With no signs of a recession on the immediate horizon, the Legislative Analyst’s Office is projecting a comfortable increase of $2.6 billion for K-12 schools and community colleges for fiscal 2017-18, starting next July. The additional 3.6 percent would provide an average of about $420 more for each of the state’s 6.2 million K-12 public school students.
The overall state budget “remains on steady footing” with a projected $11.5 billion General Fund reserve by the end of next year, the LAO wrote in an early budget forecast released Wednesday.
“The forecast is better than expected, since economists have been saying a recession is overdue,” said Kevin Gordon, president of Capitol Advisors Group, an education consulting company based in Sacramento. “After so many months of sustained growth, people have been waiting for the other shoe to drop.”
But the shadow of a possible recession beyond next year and an uncertain impact of President-elect Donald Trump’s policies on federal revenue for California complicate multiyear predications, the LAO said. The nonpartisan government agency offered two scenarios: one for continued growth and one for a mild, three-year recession starting in 2018-19.
Under the growth forecast, funding for K-12 and community colleges would rise about $9 billion through 2020-21, to a record $83.5 billion. Under a recession scenario, funding would fall $1.5 billion to $72.4 billion in 2018-19, but rebound to $78.1 billion two years later. That was the pattern in the dotcom bust in 2000, LAO education analyst Kenneth Kapphahn said. That setback was mild compared with the devastating recession in 2008-09, when K-12 schools lost about $6 billion in revenue.
The LAO forecast incorporates the passage last week of Proposition 55, which will extend for a dozen years the temporary income tax on the wealthiest Californians. The tax was due to expire at the end of 2018. It will provide an estimated $4 billion to $9 billion annually, with an estimated half going to schools and community colleges. The impact of a possible recession would be more severe on schools without its passage.
Pension costs rise
With or without a recession, steep pension costs for school employees will continue to eat into school district budgets, as a result of a deal the Legislature and Gov. Jerry Brown struck in 2014. District expenses for hourly school employees under CalPERS and teachers and administrators under CalSTRS have been rising about $1 billion per year, consuming between a quarter and a third of revenue for schools from 2013-14 through 2020-21, the LAO said.
Schools and community colleges are guaranteed a minimum level of funding under Proposition 98, a complex formula that looks at several factors: growth in per capita income, per capita state revenue, cost-of-living increases and student growth. The LAO projects the current 2016-17 guarantee of $71.9 billion to grow to $74.5 billion in 2017-18, with 89 percent – $66.3 billion – going to K-12 schools and the remainder to community colleges.
Brown has steered nearly all K-12 revenue to fund the Local Control Funding Formula since its passage in 2013. It creates a uniform base level of funding and directs additional money based on a district’s proportion of low-income children, English learners and foster and homeless youths. When it’s fully implemented, nearly all districts will receive at least what they had before the Great Recession, including annual cost-of-living increases; districts with large percentages of students targeted for extra funding are already receiving substantially more.
If the LAO’s projections are correct, and Brown steers all of next year’s Prop. 98 increase to the formula, LCFF will be 98.6 percent funded in 2017-18 and fully funded one year later, Kapphahn said. After that, Brown and legislators could use billions of dollars in new funding for other purposes, such as expanding preschool or equalizing disparities in districts’ special education costs. But if there’s a recession, full LCFF funding would be delayed until 2020-21, which is the year the state Department of Finance initially projected for full implementation.