Copyright© 2005 by School Services of California, Inc.
Volume 18 For Publication Date: December 2, 2005 No. 24
LAO Forecasts a Less
Dire—But Still Dicey—Budget Outlook
Due to a combination of a revenue upturn and reduced spending, Legislative
Analyst Elizabeth Hill writes in a
“We’re
not out of the woods yet,” Hill later told a group of Capitol reporters.
This
forecast—the annually produced “California’s Fiscal Outlook”—is the
first real peek at the fiscal context for the 2006-07 California State Budget,
and not only is it the earliest, it is also widely hailed as being the most
objective and accurate. (The entire report is available online at:
http://www.lao.ca.gov/2005/fiscal_outlook/fiscal_outlook_05.pdf.)
For
schools, the most significant short-term projection is that the natural increase
in the Proposition 98 minimum guarantee (3.6%) will be insufficient by more than
$700 million to fund $2.5 billion in “base” costs for COLA and growth.
While statewide
State
Budget Overview
The
2005-06 fiscal year will wind up, according to the Legislative Analyst’s
Office (LAO), with State Budget reserves of a projected $5.2 billion, nearly $4
billion more than was projected at the time the Budget was adopted. (Of this, $1
billion is attributable to 2004-05 and prior years and $2.8 billion to 2005-06).
This surplus would be enough to balance out the projected $4 billion operating
shortfall for 2006-07, even without any new taxes or increased revenue
projections due to a strengthened economy.
On the
downside, the LAO still projects “multibillion dollar” operating deficits
down the road through 2009-10, and warns that those numbers could skyrocket if
the economy stumbles with a downturn or even a “sharp slowdown.”
Proposition
98 Details
Budget
Year and Beyond
Through
2010-11, the LAO projects an average annual
increase in the Proposition 98 minimum guarantee of 5.7% (compared to a 5.4%
increase in overall state spending). But this increase is concentrated in the
last three years, which show an average 6.4% annual increase.
The
2006-07 Proposition 98 minimum guarantee reflects an increase of 4.4%, from
$49.9 billion to $52 billion. Of that, 0.8% is due to increased funding—and
payment obligations—under Proposition 49 . In out years, the LAO forecasts an
increase of 5.0% in 2007-08, 6.6% in 2008-09, 7.0% in 2009-10, and 6.7% in
2010-11.
This
would be more than sufficient to fund “the base” (growth and COLA) for every
year but 2006-07. In 2007-08, the LAO projects that an additional $867 million
would be available above growth and COLA, with that amount jumping to $2.1
billion in 2008-09, $2.5 billion in 2009-10, and $2.7 billion in 2010-11.
It
is important to note that all of the LAO projections—particularly regarding
Proposition 98—are based on current funding levels and do not predict any
funding above the Proposition 98 minimum guarantee. And this may not be the case
by the time the State Budget is inked. Given the inability in 2006-07 for the
minimum guarantee to provide for even mere growth and COLA, and given the
drubbing given to Proposition 76 by a pro-education electorate just one week
ago, an appropriation above the minimum is certainly possible in 2006-07. In
fact, Sacramento Bee reporter Gary Delsohn reported last week: “Schwarzenegger
said he told legislative leaders at a meeting earlier: ‘We should try
everything we can to give education as much money as possible, and we just have
to find the revenues.’"
Should
an overappropriation occur, any amount above the minimum guarantee will be built
into the base and will affect out-year amounts, possibly delaying the onset of
Test One’s application. But what is new in this projection is that any
augmentations would be overshadowed by the funding provided under Test 1. This
is the main reason why the LAO actually offers overappropriation above the
minimum level as a legislative option for 2006-07.
However,
until Test One territory is reached, Proposition 98 is also extremely sensitive
to state revenues as they factor into the repayment schedule for the maintenance
factor obligation during Test Two years, which the LAO projects will be in play
from now until Test One kicks in. These revenues could be at risk because of
rising interest rates, high energy costs, and even accounting vagaries regarding
tax amnesty dollars and in which years they should be accrued. Additionally, the
LAO believes that legislative action will be required to re-bench the Test One
formula subsequent to Proposition 1A. And even after Test 1 applies, Proposition
98 funding would still be sensitive to state economic changes, since we would
get a fixed share of the State Budget pie —a pie that still depends on the
level of state tax revenues.
Proposition
49
The
LAO projects that Proposition 49 will be triggered in 2006-07, pumping $428
million in 2006-07 into joint partnership after-school programs accessed by
schools through a competitive bidding process on a permanent basis. These
dollars will fold into—and increase—the Proposition 98 minimum guarantee.
The LAO suggests that the Legislature and Governor place a repeal of Proposition
49 on the June ballot before it becomes operational, since:
1.
It is a perfect example of the
“autopilot spending” almost everyone seems to oppose.
2.
There may not be capacity in the system
to utilize the dollars.
3.
There are currently state and federal
dollars that are going unused.
Of
course, the LAO deals in policy, not politics. A repeal—which must be passed
by the Legislature and signed by the Governor before it goes to the voters—is
probably a long shot. As you may recall, the major proponent of Proposition
49—who was a private citizen at the time—now sits in the Governor’s
Office.
What
This Means for Schools
In a
nutshell, the LAO report projects relatively good times down the road for school
funding following one or two tight years in the near future. But it is unlikely
that the education community, or its supporters in the public and the
Legislature, will patiently wait for Test One to grind to the rescue beginning
in 2008-09. As educators and their supporters see it,
—Bob Blattner