SUMMARY OF THE MAY REVISE

The Department of Finance and the Administration just provided a May Revise briefing on the budget. Only a few clarifications were added – which I’ve incorporated into the information below. Remember these are the Administration’s proposals. During the briefing a staff from legislative leadership said a few times, “good luck with that”, which gives us a glimmer of hope the Legislature may be want to soften the blow just a bit. Having said that I want to clarify we’re not telling you situation isn’t bad – it is, but it will be important to get the whole picture before making any major decisions. Below is a summary of the May Revise.

Cuts and Deferrals

The Governor’s proposal relies primarily on cuts and borrowing to close a $15.4 billion dollar budget shortfall, growing to $21.3 billion if the Propositions fail next week. For Education this translates into reducing school funding another $1 billion in the current year and $2 billion in 2009-10, and even more if Propositions 1A-E are not approved by voters next week. Note that these are K-14 numbers.

The Governor emphasizes however, that these reductions would be largely offset by the $3.3 billion in federal State Fiscal Stabilization Fund and the $2.8 billion in other federal funding from the Stimulus Package

If the Propositions Pass

Assuming the passage of the propositions next week, the May Revision proposes the following cuts:

Current Year – 2008-09

· A current year one-time reduction of $694.3 million to K-12 revenue limits ($118 per ADA)

· Elimination of the High Priority Schools Program for a savings of $114 million

· A current year increase of $8.3 million to adjust the base in Charter School Economic Impact Aid funding

· A deferral of $115 million in 2008-09 community college apportionments to 2009-10

· A reduction of $85 million in current year community college categorical funding

Budget Year – 2009-10

· A reduction of $950 million in 2009-10 K-12 revenue limits ($161 per ADA)

· A deferral of $640.3 million in K-12 apportionments from 2009-10 to 2010-11

· A reduction of $221.6 million in community college categorical programs with flexibility provisions similar to those adopted in K-12

· A $58.4 million reduction in 2009-10 community college enrollment growth

· A $120 million reduction of 2009-10 community college apportionments by reducing the funding rate for certain PE and recreation programs

· Community colleges would be expected to absorb a reduction in property tax revenue of $42.1 million in 2008-09 and $116.7 million in 2009-10

· An increase of $940.3 million to reflect adjustments in property taxes and enrollments.

More deferrals

In addition to the proposed cuts, the May Revision states that because of the cash flow crisis, it might be necessary to delay some K-12 payments, such as moving the July and August payments to October 2009.

If the propositions do not pass

If Propositions 1A-E do not pass next week, there would be additional reductions to school funding - $617 million in the current year and $2.6 billion in 2009-10. This latter figure is so high because if Prop C (the lottery initiative) fails, the Prop 98 guarantee will not include the $965.6 million in lottery revenue that was to be shifted. Instead, if Prop C fails schools will continue to receive lottery revenue rather than having the same amount added to the minimum guarantee. The specifics of the additional cuts would be:

· Current year Additional one-time reduction of K-12 revenue limits of $617.3 million ($105 per ADA)

· Additional 2009-10 cuts to K-12 revenue limits of $475 million ($81 per ADA)

· Additional deferral of $1.038 in revenue limit payments from 2009-10 to 2010-11

· Additional reduction to community college categorical programs of $112.4 million

· Additional reduction of $68.7 million to enrollment growth for community college apportionments and categorical programs

Flexibility Proposals

The Governor proposes to allow districts the option of reducing the school year by one week for up to three years. If the Propositions fail, the Governor proposes shortening the school year another two days beyond the five days, for a period not to exceed three years.

– it is hard to realize the feasibility of this with local contracts negotiated and in place. Another of his suggestions is the tried-and-failed contracting out proposal. In the briefing the Administration said they’re also seriously considering other flexibility measures, but they wouldn’t discuss them yet.

Proposed Cuts To Education Are Within Scope of Proposition 98 and ARRA

With the economy still flailing, the Proposition 98 guarantee—which is influenced by economic growth—provides little protection for education funding.  Despite proposed cuts of up to $5.3 billion in the current and budget years, both proposals would still fund education at or above the Proposition 98 guarantee.    

Many education advocates had hoped that the federal ARRA might also provide a measure of protection for state education funding, as the stimulus bill requires that states fund education at or above the dollar amount provided in 2005-06.  Unfortunately, it is likely that the cuts included in both of the Governor’s proposals fall within the maintenance of effort requirement included in the ARRA.

Revenues

It is clear there will be no tax increases in these budget negotiations. However, we anticipate many fee increases. One of the Governor’s proposals is to increase quarterly withholdings due in June from 30 percent of liability to 40 percent. His May Revise proposal would generate about $988 million in revenue accelerations and fees, while his “if the Propositions don’t pass” contingency would generate $2.8 billion to close the larger budget cap.

In addition to cuts to Education, the Governor proposes major streamlining and consolidation of state boards and agencies and significant reductions to state health and social welfare programs to make up $5.6 billion is state spending cuts, of $750 million of these will require federal waivers. If the Propositions don’t pass, cuts will grow to just under $9 billion.

Additional Comments

In a press conference held today, Finance Director Michael Genest stressed the urgency needed to enact the governor’s proposals before June 30. He told reporters if the Legislature fails to enact the education cuts by then, the Proposition 98 guarantee will be $1 billion higher in 2009-10 or it will have to be suspended.

Because the information is so new, it would be a good idea to let the dust settle for awhile to see how the Legislature responds and to see how the Propositions fare. We’ve seen nothing in detail yet and there are many hands that must touch this before there is any certainty. The situation is dire, but it is a little early to push the panic button just yet.

More to come…