[BHS etree] BUSD: Budget Advisory: ACSA Review of Governor's 2008-09 May Revision

[bhs at idiom.com]

PLEASE DO NOT REPLY to the etree, contact Mark Coplan
[mailto:Mark_Coplan at berkeley.k12.ca.us]

Budget Advisory: Review of Governor's 2008-09 May Revision

Below is a very good analysis by ACSA of the May Revised Budget
released by the Governor this afternoon. I apologize for its length,
but ACSA (the Association of California School Administrators), has
made the hard part of understanding the Governor's 85-page budget
easier. 

This is a very significant day for Berkeley. This budget appears to
keep us pretty flat, with a 1% increase next year. That doesn't sound
like a bad deal, until you realize that public education is seriously
underfunded in California to begin with.  Experts agree that what
California needs is revenue enhancement, as we try to bring California
up from 46th in the nation for per pupil spending ($2,000 below the
national average), and eliminate a serious achievement gap. 

A lot of ground was gained today, but there is still a long road ahead
if we hope to achieve the mediocrity that BHS PTSA President Mark van
Krieken describes as he reminds us that asking legislators to make
California the 25th state in the nation shouldn't be too much to ask.

Eleven buses of Berkeley High School students will spend Thursday in
Sacramento, learning about state government, speaking to legislators,
and learning about state funding for public education. They are
predicted to be the largest contingent in a statewide student rally on
the steps of the capitol.

==========================================

May 14, 2008
 
TO:       ACSA Leadership and Members
          Interested Parties
 
FROM:     Karen Stapf Walters, Assistant Executive Director
          Adonai Mack, Legislative Advocate
          Brett McFadden, Management Services Executive
 
RE:       Budget Advisory:  Release of 2008-09 May Budget Revision

Earlier today Governor Schwarzenegger released his 2008-09 May Budget
Revision.  The proposal contains significant changes to his January
proposal. The following is an analysis of the proposal's impacts to
K-adult education programs.

What is the May Revision?

The May Revision is an update to the Governor's January budget
proposal. 
The document is an annual event that marks the "real" start of the
budget development process.  The Revision contains up-to-date revenue
projections that include April tax receipts.  The Legislature will use
the proposal as a benchmark for developing its final 2008-09 budget.
The budget deliberation process jumps into high gear as the June 30
deadline looms. 
It is during this stage of the process that a majority of significant
budget and policy decisions are made.  As such, this is a critical
stage in the advocacy of the  K-adult education budget.
 
A complete copy of the 2008-09 May Revision is available on the
Department of Finance's Web site at www.dof.ca.gov.
 
May Revision Overview
 
The May Revision proposes a combination of spending reductions,
revenue solutions, and several creative financing mechanisms to
address the persistent budget gap.  The proposal includes the
following:
 
* A $2 billion fiscal reserve
* $12.6 billion in spending reductions
* 6.5% across-the-board cuts in most non-Proposition 98 programs
proposed in January 
* Changes portions of the governor's January proposal for Proposition
98 and public safety 
* Enacts a Budget Stabilization Act Enhances the state lottery and
securitizes future proceeds and directing them into a Revenue
Stabilization Fund (RSF) 
* Puts in a temporary one-cent sales tax increase triggered only if
the lottery proceeds into the RSF do not meet the targeted amount over
three years

State's fiscal condition
 
The economic recession has further weakened California's fiscal
condition and widened the state's budget gap.  In January, the
governor's administration projected deficit for 2008-09 was $14.5
billion.  Left unaddressed, the gap was projected to grow to $24.3
billion based on updated projections.  After mid-year actions taken
during the Special Session of the Legislature, the administration now
estimates the remaining budget gap is $17.2 billion.  
 
The economic outlook of the state has dimmed considerably since last
year.  California has been particularly hard hit by the housing slump,
tighter credit markets and increased food and energy prices.  The most
significant difference between the May Revision forecast and the
governor's January forecast are lower real GDP growth, weaker
California job growth, and smaller gains in state personal income in
2008 and 2009. 
The administration's economic forecast shows that the state's economy
will continue to be sluggish for the next two years, but modest
economic growth could begin as early as the first half of 2009.
 
The administration estimates total General Fund revenues to be
$101.190 billion in 2007-08 and $102.987 billion in 2008-09.  These
revenue projections include $11.7 billion in revenue solutions
proposed in the overall May Revision.  Many of these will require
statutory enactment by the Legislature or approval of voters on the
November 2008 ballot. 
 
The largest General Fund revenue sources are the Personal Income Tax
(PIT), Sale and Use Tax, and Corporation Tax (in that order).  PIT
includes stock options and capitol gains.  These revenue sources have
grown as a percentage of overall PIT revenues over the past 20 years. 
They are typically volatile and can account for as much of 25% of
overall PIT revenues in certain years.  The administration projects
all three of the primary General Fund revenue sources to decrease in
2008-09.  The table below shows these declines.
 


TAX             2007-08            2008-09 (in billions)

PIT             $ +1.407            $ -2.725

Sales and Use   $ -589              $ -1.854

Corporation     $ -540              $ -898

The May Revision does not mention the state's potential cash flow
problem.  Policymakers and key staff have reported that the state
continues to face a cash flow crunch despite attempts to address the
problem through the deferral of the K-adult education July Advanced
Apportionment.  This apportionment was shifted from July to September
as part of the mid-year reduction package this past February.  It is
possible that the state will run out of cash in mid to late August,
creating additional challenges and pressures to put a budget in place
prior to reaching this threshold.  Budget staff have informed us that
they need a budget in place three weeks prior to this deadline.  This
is another dynamic situation that alters by the week.  We will monitor
it closely and report as to its possible effects on the budget
deliberation process.
 
 
Proposition 98 funding
 
The governor's May Revision proposes a change from his initial January
proposal which included a suspension of Proposition 98 to the tune of
$4.8 billion.  Due to reductions in state revenues and personal income
levels, the Proposition 98 guarantee has gone from Test 2 condition to
a Test 3. 
As a result, the guarantee is projected to drop considerably in the
2008-09 budget year.  A suspension of Proposition 98 is no longer
necessary to achieve budget year savings.  Instead, the state realizes
this savings from the reduced guarantee and is able to meet this lower
guarantee amount in 2008-09.   

While the May Revision proposes to fully fund Proposition 98, there is
no funding provided for a cost-of-living adjustment (COLA) for LEA
revenue limits and categorical programs.  The statutory COLA has
increased from 4.94% to 5.660% due to higher gas and food prices.  The
May Revision creates a 5.357% deficit factor (see Management
Perspectives section).  Further, while the May Revision restores or
increases funding for some programs, the original January proposal to
make across the board cuts remains in place for almost all categorical
programs. This equate to approximately a loss of $1 billion.  The
categorical cut combined with a lack of COLA cuts approximately $4
billion from education funding. 
 
 
Adjustments to January Reductions
 
Public Transportation Account Funding
Similar to 2007 May Revision and the Legislative Special Session, the
May Revision funds Home-to-School Transportation within Proposition 98
with funds from the Public Transportation Account (PTA).  This is
accomplished by shifting $592.9 million from the PTA to backfill the
General Fund's cost of the Home-to-School Transportation program.
This budgeted amount also includes Special Education transportation.
Both programs would be funded at their 2007-08 levels.
 
Relocatable Classroom Program Funds
The administration proposes to use funds that are excess revenues from
the State Relocatable Classroom Program.  In the past, the state has
transferred rental income received from this program to the General
Fund. Last year, the State Allocation Board voted to phase out the
State Relocatable Classroom program due to underutilization and the
condition of relocatable classrooms.  The Office of Public School
Construction indicated that there is $14 million in excess reserves
from this program. 
This funding will be transferred to the General Fund. 
 
 
District Flexibility Options
In an effort to assist districts with balancing their budgets during
these difficult budget times, the May Revision proposes to reauthorize
the flexibility options that were adopted as part of the 2003-04
budget. School districts will be provided several options to use at
their discretion in order to balance local school district budgets.
See the Management Perspectives section for additional detail on these
proposals.
 
 
Program restorations 
 
Revenue Limits - The May Revision restores the cuts to base funding by
including $841 million for school district revenue limit funding.
This increase eliminates the 2.4% reduction in revenue limits from the
2007-08 funding level that was proposed in the January budget.
Further, this restoration reflects higher K-12 ADA in 2007-08 and
2008-09, by 24,000 and 23,000 students respectively and provides full
revenue limit growth funding for these additional students.  No COLA
is provided to LEA revenue limits in 2008-09 creating a deficit factor
of 5.357%.
 
Special Education - The administration restores $234.1 million in
special education funding, eliminating the 7.3% reduction from the
2007-08 funding level that was proposed in the January Budget.  This
includes a shift of $222.6 million in Proposition 98 funding from
deferred maintenance to cover the restoration of special education
funding. The administration believes that it will meet the federal
maintenance-of-effort requirements for special education.  No COLA
would be provided to special education in 2008-09.
 
Proposition 98 categorical programs - The May Revision makes no change
to the governor's January proposal.  Categorical programs would be
subject to the 10.89% across-the-board reduction.  Only special
education would be exempted.  Because this reduction is calculated of
a "workload" budget that factors in the statutory COLA before cutting
the programs, Proposition 98 categoricals would experience an overall
reduction of 6.5% from their 2007-08 levels.  No statutory deficit
factor is created on categorical program reductions under current law.
 
State Special Schools - The May Revision includes an additional $5.1
million from Proposition 98 general fund to fund the State Special
Schools.  This proposal also includes an augmentation for
Home-to-School Transportation costs. 
 
 
Other Programs
 
Child Care Programs - The May Revision includes an increase to child
care programs of $45.4 million, for a total of $2.5 billion, including
an increase in ongoing Proposition 98 resources of $41.9 million.
This is due to several policy changes, an increase in caseload costs,
and shift of federal resources.  
 
Student and Teacher Longitudinal Data Systems - The May Revision
includes $10.3 million to fund the development for both the California
Longitudinal Pupil Achievement Data system (CalPADS) and the
California Longitudinal Teacher Integrated Data Education System
(CalTIDES).  In an effort to assist the full implementation of these
data systems, the administration is including language authorizing the
California Technology Assistance Project (CTAP) to provide training to
school districts on implementing CalPADS. 
 
Provider Accounting and Reporting Information System - The Provider
Accounting and Reporting Information System (PARI$) is a system
designed to manage the California Department of Education's child care
agency contracts and payment processing functions.  The administration
provides $285,000 in federal funds to rewrite PARI$ because the
existing system is outdated and incompatible with other CDE data
systems. 
 
Personnel Management Assistance Teams - The May Revision proposes $3
million in Proposition 98 general fund for the Personnel Management
Assistance Teams (PMAT).  PMATs assist school districts in
establishing and maintaining effective personnel management,
recruitment and hiring processes.
 
Emergency Repair Program - The May Revision proposes transferring $100
million from the Proposition 98 Reversion Account to the Emergency
Repair Account to meet the requirements of the Williams settlement
agreement. 
 
Corrective action assistance - The administration proposes to pursue
legislation to appropriate $45 million in federal Title I Set Aside
funds to assist local educational agencies going into corrective
action.  This legislation will be consistent with the action by the
State Board of Education to further the intentions of the federal No
Child Left Behind Act.  It is unclear if this proposal is different
than SB 606 (Perata), which ACSA believed was the vehicle to implement
the SBE actions and includes an appropriation of $47 million from
federal Title I Set Aside funds to implement the corrective action
provisions. 
 
California State Teachers' Retirement System (CalSTRS) - The
Supplemental Benefit Maintenance Account (SBMA) that provides
purchasing power protection for retired educators continues to be an
attractive source of revenue in balancing the state budget.
 
SBMA provides annual supplemental payments in quarterly installments
to retirees whose purchasing power has fallen below 80% of the initial
allowance due to price inflation.  Currently, the 80% level of
supplemental payments is not a vested benefit.  This means that if the
amount in the SBMA is not sufficient to bring purchasing power up to
the 80% level, supplemental payments may have to be suspended or paid
at a lower level.
 
The state makes annual General Fund contributions to the SBMA of 2.5%
of all educators' payroll and has more than enough money to provide
purchasing power protection for current and future retirees.  
 
The governor in January had proposed to fully vest the benefit at 80%
but in return would reduce the state's contribution to the SBMA from
2.5% to 2.2% of salary for a General Fund savings of $80 million in
the 2008-09 fiscal year.  In addition, payments of 1.1% each would be
made on November
1 and April 1, instead of July 1 of each fiscal year.
 
Under current court order, the state would be committed to repayments
of $80 million in 2008-09 as the first of three payments towards the
$210 million in interest from the $500 million STRS lawsuit settled
this fall. 
Another payment of $82 million would be made in 2009-10 and the
remaining
$46 million would be paid in 2010-11.
 
The governor now seeks to increase the benefit from 80% to 85% but the
benefit would not be vested, and the plan would reduce the State's
contribution from 2.5% to 2.25% of salary.  These modifications would
result in general fund savings of $66 million in 2008-09 and $16
million in 2009-10, and require contributions in two payments of
1.125% each on November 1 and April 1 each year.  
 
Lastly, the state would commit to repayment of the CalSTRS lawsuit in
four equal payments of $52.6 million beginning in 2009-10.
 
Since January, ACSA and other stakeholders have been in negotiations
over the SBMA plan.  The proposed modified SBMA plan will continue the
discussions until a compromise can be reached.  As a result of an
actuarial analysis contracted by CalSTRS following the governor's
January
budget proposal,   ACSA continues to support a vested amount equal to
the
CalSTRS recommendation of 82.5% with a fair repayment plan.
Otherwise, the benefit is not guaranteed and if investment returns and
state contributions don't keep up with inflation, retirees could
receive less than the full benefit. 
 
 
Budget balancing mechanisms
 
The May Revision includes a variety of proposals to 1) address the
state's volatile budgeting situation, 2) develop a strategy to
increase revenues to the general fund without raising taxes and 3)
control state spending.  
The following are several of the proposals suggested by the
administration to meet the above mentioned concerns:
 
Budget Stabilization Act
The governor continues to pursue a constitutional amendment to create
a Budget Stabilization Act (BSA).  The governor believes that the BSA
will address two shortcomings in the state budget process: volatile
revenues and over-spending. The governor proposes to create a rainy
day fund titled the Revenue Stabilization Fund (RSF) that would grow
when revenues exceed a rolling 10-year average and can be tapped to
fund expenditures when revenues fall below the average.
 
In addition to the proposed Budget Stabilization Act, Governor
Schwarzenegger will issue an Executive Order to establish a bipartisan
commission of legislative and gubernatorial appointees to modernize
the state's tax laws and better reflect the current economy.  The Tax
Modernization Commission will be charged with recommending ways to
stabilize California's revenues, to bring our tax system into better
alignment with our modern economy, and to improve the state's economic
competitiveness.
 
Lottery securitization
The May Revision proposes to securitize future revenues resulting from
the improved performance of the lottery to fund the RSF. This would be
done in a manner similar to the Tobacco Securitization Act, which
authorized the issuance of bonds against future tobacco settlement
revenues. The administration believes that the proposed bonds will
yield $5.1 billion in revenue for the state budget in 2008-09 and a
total of $15 billion by 2010-11.  
 
The governor indicated that relative to lotteries in other states, the
California lottery is "an under-performing asset."  The proposal to
securitize the State Lottery assumes that changes in its
administration can increase its performance to the national average.
The $15 billion in state revenues from the securitization of the
lottery is dependent on this improved performance.  While the proposal
guarantees that schools will continue to receive their current share
of revenues from the lottery, approximately $1.2 billion annually, it
also subordinates this guarantee to the securitization.  This means
that if lottery performance does not improve sufficiently, then
lottery revenues would be diverted from education to pay investors.
The lottery proposal would be part of a budget stabilization ballot
initiative to go before the voters in November 2008. 

Fail-Safe Mechanism for RSF Capitalization  The Governor proposes a
one-time "fail safe" mechanism that would institute a 1 cent increase
in the sales tax, triggered in the event that voters do not approve
the measure. This is a temporary tax and would be repaid to taxpayers
from future budget stabilization revenues.  The transaction to
securitize the lottery would be predicated on using the current $1.2
billion in revenue that now goes to school districts as a resource to
pay off state debt should the growth in lottery revenues not be
forthcoming. Additionally, the Governor has indicated that K-14
education would not receive any of the new revenue after the lottery
is
restructured.   

 
K-adult education management perspectives
 
The following are management perspectives and recommendations based on
the May Revision proposal:
 
LEA June budget development
School agencies are advised to revise their Second Interim projections
based on aspects of the May Revision.  LEAs will no longer face a 2.4%
revenue limit reduction as proposed in the January budget proposal.
District revenue limits and special education programs will be funded
in 2008-09 at their 2007-08 levels.  The May Revision proposes no
statutory COLA for revenue limits or Proposition 98 categorical
programs.  The statutory COLA under current law is projected at
5.660%.  The administration proposes a 5.357% deficit factor, an
amount offsetting the revenue limit COLA.  LEAs are advised to revise
their budget projections and develop their June budget proposals
utilizing assumptions included in the May Revision.  In most
instances, county offices will review districts' June budgets based on
the May Revision.
 
Unfortunately, LEAs will have to continue to assume and plan for a
possible 6.5 % cut to all categorical programs except special
education.  The governor's January proposal in this area remains.
Special education is exempted from this reduction but does not receive
statutory COLA.  ACSA and the education community will advocate
against this cut.  We are optimistic that an alternative proposal can
be developed in the Legislature, but for planning purposes, LEA should
brace for such a hit. 
There is no statutory deficit factor applied to categoricals when the
COLA is not funded.
 
Finally, we note that not all aspects of the May Revision will hold
true. The Legislature will put its stamp on the final 2008-09 budget
package. LEAs and management teams should be prepared to make
modifications to their June budgets. These modifications will likely
include the utilization of any budget flexibility (see below). LEAs
have 45 days after the passage of the state budget to adopt their
final budgets.
 
AB 1200 certifications
School Services, Inc. reported that over 100 school agencies self
certified at Second Interim that their budgets were either "Qualified"
or "Negative."  This was the highest number we've seen in a very long
time. With the proposed revenue limit and special education reductions
restored, many districts that were qualified or negative at Second
Interim will regain a positive certification.  However, other
districts, particularly those in declining enrollment, will continue
to face financial challenges.
 
Budget year flexibility
The May Revision contains several budget flexibility proposals.
Although we believe that a flexibility package will be part of the
final budget deal, LEAs are cautioned from assuming these proposals
will become law.  These proposals require statutory authority and will
be scrutinized by the Legislature.  We recommend districts hold off
from assuming these proposals in their June budget preparations until
they are enacted by the Legislature. 
 
Budget flexibility in the May Revision is similar to the package
enacted in the 2003-04 budget.  The proposals include:
 
* Reduce economic reserve requirements. LEAs would be authorized to
reduce their AB 1200 recommended reserves to one-half of the amount
required.  This flexibility is extended to the budget year and one
addition year.  We caution that this be utilized only as a last
resort.  Minimum AB 1200 reserves are often the only safety net
keeping districts away from financial insolvency.

* Use of categorical funding and carryover balances.  The
administration proposes two options here.  First, LEAs can move
carryover balances from most categorical programs to their
unrestricted General Funds.  This does not include Adult Education
reserves.  Second, LEAs would also be authorized to add up to 2% to
their unrestricted funds from categorical programs.  Instructional
materials, special education, EIA, High Priority School Grants, TIIG,
and QEIA are excluded from these flexibility provisions.

* Increased AB 825 and Mega Item transfer percentages. Would raise
current transfer limits from 15% out of AB 825 Block Grants that allow
transferring out and 20%  into another AB 825 grant or any stand-alone
categorical program to 20% out and 25% in.  The January proposal to
increase Mega Item transfer percentages remains at 50% out and 55%
into a program within the Mega Item.  Programs included in the AB 825
Block Grants and the Mega Item remain in place.

* Reduced Routine Restricted Maintenance Reserves.  Would lower the
RRM required set aside from 3% to 2%.

* Eliminates the deferred maintenance match.  Would eliminate the
local 0.5% match for deferred maintenance.  But the proposal would
also reduce the state's share of deferred maintenance funding by
$222.6 million.  The May Revision proposes to keep $39.6 million in
reserve for hardship projects and $100 million in Emergency Repair as
required per the Williams Settlement. 


ACSA's initial reaction and talking points
 
The ACSA board of directors will meet on Friday, May 16 to consider
official policy positions relative to the 2008-09 May Revision.
However, the following reflects some initial reactions, comments and
talking points on the administration's budget revision:

* ASCSA supports the full funding of Proposition 98.  ACSA must stress
that Proposition 98 is a minimum guarantee and the 2008-09 May
Revision will not provide sufficient resources to prevent continued
cuts to essential programs and services to our students.  

* ACSA continues to oppose the "across-the-board" cuts to categorical
programs.  The cuts to categorical programs combined with the failure
to provide a cost-of-living adjustment will continue to devastate
valuable programs which have provided a resource to the increase in
student
achievement that our students have gained in the past decade.    

* While ACSA supports flexibility in the use of fiscal resources, ACSA
does not support flexibility as a trade off for cuts to existing base
programs.
 
* In addition, ACSA supports the administration's intent to fully fund
the CalPADs and CalTIDEs data and information systems.  The
development of these systems is vital to insuring that we have
longitudinal data necessary to make accurate and relevant policy
decisions regarding academic achievement.

* ACSA also supports the training provided to local districts on the
CalPADS system through CTAP.  However, we have concerns that the May
Revision does not specify the amount of funding provided to CTAP for
the training. 

* ACSA opposes any method of Budget Stabilization Act which restricts
funding to K-adult educationand gives any governor unilateral
authority to make mid year cuts without going through the legislative
process. California voters have repeatedly reaffirmed their support of
the Constitutional funding guarantee for education-Proposition 98.
Any reduction, manipulation or constitutional amendment to the
guarantee is unacceptable. 

* The Governor's May Revision shows that he listened to the education
community and the will of the voters by avoiding a suspension of
Proposition 98. 

* Parents and educators have voiced their strong opposition to all
cuts to schools and students. And while the Governor's revised budget
proposal avoids suspending Proposition 98, the state's minimum school
funding law, it still cuts billions of dollars from public education.
It makes cuts to the many vital programs that help student
achievement, like class size reduction.  It also fails to include a
cost-of-living adjustment for schools, despite the steadily increasing
operating costs for local districts.  With this budget, schools and
students are once again being asked to "do more with less."

* With more than 20,000 layoff notices already sent to educators
around the state, California's schools and students have paid a steep
price for proposed budget cuts.  Many teachers have already been
recruited to leave the state. In addition, many school districts have
already been forced to cut music, arts and career technical education
programs.

* These facts remain: all cuts hurt students and California's schools
are still woefully underfunded.  Our schools rank dead last in the
nation for the number of teachers per student, as well as in the
number of librarians, counselors and critical support staff, while
having some of the largest class sizes in the nation.   Today's budget
proposal keeps our schools and students at the bottom of those
rankings, despite recent studies that show that California needs to
spend 40 percent more to ensure
that all students meet the state's rigorous standards.   

* Continuing to balance this budget with a cuts-only approach hurts
children and schools. The final budget agreement must include
increased revenues as part of any approach to balancing the budget. We
look forward to working with the Legislature and the governor in
passing a state budget that invests in the future of our students and
our state. 

Conclusion

The release of the May Revision marks the start of the final budget
deliberations.  Much will happen between now and the enactment of the
final budget.  ACSA staff will continue to provide periodic advisories
and alerts as the deliberation process progresses. Should you have
questions on any of these or other policy matters, please contact ACSA
Governmental Relations at 916.444.3216.



ACSA | 1029 J Street | Sacramento | CA | 95814
governmental_relations at acsa.org