The good, the bad, the ugly: A preliminary glance at the budget deal
Analysis from CSBA’s Governmental Relations Department
Published: October 7, 2010
It appears the budget agreement recently reported between Gov. Arnold Schwarzenegger and legislative leaders will stick, with floor votes expected today. Details began emerging earlier this week and at a Budget Conference Committee hearing yesterday.
There are some good things in the budget package. For example, the governor has dropped the plans laid out in his May Revision to cut child care and cut $1.5 billion from revenue limit schools.
Unfortunately, the restoration of those proposed cuts would be done through a new cross-year deferral rather than with ongoing Proposition 98 funding. Additionally, the budget agreement would suspend Proposition 98 for 2010-11, providing less funding than schools would be entitled to under the minimum guarantee. Suspension creates a $4.3 billion Maintenance Factor that would be made up for at some unspecified time in the future. In past years the Legislature and governor have been fine with reducing funding for schools when a drop in revenues led to a drop in the minimum guarantee; however, now that the guarantee would actually increase this year, they want to suspend it so they don’t have provide schools what they are owed under the constitution.
The budget framework assumes a general fund deficit of $17.9 billion for 2010-11 and would close it as follows:
- $7.5 billion in expenditure reductions
- $5.3 billion in assumed additional federal funds
- $2.5 billion in additional revenues, including the delay of some corporate tax breaks approved in 2008 and set to take effect within this fiscal year
- $2.8 billion in fund shifts and other revenues
- $500 million in alternative funding
Education provisions
K-14 education would receive $49.6 billion in ongoing Proposition 98 funding and $52.5 billion in programmatic spending.
Within that programmatic spending would be:
- a new deferral of $1.9 billion ($1.7 billion for K-12 and $200 million for community colleges), mostly from payments expected next May that would instead be received in July
- $300 million in settle-up funds owed to schools because Proposition 98 guaranteed more for 2009-10 than was actually provided in the budget. Approximately a third of that $300 million settle-up balance would fund mandates in the current year after the suspension of several mandates
- $200 million of the programmatic funding would go out on a per-pupil basis that would reduce the state’s “credit card” obligations for underfunded prior-year mandate payments. Another $240 million in additional one-time funds would be provided.
The budget agreement also proposes to:
- suspend Proposition 98 and establish an additional $4.5 billion Maintenance Factor that would be owed to schools in the future. Absent the suspension, the Proposition 98 funding guarantee would be $54 billion
- maintain existing flexibility for Tier III programs and the K-3 class-size-reduction penalty structure, and make technical changes in how the funding for class-size reduction is allocated at the state level
- restore almost all of the funding for child care, although it would also make changes in certain reimbursement rates
BIP, science mandate reimbursements jeopardized
Plans for trailer bills—the legislation enacted to implement provisions of the budget—include one troubling aspect related to school mandates: Some provisions would attempt to do away with mandate reimbursements related to Behavioral Intervention Plans and to the additional science course that’s required for high school graduation. Both mandates are based on changes in law more than 15 years ago that have been tied up in legal challenges, despite having been approved by the Commission on State Mandates.
The trailer bill language is legally questionable, stating that the money districts receive for revenue limits would be deemed as payment for the science requirement, and money for special education would be deemed as payment for the BIPs. The language related to BIPs goes a step further, attempting to legislatively interpret the state BIP requirements as consistent with federal law, which would allow the state to evade the mandate reimbursement requirement.
Budget and pension reforms
The proposed deal also includes budget and pension reforms sought by Gov. Schwarzenegger—longtime sticking points in the budget negotiations. The proposal for budget reform would increase the state’s existing rainy day fund reserve requirement from 5 percent of general fund revenue to 10 percent, restrict when money from the rainy day fund could be used, and capture unanticipated revenue to help build up the fund. The pension proposals would roll back the retirement benefits provided to employees by Senate Bill 400, enacted in 1999. The revised benefits would be for new employees whose bargaining units have not already reached a memorandum of understanding with the state. Classified school employees are expected to be excluded from the rollback of the pension benefits.
The Conference Committee met yesterday for less than an hour and heard an overview of the spending plan that is expected to go before the entire Legislature today, when lawmakers will vote on the 20 or so bills that will implement all of the provisions.
Note of caution
While there are some good things to come out of this budget, such as the restoration of the child care and revenue limit cuts, there is cause for concern about how long it will hold up. Once again, the budget doesn’t fix the structural imbalance in the budget and doesn’t include permanent new revenues. Instead it relies heavily on increased revenue projects and anticipated federal funds—both of which are highly suspect. It can be described as a house of cards built on a fault line.
CSBA will provide further analysis once we have seen the actual language implementing the budget and the suspension.