The State Budget and

Education Issues
Legislative Analyst’s Office
Presented to:
EdSource
March 19, 2010

www.lao.ca.gov
LAO
The Budget Situation

LAO 1
Recap:
The 2008-09 and 2009-10 Budgets

 Went Into the Recession With

No Reserves and Unresolved, Underlying
Structural Deficit

 Lost Roughly 20 percent of Our Revenue Base

 State Addressed a $60 Billion Problem in

February and July of 2009

LAO 2
The 2010-11 Problem Definition

 We Estimate a Shortfall of $20 Billion

• About $6 billion in the current year.
• About $14 billion in the budget year.

 What Happened?
• Some current-year solutions did not pan out.
• The preexisting 2010-11 shortfall grew.

LAO 3
The Out-Years Look
Much the Same
General Fund Operating Deficits (In Billions)

LAO 4
So, After $60 Billion,
How Hard Can $20 Billion Be?

 Some Things Are Off the Table

 Loss of Federal One-Time Monies

 Federal MOE on Education/Medi-Cal

 Court Decisions Restrict Action

 Election Year LAO 5

What Has Happened in the
Special Session?

 Legislature Passed About $2 Billion in

Savings
• Governor vetoed most of this.

 Legislature Passed a Transportation-

Related Gas Tax “Swap”
• Potential Proposition 98 implications.
• Governor has said he will veto.
LAO 6
What Is the Outlook for the
Economy and Revenues?

 Economy: Coming Back…Slowly

• Personal income growth stronger.
• Employment numbers weaker.

 Revenues: Coming in Higher-Than-

Expected
• Good December/January.
• April will be the key.
LAO 7
What Is in Store
For the May Revision?

 Upside
• Improvement in revenues (but over half goes
to Proposition 98).

 Downside: Loss of Solutions

• Federal funds assumption risky.
• Later implementation of health/social services
proposals.
• Fund diversions not on the June ballot.
LAO 8
A Caution:
Longer-Term Liabilities Loom

 Budget-Related: About $35 Billion

 Retirement-Related: Over $130 Billion

 Infrastructure-Related: About $70 Billion

LAO 9
The Governor’s Proposed
K-14 Budget

LAO 10
Programmatic Per-Student
Funding, by Education Area

LAO 11
How Have Districts Been
Getting Through This?

 Federal Stimulus Funds

 Accessing Reserves/Categorical Balances

 Categorical Program Flexibility

LAO 12
Proposition 98:
Overall Funding Level

 Governor’s Budget Keeps Total Down by:

• Assuming NO constitutional maintenance
factor is carried into 2009-10.
• Assuming passage of a proposal changing
transportation revenues.
• Assuming the state receives federal waiver.

LAO 13
What Gives:
Big Maintenance Factor or Not?

 Dicey Legal Issue, That Most Likely Will

Have to Be Resolved in the Courts

 Issue Arose Because of:

• Test 1 falling between Test 2 and Test 3.

LAO 14
Comparing Different
Proposition 98 Funding Levels
(Dollars in Billions)

LAO 15
K-12 Proposals: Budgetary

 While Total Spending Is Flat, Reductions

Are Needed

 Proposed Revenue Limit Reductions:

• Non-instructional spending ($1.2 billion).
• Savings from contracting ($300 million).

 Other Cuts (Child Care and County Office

Reductions)
LAO 16
K-12 Proposals: Policy

 Contracting Out

 Teacher Policies:
• Change layoff “window”/eliminate hearings.
• Eliminate certain layoff seniority rules.
• Remove restrictions on priority/pay rates for
substitute teaching.
• Extend probationary period to four years.
• Change dismissal process.
LAO 17
CCC Proposals: Budgetary

 Fairly Flat Spending (After Adjusting for

Deferrals)

 Budget Provides $126 Million for

Enrollment Growth (2.2 Percent)

LAO 18
CCC Proposals: Policy

 Changes to the “Flex Item”

• Add three programs.
• Take out one (Career Tech).

 Proposed Added Flexibility

• Suspend 75/25 faculty provision until 2012-13.

LAO 19
LAO Assessment of the
Governor’s Proposals

LAO 20
Overall Proposition 98 Plan:
Tenuously Held Together

 Legal Risk

 Revenue Proposals Affect Guarantee

 MOE Waiver Requirement

LAO 21
Options to Address
Proposition 98 Spending Level

 Suspend

 Cut Other Spending

 Raise Revenue
• Addressing $3.2 billion gap (noted earlier)
would require $7.8 billion in new revenues.
• All dedicated to schools.
LAO 22
LAO Alternative:
Make Targeted Reductions

 Provide a Specific List of Recommended

Reductions Amounting to $1.1 Billion
• Class-Size Reduction: $382 million.
• Economic Impact Aid: $101 million.
• QEIA: $231 million (replace with federal school
improvement monies).

 Any Additional Cuts: Mix of Apportionment and

Categorical Flex Item Reductions

LAO 23
LAO Alternative:
Maximize Flexibility

 Include More Programs in Flex Item

• K-3 class size.
• Home-to-school transportation.
 Contracting Out
 QEIA: Allow Schools to Be Subject Only to
Federal Rules
 Eliminate Certain Career Tech Program
Requirements
LAO 24
LAO Alternative:
Undertake Mandate Reform

 Assessed 51 Existing Mandates,

Recommending That the State:
• Modify several requirements.
• Eliminate most.

 Achieve Savings of Over $350 Million

Annually

LAO 25
LAO Alternative:
Align Program Efforts
 Budget Misses Opportunity to Mesh State
and Federal School Improvement Efforts

 Recommendations:
• Determine additional recipient schools.
• Link funding with need.
• Maximize federal funds.
• Hold QEIA schools harmless.
• Hold schools only to federal program rules.
LAO 26
LAO Alternative:
Teacher Policies

 Larger Issue: Role of State in These

Matters:
• Repeal state laws and leave issues to locals.
• Amend laws to better align with state
objectives.

 Recommend Adopting Most of Governor’s

Proposals
LAO 27
CCC’s Budgetary
Recommendations

 Fund “Overcap” Enrollment, But From Fee

Increases
• Increase fees from $26 to $40 per unit.
• Raises $150 million (more than Governor).

LAO 28
CCC’s Policy Recommendations

 Agree With Governor’s Proposals to:

• Expand flex item.
• Suspend full-time faculty requirement.

 Also Recommend Amending 50 Percent

Rule

LAO 29
Some Final Thoughts on
Proposition 98

LAO 30
Why Has It Gotten So
Complicated?

 Proposition 111 (1990) Introduced Test 3

 Defined Time Periods for Tests Differently

 Legal Issues

 Steps to Deal With Unusual Situations:

• Re-benching.
• Program shifts.
LAO 31
The Problems

 From a Budgetary Perspective—It’s a Disaster

• No one understands how it is supposed to work.
• Subject to manipulation.

 Linked School Funding Directly to the State’s

Volatility Problem

 Redirects Attention Away From Key Oversight

Issues
LAO 32
Key LAO Documents
Available at: www.lao.ca.gov

 The 2010-11 Budget:

Proposition 98 and K-12 Education

 The 2010-11 Budget: Higher Education

 Education Mandates:
Overhauling a Broken System
LAO 33