March 4, 2010
Dear County and District Superintendents, Charter School Administrators, and Chief Business Officers:
GOVERNOR’S BUDGET FOR 2010–11
On January 8, 2010, Governor Arnold Schwarzenegger released his budget for 2010–11. In addition to proposals for 2010–11, the budget includes new proposals for revising the enacted 2008–09 and 2009–10 budgets to address the state’s fiscal crisis.
This letter provides information on the Governor’s proposals that affect kindergarten through grade twelve (K–12) education. Copies of this document, as well as other budget-related documents, are available on the California Department of Education (CDE) Education Budget Web page at http://www.cde.ca.gov/fg/fr/eb/. Official state budget documents are available on the Department of Finance (DOF) Web site at http://www.dof.ca.gov/
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The proposals for both 2008–09 and 2009–10 are currently under consideration by the Legislature, which is meeting in special session to address the state’s fiscal crisis. The proposals for 2010–11 will be considered by the Legislature throughout the spring. Both sets of proposals are likely to change significantly before final enactment.
Overview
The state again faces a huge budget challenge. The Governor’s Budget projects a deficit of $19.9 billion for the two-year period including fiscal years 2009–10 and 2010–11. On January 8, 2010, Governor Schwarzenegger declared a “fiscal emergency.” Pursuant to Proposition 58 (Article IV, Section 10[f] of the California Constitution), the Legislature is required to hold a special session and must act within 45 days to address the emergency. If the Legislature does not act within 45 days, it may not act on other bills or adjourn until it has done so.
This $19.9 billion deficit is the result of a variety of factors. The state has seen a greater than anticipated decline in General Fund revenues. Some budget reductions did not materialize and temporary budget solutions are set to expire. As a result, the Governor’s Budget proposes to close the budget gap in the current and budget years through expenditure reductions across most programs and significant increases in federal funds.
In the event that increases in federal funds do not materialize, the Governor’s Budget proposes to suspend tax credits and make additional ongoing program reductions.
Proposition 98
2008–09 Proposition 98 Changes
Due to a greater than anticipated drop in state revenues, the minimum funding level required by Proposition 98 is projected to be $2.2 billion below the level provided to K–12 and community college (K–14) programs under the 2008–09 budget package as amended in July 2009. The Governor proposes to reduce 2008–09 spending for K–14 programs from state and local funds by $82.9 million, from $49.1 billion to $49 billion. The DOF projects this savings can be achieved through natural savings and will not change amounts allocated to K–14 programs.
In connection with the 2008–09 spending reduction, the Governor’s Budget proposes to reopen the Proposition 98 certification that was enacted in Assembly Bill 3 of the 2009 Fourth Extraordinary Session (ABX4 3), (Chapter 3, Statutes of 2009, Fourth Extraordinary Session). This proposed change to the certified Proposition 98 guarantee for 2008–09 would mean that the Proposition 98 minimum funding level would be calculated under “Test 1” for the first time since 1988–89. Figure 1 provides an overview of Proposition 98 principles and the calculation methodology.
Effectively, this change would mean the outstanding maintenance factor of $11.2 billion specified in ABX4 3 would no longer exist. As enacted in ABX4 3, the $11.2 billion maintenance factor would have been restored over time to the Proposition 98 base as the state’s economy and revenues improve, as outlined in the constitution. The Governor’s Budget recognizes an $11.2 billion statutory “in-lieu” maintenance factor obligation and proposes to begin repayment in 2012–13; however, repayment would no longer be based on the constitutional formula and would be at the discretion of the Legislature.
Figure 1
Proposition 98 Overview
Basic Principles
Proposition 98, approved by the voters in 1988, provides a constitutionally guaranteed minimum level of funding to K–12 schools and community colleges.
In years of “normal” state revenue growth, K–14 education is guaranteed a level of state and local funding at least equal to the funding level received in the prior year, adjusted for changes in enrollment and per capita personal income.
In years of extraordinarily good or bad revenue growth, K–14 education participates in the state’s gains or losses according to specified “fair share” formulas.
Proposition 98 may be suspended in a statute passed with a two-thirds vote, enacted separately from the budget.
Following a “fair share” reduction in the level of the Proposition 98 funding guarantee or a suspension of the guarantee, the state eventually must restore K–14 education funding to the level that would have been provided had no reduction occurred. The pace of this restoration is tied to the pace of the state’s economic recovery.
The Specifics: Test 1, Test 2, Test 3, and Restoration
Specifically, the guaranteed minimum funding level for K–14 education is the greater of:
- Test 1—Percent of General Fund Revenues: The percentage of state General Fund tax revenues received by schools and community colleges in 1986–87 as adjusted for the impact of shifts in property taxes from local governments to schools (currently about 40.6 percent), or
- Test 2—Maintenance of Prior-Year Service Levels: The prior-year level of funding from state aid and local property taxes increased for enrollment growth and inflation as measured by the change in per capita personal income.
However, in years when the percentage growth in per capita General Fund revenues is less than the percentage growth in per capita personal income and the difference exceeds 0.5 percent, the following alternative test is substituted for Test 2:
- Test 3—Adjustment Based on Available Revenues: The prior-year level of funding from state aid and local property taxes increased for enrollment growth and inflation as measured by the change in per capita General Fund revenues plus 0.5 percent. Test 3 ensures that K–14 education bears a fair share of the state’s General Fund revenue growth or decline in extraordinarily good or bad revenue growth years.
- Test 3B—“Equal Pain, Equal Gain”: Test 3B is the same as Test 3, except that K–14 education cannot suffer more cuts than the rest of the state budget.
Restoration—If the Proposition 98 guarantee is reduced because of the application of Test 3 or a suspension of the guarantee, the amount lost is never repaid. The funding level must eventually be restored in the future, however, according to a formula that is tied to the pace of the state’s economic recovery.
2009–10 Proposition 98 Changes
The Governor’s Budget projects General Fund revenues for 2009–10 will be $1.5 billion less than expected as of the July enacted budget. As a result of the reduction in General Fund revenues, the current year Proposition 98 guarantee is projected to be decreased by $568 million, from $50.4 billion to $49.9 billion. This reduction is made up of a projected $340 million in savings from the kindergarten through grade three (K–3) Class Size Reduction program and a savings due to a decline in average daily attendance (ADA).
2010–11 Proposition 98 Changes
The Governor’s Budget projects General Fund revenues for 2010–11 will increase by $1.2 billion over the revised 2009–10 level. As a result of this increase, the Governor’s Budget provides $50 billion in state and local funds for K–14 programs under Proposition 98 in 2010–11. This is an increase of $100 million from the revised 2009–10 funding level.
The Governor’s Budget proposes eliminating a current sales tax on fuel and increasing the excise tax on gasoline. This proposal has a negative effect on the Proposition 98 guarantee because the fuel sales taxes are General Fund revenues used in determining the Proposition 98 minimum funding level for K–14 education. The loss of $1.8 billion in General Fund revenues equates to a $900 million decrease in the minimum amount of funding required for K–14 education.
2010–11 Major Funding Adjustments
Figure 2 provides major adjustments to 2010–11 spending. Although total Proposition 98 funding is flat from year to year, the adjustments are largely negative because of the need to backfill one-time solutions in 2009–10.
Figure 2
K–12 Proposition 98 Funding
2010–11 Adjustments (in millions)
| One-time funding | Amount |
|---|---|
Emergency Repair Program |
$ 50 |
Categorical funding for new schools in 2008–09 and 2009–10 |
20 |
Charter school facilities funding |
18 |
| Ongoing funding | Amount |
|---|---|
Backfill revenue limit reduction |
1,500 |
Special education—behavioral intervention plan |
65 |
Categorical funding for new schools |
15 |
Mandates—suspension of all mandates except for inter/intra district transfers ($7.7 million) and the California High School Exit Exam (CAHSEE) ($6.8 million) |
14 |
School district administrative costs |
-1,200 |
Reduction to the K–3 Class Size Reduction program due to projected savings in the program |
-550 |
Contracting out |
-300 |
Negative cost-of-living adjustment |
-202 |
Reduction of California Work Opportunity and Responsibility to Kids (CalWORKS) Stage 3 |
-123 |
Reduction in child care reimbursement rate limits in voucher-based programs |
-77 |
County office of education administrative consolidation |
-45 |
New School Categorical Funding
The Governor’s Budget provides $15 million from the General Fund to provide categorical funding to newly established schools. Under current law, schools established after the base year used for allocating the categorical funds that were made flexible in 2008–09 may receive an allocation for these programs if they are administering the programs as they existed before they were made flexible. Additionally, the Governor’s Budget provides $20 million in one-time funds to provide categorical funding for newly established schools in 2008–09 and 2009–10.
School Facilities Emergency Repairs (Williams)
The Governor’s Budget provides $50 million from the Proposition 98 Reversion Account for emergency facility repairs pursuant to the Williams lawsuit settlement in 2004. Additional information on the Williams case is available on the CDE Williams Case Web page at http://www.cde.ca.gov/eo/ce/wc/index.asp.
Reduction in Administrative Costs
The Governor’s Budget proposes to reduce school district revenue limit funding by approximately $1.5 billion to account for reductions to local administration. Of this amount, $1.2 billion is the result of a proposal to “reduce the proportion of funding school districts spend on central administration and protect classroom spending, including spending for teachers and principals, from further reductions.” An additional $300 million is proposed to be achieved by eliminating barriers to contracting out to enable school districts to achieve cost reductions
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Additionally, the Governor’s Budget proposes a $45 million reduction to county offices of education (COE) revenue limits. This proposal would require COE to consolidate services and functions, which may include forming regional consortia to provide services.
K–3 Class Size Reduction
The Governor’s Budget proposes to reduce the K–3 Class Size Reduction program by $550 million to reflect projected savings in the program. ABX4 3 allows school districts to continue receiving funds for the program even though they increase class sizes. Savings will occur because the funding level is lower for higher class sizes.
Mandates
The Governor’s Budget suspends all K–12 mandates except costs associated with inter/intra district transfers ($7.7 million) and the CAHSEE ($6.8 million). The Governor’s Budget also proposes to fund costs associated with special education behavioral intervention plans ($65 million).
Cost-of-Living and Growth Adjustments
The budget is reduced by $202.2 million for school district and COE revenue limits and most categorical programs to reflect a negative cost-of-living adjustment of 0.38 percent.
The Governor’s Budget projects a 0.11 percent increase in ADA. The Governor’s Budget provides growth funding only for programs listed in Figure 3.
Figure 3
Growth Adjustments by Program
| Program and Resource Code | Growth |
|---|---|
| Charter school categorical block grants (0000) | 0.11% |
| County office of education revenue limits (0000) | 0.11 |
| School district revenue limits (0000) | 0.11 |
| Special education—state portion only (various) | 0.11 |
| Child nutrition (5310) | 0.11 |
Child Care and Development
The Governor’s Budget proposes to reduce child development funding by $77.1 million through the continued use of the 2005 Market Rate Survey and by reducing the reimbursement rate ceilings for licensed child care providers in voucher-based programs from the 85th percentile to the 75th percentile of the regional market rate. The proposal will also reduce the reimbursement rate ceilings for licensed-exempt providers from 90 percent of the ceilings for licensed family child care homes to 70 percent. The reimbursement rate changes would be effective July 1, 2010. This proposal affects the voucher-based programs, including the Alternative Payment Program ($12 million) and the CalWORKS Stage 2 ($37 million) and Stage 3 ($28.1 million) programs.
The budget further reduces the CalWORKS Stage 3 program by $122.9 million to achieve additional ongoing Proposition 98 General Fund savings. In the past, CalWORKS Stage 3 has been fully funded to provide continued child care services for former CalWORKS families after their 24 months of Stage 2 transitional services have ended. Unlike CalWORKS Stage 1 and Stage 2, Stage 3 is not an entitlement program.
Charter Schools
The Governor’s Budget provides $18.4 million in one-time funds to the Charter Schools Facilities Grant Program to convert the program from a reimbursement model to an annual grant program, allowing charter schools that currently receive these funds budgetary cash relief.
Federal Funds
The Governor’s Budget proposes $8 million for the Fresh Fruit and Vegetable Program, which provides an additional free fresh fruit or vegetable snack to students during the school day.
Program Reforms
In addition to expenditure reductions, the Governor’s Budget proposes additional flexibilities to schools through program reforms.
Teacher Seniority
The Governor’s Budget proposes to change state law to give local school districts the flexibility to lay off, assign, reassign, transfer and rehire teachers based on skill and subject matter needs without regard to seniority.
Substitute Costs
The Governor’s Budget proposes to eliminate provisions in state law that require teachers who have been laid off to receive first priority for substitute assignments and these substitutes be paid at the rate they received before they were laid off if they work more than 20 days within a 60-school-day period.
Notification Process for Teacher Layoffs
The budget proposes to change the staffing notification window for teachers to 60 days after the state budget is adopted or amended. Under current law, teachers must be notified by March 15.
What is Next?
We will continue to keep you posted on the decisions made in the special session for the current year. In the meantime, you can find detailed information about individual programs on the CDE Funding Web page at http://www.cde.ca.gov/fg/fo/. The information available includes a program description, the allocation methodology, eligibility criteria, application process, and important dates. You can also subscribe to the CDE Funding mailing list to receive e-mail notifications as requests for applications are announced and posted on the Web. To subscribe, select the "Join the Funding Mailing List" link on the CDE Available Funding Web page at http://www.cde.ca.gov/fg/fo/af/.
If you have any program-specific questions regarding the impact of the 2010–11 budget package, please utilize the CDE Search CDE Funding Web page at http://www.cde.ca.gov/fg/fo/sf/ to locate CDE funding and contact information.
If you have any questions regarding this subject or the 2010–11 Budget, please contact the Fiscal Policy Division by phone at 916-324-4728.
Sincerely,
JACK O’CONNELL
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| NOTICE: The guidance in this letter is not binding on local educational agencies or other entities. Except for the statutes, regulations, and court decisions that are referenced herein, this letter is exemplary, and compliance with it is not mandatory. (See California Education Code Section 33308.5.) |
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