Big midyear hit for Prop 98 likely

The first shoe fell with a thud Wednesday, when the Legislative Analyst’s Office predicted that a $3.7 billion state revenue shortfall this year would result in $2 billion in midyear “trigger” cuts, including $1.5 billion in Proposition 98 funding and $100 million each to the University of California and California State University.

The other shoe will drop next month when the state Dept. of Finance issues its own revenue estimates and then sets the midyear cuts based on the rosier of the two projections.

The LAO is predicting a $13 billion state deficit next year, even after $2 billion in midear cuts this year, declining gradually over five years. Click to enlarge.
The LAO is predicting a $13 billion state deficit next year, even after $2 billion in midear cuts this year, declining gradually over five years. Click to enlarge.

The expected cuts, which will bite into services for the disabled as well, follow dreary revenue reports for the first four months of the fiscal year, and so should come as no shock. The repercussions were felt immediately Wednesday, with CSU trustees approving a 9 percent tuition increase for next year unless the state increases funding by at least $138 million next year. The $100 million midyear cut will put CSU that much more in a hole and wipe out the system’s reserves.

Under the budget passed last year, the shortfall also will lead to a $10 per credit community college fee increase, and will compound problems for K-12 districts, especially those that, hoping against hope, didn’t build in sufficient reserves or don’t have contingencies for negotiating additional staff furlough days this spring. Under the worst-case scenario, some of those districts, the LAO said, may run right out of cash by year-end and have to seek a state emergency loan.

The $1.5 billion in Prop 98 cuts would include the $248 million in home and school transportation payments – more than half of funding for the program – and $1.1 billion in standard revenue limit funding for districts. The latter equals a cut of $180 per student, about 3 percent of state tuition payments.

The transportation cuts, an average of $41.60 per student, will disproportionately affect rural and poor urban students, according to a breakdown by Stephen Rhoads, a lobbyist with Strategic Education Services in Sacramento. In rural Humboldt County, the cut amounts to $113 per student; in Mariposa County, $346 per student; for low-income students, the cut would average $49 per child, compared with $23 in wealthier districts. If students stop attending school regularly after bus routes are cut, districts would see a further erosion in revenue.

The Legislature made contingencies for cuts when it shifted $2 billion in sales tax revenue from Prop 98 to pay for transferring prisoners to county and local jails. Rather than immediately cut education, the Legislature assumed that the state would take in an extra $4 billion in revenue – a deal it cut with the California Teachers Association that in the end turned sour.

CTA President Dean Vogel, commenting on the LAO report, called for fixing the state’s “unfair tax structure and corporate tax breaks” in order not to shortchange education.

“It’s time to put a fair and equitable tax system in place so that our students and the most vulnerable Californians don’t have to continue to do without,” he said.

Looking ahead to a sluggish economy and an unemployment rate that will likely remain above 8 percent for another five years, the LAO assumes that the midyear cuts won’t be restored for years. Even with the midyear cuts, the LAO is predicting that the state will end this year $3 billion in the red, and the deficit will grow to $13 billion next year, and will remain above $5 billion per year through 2016-17.

If there’s good news for schools, it’s in the LAO’s projection that the funding obligation for K-12 and community colleges will rise $4 billion next year. But more than half of that will be simply part of what the state owes the schools: restoring Prop 98 to the level before the $2 billion in sales tax money was diverted and then partially repaying for the lost $2 billion this year ($400 million per year for five years).

With unemployment beginning to drop next year, per capita income will rise 4 percent, resulting in an increase of nearly $1 billion in the Prop 98 obligation. But, with the Prop 98 increase contributing to the $13 billion deficit, the LAO suggested that the Legislature would have to consider suspending Prop 98 – and how to do it.

It added two more cautionary notes: Even though an upsurge in revenue may enable the state to fund Prop 98 an average of $2.5 billion a year beyond the minimum guarantee from 2013-14 to 2016-17, it will still end up owing education $10 billion in past obligations. And it will not have begun to pay down CalSTRS’ unfunded pension liability. “Addressing the unfunded liabilities of just the teachers’ retirement fund probably will require billions of dollars of additional payments annually over the coming decades,” the report said.