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Governor's Budget for 2011-12

Letter Head: Tom Torlakson, State Superintendent of Public Instruction, California Department of Education

April 26, 2011

Dear County and District Superintendents, Direct-Funded Charter School Administrators, and County Chief Business Officers:

GOVERNOR'S BUDGET FOR 2011–12 AND LEGISLATIVE ACTIONS TO DATE

On January 10, 2011, Governor Jerry Brown released his proposed budget for 2011–12. The budget provides a plan to close a $26.4 billion deficit for 2010–11 and 2011–12 through a combination of program reductions and reforms, extension of the temporary 2009 tax increases along with other revenue proposals, and one-time solutions. The budget proposal assumes voter approval of a ballot measure to extend the temporary taxes in a June 2011 special election. To meet ballot deadlines and ensure that projected savings will be fully realized, the Governor asked the Legislature to accelerate its usual budget schedule.

In response, the Legislature passed a package of bills that, with some modifications, implement the program reductions and reforms proposed by the Governor. The Legislature’s actions to date provide solutions that address approximately half of the projected budget deficit. The Legislature did not approve the Governor’s revenue proposals or a proposal to eliminate redevelopment agencies. The deadline for placing measures on the June ballot has passed and it is not clear what approach the Governor and the Legislature will take to finish work on the 2011–12 budget.

On March 25, 2011, the Governor signed a number of trailer bills, including the education trailer bill, that are in the Legislature’s budget package. The Legislature has passed the budget bill but has not transmitted it to the Governor.

This letter provides information on the Governor’s proposals that affect kindergarten through grade twelve (K–12) education and child care. It also provides information on the Legislature’s actions to date on these proposals. I want to emphasize that the actions described in this letter are preliminary. Final action on the 2011–12 budget could be months away. Given the size of the deficit that remains, it is possible that the actions taken to date will be modified significantly.

California faces a historic budget crisis. Over the past three years our children and schools have provided the majority of the budget reduction "solutions" and suffered over $18 billion in cuts, which have translated into lost jobs, growing class sizes, and less opportunities for our kids. As this letter goes to print, Governor Jerry Brown's proposal to hold our schools harmless from further devastating cuts this year is in jeopardy. While the Legislature has approved the budget outlined in this letter, the underlying revenues to support these already meager funding amounts have not been approved. I look forward to working with the education community to ensure that our schools do not face further cuts and, in fact, are provided the new resources necessary to rebuild.

Copies of this document, as well as other budget-related documents, are available through 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 through the Department of Finance (DOF) Web site at http://www.dof.ca.gov/ External link opens in new window or tab..


Overview

The state faces a historic and difficult budget situation. The Governor identified a two-year deficit of $25.4 billion. This two-year deficit is comprised of a current-year shortfall of $8.2 billion and a budget-year shortfall of $17.2 billion. Although the economic downturn has played a part in the state’s fiscal condition, reliance on temporary remedies, savings proposals that did not materialize, and other actions, such as the Economic Recovery Bonds, have worsened the problem.

The Governor’s Budget proposes to close the deficit primarily by increasing revenues ($12 billion) and reducing expenditures ($12.5 billion). The legislative budget package passed in March contains the level of expenditure solutions proposed by the Governor. The Legislature did not approve the revenue portions of the Governor’s proposal.


Tax Proposals

The Governor’s Budget proposes the following changes for a five-year period:

  • Extends a 0.25 percent temporary income tax surcharge.

  • Extends a reduction in the dependent exemption credit.

  • Extends a 1 percent increase in the state sales and use tax. Revenues from this proposal would be dedicated to local governments for the realignment proposal (discussed below).

  • Extends a 0.5 percent increase in the vehicle license fee (VLF) rate. Revenues from this proposal would be dedicated to local governments for the realignment proposal (discussed below).

The Governor’s Budget proposes to seek voter approval of these tax increases in a June 2011 special election. The Governor’s Budget also proposes changes to corporate tax provisions related to income apportionment, elimination of enterprise zone tax incentives, and an amnesty for taxpayers who used certain tax shelters.

The Legislature did not approve the Governor’s tax proposals.


Realignment Proposal

The Governor’s Budget proposes to shift a number of programs from state-level administration to local government administration.

Phase One of the realignment proposal, which would commence in the 2011–12 fiscal year, includes a variety of public safety and social welfare programs, including mental health services for special education students (beginning in 2012–13).

Phase Two of the realignment proposal is linked to national health care reform. Under the health care reform bill, some individuals currently served by counties will become eligible for Medi-Cal, thus shifting costs from the county to the state. Under the realignment proposal, the state will become responsible for costs associated with some additional health care programs; in return, counties will assume responsibility for some welfare programs. Responsibility for child care programs will also be transferred to counties as part of the Phase Two realignment. The timing and specific provisions of the Phase Two shift is currently unknown.

The legislative budget package includes a modified version of the realignment proposal, which was developed by the Governor after meetings with stakeholders. Significant follow-up legislation must be developed to fully implement the proposal.


Redevelopment Agencies

The Governor’s Budget also proposes to phase out the current funding mechanism for redevelopment agencies (RDAs). In 2011–12, freed-up funds would be used for General Fund budget relief. Beginning in 2012–13, RDA property tax revenues would be returned to schools, community colleges, cities, counties, and non-enterprise districts. The budget estimates that the proposal will result in as much as $1 billion annually in additional funding for schools and community colleges.

The administration has indicated that the proposal will include amending the Constitution to provide for a 55 percent voter approval for limited local tax increases and bonds for development projects.

The Legislature did not approve the Governor’s RDA proposals.


Major Budget Cuts

For higher education, the Governor’s Budget cuts the University of California and the California State University each by $500 million. It cuts community colleges by $400 million and increases community college fees by $10 per credit unit. Finally, it replaces $947 million in General Fund support of Cal Grants with federal Temporary Assistance to Needy Families (TANF) funds.

The legislative budget package includes the higher education cuts proposed by the Governor. The Legislature reduced the amount of the fund shift proposed for Cal Grants and made other programmatic changes.

In health and human services programs, the Governor’s Budget:

  • Cuts the California Work Opportunities and Responsibility to Kids (CalWORKs) program by limiting aid to four years, cutting grants, and other changes.

  • Cuts Medi-Cal by reducing provider rates, establishing new limits on services and benefits, increasing costs to beneficiaries, and increasing hospital fees.

  • Replaces $1 billion in General Fund support for Medi-Cal with First 5 reserves (tobacco tax revenues) for services for children through age five.

  • Cuts the Healthy Families program by increasing premiums and copayments and reducing benefits.

  • Reduces Supplemental Security Income/State Supplemental Payment grants.

  • Reduces in-home supportive services

  • Reduces funding for regional centers, which provide services to developmentally disabled people.

The legislative budget package retains many of the health and human services cuts proposed by the Governor, but in some instances found alternative solutions that mitigate or reduce impacts to children, the disabled, and the elderly.


2010–11 Proposition 98 Changes

At the time the 2010–11 budget was enacted, the minimum funding level required by Proposition 98 was projected to be $53.8 billion. The Legislature and the Governor suspended the Proposition 98 guarantee by $4.1 billion. Senate Bill 851 (Chapter 715, Statutes of 2010) declared the minimum funding level for schools and community colleges (K–14) education to be $49.7 billion. However, the amount actually provided in the 2010 Budget Act is only $49.4 billion. The difference is a veto of $256 million in child care funds.

The Governor’s Budget assumes a Proposition 98 funding level of $49.7 billion for 2010–11. The increase in funding since enactment of the 2010–11 budget is due primarily to changes in average daily attendance (ADA). The Governor’s Budget assumes K–12 funding under Proposition 98 will be $43.8 billion in 2010–11.


2011–12 Proposition 98 Changes

The Governor’s Budget proposes a Proposition 98 funding level of $49.3 billion, which is $400 million less than the revised 2010–11 amount. This Proposition 98 funding level assumes the Legislature will place the Governor’s tax extension proposal on the ballot and that voters approve the ballot measure. It also assumes approval of the Governor’s RDA proposal

The Legislature has not approved placing the tax extension proposal on the ballot, nor the RDA proposal. Without passage of these proposals, the Proposition 98 guarantee for K–14 education will be decreased by as much as $2 billion in 2011–12. Given other pressures on the state budget, the Governor and the Legislature may consider suspending the Proposition 98 guarantee and implementing additional cuts that exceed $2 billion.

The funding level for K–12 education is $43.8 billion, an increase of $10.7 million over the revised 2010–11 funding level. The legislative budget package assumes additional tax revenues and, as a consequence, the Proposition 98 spending level is $110.5 million higher than proposed by the Governor. All of the increase is allocated to K–12 education.

Figure 1 lists major changes to K–12 spending between 2010–11 and 2011–12 for both the Governor’s Budget and the Legislature’s budget package. The net change from year to year is very small. To maintain funding at the current-year level, cuts were necessary to replace one-time reductions that were implemented in the current year.

Figure 1
K–12 Proposition 98 Funding
2011–12 Adjustments (in millions)

Program or Activity Governor's Budget Legislative Package
Backfill for one-time solutions
2,175.9
2,175.9
Unemployment and Public Employee Retirement System adjustments
402.9
402.9
Restore Stage 3 veto
256.0
256.0
Growth
104.9
104.9
Child care adjustments
-78.2
-130.2
Sunset of special disabilities adjustment
-74.0
-74.0
Economic Impact Aid base adjustment
-54.0
2.0
Special education base adjustment
-28.2
-28.2
Special education settlement
-25.0
-25.0
Defer payments to 2012–13
-2,063.8
-2,063.8
Child care policy changes
-716.0
-500.7
Reduction to basic aid districts
0.0
-80.0
Mandates
80.4
80.4
Emergency repair program
42.8
0.0
Additional funds for K–3 Class Size Reduction
0.0
14.2
Categorical funding for new schools
3.0
3.0
Other changes
-16.0
-16.0
Total
10.7
121.1

Deferrals

The Governor’s Budget proposes to defer an additional $2.1 billion in revenue limit funds from July 2011 to July 2012. This deferral is in addition to the ongoing $1.7 billion deferral adopted as part of the 2010–11 budget package. The Governor’s Budget also proposes to continue intra-year deferrals of up to $2.5 billion of K–12 funding.

The legislative budget package defers the same amount from year to year but schedules apportionment payments in a manner that reduces unpredictability and avoids deferral of funds extending over two fiscal years.


Basic Aid Districts

The Governor’s Budget does not contain any proposals related to districts that are entirely funded from local property taxes (basic aid districts). The legislative budget package imposes reductions on categorical funding received by basic aid districts to be comparable to revenue limit reductions experienced by other districts.


Cost-of-Living and Growth Adjustments

The Governor’s Budget does not provide a cost-of-living adjustment (COLA). The statutory COLA is 1.67 percent, which would have resulted in an increase of $964.5 million. A deficit factor will be established for school district and county office of education revenue limit apportionments to reflect the lack of a COLA.

The Governor’s Budget projects a 0.22 percent increase in ADA. The Governor’s Budget provides growth funding only for programs listed in Figure 2.

Figure 2
Programs Receiving Growth Adjustments

Program and Resource Code

Charter school categorical block grants (0000)
County office of education revenue limits (0000)
School district revenue limits (0000)
Special education—state portion only (various)
Child nutrition (5310)


The legislative budget package reflects the Governor’s proposals.


Special Education

The former Governor vetoed $133 million budgeted for prior-year mandate claims submitted by county mental health departments for mental health services for children receiving special education (Assembly Bill 3632 services), stating in his veto message that the mandate is suspended. The effect of suspending the mandate is to require LEAs to assume responsibility for providing these services. The Governor’s authority to suspend the AB 3632 mandate is being challenged in court. The Governor’s Budget does not propose any changes to current-year funding.

The Governor’s Budget proposes $98.6 million in Proposition 63 (Mental Health Services Act) funding in the budget year to fund prior-year AB 3632 mandate costs, therefore, “re-instating” the mandate for 2011–12. The Governor’s Budget proposes to include the AB 3632 program in his realignment proposal beginning in 2012–13. The details of the realignment proposal are not yet available.

The legislative budget package includes the Proposition 63 funding proposed by the Governor for the budget year and adds $80.8 million in one-time funds for school districts to support mental health services in the current year.


Child Care and Development

As indicated earlier, the former Governor vetoed $256 million for CalWORKs Stage 3 services in the current year. The Governor’s Budget restores funding for Stage 3 program in the current year beginning April 1, 2011, and proposes to continue to fund the program in 2011–12. The proposed budget does not provide funding for Stage 3 in January through March of the current year. However, the CDE has identified funds that are available to restore services.

The Governor’s Budget proposes to reduce child development funding by $716 million. Specific proposals are as follows:

  • Reduces subsidies by 34.6 percent, providing local agencies with flexibility to determine how the cut will be absorbed by each family. The difference between the subsidy amount and the provider's reimbursement level is to be paid by the family directly to the provider as a copayment. This copayment would be in addition to any copayment or family fee that the family is already paying.

  • Reduces the income eligibility ceiling from 75 percent of the State Median Income (SMI) to 60 percent and continues use of the SMI that was established for use in the 2008–09 fiscal year.

  • Eliminates services for 11- and 12-year-olds.

The changes would be effective on April 1, 2011, for Stage 3 and July 1, 2011, for other programs. Preschool programs would be exempt from reductions.

The legislative budget package reduces child care by $500 million instead of $716 million. The legislative budget includes the following specific changes:

  • Restores Stage 3 funding.

  • Imposes an across-the-board reduction of 15 percent, including preschool.

  • Reduces the standard reimbursement rate by 10 percent, including preschool.

  • Reduces license-exempt providers from 80 percent to 60 percent of the licensed provider rate.

  • Reduces income eligibility from 75 percent of the SMI to 70 percent of the SMI, including preschool.

  • Deprioritizes 11- and 12-year-olds and gives them priority for state and federally funded before and after school programs; exempts 11- and 12-year-olds that are at risk of abuse, neglect, or exploitation; are homeless; are receiving services in nontraditional hours; or have exceptional needs.

  • Increases the family fee by 10 percent.

Charter Schools

The Governor’s Budget provides $5 million in one-time funds (non-Proposition 98) to the Charter Schools Revolving Loan Fund, which provides low-interest loans to new charter schools. The funds may be used for startup and initial operating capital. The legislative budget package includes this funding.

The Governor’s Budget provides $3 million to provide categorical funding to newly established charter schools. Under current law, charter schools established after the base year used for allocating categorical funds that were made flexible in 2008–09 may receive an allocation for these programs if they are eligible for the programs as they existed before they were made flexible. The legislative budget package includes this funding.


School Facilities Emergency Repairs (Williams)

The Governor’s Budget provides $53.6 million ($42.8 million from ongoing Proposition 98 funds and $10.8 million from the Proposition 98 Reversion Account) for emergency facility repairs pursuant to the Williams lawsuit settlement in 2004. The legislative budget package deletes this funding.


Mandates

The Governor’s Budget provides ongoing funding of $80.4 million for reimbursement of K–12 mandates in 2011–12. This is the same level of funding as provided in 2010–11 (funding in 2010–11 was from one-time funds), and assumes suspension of the same group of mandates that was suspended in the current year. The legislative budget package includes this funding.


Program Flexibility

The Governor’s Budget proposes to extend the flexibility provisions implemented in 2008–09 for an additional two years. The legislative budget package includes this proposal.


Bill Citations

The Legislature’s budget package includes the following specific bills:

  • Budget Bill, SB 69
  • Education trailer bill, SB 70, Chapter 7
  • Intra-year cash deferral, SB 82, Chapter 12
  • Mental Health Services Act changes, AB 100, Chapter 5
  • Public safety realignment, AB 109, Chapter 15

What’s Next?

The Legislature will be considering modifications to the budget package it has already adopted throughout the spring. Given the size of the deficit that remains, it is possible that the actions taken to date will be modified significantly. As indicated earlier, while the Legislature has approved the budget outlined in this letter, the underlying revenues to support these already meager funding amounts have not been approved. I will be working with the education community throughout the budget process to advocate for additional resources for schools.

The deadline for final legislative action on the budget is June 15. The budget takes effect on July 1, 2011.

If you have any questions regarding the 2011–12 budget, please contact the Legislative Affairs and Fiscal Policy Division by phone at 916-324-4728. You may also contact Carol Bingham, Senior Fiscal Policy Advisor, Fiscal Policy Office, by e-mail at cbingham@cde.ca.gov.

Sincerely,

Tom Torlakson

TT:ll

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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