1. Small School Districts Association Summer Conference Shell Beach July 9, 2010 Budget Update Joel Montero, FCMAT

2. Overview The Economic Environment—How It’s Changing the Game The Current Status Strategies for Stabilizing the Budget Cash AB 1200 In Times of Crisis Education and California Spending Question

3. California Economics-A Moving Target Revenues Stabilizes but Assumptions Fail Consumer Confidence Improves in 2010…but Housing and Property Taxes Unemployment Recovery and the Lag Why Small Districts are Disproportionally Impacted

4. Signs of Recovery Median Home Prices have risen for 11 consecutive months ($250,000 to $310,000) Sales Tax Revenue has exceeded estimates for four consecutive months ( up 2.5% for 2009-10) General Fund Revenue ~$1 billion above estimates for January General Fund Revenues now $1.7 billion above estimates for 2009- 10.

5. What’s The Status? There is a economic crisis Our state has a structural deficit that is growing State revenues seem to be stabilizing The May revise still has approximately $2 billion reduction to education June revenues up again by $200 million

6. The Current Status—May Revision $19.1 billion deficit at June 30, 2010 Significant downside risk on Revenue Assumptions Readjust $6.9 billion from Feds (Politics!) CalWORKs Welfare to Work, Home Health Care, Childcare (Impact to Prop. 98) 2010-11 Negative COLA -0.39% Gas Tax Swap $1.1 billion Property Tax Offset Elimination of “Admin. Cuts” Language Cash Deferrals Alive and Well Testing and Data Management

7. California Rankings CA has 2 nd highest student to teacher ratio in the nation Spending per ADA was $8605 in 2008-09 placing CA at 44 th in the nation Teacher salaries in CA average $68,093 compared to a national average of $54,319 Californians spend $14 per $1000 in personal income on education, 45 th in the nation CA is 3 rd in the nation in spending on prisons, 3 rd in police and fire protection and 11 th on health/hospitals Source: National Education Association annual report: “Rankings and Estimates for 2010 ”

8. Comparison of Major General Fund Expenditure Areas (Dollars in Billions) 1998-99 1 2010-11 2 % Increase K-14 (Prop. 98) Expenditures 3 $35.2$49.941.8% Health & Human Services$15.3$21.037% Business, Transportation & Housing$0.4$.9125% Corrections$4.4$7.980% Resources$1.0$1.770% General Fund Revenues$57$89.357% 1Legislative Analyst’s Office. State spending Plan: 1998-99. October 1998, Page 4, Revenues & Expenditures; p. 26 Proposition 98 2Departemnt of Finance. Governor’s Budget Summary, January, 2010 (includes all proposed budget solutions) 3Includes Local Property Taxes and General Fund Spending 1998-99 Through 2010-11

9. June Cash Figures June receipts rose by $200 million above the estimate in the Governor’s January budget PIT equals $600 million above the May Revision estimate Corporate tax collections fell about $100 million in June State cash is deficit at June 30 th at $17.9 billion Sales and Use Tax receipts generally strong since November 2009 but have been flat for the past three months

10. AB 1200 Issues for Small School Districts Budget Adoption 2010-11 The May Revise and Budget Revisions Qualified and Negative Certifications at 2 st Interim The Watch List continues to grow Emergency Apportionments for 2010-11?

12. Why Districts Fail The Top 5 Overly aggressive estimates of enrollment, attendance, and ADA Loss of control of staffing costs—total compensation Bad decisions in collective bargaining Chronic, unplanned deficit spending Board/staff dysfunction

13. Cash Is The Name Of The Game!

14. Overview What’s the big deal about Cash? Finding Cash when you need it The consequences of running out of cash Recognizing trouble

15. Budget The budget is a stack of papers with numbers that are a virtual representation of how much you will earn (income/revenue), how much you plan to spend (expenditures), and the balance (negative or positive) when it’s all done. The budget may represent the policy and conceptual priorities of the organization. There is “really” no cash in the budget!

16. What is Cash? Cash is what you have liquid or available on demand Funds in the County Treasury Funds in banks Funds in revolving accounts Funds with fiscal agents Funds in funds?

17. What is Simple Cash Flow? The difference between the available cash balance at the beginning of an accounting period compared to the available cash balance at the end of the accounting period. Cash flow is the actual inflow and outflow of funds. Negative cash flow can be mitigated by borrowing

18. What is Cash Insolvency? Generally speaking Cash Insolvency occurs when the cash in payroll exceeds the cash available in the county treasury (or other possible sources of cash) and all options for borrowing have been exhausted. Cash insolvency is a limited function of deficit spending, erosion of fund balance, and sustained negative cash flow over time.

19. So, What’s the Big Deal? The old days….. Loss of revenue and cuts Cash deferrals Changes in apportionment schedules Erosion of fund balance and reserves in all funds Limited borrowing options

20. Finding Cash When You Need It LEAs can borrow to meet cash flow demands both internally and externally There are rules! Cash flow loans are short term—generally within the fiscal year Proceeds from borrowing can be used for any operational purpose Internal borrowing—EC 42603 Term—within the fiscal year, or…… Only 75% of the cash in the “donor” fund The receiving fund must earn enough to pay back the loan? But what about Fund 21?? External borrowing Tax and Revenue Anticipation Notes (TRANs) GC 53852 From your COE—EC 42621, EC 42622 From your County Treasurer—EC 42620 (last Monday in April)

21. The Consequences of Cash Insolvency If you run out of cash, it’s “game over” You can receive an authorization for an emergency appropriation, but….. The local governance options is lost The superintendent loses their job It’s expensive! AB 1200/2756

22. K-12 Inter Year Deferrals June to July $1.4 B JanFebMarAprMayJunJulAugSeptOctNovDec $2.6 B February to July $1 B $679 M May to August April to August

23. Blue – 2009-10 Red – 2010-11 New Intra Year K-12 Deferrals March ’11 to May ‘11 October ’10 to Jan. ‘11 July ’10 to Sept. ‘10 Up to $2.5 B July ’09 to December ‘09 Aug ’09 to Oct. ‘09 Nov. ’09 to Jan. ‘10 $1 B $1.5 B $1 B FebMarAprMayJunJulAugSeptOctNovDecJan

24. Collective Bargaining There will be no new money in 2010-11 and probably beyond (total RL deficit 18.355%--SSC Dartboard) Categorical flexibility will be volatile—consider as one-time money (for a duration of 5 years) Costs for health benefits will continue to rise You must bargain to shorten the school year Beware multi-year contracts and “COLA”

25. Negotiations Process

26. What Can Districts Do Now in Anticipation of an Uncertain Fiscal Environment Plan—Current plus at least two years and five years if possible Review your Assumptions regarding Interest Income Spend Restricted Dollars First and Conserve Cash Stay Current With Enrollment and Staffing Build Reserves/Fund Balance If Possible Be Careful About Debt including OPEB Bonds Manage Cash Forego Big/Expensive Budget Decision Where Possible Don’t Put All of Your Hopes In the Flexibility Basket Remember, This Is a Multi-Year Issue!

27. Stabilizing Budgets For Small Districts Budget for the core program Close tier 3 categoricals Re-evaluate categorical administrative ratios Instructional services must compete Review all funds Collective bargaining

28. What’s Likely? Additional reductions/corrections in 2010-11? Additional cash deferrals? Receipt of more stimulus (ARRA) dollars? Additional categorical program impacts? Recovery soon?

29. What’s Next? The July 1 st Budget Waiting for the State to adopt a budget—when? When can we reasonably expect a positive COLA What numbers do we use to build the 2010-11 budget Recovery?

30. Final Considerations Budget Risks Remain to the Downside  2009-10 revenue strength not sufficient to override questionable 2010-11 revenue assumptions  Loss of Temporary Tax Revenue in 2011 Assess and Establish Local Priorities  Budget Reductions  Categorical Program Flexibility Protect and Maximize Your “Local Control” Leadership in Challenging Times  Promoting an Ethical Environment  Acting with Authenticity and Transparency  Developing Trust

31. Summary The fiscal management game for public agencies has changed in CA. The state’s budget situation is tenuous but improving? Community Colleges are vulnerable in this budget. In the final analysis fiscal failure is still caused by the same old things. Community colleges are now and will continue to be the destination of choice for most post-secondary students. Cash flow and Cash insolvency are misunderstood by most administrators and governing boards. We are far away from an adopted budget for 2010-11. As always conservative planning is key. FCMAT is an group designed to assist education agencies