Governor’s Proposal for the2009-10 State Budget and K-12 Education

Ron Bennett, President & CEOJohn Gray, Vice President

Robert Miyashiro, Vice PresidentSheila Vickers, Vice President

Maureen Evans, Associate Vice PresidentMichele Huntoon, Associate Vice PresidentJannelle Kubinec, Associate Vice President

State General Fund Revenue Collapse

Three-year shortfall totals $31.3 billion

$103.0 $102.6 $102.6

$87.5

$102.6

$86.3

$75.0

$80.0

$85.0

$90.0

$95.0

$100.0

$105.0

2007-08 2008-09 2009-10

Baseline Revenue Projections1

(In Billions) 2008-09 Budget Act2009-10 Governor's Budget

1 Excludes new tax proposalsSource: 2009-10 Governor's Budget

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Governor’s State Revenue Proposals

Revenue Increase (In Millions)

Proposal 2008-09 2009-10

Temporary 1.5¢ Increase in Sales Tax $2,350 $7,114

Broaden Sales Tax Base 272 1,154

“Nickel-per-drink” Beverage Excise Tax 244 585

9.9% Oil Severance Tax 358 855

Reduce Dependent Exemption Credit Equal to the Personal Exemption Credit

– 1,440

Increase Vehicle Registration Fees 92 359

Shift Tribal Gaming Revenues from Transportation to General Fund 101 101

Special Fund Transfers and Loans 298 94

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State General Fund Budget Summary3

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(Dollars in Millions)

2008-09 2009-10

Prior-Year Balance $2,375 $1,079

Revenues and Transfers $91,117 $97,708

Total Resources $93,492 $98,787

Total Expenditures $92,413 $95,524

Fund Balance $1,079 $3,263

Budget Reserve:

Reserve for Encumbrance $1,079 $1,079

Reserve for Economic Uncertainties $0 $2,184

Budget Stabilization Account – $0

Total Available Reserve – $2,184

Summary assumes enactment of all of the Governor’s Budget proposals

2008-09 fiscal year relies on $13.9 billion in midyear cuts and $12.7 billion in new revenues

An estimated $5 billion in revenue anticipation warrants (RAWs) would be sold in July 2009 but not repaid until 2010-11Source: 2008-09 Governor’s Budget, p. 9

State Securitization of the Lottery

Securitization of the California Lottery continues to be a key Budget-balancing technique

Lottery revenues, which have been declining, are assumed to double, with the increase used to service long-term debt

The impact on education:

Short term: Lottery revenues would no longer go to public education

Beginning in 2009-10, they would be capped at 2008-09 levels and replaced with General Fund dollars, increased by the COLA each year

Proposition 98 would be re-based to make the proposal neutral

Long term: Education no longer shares in growth in Lottery revenues, which would be pledged to bondholders

Must be approved by voters

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The State Controller’s Office (SCO) apportioned $30.52 per ADA (unrestricted) for the first quarter of 2008-09

$5.92 per ADA lower than the first quarter of 2007-08

Although the Lottery Commission has not officially reduced the 2008-09 projections at this time, we have reduced the per-ADA projections on our Dartboard by 10% based on information released on current Lottery sales

The updated 2008-09 allocations based on the reduction are:

$109.50 per annual ADA unrestricted

$11.50 per annual ADA for Proposition 20

E-26State Lottery: 2008-095

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$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

86-8

7

87-8

8

88-8

9

89-9

0

90-9

1

91-9

2

92-9

3

93-9

4

94-9

5

95-9

6

96-9

7

97-9

8

98-9

9

99-0

0

00-0

1

01-0

2

02-0

3

03-0

4

04-0

5

05-0

6

06-0

7

07-0

8

08-0

9

09-1

0

Proposition 20

Unrestricted

$121

per

AD

A (e

st.)

E-28

Funding per Annual ADA

State Lottery: Funding

$121

per

AD

A (p

roj.)

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Revenue Limit Cuts,Cost of living Adjustment (COLA)

Governor’s Budget Proposal for:

2008-09 reduces budgeted COLA of 0.68%, eliminating the entire 5.66% statutory COLA

2009-10 provides a zero funded COLA, eliminating the projected statutory COLA of 5.02% through the deficit

Governor’s Budget made further cuts to revenue limit funding

$1.6 billion in 2008-09 is equal to a cut of 4.565%

$1.1 billion in 2009-10 is equal to a reduction of 2.515%

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2009-10 K-12 Revenue Limits8

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Base Revenue Limit per ADA

(A)Deficit Factor

(B)

Funded Base Revenue Limit (C) = (A) x (B)

1. 2008-09 Base Revenue Limit$6,106.14 .90315* $5,514.76

2. 2009-10 Base Revenue Limit$6,415.14 .83839 $5,378.39

3. Dollar Change (Line 2, Column C, minus Line 1, Column C)-$136.37

4. Percentage Change (Line 3 divided by Line 1, Column C, converted to a percentage) -2.47%

*.90315 deficit factor = 90.315% funding, or a 9.685% deficit

2009 SSC School District and COE Financial Projection Dartboard

Factor 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14Statutory COLA (use for K-12 and COE Revenue Limit)

5.66% 5.02% 0.50% 2.00% 2.50% 3.00%

K-12 Revenue Limit Deficit9.685%

16.161% 16.161% 16.161% 16.161% 16.161%

Net Revenue Limit Change-

4.57%-2.52%

0.50%2.00%

2.50% 3.00%Special Education COLA (on state and local share only)

0.00% 0.00% 0.50% 2.00% 2.50% 3.00%

State Categorical COLA (including adult education and ROC/P)

0.00% 0.00% 0.50% 2.00% 2.50% 3.00%

California CPI 2.9% 1.7% 2.7% 2.9% 3.1% 3.2%

California LotteryBase $ 109.50 $ 109.50 $ 109.50 $ 109.50 $ 109.50 $ 109.50

Prop 20 $ 11.50 $ 11.50 $ 11.50 $ 11.50 $ 11.50 $ 11.50Interest Rate for Ten-Year Treasuries 3.33% 3.55% 4.44% 4.80% 4.90% 5.00%

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See SSC’s Dartboard at end of this section

2008-09 Proposed Cuts – Governor’s and Legislature’s Major Proposals

ProvisionGovernor’s January

ProposalLegislative Proposal

(SBX1 4, vetoed)

Revenue LimitEliminate 0.68% COLA; reduce further by 4.50%

Eliminate 0.68% COLA

Categorical Program Eliminations

High Priority Schools Grant Program, Math and Reading Professional Development

Program, Deferred Maintenance, Instructional

Materials, Professional Development Block Grant,

others

Categorical Program Reductions

Minor changes Many programs

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2008-09 Proposed Flexibility – Governor’s and Legislature’s Major Proposals

ProvisionGovernor’s January

ProposalLegislative Proposal

(SBX1 4, vetoed)

Prior-Year Categorical Balances

Transfer (with limitations)

Transfer (with limitations)

Current-Year Categorical Allocations

Transfer (no dollar limitation) after public hearing

Limit Mega-Item transfer for Home-to-School

Transportation to “in” only

Routine Restricted Maintenance Set-Aside

Reduce from 3% to 1%

Reduce from 3% to 1%

Deferred Maintenance Match Requirement

Eliminate Eliminate

Reserve for Economic Uncertainties

Reduce by half for 2008-09 and 2009-10

–

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Actions to Take Now – Update Your 08/09 Budget

In your local agency budget for 2008/09:

Eliminate the 0.68% COLA

Reduce the revenue limit by 4.50%

Set aside unallocated state categorical funds

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Flexibility and Opportunity

The Governor proposes to offer broad budget and program flexibility in both 2008-09 and 2009-10

Ability to transfer state categorical funding, including special funds (e.g., adult education and child nutrition), to the unrestricted General Fund

Lifting of statutory requirements for most categorical programs

Example: Eliminating 20:1 K-3 Class-Size Reduction caps

Allow for prior-year restricted balances to be transferred to unrestricted General Fund

Cut budget reserve requirements in half

Eliminate Deferred Maintenance match requirement

Reduce routine restricted maintenance set-aside requirement from 3% to 1%

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2009/10: Fewer Days, Fewer Dollars

The Governor has proposed cutting back the work year for state employees, as well as for schools and students

As part of the Governor’s proposal for 2009/10, the state would:

Permit schools to drop from a minimum of 180 days of instruction to 175 days (five fewer days)

Reduce funding for revenue limits by $1.092 billion, or an additional 2.8%

The Governor’s proposal reduces revenue and makes it possible to legally reduce expenditures

But, ultimately, LEAs would need to renegotiate contracts to realize expenditure savings

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Most States Offer at Least 180 Days

A June 2008 report by the Education Commission of the States found that most states have at least a 180-day school year

Colorado has the lowest number of required days at 160, and Kansas has the highest at 186 days

0

5

10

15

20

25

30

Less than180 Days

180 Days More than180 Days

NoRequirement

Source: Education Commission of the States, June 2008

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Negotiations – Shortened School Year

The Governor proposes allowing districts to shorten the school year from 180 days to 175 daysThis is clearly subject to local negotiationsShould you do it?

For the district – YESIt could save about 2.5% of the district budgetBetter than cutting more programs or more layoffs

For the union – YES100% of the employees earn 98% of full salaryLost jobs don’t come back; lost days doTeachers’ unit retains membership

Caution: Do not use savings for salary increases – sooner or later the year will be restored to 180 days

Treat savings as “one-time money”

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PERS Losses and Contribution Rates

Employer contribution rate is set annually in May by Public Employees’ Retirement System (PERS) Board

2009-10 employer contribution rate is estimated at 9.40%, which has decreased despite the negative 5.1% return as of June 30, 2008

PERS instead expects to use funds set aside as result of its 15-year asset smoothing method to cushion loss

However, investment losses will likely translate into 2010-11 employer contribution rate increase

Total PERS Fund market value losses from June 30, 2008, through October 31, 2008, have reached -22.0%

Actuarial valuation of June 30, 2009 will be used to set 2010-11 rate

Employer contribution rate increase could be as high as 2%-3% if there is a negative 20% investment return for 2008-09

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STRS Losses and Contribution Rates

Legislation would be required to change the employer contribution rate from the current 8.25%

STRS has no plans, at this time, to introduce legislation to increase employer rates

However, the pressure to increase rates will intensify due to:

Investment returns of -3.7% for 2007-08 and -22.0% so far in the current year

Need to address STRS’ unfunded actuarial liability of $18.7 billion at June 30, 2007, valuation, which will undoubtedly increase due to investment losses

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Outlook for Workers’ Compensation Rates

2009 rate hikes are likely

Insurance Commissioner rejected Workers' Compensation Insurance Rating Bureau’s (WCIRB) recommended rate increase of 16%

WCIRB cited medical inflation as the reason for the recommendation

Insurance Commissioner instead accepted 5% increase to reflect higher medical and claims adjustment costs

The Commissioner has no authority to set rates, but advised insurance companies to be cautious if they adjust rates

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Governor’s January Budget ProposalImpact on Alameda USD

08/09: Eliminate 0.71% COLA of $380,000; This reduction was expected and reserved for. A reduction to revenues and to reserves will be made.

08/09: Additional Reduction of 4.57% to Revenue Limit of $2.6M

09/10: Reduction of 2.5% to Revenue Limit of $1.3M

For the $3.9M loss in revenues ($2.6M + $1.3M), look to the Proposed Categorical Flexibility Options and Measure H funds.

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AUSD

Charter School Funding

General Purpose rates are based on statewide average revenue limits*

Reflect 5.02% COLA, 12.09% deficit, and other anticipated changes

CDE will recalculate the General Purpose rates at each apportionment

Final amounts could vary by ±$20 per ADA

Categorical rates reflect the 2008-09 funding levels

Estimated 2009-10 funding rates for charter schools are:

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K-3 4-6 7-8 9-12

General Purpose Block Grant (will vary)

$5,360 $5,440 $5,596 $6,493

Categorical Block Grant $500 $500 $500 $500

Total $5,860 $5,940 $6,096 $6,993

*Ref. Education Code Section 47633(a)

Source: Department of Finance

NEA Charter School in AlamedaProjected Fiscal Impact on AUSD

For 2009/10…

Assume 250 AUSD students enroll in the Nea Charter School

Assume 10 less (non-charter) AUSD Teachers

Projected Net Fiscal Impact on AUSD is a loss of $650,000

Look to the Proposed Categorical Flexibility Options to cover these funds

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AUSD

Projected Teacher Staffing Adjustments

For 2009/10…

-3 full-time equivalents (FTE) for Declining Enrollment

-1.8 FTE for Class-Size Reduction (CSR) 9th Grade

-3 FTE to match high school staffing to enrollment

-10 FTE for NEA Charter School

-17.8 FTE for the Total Teacher Reduction

Additional teacher reductions may be proposed as the district further analyzes temporary/probationary teachers and class-size.

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AUSD

Using Categorical Flexibility (Cat. Flex.)for the Reduction in School Funding

08/09 on-going loss of $2.6M

08/09 use 1-time carryovers for Cat. Flex., including $1M from Adult Education

09/10 on-going loss of $4.6M

09/10 use 1-time carryovers from Cat. Flex of $3.8M

09/10 use on-going amounts from Cat. Flex. Of $0.8M

10/11 and forward use on-going amounts from Cat Flex. and Measure H

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AUSD

Measure H Parcel Tax

For current year and next 3 years, budget includes:

$4M in annual revenues

$1.2M in annual expenditures

$2.8M in reserve for annual expenditures

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AUSD

Closing Thoughts

We always view the Governor’s January Proposal as a beginning point

Nothing is in law; no legislative votes have been cast

But school districts prepare the Second Interim Financial Report and multiyear projections (March) using the Governor’s Proposal as a base

But as we have seen over the past year – things can change rapidly

Have a good fallback plan

If all else fails, layoffs are your last defense – be ready to do them

This is a year to engage all stakeholders in solutions – not a year to get mired in the problems

Our next statutory checkpoint is the May Revision – unless there are midyear cuts from the legislative special session

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AUSD Next Steps 27AUSD

Over the next two months, AUSD will be reviewing the Budget on the following dates:

1/28: AUSD All Management Meeting, includes Principals1/29: Principals Enrollment & Staffing Meeting2/2 to 2/6: Program Managers presentations to Executive Cabinet2/10: Board Update2/11: First Public Budget Workshop2/12-2/23: Budget analysis by staff2/24: Board Update2/25-3/9: Budget analysis by staff3/10: Board Action on Layoff Notices3/10: AUSD’s 2nd Interim Financial Report4/1: Second Public Budget Workshop