Easing the burden of deferrals

A bill working its way through the state Senate would require the state to share the financial burden it causes the next time it delays money due K-12 districts. Only a portion of the short-term interest charges that many districts face when forced to take out short-term loans would be reimbursed. But SB 1491 at least would recognize that billions of dollars in late payments can create an expensive cash crisis for districts, many of them in low-income areas.

Within the past decade the state has used late payments, called deferrals, to help balance the budget. At this point, $10.4 billion – about 30 percent of state money owed to K-12 and community colleges – is budgeted in one fiscal year, but paid in the next year. Districts that cannot borrow internally, from their own accounts, have turned to county offices of education if available or to the open market, at interest rates from a few percentage points up to double-digit rates for some charter schools.

Gov. Jerry Brown has made eliminating the state’s “wall of debt,” which includes deferrals, a priority for his proposed $9 billion tax increase, starting with repaying $1.8 billion this year. But if voters reject higher taxes, the state will face another year of big deficits, and another deferral to districts and community colleges would be an alternative to another outright cut.

The pain of deferrals has not been spread equally, which has been a major source of contention by those who bear the bigger share. School districts’ basic funding under Proposition 98 consists of  local property taxes and state revenue, with the state filling in whatever amount the property tax can’t meet. Deferrals affect only the state revenue portion, so districts with a low tax base and a high share of state revenue have been disproportionately hit by deferrals. Stephen Rhoads, a consultant who has done work on the issue for the sponsor, Sen. Gloria Negrete McLeod, has calculated, for example, that Fresno Unified currently has $2,005 per student in state aid deferred, while Huntington Union High School District in Orange County has only $526 per student deferred.

Because of these disparities, Negrete McLeod proposed spreading the per-student cost of future deferrals equally among all districts, regardless of whether they’re property poor or rich, and having the state reimburse the full borrowing costs that they incur.

Endorsing this concept, Bill Lucia, CEO of the nonprofit EdVoice, said deferrals have forced some districts to lay off teachers and cut programs. The inequitable distribution threatens to violate the Serrano case, in which the state Supreme Court demanded that the state fix inequities in school funding.

Negrete McLeod’s bill initially suggested giving further breaks to districts with high rates of poor children. But staff of the Senate Education Committee found the deferral redistribution formula too complex and possibly unconstitutional, and recommended a simpler method with less cost to the state, which the Committee approved and Negrete McLeod accepted.

Districts will be entitled to reimbursement at the interest rate that the state receives while pooling its revenue while waiting to fund various state budget accounts. That percentage is currently about 1 percent – far less than many districts are paying for short-term notes, but better than nothing.

At a hearing last week on the bill, Lucia and Liz Guillen, an attorney with the nonprofit advocacy law firm Public Advocates, criticized this solution as not going far enough to address deferral inequities.

But Negrete McLeod said she’d take what she could get. “Despite my desire to equalize the inequality of the current deferral funding system, I was willing to limit the scope of the bill,” she said in an email.  “Deferrals are a contentious issue and moving a bill that saves school districts millions of dollars in interest charges is a step in the right direction.”

It’s unclear how much districts will save or how the reimbursements would work. Details will be worked out as the bill goes through the Legislature, said Daniel Alvarez, staff director for the Senate Education Committee.