Copyright© 2006 by School Services of California, Inc.

                                      Volume 19                   For Publication Date: December 1, 2006             No. 25

Ask SSC . . . 

How Should We Budget for the COLA Next Year? 

Q.                I read your article on the likely cost-of-living adjustment (COLA) for revenue limits for 2007-08 (see “2007-08 Statutory COLA Likely to be Below 4%” in the November 9, 2006, Update, page 248). The article indicates that the COLA could be in the 3% to 4% range. Our district is using an estimated COLA of 4.7% for 2007-08, based on the latest School Services Dartboard. We are currently preparing our First Interim Report and are wondering if we should be using a lower COLA now. We are also developing our plans for collective bargaining for next year. What is your advice?

A.        We are not recommending that you change the estimated COLA at this time. The 4.7% estimate from our latest Dartboard corresponds to the forecast used when the 2006-07 Budget was enacted this past summer. We will update the Dartboard in January to reflect the Administration’s declared estimate of the COLA for the budget year, as well as other economic factors. You should make an adjustment at that time. By using the last formally announced projected COLA, you will be able to easily adjust to any new COLA number proposed by the Governor.           

            Remember, however, that the actual statutory COLA will not be known until April 2007, when the U.S. Department of Commerce publishes data for the Implicit Price Deflator for the first quarter of 2007 (i.e., January, February, and March of 2007). Remember too that the funded COLA could be different from the statutory COLA, depending upon the state’s budget condition and the will of the Legislature and the Governor. Thus, you may not know with certainty what the funded COLA will be until July 2007 or later. 

            While we regularly report changes in the economic indicators that affect the COLA, those indicators  are very volatile and will likely change several times before the final COLA is determined next April. We report changes and amend our Dartboard at specific times during the year to assist districts as we move through the budget development cycle. The next regular reporting point for us is mid-January when the Governor announces the proposed COLA for K-12 and community colleges.  

            As we say above, there have been instances where the statutory COLA and funded COLA are different. The state has provided funded COLAs that were both larger and smaller than the statutory COLA. This year, for example, the use of one-time funds may help the state to fund the COLA even if budget year revenues are insufficient to do so.

            As to the second part of your question, what this means for negotiations, the answer might vary depending on your exact circumstances. If, for example, you have a formula settlement that is COLA-based, any change in COLA will be automatically incorporated and the pay raise will be adjusted accordingly. If you have settled in advance for a specific number for a salary increase, the district bears the risk that the COLA will come in lower than expected and the bargaining unit bears the risk that it will come in higher. The real dilemma comes if you have not yet settled and are exchanging proposals for something other than a COLA-based settlement. In that case, we recommend that you include contingency language that protects both parties in the event of a “COLA surprise” next spring. Neither party benefits from a fixed agreement that turns out, through no fault of the parties, to deliver a “gotcha” to one side or the other. 

            In the meantime, remember that robust economic activity is good for the state and for its schools. We recommend that you continue to monitor economic update reports by the Legislative Analyst’s Office (LAO), the Department of Finance, and us. In fact, the LAO today released its five-year forecast for the State Budget and projected a 3.8% COLA for 2007-08. Watch for our updated Dartboard in January, and use it for your first cut at the 2007-08 budget and for the second interim report. Remember also that, until next April, the COLA estimates are just that: estimates. Avoid commitments that would force you to commit to a fixed number before the state declares. There is no such thing as a good plan that does not have a “margin of safety” in case things go awry.

—Ron Bennett and Robert Miyashiro