Budget 400: Advanced-Level Finance for the Governance Team

Presented by

Ron BennettPresident and CEOSchool Services of California, Inc.

Joel MonteroChief Executive Officer

The Fiscal Crisis andManagement Assistance Team

Stan MantoothCounty Superintendent of SchoolsVentura County Office of Education

2

The Economy

Powerful economies do great things; and they generate a lot of tax revenue In past years, revenue growth was estimated at 4% to 6%

annually In 2000, it was more than 20%!

And now, it is dropping like a rock – flat revenues would be a plus

Past revenue growth allowed: The state to avoid cuts to any major expenditure areas Full funding of statutory and formula-driven increases Increases in important areas, including education And an on-time budget

Yes, high revenue growth is a good thing! But, it is now also a thing of the past – way past

3

The Economy

In 2007-08, the choice between raising revenues or making a reduction in spending did not have to be made

The outlook for 2008-09 – and beyond – is a bit more clouded

Revenue projections are much weaker – high year-to-year growth is simply not sustainable over the longer term

The Budget assumed 2008-09 state revenues increase only slightly

Reflects that much of the jump in revenues in 2005-06 and 2006-07 is assumed to be one time

But revenues are coming in well below forecasts

4

Per-ADA Revenue Increases Have Been Volatile

It is not just how much funding, but also “when” and “how” predictable it is

Over the past eight years, revenue limits per ADA have risen by an average of about 4.2% per year

But with a high of more than 10%

And a low of -1.2%

A deficit factor was applied every year from 1991 to 2001

It is difficult to build programs and academic success on an unstable foundation

Education funding remains volatile in California

5

Per-ADA Revenue Volatility

Per-ADA Revenue Change

-2%

0%

2%

4%

6%

8%

10%

12%

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Year

Inc

rea

se

to

th

eB

as

e R

ev

en

ue

Lim

it P

er

AD

A

Average

6

Structural Budget Deficit Remains

But a structural deficit remains For 2008-09, the deficit continues to hover around the

$5.0 billion to $8.0 billion level Use of the reserve, one-time money, and “creative proposals”

lessens the reported amount of the deficit And the economy is slowing dramatically

Tremendous revenue growth in 2006-07 has dwindled to nothing for 2009-10; and the slowdown now threatens 2008-09

Revenue increases are not forecast for the foreseeable future Meaning that it will be harder to close the spending gap

A structural deficit means continued state operating deficits – which is a big concern

7

K-12 Revenue Limits – An Overview

Look at the “Revenue Limit Roller Coaster” for 2008-09

January’s Governor’s Budget proposed a 10% cut to education

Flexibility in spending was promised

By the May Revision the cut was reduced

Revenue limits were maintained from 2007-08

Categoricals were to be cut by 6.5%

8

K-12 Revenue Limits – An Overview

By the September Budget Enactment, education was flat funded

A tiny cost-of-living adjustment (COLA), 0.68% was provided

Flexibility was not included in the Budget

Just one month later the Governor announced the Special Session to deal with declining revenues

What should we plan for given all these changes?

9

Proposition 98 Funding Per Pupil

$8,558

$8,509

$8,464 $8,458

$8,610

$8,727

$8,300

$8,350

$8,400

$8,450

$8,500

$8,550

$8,600

$8,650

$8,700

$8,750

2007-08 2008-09

Per-Pupil Proposition 98 Funding

Governor's Budget May Revision Adopted

10

Structural Budget Shortfall Remains

In the end, the 2008-09 Budget Act did not solve the structural budget problem at the state level

Major permanent increases in revenues are needed

And some temporary ones

OR

Significant long-term reductions in expenditures are needed

OR

Both!

11

Structural Budget Shortfall Remains

The Legislative Analyst predicts major budget problems ahead

The state cannot “grow its way” out of this problem

Even with minor revenue growth, the budget gap swells

The message for us is – the status quo may be as good as it gets for a while

12

Negotiation Strategy –Educate with Real Numbers

Income is light: $38 COLA (unified) Less your declining

enrollment

Costs are heavy: Step and column Health benefits Unavoidable “thing”

costs increases

13

Negotiations – 2008-09

Example of what could happen in 2008-09

Revenue Recap

Across-the-Board COLA 0.68%

Minus Cost Increases (as percent of total district budget)

Step and Column (1.5%)

Health and Welfare Benefit Costs (No Cap) (2.0%)

Declining Enrollment Adjustment ?%

Total Available for Salary, Absent Changes -2.82%

14

Our Recommendation

The world is too uncertain right now – wait until after January to negotiate for 2008-09 and beyond

Plan to maintain health and welfare benefits and to pay step and column costs – most districts will have to make budget cuts to do so

View the problem as a joint challenge between the District and the state – not between management and labor

Plan for at least two more years of uncertainty and volatility

Work together to identify and solve problems during these lean times

Special Session to Reduce State Budget Deficit

Special Session to Reduce State Budget Deficit

16

Governor Calls Special Session

Purpose of the November Special Session – to reduce the Budget deficit

The Governor proposes to do this:

By cutting expenditures

$2 billion to $4 billion for education for this year, 2008-09

0.68% COLA would be “unfunded”

Additional cut to revenue limit of about $300 per ADA

And adding revenues

Largest source is proposed 1.5% sales tax increase

In the end, no action was taken

17

Proposition 98 Projections

Proposition 98 simply isn’t growing fast enough to provide a COLA Prop 111 allows the state to short education during bad times Most of the 5.66% COLA for 2008-09 has already been

deficited The Governor’s proposal would take back the remaining

0.68% We recommend districts also plan for a zero COLA for 2009-10

By 2009-10, the absence of two COLAs would cause the deficit to be more than 10% – we would get only 90¢ on the dollar

We forecast that if that happens, about 500 districts go “Qualified” or “Negative” financially

We will fight for the COLAs but need a plan to live without them

18

Governor Calls For a New Special Session

On December 1, 2008, the day the new Legislature was sworn in, the Governor called for another Special Session

Used provisions of Proposition 58

Reported deficit of $28 billion

Proposes a mixture of new revenues and budget cuts

The Legislature has 45 days to act

January 9, 2008, the Governor is scheduled to release his 2009-10 Budget proposal

19

Possible Results of the New Special Session

The Special Session could have a real impact on this year and on future years – even if nothing happens again! Big cuts this year would be painful Agreement in revenue increases will be very difficult even with

39 new legislators

But failure to act this year will set up much larger cuts for next year

Do we really think that only a few short weeks after the latest Budget in California’s history the Legislature will do all that it failed to do last summer?

We think most of the bloodbath is likely to occur in the 2009-10 Budget to be released in less than six weeks

20

Possible Additional Factors

The economy isn’t the only barrier to quality education

The Feds, led by a new President, will be revisiting No Child Left Behind – even if only to change the name

Closing the achievement gap continues to pose expensive challenges

The “Adequacy Studies” of just two years ago are but a distant memory – but the potential for a lawsuit is very real

In the end, all learning for students depends on time on task with a highly qualified teacher

We need to protect our employees, but it will be very difficult

Now is the time to set joint goals and pull together – not apart

Thank you