1. Budget advisory: Summary of final 2007-08 K-12 budget ACSA Governmental Affairs Brett McFadden, Mgt. Services Executive August 30, 2007

2. The 2007-08 State Budget: Overview After several years of steady of growth, the states economic engine begins to slow in the second half of 2007 (and projected for 2008) The decline in revenues associated with difficulties in the states housing market significantly impacts budget and policy development in FY 2007-08 The final budget package is therefore a much more austere spending plan when compared against the governors January proposal and two previous final budgets

3. Overview: Early predictions were wrong Nevertheless, early predictions were that the budget would be on time based on: 1.Lower revenues would stymie development of new policy initiatives 2.A pending initiative to reform term limits would be an incentive to look good and get it done on time 3.Some of last years so-called bi-partisan sentiments would trickle over to this year But we didnt factor that 14 Senate Republicans would hold up the process

4. Overview: Impasse breaks The impasse finally broke and the budget was signed on August 24 55 days into the 07-08 FY Third latest budget in state history But not much different than what the Assembly passed in late July Didnt address the states structural deficit and other fiscal challenges

5. State General Fund condition - 2007-08 GF revenues -$101.2 billion - Estimated GF expenditures - $102.3 billion - Total available reserve - $4.1 billion Governor keeps his promise and line-item vetoes an additional $703 million upon signing But structural deficits remain – LAO projects approx. $5 billion ongoing shortfalls for 2008-09 and 2009-10

6. 2007-08 projected revenues (budgeted) Source: Dept. of Finance

7. 2007-08 budgeted expenditures Source: Dept of Finance

8. Proposition 98 overview The final 2007-08 K-12 budget is a stark contrast to 2006-07 Year-to-year Proposition 98 growth was minimal – barely enough to cover COLA and growth Limited program enhancements and/or funding expansions No additional one-time revenues like last year

9. Proposition 98 Final budget essentially funds the minimum guarantee: 1.COLA: Fully funds COLA at 4.53% on school district and COE revenue limits and most all Prop. 98 categorical programs 2.Enrollment: Fully funds enrollment growth (for those that are experiencing it) $2.1 billion increase in Prop. 98 General Fund funding over 2006-07 – 1.4% increase LEAs wont immediately feel it – but the final budget did contain reductions for K-12 (see next slides)

10. Proposition 98: Policy changes Home-to-school transportation (HTST): Governors January proposal to fund HTST with $629 million from the Public Transit Account and rebench Prop. 98 downward by a like amount was rejected Instead HTST is funded in part with $99 million of PTA funds at $629 million (including full COLA) Prop. 98 is not rebenched downward by $99 million CalWorks Stage II Child Care: Stage II is again funded by Prop. 98 creating a $269 million reduction of funds available for other K-12 programs Stage II was previously funded with non-98 money Education community views this as an overall reduction

11. Proposition 98: Funding adjustments Governors May Revision proposed an increase in 2006-07 Prop. 98 funding based on optimistic revenue projections Legislature rejected these projections fearing possible shortfalls in 2007-08 and into budget year +1 Instead the final budget redirects $427 million in prior year unspent Prop. 98 funds for savings to the state General Fund scored for 2007-08

12. Proposition 98: One-time dollars for ongoing purposes Due to budget actions and lower overall Proposition 98 growth, the 2007-08 guarantee didnt increase sufficiently to cover COLA and continued funding for most ongoing programs To address this, the 2007-08 K-12 budget uses approx. $500 million in one-time funds to meet ongoing Prop. 98 purposes: 1.Proposition 98 Reversion Account - $217m 2.Williams School Facilities Emergency Repair Account - $250m 3.Public Transportation Account - $99 million As a result, the development of the 2008-09 K-12 budget will start in the hole when it comes to filling ongoing program funding

13. Proposition 98: Programs funded with one-time dollars HTST - $250m one-time Williams and $99m PTA Deferred maintenance - $115m one-time Prop. 98 reversion High Priority Schools Grant - $102m one-time Prop. 98 reversion The following ongoing programs are supported in part with one time dollars:

14. Proposition 98: Big picture comparison Overall Proposition 98 2007-08 GF expenditures increase by about 1.4% compared to 2006-07 But when you subtract $269m for the child care shift, the actual increase is 0.8% The overall increase for the entire state budget is 1.3% When you split Prop. 98 – 0.5% overall increase for K-12 and 3.5% for Community Colleges These figures should be weighed against the political rhetoric Source: Michael Hulsizer, Kern County Supt. of Schools

15. Misc. unrestricted Mandates: Budget restarts the deferral of mandate reimbursements Payment for 2007-08 claims deferred indefinitely In addition to the deferral of most claims for 2006-07 Revenue limit equalization: Contains no funding for equalization Approx. $130 million in additional ongoing $ is necessary to fully equalize revenue limit funding But trailer bill language (AB 193) has intent language to fully fund equalization and mandates (after COLA and growth) in 2008-09 Language will be tough to enforce – its only intent

16. Categorical programs The budget contains only two categorical funding increases Most others are funded at prior-year levels plus full COLA – except special education (see next slide) Program expansions include: Child nutrition – $24.9m increase to provide a 4.7 cent increase for school meals to 21.3 cents per student – Statutory language coincides with this increase, but further amendments are needed to address drafting errors Community Day Schools – $4.1 million additional to address for prior-year shortfalls

17. Special education: Continued COLA problem Current statute of having the state pay for COLA on only the state and local share, and not the federal, continues Impact is that special education gets less than a full 4.53% COLA COLA on the state share is estimated at $20.17 per ADA $15m of the $19m increase in federal funding is allocated to SELPAs per ADA – estimated at $2.50 per ADA This equates to an approx. 3.58% COLA for average SELPAs Source: School Services of California, Inc.

18. Policy issues Budgets almost always contain policy issues For 2007-08 they include: 2 nd Grade STAR testing – Budget provides $2.1m to continue funding testing for 2 nd graders per current procedures. Also includes trailer bill language authorizing 2 nd grade testing through July 1, 2011 (authorization would have ended July 1, 2007)

19. Policy issues (cont.): School districts of choice – This was an important issue to Republican members. Earlier in the year, AB 270 (Huff) was held which would have reauthorized existing school district of choice statutes. The primary education trailer bill (AB 80) reauthorized the program with the following requirements: 1.School districts of choice must modify record keeping requirement for local districts 2.Participation is limited to those that participated in the past 3.The law is extended until July 1, 2009 4.CDE is required to submit a report by Nov. 1, 2008 on the matter

20. Policy issues (cont.): CalPADs The California Longitudinal Pupil Achievement Data System (CalPADs) continues to a high priority of the SPI and legislators In the end, however, no funding was appropriated for local assistance Budget trailer bill language was adopted instructing the CDE to report on FERPA compliance and other implementation issues

21. Policy issues (cont.): Battle over charter schools The battle over establishment and governance of statewide benefit charters continued in the budget deliberations Assembly Democratic leadership inserted trailer bill language restricting state authorization of statewide benefit charters to three years (AB 92) – but this measure was held per threat of veto Nevertheless, Democrats managed to strip all $18m from charter school facilities grants – setting up a fight for next year

22. Governors vetoes The governor has the authority to line-item individual appropriations from the budget prior to his signature – this is typically referred to as the blue pencil Governors K-12 vetoes totaled $17.1 million That funding reverts back to Proposition 98 pending new legislation to allocate it for a prescribed purpose or into the Prop. 98 reversion account Controversial vetoes included …

23. Governors vetoes: District assistance and intervention teams The governor vetoed $7.1m in federal Title I set-aside funds for District Assistance and Intervention Teams (DAITs) facing sanction under NCLB The administration argued that this funding was premature since an evaluation of DAITs is underway Administration stated that it recognized the problem of a growing number of LEAs and schools immediately facing corrective action But this creates significant challenges…

24. Veto of DAIT funding: Policy challenges The governors veto of DAIT funding creates considerable policy challenges: 1.Approx. 100 districts will go before the State Board of Education in November 07 for corrective action under NCLB 2.Corrective action is the final stage in the process and can be draconian – removal of district/site leadership, reconstituting school sites and/or districts, instituting new curriculum, appointing a trustee, etc. 3.In addition, CDE is not authorized to release the existing $28 million for direct support for LEAs in corrective action - dollars are earmarked, but not authorized for release to LEAs 4.To make matters worse, the administration also vetoed $350,000 for CDE staff augmentations for LEA local assistance with this issue 5.So at this time, the issue is on hold with no clear sense of what the next steps will be

25. Governors vetoes: Preschool and childcare wrap around The governor vetoed $5m from preschool programs and eliminated language that would have expanded the use of these funds for wrap- around child care for children participating in the state preschool programs This created concern in the field since many programs believed they would get this funding and made plans accordingly CDE has announced that they intend to utilize existing childcare carryover funds as a stop gap to backfill the $5m veto for 07-08 They intend seek statutory change to include wrap- around authorization for 08-09 and the future – pending legislation* * Source: Chelsea Kelley, SDUSD Lobbyist

26. Unresolved issues A number of fiscal and policy issues remain: Hourly supplemental programs continue to face significant deficits Special educations reduced COLA Mandate reimbursement funding deferred again No funding for CalPADs local assistance and implementation Veto of DAIT funding and lockup of federal set-aside dollars for corrective action assistance Shift of Child Care Stage II responsibilities into Prop. 98 Enhanced policy assistance for declining enrollment Appropriate policy for statewide benefit charter schools

27. In summary… In the end, the 2007-08 K-12 budget isnt hard to explain: 1.Prior-year Prop. 98 base, plus… 2.4.53% COLA on revenue limits and Prop. 98 categoricals 3.Enrollment growth (for LEAs experiencing it) 4.No additional revenue limit dollars (i.e. equalization) 5.No additional one-time dollars 6.No new categorical programs 7.Only two categorical expansions

28. Future outlook: Statewide enrollment dropping The Dept. of Finance estimates that ADA will continue to decrease for the remainder of the decade ADA for 2007-08 is projected to decline by 0.48% - coinciding with previous declines in recent years Approx. half of all LEAs are experiencing multi-year declining enrollment Source: Dept. of Finance

29. Future outlook: Health care reform The chance for major health care reform legislation this year is dimming But much attention (and noise) will be paid to this issue in the final weeks of the session It is possible that health care for uninsured children could be expanded this year LEAs should keep an eye on it, but likely no immediate budgetary impacts for 07-08

30. Future outlook: A weather advisory ACSAs earlier projections called for a slow down in the states economy for 2007 and much of 2008 – but no recession Past indicators showed that other sectors (technology, entertainment, finance, etc.) were strong and holding up the overall economy The wild cards, however, were the housing and energy markets Revised projections – There is a higher likelihood of recessionary characteristics developing in the second half of 2007 and lasting throughout 2008 State revenues are likely to continue their decline throughout 2007-08 and into 2008-09 thereby impacting current and budget year Proposition 98 funding

31. Weather advisory: Signs and indications National Assoc. of Realtors has declared that this is the worst housing market in 16 years Sub prime market collapse is impacting credit markets – tighter restrictions on credit creating barriers to other economic activity Foreclosure projections have increase significantly Home Depot and Wal-Mart posting significant declines – citing decline in home sales as the primary culprit Macys reporting revenue declines in 41 states It has become the talk in the financial world and general media – could impact consumer confidence levels

32. Weather advisory: Impact on states finances State revenues have declined noticeably since the governors January budget proposal Revenues for May, June, and July 07 are $1.1 billion below projections* State revenue and economic indicators point to increased fiscal challenges throughout the current year and into 2008-09 Predictions are that the 2008-09 state budget will be more challenging than 2007-08 * Source: Dept of Finance

33. LEA budgeting: Recommendations Predicting state revenues and their overall impact on Prop. 98 funding is a difficult endeavor Revenues are subject to wild up and down fluctuations At this point, we recommend that LEAs: 1.Be prudent with reserves and financial assumptions 2.Carefully analyze short and long-term financial impacts of 2006-07 and 07-08 bargaining contracts 3.Move out of qualified and/or negative certifications as quick as possible 4.Closely analyze enrollment trends and figures 5.Keep a close eye on state revenues and economic projections We will have a better picture in November when the Legislative Analysts Office releases their annual forecast

34. Where to reach us Thank you and good luck For more information on K-12 finance or other policy matters, please contact: ACSA Governmental Relations 916-444-3216 www.acsa.org Brett W. McFadden Mgt. Services Executive / Legislative Advocate bmcfadden@acsa.org