Copyright© 2000 by School Services of California, Inc.
LAO Forecasts Continued Strong State Economy
California's strong economy will result in the state's reserve increasing by $5.1 billion at the end of the 2000-01 fiscal year over prior budget estimates, and state tax revenues will outpace expenditures by $3.4 billion in 2001-02 and by more than $3 billion per year in subsequent years, according to a six-year forecast released on November 15 by the state's independent Legislative Analyst's Office (LAO).
This forecast provides comfort to diehard budget watchers who have been concerned that recent weaknesses in the stock market will lead to declines in capital gains taxes for the state and hence lower revenues in future years. Indeed, the LAO comments on this very issue and includes the forecast that "capital gains and stock option-related income will drop 10 percent next year from this year's extraordinary level." But even after taking this into account, as well as the ¼-cent temporary sales tax reduction in 2001, the LAO projects that state general fund tax revenues will jump by 8.7% in 2000-01 then grow at a more modest rate of 4.0% in 2001-02 before accelerating to 7.6% growth in 2002-03, and 6.9% growth per year from 2003-04 through 2005-06.
Proposition 98 Forecast
Of special interest to schools, of course, is how this forecast of a healthy state economy translates into funding for schools. In general, the answer is "quite well." But for 2001-02, a surprising thing happens to the Proposition 98 minimum funding level.
The LAO forecast-which is based only on the state complying with the minimum requirements of Proposition 98 and not on what might happen-shows Proposition 98 funding growing by only 4.9% in 2001-02. This calculation is the result of the so-called "Test 3B" calculation under which Proposition 98 funding per ADA grows at the same rate as the growth in non-Proposition 98 expenditures per person. Given the state's projected surplus and economic health, it seems such a scenario is unlikely to happen. But if it did, it would result in funding in 2001-02 being sufficient to pay for statewide ADA growth of 1.1% and the statutory COLA estimated to be 3.8%, and nothing else.
By contrast, under the "Test 2" Proposition 98 formula-where growth in funding per ADA is based on the growth in personal income per capita-funding would jump by 9% in 2001-02 and would yield some $1.5 billion more. If the state did not provide this additional $1.5 billion in 2001-02, it would have to restore this amount in subsequent years when state tax revenues grew very quickly.
It is interesting to point out that in the current year, Proposition 98 funding would have been on a "Test 3" formula, but the Legislature and Governor agreed to ignore what would have otherwise been a cut in school funding by allocating significant dollars above the minimum funding level. Hopefully, a similar scenario will play out in 2001-02.
For years 2002-03 through 2005-06, the LAO forecasts that personal income per capita will average right around 5% annually. The growth translates into Proposition 98 funding per ADA growing fast enough to fund the statutory COLA and leave some $400 to $700 million available each year for program growth.
The LAO also points out that 2002-03 will be an exceptionally good year for schools. In that year, another $350 million becomes available for expenditure, since the final payment of $350 million toward the eight-year loan agreed to under the CTA v. Gould settlement will have been made in 2001-02. Also, the LAO notes that the four-year funding for the Schiff-Bustamante Instructional Materials Program ends after 2001-02 and, if this program is not extended, another $250 million per year will be available in 2002-03.
Commentary
It is important to recognize that the LAO prepares its annual report, "California's Fiscal Outlook," to provide the Legislature with options regarding the State Budget. This report is based on baseline state expenditures and tax policy, and makes no assumptions about changes that may occur. For Proposition 98 calculations, the LAO used the minimum funding level in each year and, as noted, this minimum reflects only a 4.9% increase under the "Test 3B" calculation for 2001-02-a cut of $1.5 billion from the more typical "Test 2" calculation.
Given that the state's reserve at the end of 2001-02 is projected to be $10.3 billion and that ongoing state revenues are projected to exceed expenditures by more than $3 billion per year, it seems inconceivable that the state will provide only the constitutionally required minimum to schools in 2001-02. But the LAO wanted to present the Legislature with this scenario so that the Legislature could choose among competing priorities to determine how to spend the one-time surplus and the ongoing resources that are available.
As usual, the Governor will be the first to present priorities when he proposes
his version of the 2001-02 State Budget on January 10, 2001. All eyes will
be on this document to see if the Governor will fully fund Proposition 98
at the "Test 2" level-thereby continuing his pledge to have education be
his top priority. And equally important will be how the Governor proposes
to spend this additional money.
--Paul Goldfinger