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Gov. Gavin Newsom will release his 2024-25 state budget proposal on Jan. 10, including a plan to address Sacramento's projected deficit. Source: Brontë Wittpenn / San Francisco Chronicle / Polaris
Gov. Gavin Newsom boosted the hopes of school district and community college educators this month when he promised to protect schools and colleges from cuts and meet future spending commitments despite significant declines in state revenues over the past three years.
They may want to clap their hands until the final bill, when Congress passes the 2024-25 budget, comes in June.
The nonpartisan Legislative Analyst's Office (LAO) warned in its analysis of the state budget that there are questions about how Newsom plans to address the massive $8 billion revenue shortfall facing schools and community colleges.
In addition to addressing these challenges, LAO urges lawmakers to begin planning for education spending beyond 2024-25, when stagnant or declining revenues are expected to make fiscal choices difficult. They can raise ongoing costs to sustain ambitious programs, including summer and after-school programs for low-income students, additional community schools, funding early literacy and math teacher training, and confronting learning disruptions after the pandemic.
“The state will likely experience significant operating deficits over the next few years, a result of lower revenue estimates and increased cost pressures,” the analyst said.
But the puzzle at hand is Newsom's strategy for the $8 billion.
Newsom projects a $14.3 billion shortfall in state revenues over three years to run schools and community colleges: the 2022-23 budget year, the current budget year 2023-24, and the following year. This figure is calculated as revenue through Proposition 98, a formula that determines what percentage of the state's general fund should be spent on schools and community colleges (about 40%).
Proposition 98's revenues, while sometimes close, are not exactly the revenues the governor and Legislature assume when approving the budget. Revenues for past and current years may be higher or lower than expected and are not projections for future years.
Budget analysts were at a particular disadvantage when calculating the 2023-24 budget. They did not anticipate the 2022-23 shortfall because of a six-month delay in the 2022 tax return filing deadline and did not discover it until the fall of 2023.
Newsom proposed $5.7 billion from the Proposition 98 Rainy Day Fund to cover this year's deficit and fund the funds needed to maintain a flat budget and modest cost-of-living increases through 2024-25. Depleting the rainy day fund would require approval from the Legislature.
The remainder, and the largest part, is the $9 billion revenue shortfall from 2022 to 2023, which would be $8 billion after applying other automatic adjustments. This shortfall is technically an overpayment above Proposition 98's statutory minimum funding guarantee. This represents a dramatic decrease in actual revenue generated, to $98.3 billion, from what Congress adopted in June 2022. The biggest decline occurred in income tax receipts for the top 1% of earners.
The district has already spent funds starting in 2022.–23, Includes negotiated employee salary increases based on good faith estimates. Newsom and the Legislature could try to deduct overpayments from the current budget and the 2024-25 budget, but such a move “would be devastating for students and staff,” said Patti Herrera, vice president of California School Services, a school consulting firm. Herrera said at the workshop: There were more than 1,000 school district administrators in Sacramento last week.
As an alternative, Newsom proposes finding cuts on the non-Proposition 98 side of the general fund, which includes higher education, child care and all other non-education costs, from prisons to climate change programs.
Herrera said he is very grateful that there will be no attempt to recoup funds awarded to the district in last year's budget.
Newsom's challenge is to make school districts and community colleges financially sound without increasing Proposition 98's guaranteed minimum amount. Raising Proposition 98 could result in larger obligations in the future, including potential deficits beyond 2024-25. The exception is unless Congress increases taxes in an election year.
How Newsom will do this is a mystery. A one-sentence mention of this in his budget summary only says, “The budget proposes statutory changes to address a reduction of approximately $8 billion to avoid impacting existing LEA (school districts) and community college district budgets.”
Both LAO and School Services said they have Treasury's understanding that general fund payments to cover Proposition 98 overpayments will be made over five years, starting in 2025-26.
“We have some questions about the proposal. Perhaps the most pressing issue is how the state will use the revenue it will not collect for several years to address the funding shortfall that currently exists,” said Ken Kapphahn, senior fiscal and policy analyst for TK-12 education at LAO. . .
The problem is legal and political. Proposed statutory language, expected to be released as a trailer bill in the coming weeks, would reveal how the state Treasury would delay balancing the $8 billion 2022-23 budget. Budget hearings on Capitol Hill next week could show how receptive legislative leaders are to further reducing general fund spending as they feel fiscally strained.
Seeking $8 billion in additional funding
Newsom is also proposing a multibillion-dollar accounting maneuver that would record spending in 2024-25 but defer and defer programs and some state benefit payments until early 2025-26. It includes $500 million in deferred repayments to the University of California and California State University for the 5% budget increase that Newsom has promised to fund in 2024-25.
“Many of these solutions involve shifting costs to next year. That’s one of the reasons why the state is seeing large deficits not only this year but also next year,” Kapphan said. “I don’t remember another situation like this.”
Excluding a recession, which neither the LAO nor the Newsom administration predicts, both Newsom and the administration project general fund deficits averaging about $30 billion per year over the next three years, 2024-25. According to LAO, moving forward with the $8 billion solution to the 2022-23 Proposition 98 deficit will compound difficult choices along with other general fund delays and delays.
“Overall, the governor’s budget risks underestimating the extent of the fiscal pressures the state will face going forward,” the LAO analysis said.
LAO proposed other options to address the deficit in 2022-23. Recommends applying the remaining $3.8 billion from Proposition 98 reserve funds that Newsom did not address and exploring cuts to unallocated one-time funding, including canceling $1 billion in unspent funding for community schools and $500 million for electric school buses I did.
Even without Proposition 98 cuts next year, many school districts and charter schools will likely face their own deficits in 2024-25. That's because cost-of-living adjustments expected for next year will not be enough to cover the loss of revenue due to declining enrollment. The COLA, tied to a federal formula that measures goods and services purchased by state and local governments rather than consumer products, is currently projected to be 0.76%. This is the lowest growth rate in 40 years except for 2009, the year after the Great Recession. This would follow two years of near-record COLAs (6.6% and 8.2%).
The analyst office expects COLA to increase by up to 1% by June, when the budget is finalized. At this rate, a hypothetical school district of 10,000 students would lose only about 100 students and lose revenue.
The Paso Robles Joint Unified School District in San Luis Obispo County, which has about 6,000 students, is one district that has seen enrollment declines since the pandemic. As a result, the district, which has about 800 full-time employees, expects to cut five full-time employees in 2024-25 and issue layoff notices for perhaps 40 the following year, said Brad Pawlowski, assistant superintendent for business services.
Pawlowski said he was encouraged after School Services announced the school would avoid cuts in the next budget, but acknowledged there would be a long time between now and the adoption of the budget.
“We saw a common message between the governor and the Legislature to protect education. “That makes me feel better,” he said. But that would require finding other ways to supplement Proposition 98, he added. That’s going to be a really difficult thing.”