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.
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).