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California's Financial Free Fall

Special to New California State News

Many thanks to the author of this story who is an educator in California. The writer is not named in the article but is in a position in the educational system where these comments are very significant. We share this information to give you a better understanding of the whole overall financial free fall occurring in California.

2020 May Revise

Governor Gavin Newsom opened his May Revision press conference with the observation that “the world has changed dramatically since I proposed my budget in January.” After a wistful review of the January budget surplus and some of the many planned investments, the Governor got down to business – a summary of the devastating impacts of the COVID-19 pandemic on the California economy and revenues. That impact, obviously, includes steep reductions in the Proposition 98 Guarantee and therefore deep cuts to K-12 public schools. Compared to the January budget, the Prop 98 guarantee will drop about $19 billion.

To slightly soften the blow, in 2020-21 the state will direct a significant amount of already authorized discretionary federal funds to public schools. More importantly, Governor Newsom committed to using future federal funds (such as those proposed in the $3 trillion HEROES Act) to “trigger off” many of the proposed cuts to schools. Recognizing the importance of the politics involved in this election year, Governor Newsom attempted to make it clear that the rather vague notion of “state and local government relief” is actually about avoiding draconian cuts to critical programs and services, and that only the federal government has the ability to provide the needed resources.

Fiscal Context

Governor Newsom noted that the financial impact of the COVID-19 crisis is truly unprecedented – the United State GDP fell by 26.5% just in the Spring of 2020. New unemployment claims in California have increased by 4.4 million from mid-March to May 9, as compared to total unemployment claims of about 2.6 million at the heart of the Great Recession in 2010. The California unemployment rate is expected to peak at a staggering 24.5% in this second quarter of 2020.

As we detailed in our recent updates of economic projections by the Department of Finance (DOF) and Legislative Analyst’s Office (LAO), all major revenue sources to the state general fund are down by at least 25%, and DOF estimates the budget shortfall is more than $54 billion. Nearly $42 billion of that amount is due to revenue losses over 2019-20 and 2020-21, and the remainder is attributed to increased spending related to COVID-19.

Governor Newsom announced that all of the $16 billion Rainy Day Fund will be allocated over three fiscal years to reduce cuts to state programs.

The May Revision estimates that 2019-20 revenues will be about $137 billion (down $9.7 billion from January) and 2020-21 revenues will be about $119.5 billion (down $32 billion from January).

Political Context

In January, Governor Newsom’s budget press conference seemed aimed at a national audience, and he argued that economic growth in California was the “engine” powering the growth of the national economy. Today, Governor Newsom often appeared to be pointing his comments to Congress, repeatedly referencing the need for passage of some version of Speaker Nancy Pelosi’s proposal for a fifth federal coronavirus relief package.

The HEROES Act contains a total of about $3 trillion in additional aid and, as noted above, the Governor stated that he will include provisions in the California budget to commit in advance to utilize federal funds to “trigger off” many of the cuts to public education and other critical programs and services. Both Governor Newsom and Director of DOF Keeley Bosler noted their constitutional obligation to propose a balanced budget, and made it clear that the federal government has no similar limitation. The federal government can borrow money and carry large deficits, and does so routinely.

It seemed fairly clear that the Governor is implementing a strategy to support Speaker Pelosi and her allies in Congress with respect to further federal stimulus funds, and to suggest that only the federal government has the authority (and therefore the responsibility) to take action to prevent deep cuts to programs and services, including education, here in California. Director Bosler made an interesting comment that suggested federal relief funds would need to be authorized before July 1 to prevent cuts, but we are not clear why that is the case if there are plans to adjust the budget in the Fall.

In an interesting aside, Governor Newsom included negotiating with the representatives of state employees as part of the solutions the state will need to pursue for the coming year. He indicated he was going to be asking these labor groups to agree to a 10% reduction in compensation to help bridge the budget shortfall. While not directly commenting on how schools will make cuts to their budgets, Director Bosler observed that schools have “employee-heavy” costs.

Proposition 98 and K-12 Funding

The Prop 98 Guarantee is estimated to fall $19 billion compared to the January budget proposal. Of more significance for local budgeting purposes, the K-12 shortfall is $15.1 billion over the three-year budget period (2018-19, 2019-20 and 2020-21). This obviously equates to very significant cuts to nearly all K-12 programs. We will provide much greater detail at our May Revision budget workshops, but here are the highlights/lowlights:

· LCFF funding will be reduced by 10%, which equals a cut of $6.5 billion. This reduction includes the loss of a 2.31% COLA, which appears to mean LCFF funding will be 7.7% less compared to the 2019 Budget Act.

· LCFF deferrals amounting to $5.3 billion that will be scheduled for payment in 2021-22. We are awaiting details, but it appears $1.9 billion will be deferred from June, 2020 to July, 2020, and an additional $3.4 billion will be added to the deferral in 2020-21.

· With the exception of special education, all the new programs and all the expansions of existing programs proposed in the January budget are withdrawn.

· Special education loses the 2.31% COLA, but the Governor proposes to retain the January funding increase and partial shift from AB 602 to a new special education base rate of at least $645 per pupil.

· Many categorical programs will be cut by about 50%, a total funding loss of over $350 million.

· The Governor proposes to utilize $4.4 billion in discretionary federal funds for one-time funding to schools to mitigate further cuts. About $4 billion comes from the state’s share of the federal Coronavirus Relief Fund, and the remaining $355 million is from the Governor’s Emergency Education Relief Fund.

· The May Revision redirects or reallocates the $2.3 billion non-Prop 98 payment in the 2019 Budget Act, which would have gone toward the long-term unfunded liabilities of CalPERS and CalSTRS. That amount will instead be used to further reduce the school employer contribution rates in 2020-21 and 2021-22.

· The CalSTRS employer rate will be approximately 16.15% in 2020-21 and 16.02% in 2021-22 instead of 18.41% and 18.2%, respectively.

· The CalPERS employer rate will be approximately 20.7% in 2020-21 and 22.84% in 2021-22 instead of 22.67% and 25%, respectively.

· All of the funds in the Public School System Stabilization Account, estimated to be $524 million in 2019-20, will be withdrawn in 2020-21.

· 90% of the $1.6 billion in federal emergency relief funds will be allocated to LEAs based on their proportion of Title I-A funding, and the remaining 10% will be allocated as follows:

· $100 million for county offices of education for developing networks of community schools and coordinating health, mental health and social service supports for high-needs students.

· $63.2 million for training and professional development for educators and other school personnel related to mitigating opportunity gaps and providing equity in learning opportunities, addressing health and mental health barriers, etc.

· $1.5 million for the California Department of Education for state operations costs related to the COVID-19 pandemic

State Preschool

While the Governor reiterated his commitment to work towards universal preschool, the May Revision includes the following reductions:

· $159.4 million GF to eliminate 10,000 slots scheduled to begin April 1, 2020 and 10,000 additional slots scheduled to begin April 1, 2021.

· $130 million Prop 98 GF to align State Preschool funding with demand.

· $94.6 million Prop 98 GF and $67.3 million GF to reflect a 10 percent decrease in the State Preschool daily reimbursement rate.

· $20.5 million Prop 98 GF and $11.6 million GF to reflect suspension of a 2.31 percent COLA.

· $3.3 million Prop 98 GF and $3 million GF to eliminate a 1 percent add-on to the full-day State Preschool reimbursement rate.

Child Care

The May Revision includes using an increase of $53.3 million in Federal Child Care and Development Block Grant funds for federal FY 2020 to expand access for approximately 5,600 children in the Alternative Payment Program but also proposes the following reductions:

· $363 million one-time GF and $45 million one-time federal Child Care and Development Block Grant funds from the 2019 Budget Act for child care workforce and infrastructure.

· $223.8 million GF to reflect a 10 percent decrease in the Standard Reimbursement Rate and the Regional Market Rate.

· $35.9 million GF to reflect to reflect lower caseload estimates in CalWORKs Stage 2 and Stage 3 child care.

· $25.3 GF to reflect suspension of a 2.31 percent cost-of-living adjustment.

· $10 million one-time GF from the 2019 Budget Act for child care data systems

· $4.4 million one-time GF to reduce resources available for the Early Childhood Policy Council, leaving $2.2 million available for both 2020-21 and 2021-22.

The Governor is also proposing to spend the $350.3 million the state received from the Federal CARES Act for COVID-19 related child care activities in the following ways:

· $144.3 million for state costs associated with SB 89 expenditures, family fee waivers, and provider payment protection.

· $125 million for one-time stipends for state-subsidized child care providers offering care during the COVID-19 pandemic.

· $73 million for increased access to care for at-risk children and children of essential workers.

· $8 million to extend family fee waivers until June 30, 2020.

What’s Next?

The May Revision will be reviewed by budget committees in both houses, and a “final” budget will be sent to the Governor in June. Remember that the April 15 tax filing deadline was extended to July 15, so we expect another budget revision after that revenue data is available.

For now, LEAs will need to budget according to the numbers in the May Revision and be prepared for adjustments. On an optimistic note, a significant federal relief package could improve the funding situation for 2020-21 and 2021-22.

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