Forecasters from the Legislative Analyst’s Office predicted in November that state revenues this year and next would be healthy, and they’re sticking to it in their latest budget outlook, despite economic pessimism underlying Gov. Brown’s proposed budget for next year. The difference could be a couple of billion dollars for K-12 schools and community colleges next year.
If Brown is right, K-12 schools will tread water next year, with little more than a 1.48 percent cost of living adjustment. For some districts, higher mandated costs for teachers’ and staff pensions alone will exceed new revenues. If the LAO’s forecast is closer, legislators and advocates will form a long line seeking more funding for early education, solutions to the teacher shortage, additional money for districts’ operating money through the Local Control Funding Formula and replenished funding to help county offices of education meet added responsibilities under the state’s new accountability system – to name a few.
The current year’s state budget is based on revenue forecasts from last May, so, in proposing next year’s budget, the state Department of Finance always makes mid-year revisions to the current year and adjusts actual revenue from the previous year. Because revenues so far fell below projections, the department has revised how much schools should have gotten in 2015-16, are entitled to get this year, and can expect to receive next year under Proposition 98, the formula that determines how much of the General Fund goes to K-12 and community colleges.
But schools already spent last year’s allocation and are midway through their current budgets, so Brown is proposing to deduct two years of overpayments, totaling $859 million, from the 2017-18 entitlement. As a result, while Prop. 98 would increase 3 percent, or $2.1 billion next year, districts will only see about $1 billion in new money: a cost of living increase plus $287 million in one-time funding that districts could spend as they want. That’s an average of about $170 per student in new money, although the amounts will vary among districts under the state’s Local Control Funding Formula.
The state would also pay its last $200 million installment of a multi-year career pathways initiative, the Career Technical Education Incentive Grant, but Brown is proposing to delay paying for 2,957 additional slots for state preschool.
Brown also isn’t proposing to help districts out with the increase next year in contributions to the California State Teachers Retirement System, which Brown and the Legislature negotiated in 2013. The increase could eat up most of the new money that many districts will get. Phasing in $3.5 billion more in annual costs to the districts over seven years, the deal would more than double districts’ contributions to CalSTRS by 2020-21.
The districts hit hardest would be those with low concentrations of English learners and low-income students. Such students are entitled to extra money under the Local Control Funding Formula. For the first time in four years, many districts can expect higher expenses than they’ll get in revenue increases. School Services of California, a Sacramento-based K-12 consulting company, projects lower revenue increases may once again become the new norm.
“Bottom line, most districts will have difficulty sustaining commitments made in prior years in the face of lower state revenue projections,” School Services said in a budget presentation in Sacramento last week.
But the LAO concluded that Brown was being too cautious. Even though state revenues in December came in $1 billion less than the state was counting on for this year’s budget, LAO is expecting a turnaround in the spring. Brown projected a 3.3 percent growth for 2016-17 in the personal income tax, the largest source of state revenue, which would be less than half of the 8 percent average growth over the past eight years. In 18 of the past 21 years, personal income tax revenue has exceeded 3.3 percent, the LAO noted (see note below.)**
The Department of Finance is forecasting a decline in capital gains revenue, even though it is also projecting the stock market’s main index will grow 6.3 percent. “We cannot reconcile these conflicting projections,” the LAO said in its assessment of Brown’s budget.
April will be the month to watch for state revenue. If it’s back on track for this year, then districts won’t face an $857 million cut in the Prop. 98 allocation in 2017-18. On top of that, $2 billion more next year in General Fund revenue over Brown’s prediction would translate into $500 million more for K-12 schools and community colleges, and $4 billion more in revenue would produce $1.5 billion more for education under Prop. 98, according to the LAO.
Legislators are beginning to file spending bills, preparing for that possibility.
The LAO said it’s not confident projecting revenues beyond next year. With so much uncertainty, it’s recommending dedicating some of any extra revenue for schools next year as one-time expenditures instead of adding to ongoing costs. Brown’s pessimism may prove true, just a year later than he foresees
**Correction: An earlier version incorrectly stated that governors had underestimated personal income tax revenue in 18 or the past 21 years.