The LAO is projecting that the surplus in the state's General Fund, assuming there is not a recession in coming years and spending remains relatively flat, will rise from $5.4 billion next year to nearly $10 billion in 2017-18 and then remain level.

The Legislative Analyst’s Office is projecting that the surplus in the state’s General Fund, assuming there is not a recession in coming years and spending remains relatively flat, will rise from $5.4 billion next year to nearly $10 billion in 2017-18 and then remain level. Source: LAO

From gloom to boom, how quickly things change. A resurgent economy and recalculations of revenue from the past two years will leave the state budget with a multi-billion-dollar surplus next year and K-12 schools and community colleges with unexpected billions more to spend, according to a projection that the Legislative Analyst’s Office released on Wednesday.

“The state’s budgetary condition is stronger than at any time in the past decade,” the LAO concluded in its 2014-15 Fiscal Outlook. “The state’s structural deficit – in which ongoing spending commitments were greater than projected revenues – is no more.”

The LAO’s annual projection is the prologue to the numbers that really count – Gov. Jerry Brown’s 2014-15 budget – which will be released in early January. Nonetheless, it will whet legislators’ appetites to what could be a big food fight over restoring cuts from the recession and creating new programs.

Michael Cohen, Gov. Jerry Brown’s director of finance, immediately sought to temper expectations in a statement to the Sacramento Bee. “The focus must continue to be on paying down the state’s accumulated budgetary debt and maintaining a prudent reserve to ensure that we do not return to the days of $26 billion deficits,” it said.

Brown’s current budget projects a $1.1 billion surplus for the year ending June 30. The LAO predicts that surplus will rise to $5.6 billion at the end of 2014-15, even after factoring in higher spending for K-12 and community colleges demanded by Proposition 98, the voter-approved school funding guarantee. And those Prop. 98 projections for 2014-15 are eye-popping.

The LAO predicts that the Proposition 98 guarantee will be $62.2 billion, $7.7 billion – 14 percent – more than the $54.4 billion K-12 and community colleges got for ongoing spending last year. Add to that $4.4 billion more from final Prop. 98 calculations for 2012-13 and this year – money that will likely be rolled over to next year instead of appropriated mid-year – and the total is $12 billion above this year’s Prop. 98 guarantee. About 89 percent of Prop. 98 goes to K-12 districts and 11 percent to community colleges.

Not all of that extra – or even most of it – will end up in districts’ operating budgets, the money that runs schools and pays teachers’ salaries. Brown already has said that a big piece would go toward paying off Prop. 98’s share of the state’s “wall of debt.” It includes $6.2 billion in Prop. 98 deferrals – late payments that disproportionately affect some low-income districts – and $4.8 billion in mandates that went unpaid during the recession, and, in some cases, years before. Brown’s wall of debt does not include additional annual payments that the state and districts must make to put a dent in the $70 billion unfunded liability to CalSTRS for teachers’ and administrators’ pensions. And the governor could also continue what he approved last year: $1.25 billion in one-time dollars to implement Common Core and add funding for the newly approved science standards and tests.

Legislative Analyst Mac Taylor explains 2014-15 budget projections in a video accompanying the Fiscal Outlook.

Legislative Analyst Mac Taylor explains 2014-15 budget projections in a video accompanying the Fiscal Outlook.

There may be plenty of new money for district operating budgets regardless. The LAO suggested that committing $4 billion more in new K-12 per–pupil programmatic funding still would increase spending by about $600 per student, or 7 percent. For a district with large percentages of low-income students and English learners, favored under the new Local Control Funding Formula, that could translate to $800 or more per student next year.

The LAO projects that Prop. 98 increases will continue through 2019-20, though at a slower clip, declining from 7.3 percent to 1.5 percent in 2018-19, when the Prop. 98 guarantee would rise only $1.1 billion. However, the good news is that this coincides with the end of the temporary income tax increase that voters approved a year ago under Proposition 30. Instead of a revenue cliff, which many had feared would occur, there would be a gentle slope.

However, all bets could be off if there is a recession between now and then, which is why the LAO is suggesting that the state build up its reserves. Since the end of World War II, a recession has happened every five years, on average. The Great Recession technically ended four years ago (even though it may not seem that way for many Californians).

Filed under: Featured, Reporting & Analysis, School Finance, State Budget

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  1. John Fensterwald says:

    Can’t fire the headline writer, John, since he needs a job. But in this case, I happen to agree with him (me). It would be potentially huge jump in one-year spending, especially when the $4 billion in one-time dollars left over from 11-12 and 12-13 is included. However, you are right: especially
    with the expiration of Prop 30, the big projected yearly Prop. 98 increases would tail off in a few years, and CA would end up still substantially lagging the national average.

  2. With all of the previous CA “blueprints” and recommendations documented in GREATNESS by DESIGN, how reasonable would it be to expect that programs like National Board Certification incentives and the BTSA induction programs would be beneficiaries of the “bump” in billions of surplus dollars in the mix? Just curious?!
    Rae Adams

  3. john mockler says:

    John Good Story bad headline. It won’t be “Huge” until they get California back to the National Average. When you cut schools by $11 billion then pay back a bit is is nice and comfy but not “Huge” John

  4. navigio says:

    The report also says that even with these current projections, LCFF will take a couple more years than planned to fully fund. The tone of the story sounds much different than that. (?)

    1. John Fensterwald says:

      Beat me to it, navigio. I was about to do a sidebar on that issue.

      1. navigio says:

        whoops, sorry. sometimes im just a teenie bit impatient.. ;-)

        1. John Fensterwald says:

          You’d be a fine editor; impatience is a strength in this line of work, navigio.

          1. el says:

            So the jist of this is, expect a bump up for next year in budget but after that there may be little if any rise?

            Are the moneys they’re talking about finally paying back ones that were already accounted for in budgets… ie were they affecting cash flow only and were booked into reserves, or is it money that hasn’t been in those district budgets?

            It sounds like the reality is is that we can all start breathing again because the cuts have stopped and will stay stopped, but most districts will still be below their 2007-2008 existence for a long time to come.

            1. navigio says:

              I think it depends on the district. Had a district kicked the can down the road to this year, its possible they’d still need to make cuts, even with the projected increase, and maybe especially if they are a low poverty district. And yes, a lot of money is going toward paying down deferrals, though if memory serves, they’ll still only make it about halfway on that front this year (I think they even incurred some more this year).

              I think your reference to 07-08 is an important one. We need to be careful about assuming something got fixed here (at least relative to that year).

              I also noticed that even though property tax revenues are slated to increase at a more normal pace, those revenues were overstated in the most recent budget. Not sure its by enough to have much impact though, however, it does offset what the state must cover, so its relevant.

            2. John Fensterwald says:

              ‘el: The $4 billion extra in Prop 98 from the last two years ’11-’12 and ’12-’13 would be one-time new money that districts had not counted on or built into their budgets. Brown might want to use most of that to pay down the $6 billion plus in deferrals, late payments that have been created cash-flow headaches for some districts.
              Navigio is right: Even with good times, some districts with declining enrollments and few high-needs students (therefore getting less revenue) and that didn’t made cuts in hard times still may face financial challenges next year.

              1. Manuel says:

                Color me confused, but I fail to understand the concept. It seems that x number of billions of dollars will be send to districts “to pay down the deferrals.”

                What exactly are the districts expected to do with this money? Put it in the bank? Pay down their debt to financial institutions? Or spend it on current personnel?

                Is there a way of tracking this “new” money? Considering that LAUSD has still to tell the public how the 2013-14 budget was affected by LCFF, I’m not holding my breath…

                But it is all bird-in-the-bush until Gov. Brown comes out with the budget for 2014-15 even though it gives the Usual Suspects something to fight over.

              2. John Fensterwald says:

                Manuel: The districts won’t see the deferrals as extra billions coming their way. They’ll just see what’s owed to them being paid on time – in the year in which it was budgeted, instead of the following year as an IOU. That means they won’t have to shift funds around or go out on the market to borrow the money, with interest, waiting for the state to pay its bills.

              3. navigio says:

                Has edsource ever done a story on what deferrals look like for different districts? it seems some districts are forced to literally borrow, while others seem able to cover the deferral with something else (maybe economic uncertainty, I dont know). I remember trying to figure this out a while back and it not being very transparent at all.

              4. John Fensterwald says:

                Not lately, navigio. But I did write about deferrals in 2011, when they totaled $10 billion, while I was writing my Educated Guess posts at the Silicon Valley Education Foundation.