30th AnnualSchool Finance and

Management Conference 2008-09

30th AnnualSchool Finance and

Management Conference 2008-09

The Economics of Government ServicesThe Economics of Government Services

California provides more services to more people at a higher cost than other states – except in two areas – K-12 education and transportation

Transportation is catching up – Proposition 42 and federal funding actions have bolstered California’s commitment to transportation systems

Education is falling further behind In an essentially flat education budget, while costs are growing and

other states are increasing funding guarantees, we fall further behind But expectations for our children continue to grow And 41st place, or worse, will not improve our Program Improvement

(PI) schools and districts There is no will to tax more or spend less, so the problem gets worse More people, more services, stagnant revenues – how do we break the

cycle?

IVIV

The Political LandscapeThe Political Landscape

We argue that California does not have a Budget problem – it has a political structural deficit that leads to bankrupt fiscal policy and causes repetitive Budget problems During good years, we overspend and make long-term commitments During bad years, we use stop-gap measures and borrowing to get

through a year at a time until we get another good year Education costs do not add to the Budget problem – they rise

proportionately to new revenues But failure to educate California’s children handicaps and impedes all

future economic growth No new revenue + increased costs = yet another Budget crisis The Budget problem is a subset of the political problem, and they get

solved together or neither gets solved

VV

The Long and Short of Budget SolutionsThe Long and Short of Budget Solutions

In the short term, the Budget is balanced by:

Budget cuts

Closing tax loopholes

Using one-time dollars and solutions

Slowing cash flow to schools to reduce borrowing costs

Longer-term issues are addressed by:

A plan for securitizing Lottery revenues

Enhancing the Budget Stabilization Fund

The real hope for long-term stability is that we have all good years –starting soon

VIIVII

The State Budget and Economic Environment

The State Budget and Economic Environment

Californians’ View of the Economy – TodayCalifornians’ View of the Economy – Today

There has been a significant deterioration in Californians’ assessment of the economy

According to a July 2008 Field Poll:

Among registered voters, 86% say we’re in “bad times,” while only 8% believe we’re in “good times”

In December 2007, 52% felt the state’s economy was in “bad times”

This is the gloomiest assessment since the recession of the early 1990s

In 1992, the “bad times” sentiment reached 93%

A-5A-5

Californians’ View of the Economy - TodayCalifornians’ View of the Economy - Today

15%11% 13%

22%

56%

75%

53%49%

NA

52%

86%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Percent Indicating “Bad Times”

A-6A-6

Source: Field Poll, July 25, 2008

Californians’ View of the Economy – The OutlookCalifornians’ View of the Economy – The OutlookA-7A-7

Economists often warn of the self-fulfilling nature of consumer sentiment

A pessimistic outlook of the economy often leads to reduced consumer and business spending, which in turn reduces total demand

Slack demand raises inventories, which leads to production cutbacks and layoffs

The current Field Poll results are the worst since 1990, when 48% of those surveyed expected the economy to get worse

In July 2008, 43% believe things will get worse, while 19% expect improvement

In 1990, 48% believed things would get worse, while 10% anticipated improvement

State EmploymentState Employment

The state’s unemployment rate is now 7.7%, up from 4.8% just a year and a half ago

Job losses continue in the construction, manufacturing, and financial services sectors

Education and health services have experienced some growth

The U.S. unemployment rate is now 6.1%

In June, the U.S. unemployment rate was 5.5% and UCLA forecasters warned that a rate above 6% could signal recession

A-9A-9

State Unemployment Rate(Percent Unemployed)

4.8%

5.3%

5.9%

7.7%

4.0%

5.0%

6.0%

7.0%

8.0%

Dec 06 Jun 07 Dec 07 Aug 08

Source: Department of Finance

State EmploymentState EmploymentA-10A-10

State EmploymentState Employment

Has California turned the corner on job losses?

As the economy improves, the unemployment rate will rise as discouraged job seekers reenter the labor market in search of employment

Unfortunately, the state continues to shed jobs

California has lost more than 100,000 jobs since December 2006

The bottom line: The economy is still in a slump, which may yet turn into a recession

A-11A-11

The Education BudgetThe Education Budget

2008-09 K-12 Revenue Limits2008-09 K-12 Revenue Limits

Caution: Impact of deficit depends on district-specific revenue limit

2007-08 Funded

Revenue Limit*

5.66% Inflation Increase

4.713%Deficit .68% Gain for

Average District

2008-09 Funded

Revenue Limit

2008-09 Computed Base Revenue

Limit

2008-09 Base Revenue Limit

After Deficit

2007-08 Base Revenue Limit

B-8B-8

Revenue Limit Deficit FactorRevenue Limit Deficit Factor

8.14

0%

11.0

10%

10.1

20%

8.80

1%

8.80

1%

8.80

1%

6.99

6%

0.00

0%

0.00

0%

0.00

0%

3.00

2%

2.14

3% 0.89

2%

0.00

0%

0.00

0%

4.71

3%

0.000%

2.000%

4.000%

6.000%

8.000%

10.000%

12.000%

1993

-9419

94-95

1995

-9619

96-97

1997

-9819

98-99

1999

-0020

00-01

2001

-0220

02-03

2003

-0420

04-05

2005

-0620

06-07

2007

-0820

08-09

B-11B-11

Statewide ADAStatewide ADA

Statewide ADA continues to decline

Decline in 2007-08 was 0.52%

The projected decline in 2008-09 is also 0.52%

B-13B-13

Charter school ADA continues the momentum upward, projecting growth by more than 10% in 2008-09

Management of School Agency Finances

Management of School Agency Finances

2008 SSC School District and COEFinancial Projection Dartboard2008 SSC School District and COEFinancial Projection DartboardC-3C-3

Factor 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

Statutory COLA (use for K-12 and COE Revenue Limit) 4.53% 5.66% 5.60% 3.50% 2.70% 2.90%

K-12 Revenue Limit Deficit 0.00% 4.71% 4.71% 4.71% 4.71% 4.71%

County Office Revenue Limit Deficit 0.00% 4.40% 4.40% 4.40% 4.40% 4.40%

Net Revenue Limit Change 4.53% 0.68% 5.60% 3.50% 2.70% 2.90%

SSC’s Recommended Planning COLA 4.53% 0.68% 0.00% 3.50% 2.70% 2.90%

Special Education COLA (on state and local share only) 4.53% 0.00% 5.60% 3.50% 2.20% 2.90%

State Categorical COLA (including adult education and ROC/P) 4.53% 0.00% 5.60% 3.50% 2.20% 2.90%

California CPI 3.50% 4.5% 2.80% 2.50% 2.70% 2.90%

California LotteryBase $ 114.75 $ 118.00 $118.00 $ 118.00 $ 118.25 $ 118.50

Prop 20 $ 16.10 $ 19.00 $ 19.00 $ 19.25 $ 19.50 $ 19.60

Interest Rate for Ten-Year Treasuries 4.01% 3.50% 4.00% 4.40% 4.80% 5.00%

Negotiations – 2008-09Negotiations – 2008-09

RBJUHSD Estimates 2008-09

Revenue Recap

COLA .68%

Minus Cost Increases (as percent of total district budget)

Step and Column (1.50%)

Declining Enrollment Adjustment ( 4.07%)

Total Available for Salary, Absent Changes ( 5.57%)

F-6F-6

Expectations in NegotiationsExpectations in Negotiations

Developing conditions

This year’s COLA is tiny and next year is likely to be no better

This year’s categorical cuts were reversed, but may very well be proposed again in January

There is a definite possibility for midyear cuts in 2008-09, and we think the Governor may again propose big cuts for 2009-10

Neither party can count on new revenues

C-6C-6

Expectations in NegotiationsExpectations in Negotiations

Look to the future

Deficit factors to Proposition 98 must be made up eventually

Don’t look to the bad years for compensation increases, look to the coming good years

The deficit factor could reach 10% or more by 2009-10, plan to commit to use future deficit reduction dollars to catch up on compensation

C-7C-7

Second-Period Interim Reporting HistorySecond-Period Interim Reporting History

88% of the LEAs managed to file positive certifications But the number of school agencies reporting qualified and negative

status has jumped significantly since 2006-07

2003-04 2004-05 2005-06 2006-07 2007-08

Positive 996 979 1,007 1,016 929

Qualified 35 47 29 19 109

Negative 9 14 4 5 14

C-19C-19

Declining EnrollmentDeclining Enrollment

Recent calculations* show that 53% of districts are declining in ADA

Averaging a .56% decline last year

Comprising just over 60% of the state’s ADA

The special financial challenges are well publicized

But can be more challenging if the decline is not as significant as projected

The revenue for declining enrollment districts is based upon prior-year ADA, with some exceptions – charter schools

So there is no additional revenue to pay for additional teachers to serve the additional students

*Calculations based on the 2007-08 Second Principal Apportionment

C-28C-28

Looking to the FutureLooking to the Future

Looking to the FutureLooking to the Future

There are many more challenges ahead of us

Few of the Budget “solutions” this year provide any ongoing help

In addition to education and transportation, California still has to deal with health care and many more important issues

It looks like Proposition 98 is going nowhere fast

Mandate reform is still on the agenda, but way down the list

And the politics that got us here haven’t changed much

D-1D-1

The Structural Budget GapThe Structural Budget Gap

Nothing that was done in this year’s Budget will help avoid serious cuts in next year’s Budget

The Lottery securitization plan is a long way from being a done deal

Over the past several years, all of the one-time solutions have been used up – and yet the structural deficit remains

We see 2009-10 as being more difficult than 2008-09

Revenues will remain relatively flat

Expenditures continue their inexorable march upward

Borrowing will be difficult and expensive

There will be political fallout from this year

In the past, we have had structural problems year after year until we have gotten lucky and the economy has turned around

D-3D-3

In Other Words . . .In Other Words . . .

In 2009, we will find ourselves in exactly the same place unless:

Economy improves

Agreement is reached on Budget reforms

Public trust in state policymakers is restored

Cost of services is acknowledged along with the will to pay for them

D-12D-12

Final ThoughtsFinal Thoughts

California Continues to Fall BehindCalifornia Continues to Fall Behind

In 2008-09, California is spending approximately $1,055 per pupil less than the national average

In less than 40 years, we’ve fallen from near the top to near the bottom of the states when it comes to spending per pupil

Passage of Proposition 98 in 1988 has not stopped that slide

And, the 2008-09 Budget will widen the distancebetween California and other states

Reversing gains made in recent years

E-1E-1

California Continues to Fall BehindCalifornia Continues to Fall Behind

0

2,000

4,000

6,000

8,000

10,000

12,00069

-70

79-8

0

89-9

0

97-9

8

99-0

0

01-0

2

02-0

3

03-0

4

04-0

5

05-0

6 (e

st.)

06-0

7 (e

st.)

07-0

8 (p

roj.)

08-0

9 (p

roj.)

Expe

nditu

res

per S

tude

nt (2

008-

09 d

olla

rs)

California

National Average

Year 69-70 79-80 89-90 99-00 01-02 02-03 03-04 04-05 05-06

Ranking 9 17 22 29 23 26 27 29 32

Source: National Center for Education Statistics, 2008; Bureau of Labor Statistics 2008 CPI Inflation Calculator

E-2E-2

Thanks you Thanks you

Our Response

Please continue to identify areas of cost savings

Continue to be frugal with supplies, copies, consumables, etc.

We are working to shore up enrollment and our budget– Charter school, grant funded programs

Our Response

Reduction in travel by 50%– All departments will work to identify 50% cuts to

travel from last year– Some travel is funded through categoricals and is

required by the terms of the funding source– Those identified cuts will be turned in and used as

a reference as the year progresses

Be prepared for additional cuts mid-year

Our Response

This current budget crisis is expected to continue for the foreseeable future– At least 3 years, by some estimates– Variables include the national economy, state

economy, and the state’s willingness to fundamentally restructure the budgeting policy and process

THANK YOU FOR ALL YOU DO!

I remain fundamentally optimistic about the ability of schools to continue providing high quality education in the face of financial difficulty– Schools have weathered these storms before– I have complete faith in your ability to do it again