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2011 Budget Act and Related Legislation

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

July 25, 2011 (Revised September 1, 2011)

[This letter has been revised since it was originally released on July 25, 2011]

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

2011 BUDGET ACT AND RELATED LEGISLATION

On June 30, 2011, Governor Jerry Brown signed Senate Bill 87 (Chapter 33, Statutes of 2011), the Budget Act of 2011. In addition to the Budget Act, the Governor signed various "trailer bills" that amend the California Education Code and other California codes to reflect technical changes necessary to implement the budget. In enacting the 2011 Budget Act, the Governor and the Legislature were obligated to take drastic measures for the fourth year in a row to bring the state budget into balance.

Prepared by the California Department of Education (CDE) fiscal policy staff, this letter provides information on budget provisions affecting kindergarten through grade twelve (K–12) education. Copies of this document, as well as other budget-related documents, are available through the 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 Web site at http://www.dof.ca.gov/.

OVERVIEW
Governor’s Budget Proposal and March Actions

On January 10, 2011, Governor Jerry Brown released his proposed budget for 2011–12. The plan identified a $26.4 billion deficit for 2010–11 and 2011–12. Although the economic downturn 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, worsened the problem.

The Governor proposed to close the deficit through a combination of program reductions and reforms ($12.5 billion), extension of the temporary 2009 tax increases along with other revenue proposals ($12 billion), and one-time solutions. The budget proposal assumed 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 would be fully realized, the Governor asked the Legislature to accelerate its usual budget schedule.

In March, the Legislature passed a package of bills that, with some modifications, implement the program reductions and reforms proposed by the Governor. This legislative budget package contained the level of expenditure solutions proposed by the Governor; however, the Legislature did not approve the Governor’s revenue proposals or a proposal to eliminate redevelopment agencies. The Legislature approved a proposal to shift responsibility for some public safety services from the state to local governments, but did not approve the measures needed to provide financing for the proposal.

The Governor signed a number of trailer bills on March 25, 2011, including an education trailer bill. The Legislature passed a budget bill but did not transmit it to the Governor.

Governor's May Revision

On May 16, 2011, the Governor released his revised budget plan. After accounting for the actions taken in March and improvements in the General Fund revenue picture, the Governor projected that additional solutions totaling $10.8 billion were needed to bring the budget into balance. The Governor proposed additional expenditure reductions of $2.3 billion and revenue solutions of $9.3 billion. (The May revision also reflected increased costs of $745 million.) As part of the revenue solutions, the May revision proposal continued to assume voter approval of extension of the 2009 temporary tax increases.

Final Budget Act

The Legislature did not approve the Governor’s revenue proposals. The Governor worked with the Legislature to develop alternative solutions to balance the budget. Fortunately, the state’s revenue estimates improved prior to the final budget passage, which allowed for a revised funding package for the Governor’s proposals. As of passage of the final budget act, the budget deficit was estimated at $27.2 billion. The actions in March, together with final budget actions, close the deficit through improvement in the state’s revenue outlook ($8.3 billion), expenditure reductions ($15 billion), revenue solutions ($900 million), and other solutions ($2.9 billion).

The budget includes the following major components:

  • Mid-Year Reduction Triggers. The budget package includes a provision to trigger additional mid-year cuts if the revenues do not materialize as anticipated. Tier One cuts, totaling $600 million and affecting a wide variety of programs (including child care), will occur if the revenue shortfall is more than $1 billion. Tier Two cuts, totaling up to $1.9 billion and affecting Proposition 98 programs, will occur in February 2012 if the revenue shortfall is more than $2 billion (more information on K–12 triggered cuts below).
  • Realignment. The final budget shifts a variety of public safety and social welfare programs from state-level administration to local government administration. The primary source of funding for the shift is a sales tax swap that will give $5.1 billion in sales tax revenues to local governments.
  • Redevelopment Agencies. The budget package (Assembly Bill 26 of the 2011–12 First Extraordinary Session [ABX1 26]) eliminates redevelopment agencies (RDAs). Cities and counties may elect to participate in an Alternative Voluntary Redevelopment Program provided that they make payments to fund local services, including schools (ABX1 27). The budget assumes that payments to schools will total $1.7 billion in 2011–12. The payments would offset General Fund obligations under Proposition 98. In later years, payments would total $400 million annually, of which $340 million would go to schools. The payments in later years would not offset General Fund obligations under Proposition 98.
Major Budget Cuts Outside of K–12 Education

For higher education, the budget package cuts the University of California and the California State University by $650 million each—and triggers $100 million more in reductions each, if revenues fall more than $1 billion short of the level anticipated (Tier One). It cuts community colleges by $400 million and increases community college fees by $10 per credit unit.

In health and human services programs, the budget package:

  • 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, and increasing costs to beneficiaries.
  • Cuts the Healthy Families program by increasing premiums and copayments.
  • 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 budget also cuts trial court funding by $350 million.

PROPOSITION 98 CHANGES
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 2010–11 budget package suspended the Proposition 98 guarantee by $4.1 billion. SB 851 (Chapter 715, Statutes of 2010) declared the minimum funding level for schools and community colleges
(K–14) education to be $49.7 billion.

The 2011–12 budget package assumes a Proposition 98 funding level (K–14) of $49.8 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).

2011–12 Proposition 98 Changes

The Governor’s Budget proposed a Proposition 98 funding level of $49.3 billion. This funding level assumed that the Legislature would place the Governor’s tax extension proposal on the ballot in May 2011, and voters would approve the ballot measure. In the May revision, the Governor proposed a Proposition 98 funding level of $53.4 billion. This higher amount was based on improvements in the state’s fiscal situation and continued to assume that the tax extensions would be approved.

As indicated above, the Legislature did not place the tax measures on the ballot. The Governor worked with the Legislature to develop alternative proposals. The final 2011–12 budget package provides a Proposition 98 funding level of $48.7 billion, a reduction of $1.1 billion compared to the revised 2010–11 level.

Given the increase in revenues since the January budget was released, the reduction in Proposition 98 spending requires explanation. There are several reasons for the reduction. First, there are two major program shifts: child care, excluding Preschool, has been moved out of Proposition 98—$1.1 billion—and educationally necessary mental health services for children in special education has been moved into Proposition 98—$221.8 million. The Proposition 98 guarantee has been “rebenched” to account for these program changes.

Second, the $5.1 billion in sales tax revenues associated with the realignment of public safety and social welfare programs from state-level administration to local government administration pursuant to AB 118 is not included in the revenues used in the Proposition 98 calculation, pursuant to AB 114.The provision in AB 114 is contingent on passage of a ballot measure before November 17, 2012, that provides additional funds for schools in an amount sufficient to hold Proposition 98 funding harmless. If the ballot measure is not passed, the amount of the shortfall in funding in 2011–12 (i.e. the amount of the $5.1 billion, estimated at $2.1 billion, required to be provided to K–14 education if the sales tax revenues were included as General Fund revenues) would be repaid over five years as settle-up beginning in 2012–13. The repayments would be used to reduce deferrals, pay mandate obligations, and to support other one-time purposes.

Proposition 98 has also been rebenched as follows:

  • An increase of $578.1 million to hold the guarantee harmless from changes related to motor vehicle revenues.
  • A decrease of $1.7 billion to reflect the availability of property tax revenues in 2011–12 related to the action affecting redevelopment agencies.
K–12 Changes

The budget package assumes K–12 funding under Proposition 98 will be $43.9 billion in 2010–11 and provides $43.2 billion in 2011–12. The 2011–12 funding level is a reduction of $717.2 million compared to the revised 2010–11 level.

Figure 1 (next page) lists major changes to K–12 spending between 2010–11 and 2011–12. Cuts were necessary to replace one-time reductions that were implemented in the current year.

Deferrals

The budget package defers an additional $2.1 billion in revenue limit funds from 2011–12 to 2012–13. This deferral is in addition to the ongoing $1.7 billion deferral adopted as part of the 2010–11 budget package. The deferral was enacted in March. The March package also changed the schedule of intra-year deferrals in a manner that reduces unpredictability and avoids deferral of funds extending over two fiscal years.

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

Program or Activity

Amount
Backfill for one-time solutions/includes deferral 2,095.2
Revenue limit adjustments 267.7
Growth 212.7
Child care adjustments -180.8
Sunset of special disabilities adjustment -74.0
Sunset of special education settlement -25.0
Other special education adjustments -28.2
Restore CalWORKs Stage 3 veto 256.0
Mental health services 221.8
Mandates 80.4
Categorical funding for new charter schools 11.0
Partnership academies 3.2
Defer payments to 2012–13 -2,063.8
Remove child care from Proposition 98 -1,054.5
Child care policy changes -242.7
Use one-time funds for special education -148.6
Other changes -47.4
Total
-717.2
K–12 Changes in Detail
Mid-Year Reduction Triggers

If General Fund revenues fall $2 billion or more short of the amount assumed in the budget (Tier Two), a new reduction of up to 4 percent ($1.5 billion, according to the Department of Finance) will be imposed on revenue limits for school districts, county offices of education, and charter schools. The actual amount will be proportionate to the amount the shortfall exceeds $2 billion. If the reductions are imposed, local educational agencies (LEAs) may reduce the number of instructional days and minutes by up to seven days, subject to collective bargaining agreements. These seven days would be in addition to the five-day reduction allowed previously. This provision is effective February 2012.

In addition, up to $248 million will be reduced from Home-to-School Transportation, if the shortfall exceeds $2 billion. This provision is effective January 2012.

The mid-year reduction trigger provisions were new in June.

Cost-of-Living and Growth Adjustments

The budget package does not provide a cost-of-living adjustment (COLA). The statutory COLA is 2.24 percent, which would have resulted in an increase of $1.2 billion. A deficit factor was established for school district and county office of education revenue limit apportionments to reflect the lack of a COLA.

The budget package assumes a 0.24 percent increase in average daily attendance (ADA). The budget package provides growth funding 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)
Economic Impact Aid (7090 and 7091)
Child nutrition (5310)

Local Budgeting

The budget package specifies that school district and county office of education budgets for 2011–12 “shall project the same level of revenue per unit of average daily attendance as [the agency] received in the 2010–11 fiscal year and shall maintain staffing and program levels commensurate with that level.” The budget package further specifies that school districts and county offices of education “shall not be required to certify in writing whether or not [the agency] is able to meet its financial obligations for the two subsequent fiscal years.”

The budget package also suspends a provision of existing law that allows certificated staff layoffs in August if revenue limits increase by less than 2 percent.

The local budgeting provisions were new in June.

Special Education

The former Governor vetoed $133 million provided in the 2010–11 budget for prior-year mandate claims submitted by county mental health departments for mental health services for special education pupils (AB 3632 services), stating in his veto message that the mandate was suspended. The effect of suspending the mandate was to require LEAs to assume responsibility for providing these services. The March budget package provided $80.8 million in one-time funds for school districts to support mental health services in 2010–11.

The final 2011–12 budget package:

  • Eliminates the AB 3632 mandate, thereby permanently shifting the responsibility for providing educationally necessary mental health services to special education pupils from county mental health departments to LEAs.
  • Provides $221.8 million for LEAs to provide educationally necessary mental health services, including $3 million to fund an extraordinary cost pool for necessary small Special Education Local Plan Areas. The package rebenches the Proposition 98 guarantee to account for the program shift.
  • Redirects $69 million in federal funds from county mental health departments to LEAs for educationally necessary mental health services.
  • Provides $98.6 million in Proposition 63 (Mental Health Services Act) funds on a one-time basis to county mental health departments for mental health services.

These actions were proposed in the May revision. The January budget had proposed to continue the mandate on county mental health departments.

Child Care and Development

The former Governor vetoed $256 million for CalWORKs Stage 3 services in 2010–11. The funding for these services was restored through actions in March and one-time funding identified by the CDE.

The Governor’s Budget proposed to reduce child care funding by $716 million. The March budget package reduced child care by $483 million instead of $716 million. The final budget package reduces child care by less than the March budget
package—$242.7 million. The specific actions in the budget package include:

  • Imposes an across-the-board reduction of 11 percent, including Preschool and excluding CalWORKs Stage 2.
  • Reduces license-exempt providers from 80 percent to 60 percent of the licensed provider rate.
  • Reduces income eligibility from 75 percent of the state median income (SMI) to 70 percent of the SMI, including Preschool.
  • Shifts $1.1 billion in child care expenditures from Proposition 98 funds ($1 billion) and Proposition 98 one-time funds ($52.2 million) to non-Proposition 98 funds. The package rebenches the Proposition 98 guarantee to account for the program shift.

An additional cut of up to $23 million will be triggered if General Fund revenues fall short by more than $1 billion (Tier One).

Charter Schools

The budget package provides $5 million in one-time funds (non-Proposition 98) to supplement 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. This proposal was included in the January budget.

The budget package also provides $11 million for categorical funding ($127 per ADA) to newly established charter schools. Under current law, charter schools established after the base year used for allocating categorical funds (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. Conversion schools are excluded from eligibility; instead, school districts are required to pass through funding to conversion schools.

Student and Teacher Data Systems

The budget funds the California Longitudinal Pupil Achievement Data System (CALPADS) but not the California Longitudinal Teacher Integrated Data Education System (CALTIDES).

The January budget proposed eliminating some funds for these systems. The May revision proposed eliminating additional funds and shifting available federal funding to student assessments, assuming all federally required data collection and reporting can be performed through the older California Basic Educational Data System (CBEDS), pending further review of the state’s data collection, testing, and accountability requirements. The Legislature restored funding for these systems in its June actions but the Governor vetoed funds for CALTIDES.

Mandates

The budget package 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 May revision had proposed to suspend an additional group of mandates but this proposal was not approved by the Legislature.

Federal Funding

The budget provides $21.3 million in federal Title I set-aside carryover funds to be distributed based on the Title I, Part A, Basic, program methodology. The budget package directs $3.5 million of these funds for professional development and other activities related to adoption of the Common Core Standards.

The budget eliminates new funding for several programs to conform to recent federal budget actions.

Other Actions

The March budget package:

  • Extended the flexibility provisions implemented in 2008–09 for an additional two years.
  • Imposed reductions on categorical funding received by basic aid districts to be comparable to revenue limit reductions experienced by other districts.
  • Extended for an additional year the continuous appropriation for K–3 Class Size Reduction.

The June budget package:

  • Changes the distribution of certain “surplus” property taxes. The provision has the effect of using funds that county offices of education cannot spend to reduce state General Fund costs.
  • Provides $3.4 million (Proposition 98 General Fund) for the Clean Technology and Renewable Energy Job Training, Career Technical Education, and Dropout Prevention Program (SBX1 1).
Bill Citations

The budget package includes the following specific bills:

  • March education trailer bill, SB 70, Chapter 7, signed March 24, 2011
  • Intra-year cash deferral, SB 82, Chapter 12, signed March 24, 2011
  • Mental Health Services Act changes, AB 100, Chapter 5, signed March 24, 2011
  • Budget Act, SB 87, Chapter 33, signed June 30, 2011
  • June education trailer bill, AB 114, Chapter 43, signed June 30, 2011
  • Realignment revenues, AB 118, Chapter 40, signed June 30, 2011
  • Trigger reductions, AB 121, Chapter 41, signed June 30, 2011
  • Redevelopment agencies, ABX1 26 and ABX1 27, Chapters 6 and 7, First Extraordinary Session, signed June 29, 2011

If you have any questions regarding the 2011–12 budget, please contact the Legislative Affairs 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:cb

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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