Budget Picture Likely to Remain Murky For Some Time

However, several risk factors may have a significant impact on the budget— ranging from accelerated withholding,  a total of eight million dollars in State IOUs, expenditure cuts, a non-improving economy, the veto of AB 3632, and the ending of five-year flexibility.

The state budget is all based upon the economy in the state of California.  It doesn’t appear that the economy is getting worse, but at the same time, the economy isn’t getting any better. The budget is very dependent on where the economy goes now and for the next several years to come. 

The keys to the recovery have always been improvement in the construction agency and improvement in employment (as long as CA has a high unemployment rate—that will be a problem for the income and state taxes that funds the budget).

As discussed in the last board meeting, the state budget assumes a $1.4B higher revenue estimate, on top of the 5.7% revenue increase projected in the May Revision.  The district needs to figure out if they are going to meet those revenues.

July and August were tracking the May Revision, not exceeding it.  To help the state cash flows, they’ve accelerated withholding, which is also a channel they have in tracking the revenues.  Therefore, it’s very hard, even when the cash receipts are up at the State Level because they expect, starting in November, December and January, that the dollar will actually start going down because people have paid enough withholding towards their taxes. 

This makes it a challenge when you’re doing cash accounting because you really have to ask if it’s withholding or real revenue dollars coming in.  This is because the district’s fiscal year goes from July to June, and the people’s tax years go from January to December.

The district had assumed the May Revision had a high number, but it appears to be $1.6B more than thought.  As far as this goes, the district has to wait and see if that money will come from the Federal Government.

Another fairly aggressive risk is expenditure cuts in other areas of the budget.  There are $7.5B assumed; however, one third of the year is already gone, so that the nine months left in the year have to get the $7.5B—and once the state signs the budget, it actually takes months to implement.  This leaves the district wondering if at this point in time they can get that dollar amount.

The troubling thing about the growth and assumptions in the revenue is that, according to a UCLA economy forecast (which is considered the better source to use when looking at revenue growth in California) the projection of economic growth is much weaker than the State’s assumption, with a 3.7% increase in 2011 by UCLA, and a 4.5% difference in 2011 for the State.  The school services see this and realize that there is a lot of risk inherent as to whether all these revenues will actually come in.

Spending to support K-12 education in 2010-2011 will exceed suspended level of Proposition 98 (which funds K-14) by an estimated $2.8B, reaching $52.5B.  The $2.8B is actually deferred into getting paid in next year’s budget, so while on accounting dollars it’s on the districts ledger it’s not funded and appropriated in the state budget until next year.  This brings forth the issue of whether the money is available to spend this year or not.

There were a few major changes made from the May Revision to the Final Budget. The May Revision reduced revenue limits by $1.5 B, but they were all fully restored in the budget. 

The May Revision offered no funding for prior-year mandates.  The budget has $30M in one-time mandate funds, of which $100 M is for the 2010-11 claims and $200M is for prior-year claims.

The May Revision eliminated child care programs, while funding was fully restored for licensed care providers in the Final Budget.

However, the May Revision suspended the existing AB 3632 special education county mental health mandate, which would have not been suspended in the Final Budget, had the governor not vetoed.  Bruce Colby stated, “that’s one of the reason why I say we’re not better off from where we were…that’s going to be a huge legal battle and there’s a huge bill that comes because we have to provide those services to our students.”

Something else to keep in mind is that the five-year flexibility items that were put up at the beginning when the state started having budget problems are going to end soon.  K-3 CSR flexibility goes away for 2012-13, as well as all the rest of Tier III categorical flexibility in June 2013.  There is a chance that they may be extended, but there’s a chance they won’t be, and that’s why Mr. Colby insists that planning ahead is important.

One thing is that there are no reductions to revenue limit funding—there will be a budget increase of $2M dollars (not to be confused with a cash increase).  This is currently in the form of a state IOU, and will not be funded until July or August of next year.  Mandate funding will be a budget increase of $300-$400 thousand—and the district is still unsure if this will be a deferred or not.

Also, mental health coverage with become the district’s responsibility, and the Governor’s veto will be an estimated cost of $4M per year, with Yolo Country responsible for 40%.  According to Bruce Colby, “that could be a $1.6M dollar price tag [annually] for DJUSD school students for mental health.”

Davis has a higher volume of students who fall into the classification of special needs (Families First), which is taken care of by Mental Health Coverage, so Davis in particular has an elevated cost for that.

This creates a challenge with the budget, because the phantom $2M is not cash, and the estimated $1.6M is—so the district could potentially be, right off the bat, $1.6M dollars in the hole.  This really depends on legislation and whether the decision is made to keep this veto active or not, and according to Mr. Colby, “the Senate is not happy with this… [they’ll need] to work with the new Governor.”

SELPA is sending out a letter to Sacramento to express “displeasure” with many representatives, including the district board.  This will most likely go to court.

Tim Taylor mentioned that, “In honest truth, if there’s a lot of service being provided…we would still have to pay…But I’m sure the providers aren’t going to just sit on it and wait for a lawsuit to just wind its way through.”

Mr. Colby admitted, “It’s a challenge…a sticky point in the budget process that we just have to work through.”

It’s a Federal Mandate to provide these services, they don’t prescribe who has to pay, but it has to be paid for.  The Governor doesn’t really have the authority to suspend a mandate, he just actually line-itemed the dollars that go with it.  So the problem is that the service has to be provided and it defaults back to the district where the student is.

On the good news side, the district did receive $1.4M in the federal education jobs to be spent by September 2012. There were also some carryovers owed to programs.  Also, the favorabilities received by the un-audited actuals will help to cover more teaching staff the district has for its students.

The summary of the budget is that there is no new cash funding.  The biggest thing that has to be watched is that the State Budget remains in a huge deficit position and the problem keeps being moved out further.  It’s not sustainable, so the funding is still at risk for the district. 

The first interim report will be received by the Board on December 16th. 

This is Samantha Lynch reporting.