A View into the Future after the May 19th Election
Frost, Davis & Donnelly

Ballot Measure Popularity Getting Lower

In the next 13 days, the Governor and the Yes on Propositions 1A – 1F Campaign will spend more than $20 million to convince the voters to approve the measures negotiated during the recent budget battle. The polling is not good and shows that the voters appear to be very angry and resentful that the Governor and legislative leaders did not solve the budget problem long ago and without asking the public to vote on a series of complicated proposals. Amazingly, it appears that the more the campaign spends on the five measures, the more confusion is raised and the further behind they get. At this point the campaign seems focused on trying to salvage Proposition 1A and 1B. The other measures, which are more closely related to the specific 2009-10 budget, seem to be too far behind at this point to succeed. Assuming that Proposition 1C (lottery), 1D (tobacco tax funds) and 1E (mental health funding) fail, the 2009-10 budget will be $5.6 billion short of balancing.

A pril Tax Receipts below Estimates

The Department of Finance has announced that the April tax collections are $1.8 billion below the estimates used to craft the February budget deal. That puts the state's 2009-10 budget gap at just under $10 billion and could keep growing. The failure of the May 19 ballot measures would immediately increase that gap by another $5.6 billion – creating a $16 billion difference between expenditures and revenues in the next fiscal year. The 2009-10 budget does include a $2 billion reserve for emergencies, and there is the ability to do some costly temporary borrowing from local government and transportation accounts of as much as $6 billion. Additionally, the Treasurer is working on the possibility of getting a loan from the federal government in order to meet this summer's cash flow needs. However, these actions would likely leave almost $8 billion in cuts that would need to be made. Proposition 98's share of that remaining gap would be just under $4 billion assuming the size of the cut is limited to an $8 billion amount.

Federal Funds Coming Soon…Don't Spend Them Yet

The CDE is now letting school districts know the exact funding levels they should expect from the IDEA and Title I federal stimulus funding. The specific level of funding for each district for the State Stabilization funds is being calculated right now. That data should be available within the next week or two. It is the hope of the Governor and Superintendent O'Connell to have these federal funds out to school districts as soon as possible. For school districts, the total amount of funding will exceed the amount of the cuts made in the February budget. These funds will be very helpful in offsetting the 2008-09 budget cuts. However, it is critical that districts remain patient in planning how to spend these funds in light of the additional cuts mentioned above. The federal stimulus funds are one-time and will have to help districts offset the 2008-09 cuts, the 2009-10 cuts outlined in the approved budget and any additional cuts that will come this summer as the result of the continued economic downturn and the failure of the May ballot measures. It is important that district take no final action regarding layoffs until the May/June budget revision is made public. The options offered by the Governor will give districts a good idea of the size of the next round of proposed Prop 98 cuts. March 15 th layoff notices can still be rescinded later this summer if such action is warranted.

May 15 th Layoff Notifications

Under current law, school districts that send reduction in force notices to certificated employees by March 15 th , must notify them by May 15 th of their final determination to end their employment. This is a

difficult action for districts to take and there have been numerous questions about whether this final notification date can be moved to June and whether the August layoff option in the Education Code will be available to districts.

Regarding the final May 15 th notification date, legislation was introduced recently to extend this date until June 15 th . This bill, AB 3x 32 (Silva) was pulled from the Assembly Education Committee agenda on May 6 th and will not be heard. From a practical standpoint, there was no way to move the bill in time to give districts any certainty that it would pass and be signed into law prior to the actual May 15 th deadline. Additionally, there was concern that amendments would be forced on the author that would eliminate the August layoff code section.

August Layoff Option

This statute has never been used by school districts and has never been tested legally. In conversations with school attorneys, there are a number of questions regarding the actions needed to implement a layoff under this section. Because this code section ahs never been used, there are several unanswered questions. Is an accusation packet required as a part of an August layoff proceeding? Education Code section 44955.5 does not mention EC section 44949 which is where the standard notice and hearing procedures are found. If a school board can adopt its own notice and hearing procedures is EC 44949 still required or irrelevant? It is not clear if the Legislature will address the August layoff code section in 2009-10 budget trailer bills. As of now, Education Code section 44655.5 is available to districts. The question, however, is why a district would chose to use it assuming it took appropriate actions with its March 15 th layoffs.

If districts were to rescind March 15 th notices only to try to re-impose them in August they would have to begin the administrative process from the beginning. If districts feel they will need to layoff additional personnel based on May/June Revise cuts, there could be an issue with hearings that could run into the beginning of the new school year.  This timeline could mean that districts could have teachers in classrooms or at least on the payroll for the first part of the school year and then have to pull them out and restructure classes.  If a district were to utilize the August option, they should consider the following questions: 1) what provisions are districts using to assist the newly laid off personnel at such a late date in securing other employment.  (Note: The purpose of the March and May notices is to give employees time to look for other work.); 2) what is the district's plan for negotiating the effects of an August layoff?  3) Does the local bargaining agreement contain language related to the need to negotiate the outcomes of these layoffs? 

Summary

First, it is very important to turn out education supporters at the polls for the May 19 th election. While the polling does not look good now, it is possible that Propositions 1A and 1B can pass. Second, do not take any immediate actions on rescinding the March layoff notices this month. We should know far more about the 2009-10 budget by mid-June. Finally, begin planning for further program cuts and determining how the federal stimulus funding can help you offset not only the 2008-09 budget cuts, but additional cuts that are likely to come later this summer. As we know more we will keep you informed.

The Constitutional deadline for the Governor to release his initial budget proposal for 2009-10 is January 10th. However, in an unprecedented move, on December 31, 2008, the Governor's proposal was presented. This early release was an effort to stimulate legislative action to address not only the 2009-10 Budget, but also the shortfall in the 2008-09 Budget. According to School Services of California's Fiscal Report, "The State deficit at the end of 2009-10 is estimated now to be $41.6 billion unless corrective action is taken."

At this time, the District does not have details of the Governor's proposal. However, based on the information in the press and the advisories from the various educational groups some of the major impacts to the District would be:

2008-09

• Elimination of the .68% cost of living adjustment (COLA) for K-14 education:
• GUSD Impact - approx. $1 million
• Further reduction of the K-12 revenue limits of $1.6 billion, estimated to be 4.5%:
• GUSD Impact - approx. $7 million
• Flexibility:
• Utilize categorical funds for any purpose after local public hearings
• Reducing the K-12 local Routine Restricted Maintenance Account (RRMA) set-aside requirement from 3% of General Fund expenditures to 1%
• Elimination of the K-12 Deferred Maintenance match
• Reducing the State required level of K-12 Unrestricted General Fund reserves from 3% to 1.5%

2009-10

• No COLA (estimated to be 5.02%) for K-14 education
• $1.1 billion reduction in the revenue limit funding for K-12 education to allow school agencies to eliminate 5 days of instruction
• Shift of $1.06 billion from the General fund to K-14 education to replace Lottery revenue due to the securitization proposal, bringing this funding under the Proposition 98 umbrella (note: this would require voter approval)
• $65 million increase to pay for the special education behavioral intervention lawsuit settlement
• $13.4 million for State mandated programs, thereby suspending all programs except for two K-12 mandates: interdistrict and intradistrict transfers and the California High School Exit Exam. It is believed that this is in response to the recent judgment that the State must either fund or suspend the mandates.
• Flexibility: the same flexibility as proposed for 2008-09

On January 13, 2009, a workshop is scheduled to review the Governor's proposals in more detail. That information will be shared with the Board when it is received. At this point in time, the District's administrative team continues to focus on reducing expenditures in the current year and future years, analyzing the various programs for potential reductions/restructuring, and developing cost analysis. Additionally, data is being gathered to develop options that may become available should the State adopt the flexibility proposals.

It is important to note that this is the Governor's proposal and reduction for 2008-09 will require legislative action. Additionally, this is just the initial step in the 2009-10 State budget process. While we know there will be reductions to education, there is no certainty as to how the reductions will be structured and that is a critical component in our decision making process.

The overall budget solution includes $15 billion in cuts, $14.4 billion in temporary revenues, and $11 billion of borrowing ($6 billion from Revenue Anticipation Warrants and $5.4 billion from lottery securitization). Revenues include five major elements:

• 1 cent increase in the sales tax
• Increase in the VLF to 1-1.15 percent of the car's value
• Gas excise tax of approximately 12 cents per gallon
• Eliminating the dependent care tax credit
• Increasing the taxes on high income earners

Revenues are tied directly to the passage or failure of a modified spending cap which will appear on the ballot on a statewide special election to be held on May 19 th of this year. If the spending cap is approved by voters, then the revenues will stay in effect through the 2012/13 fiscal year. If the spending cap is not approved by voters, then the revenue will stay in effect for only 24 months after their enactment.

The May 19 th ballot will the following measures:

• Proposition 1A: A measure to securitize the state lottery, taking schools out of the lottery and allowing the state to sell bonds to help balance the budget in the 2009-10 fiscal year and possibly later. Schools will see an increase in Proposition 98 funding to accommodate the loss of lottery revenue.
• Proposition 1B: State spending cap (ACA 1 3x)
• Proposition 1C: Education Funding (ACA 2 3x)
• Proposition 1D: Allows the state to divert the use of Proposition 63 monies
• Proposition 1E: Allows the state to divert the use of Proposition 10 monies

Spending Cap

ACA 3X 1 (Niello), which will appear on the May 19 ballot as Proposition 1B, establishes a state rainy day fund. Beginning with the 1011-12 fiscal year, ACA 3X 1 would require the state to calculate "unanticipated revenues." Unanticipated revenues would be actual revenues (plus transfers and prior year reserves) that exceed forecasted revenues for that year. The calculation of forecasted revenues would be based on actual revenues received for the prior 10 years, using a linear regression analysis.

The first use of unanticipated revenues would be to satisfy any outstanding Proposition 98 obligations for that year. Any remaining funds would be transferred to the Budget Stabilization Fund until the amount in the fund reaches 12.5 percent of General Fund revenues. However, the transfer to the rainy day fund could be less than the difference between actual and forecasted revenues if a portion of the excess revenues are needed to maintain a "workload" budget. The workload budget would be defined as the General Fund expenditures for the prior year as increased for the so-called "Gann factors" (California CPI and population growth).

After the Budget Stabilization Fund reaches its cap, any unanticipated revenues would be spent in the following order of priority:

1. Outstanding Proposition 98 obligations
2. Debt service
3. One-time infrastructure or other capital outlay purposes
4. Additional debt retirement
5. Unfunded liabilities for vested non pension benefits for state annuitants
6. Transfer by statute to the Budget Stabilization Fund

Voter approval of ACA 3X 1 is tied to the proposed revenue package and to ACA 3X 2. If voters approve ACA 3X 1, then the new revenues would be in place for the balance of the current year plus the next four budget years. If rejected, the new revenues would be in place for the next 24 months.

In addition, approval of ACA 3X 1 is necessary to provide the funding source for the Proposition 98 payment provided in ACA 3X 2.

Maintenance Factor

In January an issue arose regarding the long term funding levels under Proposition 98. During downturns in state revenues, Proposition 98 allows for a lower level of funding for schools known as Test 3. However the Constitution also provides that the loss of funding be restored over time, through a maintenance factor. The Department of Finance, in calculating the revised funding levels for 2008-09 and 2009-10, determined that both years would be Test 1 years and in this determination they also falsely asserted that no maintenance factor was created resulting in a loss of $9 billion for schools.

This issue was part of the negotiations on the budget deal and an agreement was reached that calls for the electorate to vote on a constitutional amendment that would provide $9.3 billion in payments to schools and community colleges. Specifically the proposal, contained in ACA3X 2 (Bass), would establish annual supplemental payments beginning in 2011-12 that would be in lieu of a maintenance factor for 2007-08 and 2008-09. The supplemental funding would be adjustments to school district revenue limits and in addition to the Proposition 98 guarantee. The supplemental payments would subsequently be built into the base for each year. Up to $200 million would be set aside in the first payment to fully fund any remaining equalization.

Establishing these supplemental payments is linked to the establishment of a rainy day fund as the funding source for these payments would be half of the annual set-aside for the fund. ACA 3X 1 (Niello) creates the Supplemental Education Payment Account for the purpose of making the payments to schools and requires that 1.5 percent of general fund revenues be transferred to that account annually. The entire $9.3 billion would likely be paid out over five years.

This issue will appear before voters as Proposition 1C on the May 19 ballot.

Summary of Current Year Funding Cuts  

Current year (2008-09) K-12 funding cuts total $1.88 billion - the same level of cuts proposed earlier by the Governor. However, unlike the Governor's proposal, this agreement does not take the entire cut through a revenue limit reduction. It does include elimination of the current year .68% revenue limit COLA. But the remainder of the reduction is split 50/50 - with half coming from revenue limits (a little over 1% additional cut) and the remainder through a 15% cut to specified categorical programs, as noted below.  

Categorical Program Cuts & Flexibility

There are 3 tiers of categorical program cuts. Tier I receives no funding cut and there is no "program flexibility" in the use of the funds and no statutory requirements can be waived. Programs in Tier II will receive a funding reduction of approximately 15% but there is no program flexibility and the programs are to be operated in accordance with current statute. Tier III will take an approximate 15% cut and there is "maximum flexibility." Districts will be able to use of these funds for any purpose. The changes to these categorical programs will be in effect for the remainder of this fiscal year and for 4 additional years.

Tier I:

• Child Development Child Nutrition
• Economic Impact Aid K-3 Class Size Reduction
• Proposition 49 after school programs Special Education
• Quality Education Investment Act Home-to-School Transportation

Tier II:

• Adults in correctional facilities Partnership Academies
• Apprenticeship programs State Testing
• English Language Acquisition Program Agriculture-Vocational Education
• Foster Youth Charter School Facilities Grants
• K-12 High Speed Network Multi-Track YRE

Tier III includes all other categorical programs. These programs will receive an approximate 15% reduction in the current year and for 4 additional years.

Use of Prior-Year Categorical Reserves

The budget proposal authorizes districts to access ending fund balances as of June 30, 2008 (from the 2007-08 school year only), from most restricted, categorical program accounts - to use for any educational purpose. Those categorical programs "protected" from such access are:

• Economic Impact Aid (EIA)
• Targeted Instructional Improvement Grants (TIIG)
• Instructional Materials
• Special Education
• Quality Education Investment Act (QEIA)
• California High School Exit Exam (CAHSEE)
• Supplemental Instruction Home-to-School Transportation

K-3 Class Size Reduction Flexibility

Technically, there is no change to the statutory requirements of the K-3 class size reduction program. However, changes have been made to the penalty provision should a class exceed the current 20.4 to 1 ratio. The changes to the penalties are as follows:

• Up to 20.5 - no penalty
• Up to 21 - 5% penalty (20% penalty is current law)
• Up to 21.5 - 10% penalty (40% penalty is current law)
• Up to 22 - 15% penalty (out of compliance penalty is current law)
• From 22 to 25 - 20 % penalty
• Over 25 penalty is 30% (with no cap)

2009-10 Fiscal Year

This package includes the passage of the 2009-10 Budget. The agreement includes the following K-12 education provisions:

• Elimination of a 5.02% statutory COLA on school district and county office revenue limits. This results in $2.5 billion in cost savings to the General Fund and increases the Proposition 98 deficit factor by 4.529%.
• Further reduces K-12 spending within Proposition 98 spending level by $530 million. Just as was done in the 2008-09 year, this reduction will be split equally by reductions to Revenue Limits and Categorical Programs as follows:
• $265 million reduction to school district and county office revenue limits (added to Proposition 98 deficit factor)
• $265 million in across-the-board reductions (4.9%) to the same categorical programs (Tier 2 and 3) reduced in 2008-09.
• Eliminates the High Priority Schools Grant Program, resulting in $114.2 million in additional GF savings.
• There is to be a May Revision in late May to reconcile the spending levels and budget projections made as a part of these actions.

Impact of Federal Stimulus Package

The federal stimulus package will likely be approved by the President in the coming week. This funding will provide $789 billion to boost the national economy. While there will be billions of dollars provided for education, these resources will have a minimal impact on reducing the size and magnitude of the state reductions in education funding. The current stimulus package contains funding dedicated to a provision called the "State Stabilization Fund." This funding will be allocated to local school districts and/or higher education using existing funding formulas, which can be used to backfill cuts, prevent layoffs and modernize schools as well as other purposes. However, these funds will be provided to the Governor to determine how they will be spent. We believe that the state Legislature will also decide how best to use those resources. We also believe that a portion of that money will be provided to pay for the state's Revenue Anticipation Warrants and to build the state General Fund reserves.

Budget woes worsen as new year begins Analysis from CSBA's Governmental Relations Department The state Legislature remains in partisan gridlock over the budget, with the current fiscal year's shortfall mounting and Gov. Arnold Schwarzenegger's 2009-10 budget proposal due by Jan. 10. An $18 billion Democratic package passed both houses of the Legislature on party-line votes last week only to face a threatened veto by the governor and a legal challenge by legislative Republicans. Even if enacted, the Democrats' proposal would fall some $20 billion short of balancing the state's books, despite its inclusion of $7.3 billion in spending cuts-including $2.5 billion for K-14 education. For the full story, click here.

Budget crisis forces freeze of school facilities funds School districts find themselves caught up in the State Allocation Board's freeze on infrastructure funding. More than 2,000 projects are affected statewide, including 912 K-12 projects. SAB's action followed a freeze on funding announced by the state's Pooled Money Investment Board, which fears California will run out of cash to support operational programs. The cash crunch is, of course, caused by the fact that the state budget is severely out of balance and the Legislature has not acted to either make cuts or raise revenue to correct the problem. For more information, click here.

Local action needed for reimbursement of mandated BIP special education costs Materials are now available to help local boards expedite a lawsuit settlement, recently negotiated by CSBA's Education Legal Alliance, that will result in millions of dollars for mandated costs incurred providing Behavioral Intervention Plan services for certain special education students. An annual increase of $65 million for local educational agencies will begin in the 2009-10 school year, with millions more in reimbursements beginning in 2011-12. However, 85 percent of all LEAs, representing 92 percent of statewide average daily attendance, must first waive their right to file cost claims and send required documents to CSBA. Forms and further information are available here.