:No relief proposed

• The governor’s budget proposes no additional funding for districts experiencing declining ADA beyond current law

• Current law remains in place allowing districts to count prior-year ADA if it is greater than current-year

• Education advocates continue to propose and sponsor reforms, but General Fund cost implications have stalled such measures

• Opponents to declining enrollment reform argue that the one-year waiver provision “costs the state over $500 million in lost revenues” and delays districts from making the reductions necessary to deal with the problem

Declining enrollment:Charter school related

Three changes to address charter school related ADA loss are effective as of 2007-08:

1. Reduction of prior-year ADA is based on the net shift in ADA from district schools to district-sponsored charter schools. District gets credit for the ADA of students transferring from a district-sponsored charter school in the prior year to a district school in the current year. However, this cannot result in an increase in prior-year ADA

2. Reduction to prior year’s ADA for a pupil can’t be greater than the ADA claimed by the charter school in the current year

3. No required reduction to prior-year ADA for a K-8 district for a pupil attending the 9th grade in a charter school. Or for a K-6 district for a student attending the 7th grade in a charter school

Declining enrollment districts with charter schools now get credit for pupils returning back from charter schools. For instance, a unified district can now get credit for students graduating from a district K-6 or K-8 charter school and then attending district middle or high schools

Managing declining ADA• First, recognize and accept that the state is not likely to come to your aid

on this matter any time soon• After that, consider the following options:

1. JPAs with other entities – transportation, food preparation, back office (purchasing, payroll, insurance, legal), child care

2. District and/or position restructuring3. Joint hiring of staff – specialty

instructors, principals, consultants, district office (if small enough)

4. Early retirement buyout – via public agency retirement system, STRS, or locally developed (mid-year plans can offer added benefits)

K-12 mandates

• Governor’s budget proposes to again defer paying K-12 mandates, providing only $1000 each for 38 mandates

• 2006-07 Budget Act appropriated about $900 million for K-12 mandate reimbursement, but did not completely pay off the State’s “credit card” debt to schools

• Total current debt to schools from deferrals since 2006-07 and additional amounts owed is nearly a $1 billion

• CSBA’s Legal Alliance, joined by several districts, has filed a lawsuit to challenge the authority of the State to defer mandate payments – this litigation is not likely to impact 2008-09 BudgetMandate deferrals

to continue

The education credit card

A significant amount is still owed to K-14:

a. This amount is the deferral of the P2 apportionment from June to July. It does not account for the Governor’s current year proposal to shift it to September

b. A majority of prior-year outstanding K-12 mandate claims were paid up in 2006-07, however deferrals for 2006-07 and subsequent claims restarted again

c. Estimated amounts

K-14 “education credit card” balance

(in millions) 2005-06 2006-07 2007-08 2008-09

Deferrals K-12 $1,103 $1,103 $1,103 $1,103a

Comm Colleges 200 200 200 200 Mandates K-12 $ 900b $ 275 $ 435 $ 606 Comm Colleges 100 90 115 132

Totals: $2,303 $1,668 $1,853 $2,041

Source: LAO

Negotiations

Impacts of mid-year cuts:• Mid-year reductions won’t create direct implications to

07-08 negotiations and/or settlements• Mid-year reductions are more than likely to stay away

from people, programs, and/or reserves

Budget year implications:• Anticipating budget year impacts will be critical to LEA fiscal and programmatic

integrity

• LEAs should anticipate a zero COLA for 2008-09

• A possible 2% revenue limit reduction for 2008-09 is too close to call, but should be included in multi-year projections – just in case

Negotiations (cont.)

• Sometimes it’s easier to bargain when there is no money – and everyone knows it But the pressure will be on management to settle 07-08 contracts

quickly if you haven’t done so already Management is cautioned to plan carefully – re-examine long range

projections and, if possible, reassess current offers – without engaging in an unfair labor practice

Consider off salary, one-time bonuses or enhancements Expectations among employee groups will likely be more tempered,

but demands and expectations will continue to outpace long range revenue estimates

Careful not to trade too much contract language in lieu of money – you renegotiate fiscal issues, but contract language can be here to stay

LEA health care costs

Statewide cost trends

Moderate cost increases projected in

the near future

* Source: Kaiser Family Foundation

Coverage premiums grew 87% nationwide from 2000 to 2006 – more than four times the growth in wages* LEA contributions to health benefits doubled during this time But costs for 2007-08 and 2008-09 likely to be moderate for most LEAs Projected cost range increase of 8% - 13% for 2007-08AB1X 1 (Nunez) died in Senate Health in late January

National health expenditures (NHE) per capita since 1960

Source: Kaiser Family Foundation, Health Care Costs Primer, August 2007

Health care:Dangers of uncontrolled cost increases

* Source: Ken Hall and Carol Berg, School Services of CA, Inc. Fall 2004

Health care increases can use up available dollars quickly in an uncapped plan

Example:*

Assuming a $8,000 benefit cost and a $60,000 average teacher salaryA 10% increase in benefits costs is $800This is equal to a 1.3% salary increaseThis increase has to compete against an LEA’s total COLA and unrestricted salary increase

Managing health care costs• Managing health care costs will continue to be one of the most challenging issues for K-12 management

• Consider the following to address cost increases:

Educate employees, management, and the board to be better consumers Restructure plan offerings and/or increase deductibles and co-pays

Look at new carriers or join larger health groups or JPA Self insure where appropriate – dental might be one option Consider different models – Health Savings Accounts for instance Put in a cap if you don’t have one, carefully analyze impacts of cap increases if you do

GASB 43/45:A reminder

Net effect: Puts retiree benefits and their costs on the negotiating table

•GASB 43 and 45 apply to local government agencies that provide “other post-employment benefits” (OPEBs) to former employees

•OPEBs include any health or other benefits provided to employees after retirement – life long or until age specified (i.e. plan termination at age 65)

GASB 43: Requires local agencies to plan for funding of other post-retirement benefits GASB 45: Requires that OPEBs be recognized as an expense on an local agency’s financial statements

GASB 43/45:Implementation dates

• Actuary must be performed to determine liability of the OPEB

• The liability must be recognized on LEA government-wide financials with annual amount shown to fully fund the benefit

• GASB 45 is effective for periods beginning after December 15, 2006. Its implementation dates are as follows:

2007-08 for LEAs with revenues greater than $100 million 2008-09 for LEAs with revenues between $10 million to $100 million 2009-10 for LEAs with revenues under $10 million

School facilities

Major school facility issues in 2008:

2008 school bond? Deferred maintenance Routine restricted

maintenance Grant adequacy Misc. issues

School facilities:School bond

• Governor proposes another K-12 school bond proposal $4.430 billion new construction $1.539 billion modernization $1.0 billion charter schools $1.0 billion career technical education facilities Reduction of New Construction State Grant amount

• AB 100 (Mullin/Nunez) – Legislature’s (Dem) Bond Proposal $3 billion new construction (no seismic retrofit) $1.2 billion modernization (up to 200 million for small high schools) $1 billion Overcrowding grants $500 million charter schools $500 career technical education

Bond for November 2008?

• Unlcertain… budget politics could keep Republican lawmakers from supporting the measure

• New Construction – Proposition 55 and 1D Have enough until early 2010 ($2.7 billion) 60% Local and 40% state by default

• Modernization – Proposition 1D Have enough until late 2009 ($2.7 billion) Lower state share by default

• Maybe something for: Career Technical Education Charter Schools Seismic Green Schools

Deferred and routine restricted maintenance

Deferred maintenance:• The State Allocation Board has recently apportioned

$285 million in deferred maintenance funding fromthe 2007-08 State Budget

• This is approximately 91% of the total max. matchfor LEAs

• The governor’s budget proposes to fully fund the state’s match at approx. $262.5 million – this would equate to approx. 82%-85% apportionment level after extreme hardship cases are funded

Routine restricted maintenance: No change proposed in the governor’s budget – 3% min. contribution based on a district’s 2008-09 GF expenditures and other financing reflected on the agency’s adopted budget

School facilities:Williams case

• If unclaimed money is swept for mid-year reductions, then little if any will be available for 2008 Reversion Rccount

• Proposition 98 reversion funding has been used to fund Williams-related programs the past couple of years

• Unfunded Williams emergency repair projects could be placed on a waiting list• Expect to see a political and legal challenges if this were to occur

School facilities:Misc. issues

Misc. issues in 2008 and beyond:• Grant adequacy:

Next 6% adjustment will be in late January or later It does not include modernization grants

• Val Verde Unified hardship litigation - suing the state for adequate facilities• Labor compliance programs for the next bond (not part of 1D)• Americans with Disabilities Act cost adjustments for new construction as was

done for modernization

Federal issues and funding

• LEAs should plan to receive lower levels of fundingfor most federal programs in 2008

The following chart displays programs and funding levels for California:*

CA Expenditures (in thousands) Program

2007-08 2008-09

(estimate)

% Change

Title I, Part A (Basic Grant) $1,643,496 $1,767,657 7.6% Special Education $1,150,175 $1,117,655 -2.8% Title II, Part A (Teacher Quality) $331,226 $318,446 -3.9% Title II, Part D (Enhancing Education through Technology) $32,823 $0 -100% Title III (Language Acquisition) $169,057 $169,521 0.3% Title IV (Safe and Drug Free Schools) $41,539 $12,832 -69.1% Title V, Part A (Innovative Programs) $12,108 $0 -100% Title V, Part B (21st Century Learning Centers) $127,685 $119,526 -6.4%

* Source: School Services of CA, Inc.

Other federal issues

NCLB Reauthorization – Because Congress didn’t act in 2007, likely not to occur until after 2008 election

MAA claiming / reimbursement:• Regulations issued by the Centers for Medicare and Medicaid Services propose to eliminate

reimbursement for school-based administrative claiming and transportation services for students with disabilities

• If the regulations go into effect, without Congressional intervention, school agencies face a potential loss of $130 million annually

National forest area schools:• The battle continues over federal assistance funding for LEAs with national forest lands within their

jurisdictions• Reauthorization of payments under the Secure Rural Schools and Community Self-Determination

Act is stalled in Congress• Efforts to address this issues continue in Washington

Section five

Outlooks and Predictions

Predictions:Things you can plan on happening

Mid-year reductions – likely to remain at $400 million, amount could increase nominally but won’t impact people and/or programs

Zero COLA for 2008-09 – Legislature likely not to restore COLA funding in the budget year

If Prop. 93 (term limits change) fails - budget dynamic changes, new legislative leadership and new elections, they will be seeking education support

CALPADs and CALTides - proposals pass as proposed

Predictions:Things that won’t happen

No change to COLA methodology – use of the implicit price deflator remains Budget stabilization proposal – not as proposed Revenue limit funding – nothing for declining enrollment, additional revenue limit

equalization, or one-time discretionary grants Taxes and/or fees – not enough will be enacted to save K-12 from significant

reductions in 2008-09

Predictions:Too close to call at this time

2008-09 suspension –Election year dynamics and strong opposition from the Education Coalition…

2008-09 reduction methodology – Will Legislature want to pick and choose winners / losers in an election year?

Governor vs. Legislature – governance system is polarized, policy and budget deliberations will be very contentious

General tax increase(s) – likely not enough to save us from budget year cuts, but maybe via the ballot

Health care initiative – if there are significant fees and/or employer costs the business community will strongly oppose

Department of Finance’s revenue estimates – these could be overly pessimistic, state will still face a deficit, but perhaps not as bad

Long term outlook

• LEAs should prepare for difficult weather• 2008-09 will be an extremely challenging year for school funding• But program restoration could come as early as 2009-10 if Proposition 98

goes into a “Test 1” condition

But how budget reductions are restored will be a key factor in budget years +1 and +2

Will reduced programs be fully restored, or will new funding be dedicated to other things / programs?

Thank you and good luck!

For additional questions on these or other K-12 finance and policy matters please contact:

Teri Burns

916-669-5425

terib@sia-us.com