The State Budget: Where Are We Now? Presented by Robert Miyashiro Vice President School Services of California, Inc.

1 The State Budget: Where Are We Now?  The State Economy  The Political Environment  Policy Choices

2 The State Economy Fiscal Year Days ? Number of Days the State Budget is Late

3 State Economy

4

5 Budget Gap  The ongoing demands of state programs, the loss of one-time prior-year Budget solutions, and weak revenues from a slowing economy have resulted in a $15.2 billion Budget gap  This estimate, however, is now four months old  Some of the Budget solutions are foregone  The economic outlook appears weaker January 2008 Budget Gap-$ 14.5 billion May Revision Adjustment-$ 7.7 billion Special Session Solutions$ 7.0 billion Remaining Budget Gap-$ 15.2 billion

6 Political Environment  The Budget requires a two-thirds vote in both houses to pass  54 aye votes in the Assembly (there are 48 Democrats and 32 Republicans)  27 aye votes in the Senate (there are 25 Democrats and 15 Republicans)  Legislative districts have been drawn to create safe Democratic and Republican seats making it more difficult to compromise  Term limits have shortened the time for Legislators to understand the issues and know their colleagues  The “Big 5” process forces many issues to leaders who are themselves new to their position

7 Proposed Budget Solutions  The Governor has proposed  No new revenues and across-the-board cuts in January  Borrowing against Lottery growth, with a stand-by sales tax increase in May  A three-year 1¢ sales tax increase and a permanent ¼ ¢ reduction in August  Democrats Conference Committee Budget includes:  Higher revenues from increases in the income tax and corporation tax  Restoration of cuts to K-12 programs, plus a 2% cost-of-living adjustment (COLA)  Restoration of Governor’s proposed cuts to other state programs  Republicans in the Legislature have proposed  Borrowing from local governments and transportation funds  Securitization of Lottery revenues  Fund shift from redevelopment agencies

8 The Education Budget  Legislators of both parties and the Governor have narrowed their differences on funding for K-12 education  Year-over-year cuts to revenue limits and categorical programs have been rejected  Proposition 98 funding of $57.8 billion, but potentially higher if taxes are increased  Major unresolved K-12 issues  COLA  2% in Conference Committee Budget, but this assumes billions in new ongoing revenues  0.0% in the Governor’s “August Revise,” the Senate’s Budget proposal, and the Republican plan  Lottery securitization and Proposition 98 base funding adjustments  Local flexibility options

9 How Will This End?  Financially complex and legally questionable Budget solutions often emerge when Budget stalemates continue. Recall:  “Off book loans” from Proposition 98 in the early 1990s  Borrowing from the PERS system earlier this decade  The “triple flip,” involving local sales tax, schools’ share of the property tax, and the state’s backfill to schools  In the end, all parties will have to compromise, but this is very difficult because the State Budget is not simply an accounting document, it is a reflection of our collective values

Management in the Face of Uncertainty Presented by Sheila Vickers Vice President School Services of California, Inc.

11 Management in the Face of Uncertainty  To understand where we might be headed, we need to revisit past state fiscal crises  Several years in the early 1990s of underfunded or no COLA  Deficit factor was invented, and eventually made whole ten years later  But not retroactively – the funding was lost in the intervening years  In the current decade, we have already seen cuts, no COLAs, deficit factors, and even mid-year cuts  Might we be headed for more of the same in the current state fiscal crisis?  What can you pull from your toolbox to cope with this if it happens again?

12 Budget Update With No State Budget  Most districts have closed the books on  School has begun and enrollment numbers are coming in for the current year  Staffing decisions are solidifying for the current year Recommendations:  Update your beginning balance for to the actual ending balance for  Revise your estimated ADA for based upon latest enrollment information  Update and beyond for revised enrollment and ADA estimates:  Projected revenues  Staffing budget  If declining in enrollment and had staffing reserve in place, evaluate usage of staffing reserve and possible redirection to other purposes – or the ending balance

13 Categoricals With No State Budget  Governor’s May Revision contained a 6.5% cut for  Conference Committee and others propose not to cut  The risk is that you could be spending dollars that may not be there in the end Recommendations:  If books are still open for , book Mega-Item and AB 825 Block Grant transfers where possible and appropriate  Continue to budget based upon SSC’s May Revision Dartboard (no COLA, 6.5% cut)  Delay and reduce spending where possible  Use SSC’s CATWizard to maximize use of funding available to you  Funding rates will be updated for all programs once State Budget is signed

14 Flexibility With No State Budget  Flexibility may or may not be in the end game of the State Budget  If there is no COLA, flexibility proposals probably survive  If there is any amount of COLA, don’t count on flexibility too Recommendations:  If books still open for , manage program balances during closing to maximize ability to take advantage of proposed flexibility for  If flexibility has been planned on in your budget, have a fallback plan if that flexibility is eliminated  If flexibility is in the end game – particularly in the transfer of restricted balances – plan to make the maximum transfer  You can always transfer it back if you need to

15 Multiyear Projections  Multiyear projections are only as good as the assumptions behind them  A funded COLA in and are as uncertain as ever  Economic projections change every day, but one thing remains constant  Education is a big target when there is a huge gap in the State Budget  And the Governor’s January Proposal is less than four months away Recommendations:  Take your updated budget and, using SSC’s Dartboard, rebuild your multiyear projections as a “base projection”  Then do a variety of “what if” scenarios and determine whether your district will be in trouble if there are mid-year cuts in or unfunded COLAs in the out years  Have a backup plan if these scenarios come to fruition – do not wait until January  Have seniority lists ready before January in case the Governor’s January news is as bad as or worse than last January

16 Cash Management With No State Budget  July 2008 Advance Apportionment will be received this month  Significant apportionment funds are not being received due to the lack of a State Budget: adult education, instructional materials, block grants, special education, etc.  K-3 Class-Size Reduction and Principal Apportionment funding for is to be deferred from February to April  Districts are receiving the statutory COLA of 5.66% in apportionment funding, when no COLA in the State Budget will require it to be paid back  And through all this your district is expected to make payroll and vendor payments on time Recommendations:  Closely monitor cash flow  Update cash flow actuals and projections as soon as the prior month closes and inflows, outflows, and balance are known  Evaluate whether internal or external borrowing is needed  If you have issued TRANs, will that be enough?

17 Collective Bargaining With No State Budget  Successful bargaining is about problem solving  But it’s hard to solve problems that are undefined  What we don’t know:  This year’s COLA or lack thereof  This year’s categorical funding cuts – or not  This year’s flexibility options – or not  Whether next year’s COLA will be funded or not  Whether there will be mid-year cuts this year  Whether the Governor will propose in January cuts to  Neither party to an agreement can count on new revenues Recommendations:  Talk to bargaining units about waiting until after January 2009 before settling the current year  If you must settle now, have a fallback plan if things get worse

Thank you