Small School Districts AssociationSummer Conference Shell Beach

July 9, 2010

Budget Update

Joel Montero, FCMAT

Overview• The Economic Environment—How It’s Changing the Game

• The Current Status

• Strategies for Stabilizing the Budget

• Cash

• AB 1200 In Times of Crisis

• Education and California Spending

• Question

California Economics-A Moving Target• Revenues Stabilizes but Assumptions Fail

• Consumer Confidence Improves in 2010…but

• Housing and Property Taxes

• Unemployment

• Recovery and the Lag

• Why Small Districts are Disproportionally Impacted

Signs of Recovery

• Median Home Prices have risen for 11 consecutive months ($250,000 to $310,000)

• Sales Tax Revenue has exceeded estimates for four consecutive months ( up 2.5% for 2009-10)

• General Fund Revenue ~$1 billion above estimates for January

• General Fund Revenues now $1.7 billion above estimates for 2009-10.

What’s The Status?

• There is a economic crisis• Our state has a structural deficit that is growing• State revenues seem to be stabilizing• The May revise still has approximately $2 billion

reduction to education• June revenues up again by $200 million

The Current Status—May Revision• $19.1 billion deficit at June 30, 2010• Significant downside risk on Revenue Assumptions

• Readjust $6.9 billion from Feds (Politics!)• CalWORKs Welfare to Work, Home Health Care,

Childcare (Impact to Prop. 98)• 2010-11 Negative COLA -0.39%• Gas Tax Swap• $1.1 billion Property Tax Offset• Elimination of “Admin. Cuts” Language• Cash Deferrals Alive and Well• Testing and Data Management

California Rankings

• CA has 2nd highest student to teacher ratio in the nation• Spending per ADA was $8605 in 2008-09 placing CA

at 44th in the nation• Teacher salaries in CA average $68,093 compared to a

national average of $54,319• Californians spend $14 per $1000 in personal income

on education, 45th in the nation• CA is 3rd in the nation in spending on prisons, 3rd in

police and fire protection and 11th on health/hospitals

Source: National Education Association annual report: “Rankings and Estimates for 2010”

Comparison of Major General Fund Expenditure Areas

(Dollars in Billions)

1998-991 2010-112 % Increase

K-14 (Prop. 98) Expenditures3 $35.2 $49.9 41.8%

Health & Human Services $15.3 $21.0 37%

Business, Transportation & Housing $0.4 $.9 125%

Corrections $4.4 $7.9 80%

Resources $1.0 $1.7 70%

General Fund Revenues $57 $89.3 57%

1Legislative Analyst’s Office. State spending Plan: 1998-99. October 1998, Page 4, Revenues & Expenditures; p. 26 Proposition 982Departemnt of Finance. Governor’s Budget Summary, January, 2010 (includes all proposed budget solutions)3Includes Local Property Taxes and General Fund Spending

1998-99 Through 2010-11

June Cash Figures

• June receipts rose by $200 million above the estimate in the Governor’s January budget

• PIT equals $600 million above the May Revision estimate

• Corporate tax collections fell about $100 million in June

• State cash is deficit at June 30th at $17.9 billion• Sales and Use Tax receipts generally strong since

November 2009 but have been flat for the past three months

AB 1200 Issues for Small School Districts

• Budget Adoption 2010-11• The May Revise and Budget Revisions• Qualified and Negative Certifications at 2st Interim• The Watch List continues to grow• Emergency Apportionments for 2010-11?

Why Districts FailThe Top 5

• Overly aggressive estimates of enrollment, attendance, and ADA• Loss of control of staffing costs—total compensation• Bad decisions in collective bargaining• Chronic, unplanned deficit spending• Board/staff dysfunction

Cash Is The Name Of The Game!

Overview

• What’s the big deal about Cash?

• Finding Cash when you need it

• The consequences of running out of cash

• Recognizing trouble

Budget• The budget is a stack of papers with numbers that are

a virtual representation of how much you will earn (income/revenue), how much you plan to spend (expenditures), and the balance (negative or positive) when it’s all done.

• The budget may represent the policy and conceptual priorities of the organization.

• There is “really” no cash in the budget!

What is Cash?

• Cash is what you have liquid or available on demand• Funds in the County Treasury• Funds in banks• Funds in revolving accounts• Funds with fiscal agents• Funds in funds?

What is Simple Cash Flow? • The difference between the available cash

balance at the beginning of an accounting period compared to the available cash balance at the end of the accounting period.

• Cash flow is the actual inflow and outflow of funds.

• Negative cash flow can be mitigated by borrowing

What is Cash Insolvency?

• Generally speaking Cash Insolvency occurs when the cash in payroll exceeds the cash available in the county treasury (or other possible sources of cash) and all options for borrowing have been exhausted.

• Cash insolvency is a limited function of deficit spending, erosion of fund balance, and sustained negative cash flow over time.

So, What’s the Big Deal?

• The old days…..• Loss of revenue and cuts• Cash deferrals• Changes in apportionment schedules• Erosion of fund balance and reserves in all funds• Limited borrowing options

Finding Cash When You Need It• LEAs can borrow to meet cash flow demands both internally and externally• There are rules!

• Cash flow loans are short term—generally within the fiscal year• Proceeds from borrowing can be used for any operational purpose

• Internal borrowing—EC 42603• Term—within the fiscal year, or……• Only 75% of the cash in the “donor” fund• The receiving fund must earn enough to pay back the loan? • But what about Fund 21??

• External borrowing• Tax and Revenue Anticipation Notes (TRANs) GC 53852• From your COE—EC 42621, EC 42622• From your County Treasurer—EC 42620 (last Monday in April)

The Consequences of Cash Insolvency

• If you run out of cash, it’s “game over”• You can receive an authorization for an emergency

appropriation, but…..• The local governance options is lost• The superintendent loses their job• It’s expensive!

• AB 1200/2756

K-12 Inter Year DeferralsJune to July

$1.4 B

Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec

$2.6 B

February to July

$1 B

$679 M

May to August

April to August

Blue – 2009-10

Red – 2010-11

New Intra Year K-12 Deferrals

March ’11 to May ‘11

October ’10 to Jan. ‘11

July ’10 to Sept. ‘10

Up to $2.5 B

Up to $2.5 B

Up to $2.5 B

July ’09 to December ‘09

Aug ’09 to Oct. ‘09

Nov. ’09 to Jan. ‘10

$1 B

$1.5 B

$1 B

Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan

Collective Bargaining

• There will be no new money in 2010-11 and probably beyond (total RL deficit 18.355%--SSC Dartboard)

• Categorical flexibility will be volatile—consider as one-time money (for a duration of 5 years)

• Costs for health benefits will continue to rise

• You must bargain to shorten the school year

• Beware multi-year contracts and “COLA”

Negotiations Process

What Can Districts Do Now in Anticipation of an Uncertain Fiscal Environment

• Plan—Current plus at least two years and five years if possible• Review your Assumptions regarding Interest Income• Spend Restricted Dollars First and Conserve Cash• Stay Current With Enrollment and Staffing• Build Reserves/Fund Balance If Possible• Be Careful About Debt including OPEB Bonds• Manage Cash• Forego Big/Expensive Budget Decision Where Possible• Don’t Put All of Your Hopes In the Flexibility Basket

Remember, This Is a Multi-Year Issue!

Stabilizing Budgets For Small Districts

• Budget for the core program• Close tier 3 categoricals• Re-evaluate categorical administrative ratios• Instructional services must compete• Review all funds• Collective bargaining

What’s Likely?

• Additional reductions/corrections in 2010-11?

• Additional cash deferrals?

• Receipt of more stimulus (ARRA) dollars?

• Additional categorical program impacts?

• Recovery soon?

What’s Next?

• The July 1st Budget

• Waiting for the State to adopt a budget—when?

• When can we reasonably expect a positive COLA

• What numbers do we use to build the 2010-11 budget

• Recovery?

Final Considerations

• Budget Risks Remain to the Downside 2009-10 revenue strength not sufficient to override questionable 2010-11 revenue

assumptions Loss of Temporary Tax Revenue in 2011

• Assess and Establish Local Priorities Budget Reductions Categorical Program Flexibility

• Protect and Maximize Your “Local Control”

• Leadership in Challenging Times Promoting an Ethical Environment Acting with Authenticity and Transparency Developing Trust

Summary• The fiscal management game for public agencies has changed in CA. • The state’s budget situation is tenuous but improving? • Community Colleges are vulnerable in this budget. • In the final analysis fiscal failure is still caused by the same old things.• Community colleges are now and will continue to be the destination of

choice for most post-secondary students.• Cash flow and Cash insolvency are misunderstood by most administrators

and governing boards.• We are far away from an adopted budget for 2010-11.• As always conservative planning is key. • FCMAT is an group designed to assist education agencies