Governor’s Proposals for the

2011-12 State Budget and

K-12 Education

Board of Trustees

March, 2011

Governor’s Budget Proposals for 2011-12Overview 18 month shortfall now pegged at $25.4 billion

• $8.2 billion in the current year (10-11)

• $17.2 billion in the budget year (11-12)

• $1 billion reserve for the budget year (11-12)

“Balanced Approach” to close the gap

• $12.5 billion in program cuts• $12 billion in revenue (tax extensions)• $1.8 billion in one-time borrowing and transfers

K-12 “Flat Funding” from current year to next year – actual decrease

• Deficit factor (19.608%) calculation is greater than COLA of 1.67% resulting in $19.05 reduction/ADA

• PVUSD declining enrollment

Multiyear restructuring plan to push funding and program authority from state to local governments

All projections assume voters approve the tax extension as proposed in a June special election

Governor’s Budget Proposals for 2011-12

So, how does the Governor propose to dig the state out of this

economic quagmire?

Cuts – lots of them

• But with the acknowledgement that education has already

taken more than its fair share of cuts

Realignment

• To restore local control of service delivery and save the state

money

Continuation of taxes

• Temporary taxes would be extended by five years

Basically the Governor has two plans:

If the taxes are extended, the cuts are as budgeted in January

• Education would be flat funded for 2011-12

If the taxes are not extended, an estimated additional $9 billion in

cuts would be needed, including large cuts to education

The Plan

Governor’s Budget Proposals for 2011-12Big Ideas on Non-K12 Items

Program cuts hit Medi-Cal, CalWORKS, CSU, UC, Developmental Services, In-home Supportive Services, 10 percent pay cut for some state employees, some child programs.

Community Colleges (part of Proposition 98 with K-12) projected to have a $510 million reduction; $400 million (mainly due to timing of when they measure student counts – push count back to a lower point in the year) and $110 million (to be back filled with fee increases).

Multiyear restructuring plan to push funding and program authority from state to local governments for fire, court security, community-based corrections, mental health services, foster care, child welfare, substance abuse, and adult protective services.

Complete change to redevelopment laws to move incremental tax increases from redevelopment agencies back to schools, fire, police, other local services.

Governor’s Budget Proposals for 2011-12Big Ideas on K12 Items

Funding level decreases slightly – about -$19.05 per ADA (if tax extension passes)

Cost of Living Adjustment (COLA) is 1.67% and is unfunded

Proposes large new deferral of $2.2 billion inter-year borrowing. Leaves current $250 per ADA deferral in tack (May Revise 1.7 billion). Both the Department of Finance and Legislative Analyst’s Office criticize the current and proposed expanded deferral

Extends all current flexibility provisions by two years (CSR, Tier III, Deferred Maintenance, etc.)

AB3632 Mental Health Services to Special Education students is included in state-local realignment (shifting responsibility to districts). Additionally, no funding for current year AB3632 veto is provided

Does not reinstate funding for CalPADS or CalTIDES, leaving the previous funding veto in place

Governor’s Budget Proposals for 2011-12

K-12 Protection???

Governor acknowledges that almost all of the previous budget cuts were focused on K-12

However, K-12 funding “protection” is fully dependent on voter approval in June of a proposed five-year extension of temporary taxes about to expire, as well as the repeal of specified corporate tax breaks. If those taxes are not approved by the voters, the state will fall about $2.3 billion short of being able to fund the proposals for K-12. Even more troubling, failure of the tax extension would mean another $8 billion or more in cuts – that the governor said would almost certainly have to fall on K-12 schools, higher education, and prisons.

When California Increases Expenditures:

K-12 Gets the Smallest Increases

Dollars in Billions

1998-99 2010-11 % Increase

K-14, Proposition 98* $35.2 $49.7 41%

Higher Education (CSU and UC) $4.7 $7.4 57%

Natural Resources $1.2 $2.0 67%

Health and Human Services $15.3 $27.0 76%

Corrections $4.4 $9.3 111%

General Fund Revenues $57.3 $94.1 64%

* Includes state general fund and local property taxes

Source: Legislative Analyst’s Office, State Spending Plan: 1998-99 and 2011-12 Governor’s Budget Summary

When Times Are Tough:

K-12 Education Takes Biggest Cuts

Source: 2011-12 Governor’s Budget Summary

Program Area

Dollars in Billions% Change

2007-08 to

2010-112007-08 2008-09 2009-10 2010-11

K-12 Education $42.5 $35.5 $34.6 $36.3 <14.5%>

Higher Education $11.8 $11.7 $10.6 $11.6 <1.4%>

Health and Human Services $29.7 $30.9 $25.0 $27.0 <9.3%>

Corrections and Rehabilitation $10.2 $10.3 $8.2 $9.3 <9.0%>

Natural Resources $1.9 $2.0 $1.9 $2.0 8.3%

General Fund Expenditures by Major Program Area

Proposition 98 and The Education Budget Because of a current suspension, Proposition 98 is not a factor in

2010-11, except for marking the maintenance factor

For 2011-12, there is no proposal to suspend Proposition 98

But if the temporary taxes are not extended, Proposition 98 drops by $2.3 billion for K-12

And the Governor indicates he expects education to take that hit

Additionally, another $6 billion in solutions would need to be found and would include K-12 further reductions

With extension of taxes, education is flat-funded for 2011-12. The term “Flat-Funding” is somewhat misleading. For PVUSD, funding for 2011-12 will actually be $19.05/ADA less due to the deficit factor and further reduced due to declining enrollment.

No midyear cuts are proposed, so we keep the funding level in the enacted 2010-11 Budget through 2011-12

Mandates are funded to the tune of $89 million

The maintenance factor, to be collected in some future “good year,” continues to grow

California’s Economic Outlook California’s economy was hit hard during the recession

Subprime loans and the collapse of housing led the downturn

The state’s 12.4% unemployment rate is the third highest in the nation

• Since the employment peak, the state has lost 1.3 million jobs

• Construction employment was hit hardest

UCLA says the state is well positioned for the recovery

UCLA identifies education, health care, exports, and technology as leading the way

• Regional differences: Coastal cities will thrive, while the Inland Empire and Central Valley will struggle

The Governor’s Budget, however, expects the labor market to be a continuing challenge

Payroll employment is not projected to reach prerecession (07-08)

levels until 2016, eight years from the beginning of the recession

California’s Unemployment Rate

3.8%4.5% 4.6%

5.4% 5.7%

11.6% 12.0% 12.4% 12.4%

14.3%

0.0%

5.0%

10.0%

15.0%

Highest and Lowest State Unemployment Rates

Lowest Rates Highest Rates

National Average 9.4%

Source: Bureau of Labor Statistics, December 2010

Recovery Takes a Long Time

Prior-Year Budget “Solutions” (some not realized)

Ongoing state expenditures have been funded with one-time revenue from:

$17.4 billion in federal stimulus funds

$8.3 billion in higher taxes

$6.5 billion from accelerated tax collections

$2.1 billion from redevelopment agencies

$1.7 billion in accounting changes from Medi-Cal and state payroll

Solutions that make future deficits worse:

$14.6 billion in Economic Recovery Bonds

$7.6 billion from securitization of tobacco lawsuit settlement

$5.5 billion in loans from special funds and local governments

$2.4 billion from sale of state buildings and mandate deferrals

Realignment and Education

The Governor’s realignment proposals could affect LEAs in several ways:

Proposition 98

• The 2011-12 proposed level of funding assumes that voters agree to extend temporary tax measures (temp taxes first initiated in

2008-09 and due to end June 2011)

Absent such action, the Proposition 98 guarantee would drop along with revenues

• Tax revenues from the 1¢ sales tax and 0.5% from the VLF (vehicle license fee) would be dedicated to a special fund

Results in a reduction to General Fund revenues used for determining the Proposition 98 minimum guarantee

Programs

• Structure and funding for child care and mental health is changed to allow for increased local control

What’s Proposed for Redevelopment? Governor Brown proposes to phase out redevelopment agencies

beginning in 2011-12

No new obligations; however, existing obligations will be honored

Freed-up funds will provide General Fund relief

In future years, funds will be available for local government, including schools

Estimated to be $900 million by 2012-13

Similar amount for education

Proposes constitutional amendment to allow 55% voter approval for limited local tax increases and bonding against local revenues for development projects

Where Do Local Property Taxes Go? The Governor proposes restructuring the flow of local property tax

funding away from redevelopment agencies (RDA) to other local entities

The Governor estimates that RDAs will divert $5 billion in property tax revenue from other agencies in 2011-12 allocated in proportionate shares to remaining local agencies

Shift

RDA Funding

Redevelopment Agencies

12%

Bumpy Road for Redevelopment Shifts A change in the state’s approach to redevelopment funds could

yield significant gains for many LEAs

However, there are many practical and political barriers that such a proposal must overcome:

Timing – the Governor expects funds to be available as early as 2011-12, but most RDA projects are capital projects for which there are decades of outstanding payments

Equity by county – the amount of property taxes that go toward redevelopment varies dramatically throughout the state

Equity for LEAs – the proposal calls for the funding to be shared on an equal amount per student within each county, but inter-county disparities will be significant

Boundaries – RDA funds are within county boundaries, but some LEAs cross county lines

Risks to the Budget Proposal Flat funding for K-12 education is dependent upon voters

approving the extension of the current temporary taxes

The Legislature must place this proposal on the ballot, requiring two-thirds vote in each house

• Two Republicans in each house must agree – will be a tough sell!

Voters may turn this down even if it gets on the ballot

Legislature must approve shifting special funds (Proposition 63 for mental health and Proposition 10 for First 5 Program)

– Two-thirds vote is required

The Legislature must approve the local government realignment proposal and place the tax extension proposals on the ballot to pay for realignment

(Flat Funding – PVUSD $19.05/ADA annual reduction plus declining enrollment)

Risks to the Budget Proposal

Court challenges could thwart full implementation of the program reductions and fund shifts

Last November, voters protected local government funding by adopting Proposition 22

• This measure is at odds with the Governor’s Proposal for redevelopment funds and transportation bonds

The economic recovery could stall and revenues could underperform the forecast

Problems in Europe could threaten California’s export market

Massive federal deficits could rekindle inflation

A trade war with China could weaken exports and spur inflation

The recovery rate could simply be slower than expected

Budget Contingency Plan

The Governor’s Budget assumes that the temporary taxes are extended by the voters for five more years (2015-16)

The Budget also proposes that additional reductions be made in the event that the tax extensions are not approved

This leaves schools in a position of needing at least two plans

Plan A – Flat Funding – continues the funding level contained in the enacted Budget for 2010-11 into 2011-12

Plan B – a $2.3 billion reduction in funding – results in a loss of about $330 per ADA for the average district plus $19/ADA plus a possible $1,000/ADA in additional necessary reductions

Districts will need to plan for both eventualities as well as Plan C until the fate of the tax extensions is determined

Additionally, economic changes between now and enactment of the 2011-12 Budget could also cause a revision, up or down

Budget and Special Education Timeline The Governor released his Budget Proposal on January 10

He has called for legislative action within the next 60 days to adopt all necessary statutory changes to implement the Budget

These are usually the Budget Trailer Bills

These changes would conform to the Governor’s Budget Proposal

The actual Budget Bill, however, would not be adopted

In June, the voters will decide whether to continue $8.8 billion in temporary taxes

If the taxes are extended, the Legislature would then adopt the Budget Bill before the new fiscal year begins

If the taxes are rejected, further unspecified cuts would be required

Revenue Limit Deficit Factors

0.000%

2.000%

4.000%

6.000%

8.000%

10.000%

12.000%

14.000%

16.000%

18.000%

20.000%

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%

7.84

4%

18.3

55%

17.9

63%

19.6

08%

Deferrals Continue to Grow

In order to maintain “FLAT” funding for Proposition 98, the Governor proposes additional deferrals

The Governor proposes to add $2.1 billion in year-over-year deferrals, which would bring total K-14 deferrals to nearly $10 billion

This amounts to around 45% of the state’s contribution to education being deferred between school years

In short, the size and duration of deferrals grow, which impairs cash shortages experienced by LEAs

Governor Brown’s Proposed Initiative

Requires 2/3 vote of both the Assembly and Senate, and majority vote of CA voters

Would extend current rates for personal income tax, sales and use tax, vehicle license fees , and the lowered dependent tax credit

Would maintain PVUSD’s 2011-12 revenue at approximately current-year levels (minus $19.05/ADA)

PVUSD will still need to make budget cuts over the next two years due largely to the loss of federal stimulus funding

For PVUSD - $19.05/ADA = $540K reduction in 2011-12 and $540K reduction in 2012-13 assuming 3500 ADA

Without Governor Brown’s Proposed Initiative

California revenue would fall more than $8 billion if the initiative does not pass

Governor Brown did not propose a budget with the lower level of revenues that would result from the sunset of the temporary tax provisions

Estimates vary on how much school funding would drop. The most conservative estimate is that school revenue would drop by $1,000 per student (assuming Prop 98 would be suspended again in 2011-12)

WHAT BUDGET REDUCTION IS NEEDED IN PVUSD?

• PVUSD must stop current deficit spending, must plan for

additional cuts, and must provide a 3% Reserve. Three budgets

are planned; the first based on tax extension, the second based on tax extension failure, the third based on a worst case scenario.

• Plan A: Deficit + -$19ADA = $970K 11-12, $1.3m 12-13

• Plan B: Deficit +-$350ADA = $2.3m 11-12, 2.6m 12-13

• Plan C: Factors Unknown, expected loss of $1000 - $1200 ADA

Will be horrific.

Palo Verde Unified School DistrictBlythe, CaMarch, 2011