1. Presented at the South Bay Union School District Budget Meeting September 27, 2014 By Lynette Kerr, Director of Fiscal Services South Bay Union School District

2. 2014-2015 State Level Overall budget policy decisions continue to be reflective of slow but seemingly steady economic improvement State revenues surge for a variety of reasons, but: The Department of Finance (DOF) lowers its forecast for 2015-16 Local Control Funding Formula (LCFF) funding levels significantly The revenue vitality we have been concerned about is coming into play There are no statutory or constitutional guarantees for out-year LCFF funding levels The real story is on the expenditure and reserve side of the equation © 2013 School Services of California, Inc.

3. Expenditures – Where the Action Is While LCFF funding projections take a marked turn downward in 2015-16, expenditures shoot up California State Teachers’ Retirement System (CalSTRS) contributions go up for employers, employees, and the state beginning in 2014-15 But by far the biggest impact is on the employer contribution which will increase each year and represents a total increase of 4.33% BY 2016- 17, the third year of the multiyear projection Beginning in 2015-16, California Public employees’ Retirement System (CalPERS) rates also rocket upward © 2013 School Services of California, Inc.

4. The LCAP is King! 2014-15 is the first year for which the Local Control and Accountability Plan (LCAP) guides expenditures And the differences between district funding levels and flexibility are dramatic The State Board of Education (SBE) is struggling with demands for more flexibility on one hand and tighter restrictions on the other For high-funded districts, about two-thirds of the new money is targeted for improved or increased services to students The targeted funding can be used for across-the-board salary increases in only very limited circumstances If the targeted funds are to be used for compensation, they have to be tied to activities that “increase or improve” services to students. © 2013 School Services of California, Inc.

5. 2014-2015 State Level - Recap The 2014-15 State Budget continues increased funding for the Local Control Funding Formula (LCFF) which will continue the restoration of cuts that began in 2008-09 The new funding formula will be over one-third of the way to full implementation after the first two years The LCFF increases of individual LEAs can vary significantly The Governor’s proposed to eliminate the cross-year apportionment deferrals of $5.5 billion for school districts The Legislature reduced the deferral buy back by $900 million At their peak in 2011-12 K-12 deferrals totaled $9.4 billion Increased STRS/PERS contributions will have a material impact on LEA multi- year projection budgets The Local Control Accountability Plan became one of the most important considerations in the allocation of resources for districts © 2013 School Services of California, Inc.

6. Base Year Funding and LCFF Target A school district’s LCFF entitlement is based on three key elements: Its base year funding in 2012-13 The demographics of its student population, specifically the percentage of students who qualify for supplemental/concentration grants The state appropriation for LCFF In general, a school district is better off under the LCFF if: Its base year funding is below the statewide average The proportion of students qualifying for supplemental/concentration grants is above the statewide average South Bay USD is projected to be 70.86% unduplicated for 2014-15 © 2013 School Services of California, Inc.

7. LCFF Implementation Phase There are two distinct phases of the LCFF: (1) the eight- year implementation phase, and (2) the fully funded phase The eight-year implementation phase is not set in statute and can be longer or shorter than eight years, depending upon the annual LCFF appropriation Numerous fiscal inequities could arise during the implementation phase There is no statutory language for cost-of-living increases under LCFF Funding is subject to state allocation © 2013 School Services of California, Inc.

8. LCFF – What it Does The LCFF makes fundamental changes to how we allocate state Proposition 98 revenues to schools There are direct parallels with how we have funded schools in the past The LCFF base grants are like revenue limits The LCFF base grant adjustments – class-size reduction (CSR), CTE, supplemental grants, concentration grants – are like categorical programs At full implementation, the LCFF will fund every student at the same base rate Over time, most school district and charter school base grant funding will equalize to the same level The LCFF provides that each school district receive at least as much state aid in 2013-14 and future fiscal years as the district received in 2012-13 © 2013 School Services of California, Inc.

9. South Bay Union School District- Revenue Comparison 2007-08 Revenue Limit$2,104,482 State Categoricals-LCFF Base 621,370 Deferred Maintenance-LCFF Base 15,254 Total$2,741,106 2014-15 (Budget Adoption) Local Control Funding Formula (LCFF) $3,213,794 Based on updated FCMAT Calculator (5/8/14) Based on 2013-14 P-2 ADA & CALPADS Data

10. South Bay Union School District- District’s General Fund Deficit 2014-15 Budget Adoption: Revenue: $ 4,487,605 Expense: 4,638,776 Sub-total (151,171) Transfers Out (Charter-SE) (54,635) Fund Balance Change$ (205,806) Deficit spending occurs when expenditures and transfer out exceed revenues and other sources

11. South Bay Union School District- District’s General Fund Deficit A deficit is considered a “structural deficit” if the “on-going” expenditures and transfers out exceed on-going revenues and other sources. 2014-15 Adopted Budget - deficit adjusted for identified one-time expenditures General Fund: Fund Balance Change($205,806) One-time Expenditures Core Standard (RS 7405) $80,866 Prop 39 (RS 6230) 54,689 OPEB-Retiree Benefits 43,258 Structural (on-going) Deficit ($26,993) Charter Fund: Deficit spending Dependent charter Appropriate to be included in district deficit discussion

12. Budget Review/Assumptions Key Data Points Expenditures Step & Column Per 2014-15 C & S$58,777 Staffing levels Student/teacher ratios Revenues Enrollment Attendance rate Unduplicated percentage Class size

13. Budget Planning Other Considerations Balanced Budget LCFF “Reset” State Funding Every LEA should plan for a balanced budget Understanding on-going vs one-time revenues and expenditures Carryover is considered a “one-time” resource Draw-down of ending balance should be: Planned One-time resources should not be used for ongoing programs or ongoing employee compensation

14. Budget Planning Other Considerations (continued) Establishing a Local Reserve Level SB 858 requires districts that adopt an ending fund balance for 2015-16 in excess of the minimum reserve requirement identifying the amount in excess and prepare a statement that substantiates need for the excess Considerations Cash flow District’s deferral level in 2011-12 was $587,320 Demographic changes, i.e., declining enrollment Local Funding Risk Under LCFF, higher funded districts have a higher risk in economic downturns

15. Budget Planning Other Considerations (continued) Identifying Annual Set-asides Facilities – long-term planning Districts no longer receive restricted funding for deferred maintenance projects Textbook Adoptions District’s no longer receive a per ADA allocation restricted to meet state textbook adoption requirements Impact of increased STRS/PERS contributions Currently the subject of ongoing conversations, subject to change Initial projection for SBUSD 2015-16$47,266 2016-17 $97,479 Local Priorities LCAP Budget must remain aligned with LCAP