1. Budget 400: Advanced-Level Finance for the Governance Team Presented by Ron Bennett President and CEO School Services of California, Inc. Joel Montero Chief Executive Officer The Fiscal Crisis and Management Assistance Team Stan Mantooth County Superintendent of Schools Ventura County Office of Education

2. 1 The Economy  Powerful economies do great things; and they generate a lot of tax revenue  In past years, revenue growth was estimated at 4% to 6% annually  In 2000, it was more than 20%!  And now, it is dropping like a rock – flat revenues would be a plus  Past revenue growth allowed:  The state to avoid cuts to any major expenditure areas  Full funding of statutory and formula-driven increases  Increases in important areas, including education  And an on-time budget  Yes, high revenue growth is a good thing!  But, it is now also a thing of the past – way past

3. 2 The Economy  In 2007-08, the choice between raising revenues or making a reduction in spending did not have to be made  The outlook for 2008-09 – and beyond – is a bit more clouded  Revenue projections are much weaker – high year-to-year growth is simply not sustainable over the longer term  The Budget assumed 2008-09 state revenues increase only slightly  Reflects that much of the jump in revenues in 2005-06 and 2006-07 is assumed to be one time  But revenues are coming in well below forecasts

4. 3 Per-ADA Revenue Increases Have Been Volatile  It is not just how much funding, but also “when” and “how” predictable it is  Over the past eight years, revenue limits per ADA have risen by an average of about 4.2% per year  But with a high of more than 10%  And a low of -1.2%  A deficit factor was applied every year from 1991 to 2001  It is difficult to build programs and academic success on an unstable foundation  Education funding remains volatile in California

5. 4 Per-ADA Revenue Volatility

6. 5 Structural Budget Deficit Remains  But a structural deficit remains  For 2008-09, the deficit continues to hover around the $5.0 billion to $8.0 billion level  Use of the reserve, one-time money, and “creative proposals” lessens the reported amount of the deficit  And the economy is slowing dramatically  Tremendous revenue growth in 2006-07 has dwindled to nothing for 2009-10; and the slowdown now threatens 2008-09  Revenue increases are not forecast for the foreseeable future  Meaning that it will be harder to close the spending gap  A structural deficit means continued state operating deficits – which is a big concern

7. 6 K-12 Revenue Limits – An Overview  Look at the “Revenue Limit Roller Coaster” for 2008-09  January’s Governor’s Budget proposed a 10% cut to education  Flexibility in spending was promised  By the May Revision the cut was reduced  Revenue limits were maintained from 2007-08  Categoricals were to be cut by 6.5%

8. 7 K-12 Revenue Limits – An Overview  By the September Budget Enactment, education was flat funded  A tiny cost-of-living adjustment (COLA), 0.68% was provided  Flexibility was not included in the Budget  Just one month later the Governor announced the Special Session to deal with declining revenues  What should we plan for given all these changes?

9. 8 Proposition 98 Funding Per Pupil

10. 9 Structural Budget Shortfall Remains  In the end, the 2008-09 Budget Act did not solve the structural budget problem at the state level  Major permanent increases in revenues are needed  And some temporary ones OR  Significant long-term reductions in expenditures are needed OR  Both!

11. 10 Structural Budget Shortfall Remains  The Legislative Analyst predicts major budget problems ahead  The state cannot “grow its way” out of this problem  Even with minor revenue growth, the budget gap swells  The message for us is – the status quo may be as good as it gets for a while

12. 11 Negotiation Strategy – Educate with Real Numbers Income is light:  $38 COLA (unified)  Less your declining enrollment Costs are heavy:  Step and column  Health benefits  Unavoidable “thing” costs increases

13. 12 Negotiations – 2008-09  Example of what could happen in 2008-09 Revenue Recap Across-the-Board COLA0.68% Minus Cost Increases (as percent of total district budget) Step and Column(1.5%) Health and Welfare Benefit Costs (No Cap)(2.0%) Declining Enrollment Adjustment?% Total Available for Salary, Absent Changes-2.82%

14. 13 Our Recommendation  The world is too uncertain right now – wait until after January to negotiate for 2008-09 and beyond  Plan to maintain health and welfare benefits and to pay step and column costs – most districts will have to make budget cuts to do so  View the problem as a joint challenge between the District and the state – not between management and labor  Plan for at least two more years of uncertainty and volatility  Work together to identify and solve problems during these lean times

15. Special Session to Reduce State Budget Deficit

16. 15 Governor Calls Special Session  Purpose of the November Special Session – to reduce the Budget deficit  The Governor proposes to do this:  By cutting expenditures  $2 billion to $4 billion for education for this year, 2008-09  0.68% COLA would be “unfunded”  Additional cut to revenue limit of about $300 per ADA  And adding revenues  Largest source is proposed 1.5% sales tax increase  In the end, no action was taken

17. 16 Proposition 98 Projections  Proposition 98 simply isn’t growing fast enough to provide a COLA  Prop 111 allows the state to short education during bad times  Most of the 5.66% COLA for 2008-09 has already been deficited  The Governor’s proposal would take back the remaining 0.68%  We recommend districts also plan for a zero COLA for 2009-10  By 2009-10, the absence of two COLAs would cause the deficit to be more than 10% – we would get only 90¢ on the dollar  We forecast that if that happens, about 500 districts go “Qualified” or “Negative” financially  We will fight for the COLAs but need a plan to live without them

18. 17 Governor Calls For a New Special Session  On December 1, 2008, the day the new Legislature was sworn in, the Governor called for another Special Session  Used provisions of Proposition 58  Reported deficit of $28 billion  Proposes a mixture of new revenues and budget cuts  The Legislature has 45 days to act  January 9, 2008, the Governor is scheduled to release his 2009-10 Budget proposal

19. 18 Possible Results of the New Special Session  The Special Session could have a real impact on this year and on future years – even if nothing happens again!  Big cuts this year would be painful  Agreement in revenue increases will be very difficult even with 39 new legislators  But failure to act this year will set up much larger cuts for next year  Do we really think that only a few short weeks after the latest Budget in California’s history the Legislature will do all that it failed to do last summer?  We think most of the bloodbath is likely to occur in the 2009-10 Budget to be released in less than six weeks

20. 19 Possible Additional Factors  The economy isn’t the only barrier to quality education  The Feds, led by a new President, will be revisiting No Child Left Behind – even if only to change the name  Closing the achievement gap continues to pose expensive challenges  The “Adequacy Studies” of just two years ago are but a distant memory – but the potential for a lawsuit is very real  In the end, all learning for students depends on time on task with a highly qualified teacher  We need to protect our employees, but it will be very difficult  Now is the time to set joint goals and pull together – not apart

21. Thank you