Lawmakers suspend fiscal oversight

Superintendents, business officers, and budget consultants are expressing bewilderment over demands and restrictions in the education trailer bill – AB 114 – that they say could throw already financially stressed school districts into serious financial jeopardy. School Services of California, which advises many districts on financial issues, has called on Gov. Jerry Brown to veto one particularly worrisome section of the bill that suspends fiscal oversight by county offices of education for the coming year. In adopting the provision, the Legislature “has eclipsed all of its previous low standards for ethics and integrity,” the company wrote on its website.

The 100-page trailer bill was published Wednesday morning, 12 hours after Democrats in the Legislature passed it without discussion. Except perhaps for a handful of insiders, educators had no idea what was in it.

After manipulating Proposition 98, which determines how much will be spent on education, legislators appropriated the same amount for K-12 schools as last year. Because it is based on an optimistic projection of $4 billion in additional revenue, the budget also lays out $1.9 billion in cuts, primarily by shortening the school year by as much as a week, if by January revenues are coming up short.

The problem is not the budget per se. Some school officials say it may be the best that schools could have expected, given Republican legislators’ refusal to extend about $10 billion in temporary taxes. “To this point, I have no quarrel” with legislators or with Gov. Jerry Brown, who “asked for shared sacrifice” and “put out a responsible and fair solution,” said Michael Hulsizer, chief deputy for governmental affairs in the Kern County Office of Education.

But in the trailer bill, he said, legislators “did things that tie hands of school district boards, superintendents, and county superintendents that provide oversight of budgets. They limit officials at local levels to respond to the same risks they acknowledge exist through midyear cuts.”

AB 114 does this in three ways:

1) Requiring that each school district, regardless of its individual circumstances, assume the same level of funding as last year and maintain staffing and program levels consistent with that. Legislators are dictating this even though they admit there’s a good chance that revenues may not bear that out. Many districts, taking no chances, set aside in reserve $350 per student to cover a possible $2 billion revenue shortfall. Now the Legislature is saying abandon that caution and rehire teachers and staff and reinstitute programs as before, Hulsizer said. School Services observed that even with the same amount of state revenue, expenses  and other factors– health care costs, depletion of federal stimulus money, step increases in salaries – require adjustments.

Those districts that based their budget on Brown’s May budget revision – and its assumption that temporary taxes would be extended – might choose to make further cuts now. But the Legislature precluded that by:

2) Eliminating the option that districts would have over the next 45 days to make staff adjustments if they view this as necessary. Instead, the Legislature is suspending that capability under the law for the next year. As School Services noted, “This provision is clearly designed to protect union positions, even if the district cannot afford to pay for the services.”

Once the 45 days are up, districts no longer will be able to lay off any certificated teachers this year. That means that if revenues turn south, their only option will be cutting the year short, cutting teachers’ pay but also shrinking learning time. That may be the Legislature’s intent, but furloughs still must be negotiated locally. The Legislature did not authorize school districts to unilaterally impose them. Some local unions may resist additional furloughs or stretch out negotiations for months. If so, districts could run into big money problems.

“So the Budget is essentially limiting schools to only one tool in their toolbox – furloughs – for dealing with mid-year cuts,” Bob Blattner of Blattner & Associates, an education consulting firm based in Sacramento, wrote in a memo. “And furloughs are the equivalent of a two-handed saw; if the local bargaining units don’t help from their end, the tool is useless.”

Some privately speculate that the two provisions are a payoff to the California Teachers Association for agreeing not to file suit over the machinations that siphoned about $2 billion away from Prop 98 for a year. (AB 114 includes a commitment to repay schools the money over five years, though one Legislature cannot bind the next to do that.)

But the new president of the California Teachers Association, Dean Vogel, doesn’t see it this way. Calling from the National Education Assn. convention in Chicago, he said that suspending the August layoff provision will provide stability to school districts and set the right spending priorities. “This will give districts, teachers, and students assurance that once they begin the school year, the learning environment will not be disrupted.”

What most exasperated school officials was the final provision:

3) Suspending key provisions for one year of AB 1200, under which school districts must self-certify that they can balance their budgets in the current year and one and two years into the future. Those that cannot must work with their county office of education to align revenues and spending. This year 13 districts were negatively certified in the latest filing, indicating they could not balance their budgets this year and next. An additional 130 districts – nearly one in seven – acknowledged trouble balancing their budgets two years out. AB 114 would require districts to assume the same revenue as this year and prevent county offices from seeking evidence of financial stability for the next two years.

Blattner likens this to “sending riders in a dirt-bike race with blindfolds on. You have got to see what’s coming around the corner.”

Hulsizer said it would be “frightening to pull the plug on a warning system that works. The consequence will be to enable districts to make bad decisions.” A year from now, he said, districts will declare insolvency.

In his letter to Brown, School Services CEO and President Ron Bennett was more specific. “Stripping the county superintendents of their oversight responsibilities in 2011-12 will almost certainly bring dozens, if not hundreds, of school districts to the state’s door for emergency loans in future years,” he wrote. “The authority of the county superintendents to protect the state should not be taken away when it is needed most.”

At the same time, in its commentary to client districts, School Services predicted that districts would continue to do their multi-year financial projections anyway. If they don’t, they won’t be able to obtain short-term loans, called TRANs, that will keep districts afloat. “It would be difficult to find even one district chief business official who would be stupid enough to follow this misguided direction from the state,” the commentary said.

Big (invisible) K-12 spending boost

Gov. Jerry Brown gave K-12 school districts significantly more money, tempered by conflicting messages and sober warnings in the revised budget he presented on Monday. Reflecting higher state revenues and an acknowledgment that schools and community colleges have been socked disproportionately in recent years, the extra dollars for 2011-12 would raise base level funding under Proposition 98 $3 billion above the $49.4 billion that Brown proposed five months ago. That’s about half of the $6.6 billion in new money that the state now expects (see budget summary for education).

For most parents and teachers, the extra dollars will be all but invisible. Most districts won’t be rehiring staff or restoring programs from a few years ago; additional per-student aid will rise but a blip. Brown is proposing that nearly all of the money be used to eliminate $2 billion in late payments, known as deferrals, that he had proposed in January, and to pay down $400 million in previous K-12 deferrals, along with $350 million in community college deferrals. That will help districts’ balance sheets, but not the classroom, at least not directly. Funding overall would remain flat.

Brown’s May budget also continues to assume  that the Legislature will put on the ballot – and voters will soon approve – a five-year extension of the temporary increase in the sales tax, the vehicle license fee, and the personal income tax. (The .25 percent income tax increase would be suspended this year but resume in 2012-13.) Tax extensions are critical to closing a budget shortfall that, even with higher revenues, remains at about $10 billion, Brown said.

Though pressed by reporters, Brown and his finance director, Ana Matosantos, were vague – perhaps intentionally so since they are continuing to negotiate with Republicans on timing, length, and details of the taxes – in explaining how districts should go about building next year’s budgets now without knowing for sure there will be more revenue. He said he understood the school districts’ dilemma and indicated that there would have to be a transition in the event that the taxes were approved temporarily by the Legislature (four Republicans willing), then defeated by voters. But he did not elaborate. Even with taxes extended, spending for K-12 and community colleges next year would be $4 billion below the 2007-08 high water mark.

Even with tax extensions, state revenue as a percentage of personal income would fall to the 1972-73 levels (May Revision budget). Click to enlarge.
Even with tax extensions, state revenue as a percentage of personal income would fall to the 1972-73 levels (May Revision budget). Click to enlarge.

The Education Coalition – the California Teachers Association, the state PTA, and the California School Boards Association (CSBA) – all separately praised Brown’s “balanced” approach to the budget. But consultants paid by districts to look into details were giving conflicting advice Monday. School Services of California Inc. was recommending to assume for the best: “Under the current circumstances, we advise following the Governor’s stridently delivered advice; if he is unable to deliver on his plan, the consequences will be laid at the Governor’s door.” But Bob Blattner of Bob Blattner & Associates was urging caution: “The Governor is essentially asking school leaders to jump out of an airplane, trusting that the backpack they are wearing contains a parachute.” Blattner was recommending that districts assume there may be as much as a $675 per student cut in state tuition, and then look for assurances from Sacramento that even if the tax extensions fail, there would be ways to soften the impact – like reinstating the deferrals.

School districts handed out layoff notices to 20,000 teachers statewide. They became final on Sunday. If Brown’s May revise is adopted and taxes are extended, most of the teachers could be recalled. But districts worried that voters would say no to taxes would be wary of adding to their payrolls.

Deferrals and adult supervision

Deferrals have grown dangerously large, to nearly $10 billion, putting dozens of districts in financial danger. As Bob Wells, executive director of the Association of California School Administrators, told us, the first deferral, moving payments back a day, from June 30 to the new fiscal year on July 1, seemed innocuous. But it quickly became a slippery slope, Wells said, with billions of dollars now deferred for 8 to 10 months.

“I think for any family, if you looked at your June budget and said could you hang in there and get your money on July 1, sure; but if you woke up the next day and learned it would be months, then you’d be in trouble,” he said.

Rick Pratt, vice president of CSBA, and Bill Lucia, president and CEO of EdVoice, agreed that erasing some of the deferrals was appropriate. Lucia said that deferring money owed to school districts, forcing them to borrow money, was using education to subsidize other parts of the state budget.

“The governor has now made education a priority, and paying down deferrals is wise for education and wise budgeting,” Lucia said.

Deferrals have had the biggest impact on small school districts and charter schools, which have had to borrow money at much higher rates than large districts, Lucia said. Property-wealthy districts that get a smaller portion of their money from the state for their base revenue were least affected, so reducing deferrals would begin to address that inequity in education funding and will ease cash flow problems, and even prevent some districts from being forced into insolvency, according to Nick Schweizer of the Department of Finance. To the extent that districts have to borrow less, they’ll be able to redirect savings to programs and personnel.

What happened to the all-cuts budget?

I and many others had assumed that Brown would lay out an all-cuts budget in detail – a Plan B – in the event that tax extensions are defeated. In his press conference, he would not be pinned down on the consequences. “I will not give Republicans a road map to ruin; I am giving them a road map to success,” he said.

However, on page 12 of his budget summary, he wrote that community colleges and K-12 schools, comprising 40 percent of the general budget, “would need to bear a heavy share of an ‘all-cuts’ budget.” Proposition 98 would have to be suspended, he said. A cut of $5 billion to Prop 98 is the equivalent of lopping a month off of the school year and laying off 51,000 teachers, eliminating 52,000 courses at community colleges, and raising fees from $36 to $125 per credit.

Brown has said he doesn’t favor using scare tactics to pressure voters to do the right thing. That may be one reason he didn’t lay out Plan B in detail. Another reason is that even an all-cuts budget would require four Republican votes – two in the Assembly and two in the Senate – and last week Republicans vowed not to suspend Prop 98.

Brown said he was optimistic he could turn Republican votes; he said he was talking seriously with between four and 10 of them, without saying who.

One can imagine variables at play in his talks:

  • When to vote: Brown said he’d favor a popular vote as soon as this fall. But that would create problems for school districts; if he could persuade Republicans to extend taxes until a ballot vote next June or in November 2012 (what CTA favors), school districts could budget for a year without cuts.
  • How long to extend taxes: Brown wants to extend taxes for five years. Could he persuade Republicans to agree to two or three?
  • Price of reform: Business groups, including the Silicon Valley Leadership Group, the Bay Area Council, and the Los Angeles Chamber of Commerce, have written Brown calling for a “workout plan” pairing tax increases with structural changes in Sacramento: amending environmental regulations, adopting a spending cap, and scaling  back public pensions. Brown said Monday he too favors annual limits on spending and pension reforms. Can he and Republicans reach a deal that doesn’t alienate Democrats?

Here are some key education numbers:

Proposed 2011-12 Prop 98 guarantee: May revise, $52.4 billion ($38 billion from General Fund); January budget, $49.4 billion. Increase: $3 billion.
2010-11 Prop 98 guarantee, as adopted: $49.7 billion.
2011-12 Prop 98 guarantee without tax extensions: $50.8 billion. Increase over 2010-11: $1.1 billion.
Proposed 2011-12 K-12 per-pupil funding: $7,878; January budget as amended by the Legislature, $7,693. New proposed increase: $185 per student, 2.4 percent.