Dems’ budget: Prop 98 with twist

Giving K-12 and community colleges more money with one hand and taking it away with the other, Democratic leaders are proposing a balanced budget that would fund K-12 schools at last year’s level while meeting the state obligation to education under Proposition 98. They are doing this without $10 billion in temporary taxes that Republicans refuse to extend. No easy feat, this is budgeting with a twist – of the arm of education groups, which could sue over budget maneuvers (but probably won’t).

Nine days ago, Democratic lawmakers passed a state budget by majority vote, which Gov. Jerry Brown vetoed. Today they will try again, only with Brown’s full support. After months of stubbornly trying, Brown over the weekend gave up hope of persuading four Republicans to temporarily extend taxes in exchange for pension and environmental law changes and a cap on state spending.

Brown said the proposed budget would require up to $1.9 billion in midyear education cuts, including seven fewer school days, if rosy revenue estimates come up short. The budget will be balanced but will not solve the state’s structural deficit. That will take higher taxes, and he promised to propose them in an initiative on the November 2012 ballot.

Details were sketchy Monday on how Brown, House Speaker John Perez, and Senate President pro Tem Darrell Steinberg balanced the budget. Brown promised budget briefings after the Legislature approves the budget. (He actually said that in a press webcast.) But this is basically how they plan to square the circle:

  • Democrats are building in $5.2 billion more in revenue, including the optimistic projection of $4 billion in natural growth in taxes, mainly from high-income earners, beyond the $6.6 billion that Brown included in his May budget revision.
  • Since K-12 schools and community colleges are entitled to about 40 cents of every new dollar under Prop 98, they would get about an extra $2.1 billion of the $5 billion. Instead, Democratic leaders will nullify that by diverting 1.06 percent of the state sales tax to local governments to pay for realignment that shifts more state functions to cities and towns. That 1 percent will no longer count toward Prop 98.

According to John Mockler, the architect of Prop 98 and occasional consultant for the California Teachers Association, who was in on negotiations on Sunday, this will be a one-year deal, and groups in the Education Coalition will not sue over it. The November 2012 ballot initiative will call for permanently reimbursing schools to replace the loss of state sales tax revenue. (Update: Next year’s budget would be written so that schools would be compensated even if a budget initiative failed). “We’re supportive [of Brown’s plan for realignment] but not chumps,” Mockler said. (Rick Pratt, vice president of the California School Boards Association, said Mockler must have been speaking for the CTA, because CSBA hadn’t been consulted.)

  • About $1.5 billion in child care programs that have been included within Proposition 98 will be moved outside of it, further lowering the Proposition 98 guarantee. According to Mockler, a previous court ruling gives the Legislature authority to do this. But Pratt said it would be a “bad precedent” to move a program outside of the Prop 98 obligation just because the Legislature decides not to fund it.
  • If the projected revenue increases come up short, then in January Director of Finance Ana Matosantos could order up to $2.6 billion in cuts, starting with $700 million to higher education and social services, and then the rest to K-12 schools and community colleges. Midyear cuts are especially tough on districts, which set budgets by July 1. So the Legislature will approve cutting another seven days off the end of the school year – likely giving California the shortest school year in the United States, if not the developed world, at 168 days. It’s not clear whether the Legislature would mandate or simply permit a shorter year. (Update: Economist Chris Thornberg of Beacon Economics, a Los Angeles consulting firm, was asked whether Democrats should rely on $4 billion more in tax revenue this year “They’re out of their minds,” he told the Sacramento Bee.)
  • In his initial January budget, Brown had proposed delaying payment of an additional $2.1 billion owed to schools and community colleges in 2011-12 until the following year. In his May budget revision, which assumed Republicans would agree to extend taxes, Brown withdrew the deferral and even rescinded several hundred million dollars in past deferrals. But in the latest proposal, Democrats would reinstate Brown’s $2.1 billion deferral from January and add $700 million to it. This would bring the total of deferrals to more than $10 billion. In yesterday’s post, I pointed out potential dangers of doing this.

The bottom line is that K-14 schools will receive $48.3 billion in Prop 98 money next year, including $2.8 billion in new deferrals. Asked Monday how he could meet the Prop 98 obligation without tax extensions, Brown replied “very legally and creatively.”

“It is very creative,” Pratt said. “I don’t know about very legal.”

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According to the Sacramento Bee, the latest budget will also include the following features in the Democrats’ budget that Brown vetoed last week:
  • $1.7 billion from eliminating redevelopment agencies;
  • $300 million from $12 per vehicle increase in DMV registration fee;
  • $200 million in enforcing an online tax of Amazon;
  • $150 million cut each to University of California, California State University;
  • $150 million cut to state courts.

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.