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.

Push for deferral reform

Given a choice between school funding cut and funding delayed, districts until now have preferred late payments, known as deferrals. They now total about $10.4 billion or 30 percent of state funding for K-12 and community colleges. While bailing out the state short-term, they have created cash flow havoc for charter schools and for many of the state’s nearly 1,000 districts.

Many, but not all. Basic aid districts – those that fund their schools totally from their own property taxes – and those districts more dependent on property taxes than state dollars for their Proposition 98 funding have largely escaped the impact of deferrals. But those districts with small tax bases that rely on state revenues for most of their money have gotten hit disproportionately hard.* That’s because deferrals only affect the state revenue portion of a district’s total funding. And districts most affected tend to serve large numbers of poor children,

Districts with large percentages of low-income students tend to have the largest percentages of low-income students. Click to enlarge. (Source: Stephen Rhoads)
Districts with large percentages of low-income students tend to have the largest deferrals per student. Click to enlarge. (Source: Stephen Rhoads)

according to Stephen Rhoads, a policy consultant for school districts who is working with State Sen. Gloria Negrete McLeod, a Democrat from San Bernardino and Los Angeles counties, on the issue.

Negrete McLeod is sponsoring SB 1491, the Fairness in Education Deferral Funding Act. For future deferrals, it would require that the state pay the interest on the money that districts and charter schools have to borrow because of the deferral. And it would spread the cost of the deferral equally among districts on a per-student basis, so districts funded largely by property taxes would share the pain. Districts serving mostly low-income students would get an extra break.

That’s fine and good, you might say, but isn’t Gov. Jerry Brown promising to wipe out K-14 deferrals over the next four years, if his temporary tax initiative, which would raise the sales tax and income tax on the wealthy, passes? Yes, Brown’s first priority for the extra money would be to pay down the state’s “wall of debt,” starting with eliminating $2.4 billion of the late payments to school districts and community colleges, next year.

But if the tax initiative fails (the latest Public Policy Institute of California poll shows it favored by just over 50 percent of voters), Brown is proposing to cut Proposition 98 funding by $4.8 billion or about $450 per student. If he’s serious, then once again districts may be faced with a familiar choice: a cut or a deferral, in which districts budget the spending but don’t receive the money from the state until the next fiscal year, borrowing from the outside market if they can’t borrow internally. If that happens, then Negrete McLeod’s bill would kick in.

Those districts with small property tax bases, relying more on state revenue to fund schools, get hit hardest by deferrals. Clike to enlarge. (Source: Stephen Rhoads)
Those districts with small property tax bases, relying more on state revenue to fund schools, get hit hardest by deferrals. Click to enlarge. (Source: Stephen Rhoads)

In a comparison of four districts, Rhoads illustrates the disparate effects that deferrals have had on poor districts. Take San Bernardino Unified (one of Rhoads’ clients), where 87 percent of students’ family incomes qualify for free or reduced lunches, and Capistrano Unified, where only 20 percent do; both serve 51,000 students. Because of Capistrano’s strong property tax base, it relies on the state for only $386 per student of its revenue limit, with $174 per student of that deferred. San Bernardino gets $4,783 per student from state revenue, with $2,149 deferred – a huge burden.

Although SB 1491 would apply only to future deferrals, Rhoads created worksheets to illustrate the impact had the bill been in effect today, for $8.6 billion of revenue-limit deferrals. By spreading deferrals uniformly, per student, among all districts, then giving added help to low-income districts, San Bernardino Unified would have seen the amount of money deferred go from $110 million to $72 million or from $2,149 per student to $1,401. Capistrano’s deferrals would have increased from $174 per student to $1,327, which would have been more than it gets in state revenue – and probably grist for litigation. Fresno Unified would have seen $143 million in deferrals drop by $43 million or $612 per student.

There have also been $900 million in deferrals in funding of categorical programs.

* A school district’s allotment of unrestricted dollars – its revenue limit – is funded by a combination of property taxes and state revenue. Because of Proposition 13 restrictions on increasing property taxes, state revenues now comprise about two-thirds of Proposition 98 funding, but the proportion varies from district to district.