The Budget goes to the Governor - July 24, 2009

 

From: Skinner, Erik
To: SO2CBO@LISTSERV
Sent: Fri Jul 24 14:33:33 2009

Subject: The Budget goes to the Governor - July 24, 2009

Dear Colleagues:

Working through the night and well into the next afternoon, the State Legislature has just passed a package of 31 bills reflecting the budget agreement reached by the Big 5. The State Senate finished its work this morning around 7 a.m. and the State Assembly passed the final bills just moments ago. The budget package now goes to the Governor for his consideration, and presumably his signature.

The package of bills contains $24 billion in budget solutions including: $15.3 billion in cuts; $4 billion in revenue accelerations and fees; $2.7 billion in funding shifts and deferrals; and $2.1 billion in new borrowing. The package includes a reserve of $921 million. Taken together, the 31 bills bring the state budget back into alignment--at least for the moment.

From an overall perspective, the budget package avoids many of the most severe program reductions and eliminations that had been proposed in the Governor's May Revision. Notably, the elimination of all new Cal Grant awards and the elimination of the CalWORKs program were both rejected. Deep cuts to the Healthy Families program and State Parks were also significantly reduced. These changes were made possible largely by shrinking the size of the reserve (from $4.5 billion to $921 million) and the use of some smoke and mirrors, such as moving the June 30, 2010 payday for state workers to July 1, 2010 thus pushing the expense into the next fiscal year and "saving" $1.2 billion.

Proposition 98

The budget package does not suspend Proposition 98 as had been proposed by the Governor. When the Legislature failed to implement $1.6 billion in proposed 2008-09 Proposition 98 cuts before the end of the fiscal year, it appeared that the level of required Proposition 98 funding for 2009-10 would be increased by a like amount due to a higher 2008-09 base. This would have blown a $3.2 billion hole in the already strapped state budget ($1.6 billion due to the missed 2008-09 cuts and $1.6 billion due to the higher obligation in 2009-10). To address this problem, the Governor proposed suspending the Proposition 98 minimum guarantee in 2009-10 in order to avoid this spending pressure. As might be expected, the suspension proposal raised significant criticism from the education community. Rather than take on the formidable political opposition to suspension, creative budget staffers found an alternative way to solve this problem without suspending Proposition 98 by identifying and cutting $1.6 billion in 2008-09 K-12 categorical funding that had not yet cleared the Controller's Office.

The budget package settles another high stakes and highly technical Proposition 98 issue that dominated the final days of budget negotiations, namely the amount of Proposition 98 "maintenance factor" owed to schools and colleges. Under the provisions of Proposition 98, when the state funds schools and colleges below a certain baseline level, an obligation is incurred to increase Proposition 98 spending in future years to correct this underfunding. Due to a unique set of circumstances occurring in 2008-09, the language of Proposition 98 left some ambiguity as to whether a maintenance factor was incurred in that year. One of the bills passed as part of the adopted package, AB 3xxxx, settled that issue by certifying that a maintenance factor was incurred, resulting in an future year obligation of $11.2 billion ($9.5 billion of this was incurred in 2008-09 and $1.7 billion was incurred in 2007-08). This funding will be added to the Proposition 98 guarantee in future years in which State General Fund revenues have rebounded. Based on the repayment formula it is likely that none of this maintenance factor will be repaid until 2012-13.

The language in AB 3xxxx specifies that community colleges are to receive 8 percent of the maintenance factor funds--or roughly $900 million. It is unclear why the community colleges would receive less than their proportional 11 percent share; we will be gathering additional information regarding what led to this allocation. The language also specifies that the funds provided to the community colleges would be split equally between career technical education (CTE) and general purpose allocations. While both these items have historically been high priorities for the community college system, other priorities such as restoring deep cuts to student support categorical programs seem to have been ignored. The language was developed without input from community college representatives and we will need to do additional analysis and information gathering before we fully understand its intent and implications. As we better understand the situation, we will make decisions about whether it makes sense to seek changes to the provisions. Given that funding will not be distributed under the language until 2012-13 at the earliest, there is time for us to tackle this issue.

California Community Colleges

As anticipated, the community college budget largely reflects the Conference Committee package adopted in June. Departures from the Conference Committee version include:

• $85 million in proposed 2008-09 cuts were not adopted.
• The deferral of an additional $115 million from 2008-09 to 2009-10 was not adopted.
• An augmentation of $10 million to SB 70 CTE programs relative to the Conference version. This augmentation was accomplished by redirecting $10 million previously committed to a general purpose one-time block grant under SB 1133. (Note, the Conference version cut $20 million from SB 70 CTE funds, leaving $38 million. The adopted package brings the total to $48 million.)
• The deferral of general apportionments from 2009-10 to 2010-11 was increased by $48 million over the Conference version, bringing the total inter-year deferral to $703 million. (Note: the deferral from 2008-09 to 2009-10 was $540 million. The Conference version increased the deferral by $115 million. The adopted package adds another $48 million.)

Other than the features noted above, the adopted budget package is consistent with the Conference version. Below are the major elements of the adopted package for the community colleges:

• An increase in student fees from $20 to $26 per credit unit effective fall 2009 (this increase generates $80 million in revenues that is used to mitigate cuts to the community colleges)
• An estimated allocation of $130 million in federal funds provided through the State Stabilization provisions of ARRA. The actual amount of funding received by the community colleges will be determined in the coming weeks based through a formula-driven calculation.
• Elimination of all growth funds
• No COLA
• $333 million in cuts to categorical programs (a $140 million one-time backfill is provided using federal ARRA funds and fee revenues, bringing the net reduction to $193 million). Cuts to specific categorical programs vary from no cut (Foster Care and Student Financial Aid Administration) to total elimination (Physical Plant/Instructional Equipment Block Grant) with most programs facing cuts of between 16 and 32 percent, after accounting for the one-time backfill.
• $120 million reduction to general purpose funds (in lieu of the proposal to reduce funding rates for physical education courses).
• A budgeted 2009-10 local property tax shortfall of $53 million (the total budgeted property tax shortfall is $116 million, but $63 million in relief is provided).
• A budgeted 2009-10 student fee shortfall of $21 million.
• Language authorizing the Chancellor to reduce base workload measures in proportion to cuts in general apportionment funding. This provision will bring the enrollment expectations used in the apportionment process in line with the level of funding provided by the state. Legislative intent language states that districts should, to the greatest extent possible, make reductions in course sections in areas other than workforce training, transfer, and basic skills.
• Language authorizing community college districts to transfer funds out of certain categorical programs and into any other categorical program included in the state budget. A public board meeting is required before making such a transfer.

Given that the budget package adopted by the Legislature was the product of Big 5 negotiations, we anticipate that Governor Schwarzenegger will endorse it. It is likely that the Governor will expedite his signing of this budget in order to bring a close to this budget crisis, including the issuance of additional costly IOUs. However, as is typically the case, the Governor will likely veto some specific budget line items as he signs the budget.

I would note that the analysis provided above is based largely on an a review of draft bills that have leaked out of the Capitol (many of the bills are not officially in print yet). We will continue to analyze the fine print of the budget package and check it against the official bills once they have been released.

After the Governor takes action on the budget package, we will follow up with a final budget update. That update will includes greater detail on the cuts to specific categorical programs, the language related to workload reductions and categorical funding flexibility, and some discussion on implementing the changes contained in this newly adopted budget package.

Regards,

Erik Skinner
Vice Chancellor for Fiscal Policy
California Community Colleges,
State Chancellor's Office
916-323-7007