Photo by Zaidee Stavely / EdSource
A school mural at Havenscourt Campus in Oakland

State officials insist it’s too early to predict the size of the fiscal hole in the 2020-21 state budget. The filing deadline for the income and capital gains taxes for last year has been pushed back to July, and the path of the coronavirus remains unpredictable.

Next week, when he releases the May revision of the state budget from January, Gov. Gavin Newsom will likely say it’ll be bad, but stay tuned for the details later this summer.

“We can build scenarios around different levels of cuts and reductions,” said David Gordon, superintendent of the Sacramento County Office of Education, “but it’s all speculation till we see the actual numbers.”

Nonetheless, there are some ballpark estimates. As unemployment soars and the outlook for a steep recession looms, analysts are cranking new data into old forecasts, and the projected impact on education funding is ugly — probably a bigger dollar cut next year than the worst year in the Great Recession. Whether school districts, community colleges and early education programs will feel the full impact may depend on how much Newsom funds them beyond the statutory minimum.

Newsom this week acknowledged overall state revenue declines would be in the “tens of billions.” The California Department of Finance pointed to a scenario in the January budget (page 228) of a “moderate” recession with revenue losses of $50 billion — $25 billion for each of the first two years — followed by further annual declines of $15 billion to $20 billion for years after that.

In testimony on April 16 before the Senate budget committee last month (starting at 13:50), Legislative Analyst Gabriel Petek applied COVID-19’s financial equivalent of a coronary thrombosis to the Great Recession. His conclusion: a two-year, $35 billion hit in revenue, with 80% — $28 billion — falling in 2020-21 and only $7 billion in the current year that ends June 30. That’s because plummeting personal income taxes in calendar 2020, which account for about two-thirds of General Fund revenue, will wallop the 2020-21 fiscal year and beyond.

When he closed schools in March, Newsom assured K-12 schools they’d get their full state funding for 2019-20 year as long as they agreed to feed low-income students, provide distance learning for all students and child care for essential workers. Districts won’t directly be affected by a drop this year in the funding through Proposition 98, the formula that determines how much of the General Fund goes to K-12 and community colleges.

But 2020-21 will be painful. Prop. 98, a constitutional provision that voters passed in 1988, is a complicated formula. But as a rule of thumb, K-12 and community colleges receive 40% of the General Fund each year. A 40% slice of the LAO’s estimated $28 million drop in revenue for the coming year would be $11.2 billion for K-12 and community colleges. That compares with a cut of $7.4 billion in Prop. 98 in 2008-09, the worst single year during the Great Recession.

In terms of percentages, the Prop. 98 drop in 2008-09 was 13%, about $1,200 per student. Prop. 98 has grown more than $30 billion since the nadir of the Great Recession and a loss of $11 billion next year would be 14 or 15%, about $1,700 per student. And that’s for a “moderate” recession; the COVID-19 recession is looking to be severe, at least for the next year or two.

During the Great Recession, the American Recovery and Reinvestment Act, which Congress passed in 2009, helped school districts weather the recession with $6 billion in help during the first two years. When the money ran out, Prop. 98 cuts continued until 2011-12.

Newsom is fond of calling California, the world’s fifth-largest economy, a “nation state,” but he’s counting on Washington, D.C., to help it and other states ward off financial disaster. Unlike the federal government, states have to balance their budgets each year.

By July 1, California’s K-12 schools will receive $1.9 billion as its share of the $2.2 trillion in relief from the CARES Act, which Congress passed on March 27. California schools would get at least $20 billion more if Congress agrees to include $200 billion, sought by the Council of the Great City Schools and other education organizations, in the next round of relief. In an April 8 letter to House Speaker Nancy Pelosi, Newsom requested a $1 trillion package for state and local governments, including several hundred billion dollars for K-12.

Pelosi’s all in for that plus more money for special education, but Senate Majority Leader Mitch McConnell isn’t yet, and negotiations could be long and hard. In a column this week, longtime Capitol Hill observer Marguerite Roza, director of the Edunomics Lab and a research associate professor at Georgetown University, warned school systems not to engage in a “game of chicken” with Congress while they should be preparing for tough decisions.

Stocking up with cash

School districts have one advantage they lacked heading into the Great Recession: budget reserves that average 17% of their budgets, a historically high level, according to a recent LAO report. But there is a wide variation, too, with big districts tending to have smaller savings. They will need big reserves if, as expected, the state resorts to a tactic used extensively during the Great Recession to avoid additional funding cuts. That is to use “deferrals,” which are late payments to school districts, by months or, as occurred in the Great Recession, into the next fiscal year. The advantage to districts is that they can budget the IOU as revenue and avoid layoffs. By 2012-12, $10 billion – about a quarter of what the state owed districts – was paid  one to five month late.

The challenge is they have to borrow money to make payroll — a burden for some small districts, charter schools and larger districts living on the edge. In an April alert, the Fiscal Crisis and Management Assistance Team, the state agency that oversees districts’ financial health, warned districts to build up their cash reserves. “Cash deferrals are more favorable than actual reductions in state funding,” it said but districts have to pay attention to how much money they have on hand, it said.

“This is the time your school boards should bless those who stood strong and said, ‘We are not going to eat into our reserves,'” said Gordon.

The state has built up a rainy day fund — the Budget Stabilization Account — that as of February was $17.5 billion, also a historic level. But there will be big demands for the money and no assurance that Newsom will direct any of it to schools. There is a separate Prop. 98 reserve, but the LAO reports it’s only $377 million — less than 1% of school spending.

Unlike the Great Recession, the pandemic has imposed unprecedented expenses, from food to computer purchases. A return to school could compound staffing needs and add to expenses. Addressing learning deficits and issues of trauma will demand more counseling, after school programs or perhaps an extended year, adding cost pressures for districts looking to cut costs.

In an April 23 letter to Newsom, Assembly Speaker Anthony Rendon and Senate President Pro Tem Toni Atkins, 760 nonprofit children’s organizations, advocacy groups and health agencies called on them to “prioritize kids” in the next state budget, “holding crucial children’s programs and services harmless and increasing targeted supports as much as possible.”

The release of the May budget revision next week may offer some early signals of Newsom’s willingness and ability to do so:

Status of cost of living adjustment: In his pre-COVID-19 budget in January, Newsom proposed increasing spending by nearly $4 billion, including $1.2 billion for a 2.3% cost of living adjustment for the Local Control Funding Formula, the source for most district spending. Now, education groups would be happy with just the COLA alone and will be watching closely to see if it’s included.

Pension increases: Some of the state’s largest school districts have called on the Legislature to suspend school districts’ contribution increases for two years to the two pension funds representing school employees. Since 2014, districts’ payments to for teachers, through CalSTRS, and other school employees, through CalPERS have more than doubled. The increases are required to restore the pension funds’ financial health from investment losses during the Great Recession and unwise benefits decisions before then. Postponing higher payments would free up nearly $2 billion for districts over the next two years. Districts are hoping Newsom will agree, in the May revision.

Learning loss: Last week, Newsom suggested that districts should start school early to mitigate the loss of learning that most students, but especially low-income children, have experienced during two months of school closures. He did not indicate how the interventions would be paid for. District leaders hope Newsom will identify a funding source in the May revision.

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  1. Robert Rada 3 weeks ago3 weeks ago

    In recent years, districts have implemented various cash retirement incentives to older more expensive teachers to stand-down to save $$$. That strategy will no longer be needed. Veteran teachers will now stand-down voluntarily rather than ride out this crisis. In my area, I have noticed teacher friends now submitting their paperwork to STRS and heading out to pasture. I predict a massive teacher retirement wave throughout CA. Hopefully I'm right and this will help to … Read More

    In recent years, districts have implemented various cash retirement incentives to older more expensive teachers to stand-down to save $$$. That strategy will no longer be needed. Veteran teachers will now stand-down voluntarily rather than ride out this crisis. In my area, I have noticed teacher friends now submitting their paperwork to STRS and heading out to pasture. I predict a massive teacher retirement wave throughout CA. Hopefully I’m right and this will help to elevate some financial pressure for districts.

  2. Prof Watson 4 weeks ago4 weeks ago

    Class sizes can double due to layoffs of teachers or teachers could take a 25% deferred compensation. They would in effect be loaning money to the school district. Obviously, the federal government will not make the school districts whole. There will be big cuts. The party is over. Our borrowings will be paid for by our children and grandchildren.

  3. Jennifer Bestor 1 month ago1 month ago

    Deferrals are not a panacea. The rapidly growing deferrals in the wake of the 2008 recession only "worked" because Prop 30 passed in 2012. That proposition raised taxes by $6B a year, slowly bailing K-14 schools out by 2016. Both the January 2012 budget and May 2012 revise made it clear that, without $6B in new tax revenue, there would be a $6B cut to school spending. One week before Prop … Read More

    Deferrals are not a panacea. The rapidly growing deferrals in the wake of the 2008 recession only “worked” because Prop 30 passed in 2012. That proposition raised taxes by $6B a year, slowly bailing K-14 schools out by 2016. Both the January 2012 budget and May 2012 revise made it clear that, without $6B in new tax revenue, there would be a $6B cut to school spending. One week before Prop 30’s passage, Gov. Brown was on the record doubting its passage.

  4. Cathy Campbell 1 month ago1 month ago

    Can someone link to the FCMAT statement that came out today with very dire projections?

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  5. Jennifer Andaluz 1 month ago1 month ago

    Excellent summary that will be used to help DCP stakeholders understand the financial realities facing all public schools, including charter schools.

  6. Frances O'Neill Zimmerman 1 month ago1 month ago

    Erosion of public education opportunity for California's children is nothing new: it's just more sudden and dramatic with the sudden pandemic emergency. Since March 13 the coronavirus has already dealt a body-blow to the prospects of every public school student in the state of California. And there's more to come.Our mediocre K-12 education system -- look at state rankings -- has been tolerated, underfunded and hollowed-out rather than strengthened and improved. Such a … Read More

    Erosion of public education opportunity for California’s children is nothing new: it’s just more sudden and dramatic with the sudden pandemic emergency. Since March 13 the coronavirus has already dealt a body-blow to the prospects of every public school student in the state of California. And there’s more to come.Our mediocre K-12 education system — look at state rankings — has been tolerated, underfunded and hollowed-out rather than strengthened and improved. Such a system cannot withstand this new shock. As we move to half-a-loaf online classes, physically-distanced smaller classrooms that require split daily schedules, we should acknowledge that “learning loss” is everybody’s fate now.

  7. Thomas Jamison 1 month ago1 month ago

    It is so disheartening to hear that schools will once again struggle under the lack of funds but this does not seem to stop Gov. Newsom from giving $75M of tax payer money to illegal aliens as a stimulus during the Coronavirus pandemic. He cares more about illegal, non-citizens that he does for the people of California and out children wind up being the ultimate victims here.

  8. Stan Sexton 1 month ago1 month ago

    I welcome the Storm! When Curtis Ishii’s $418,000+ CalPERS pension is cut, the poor taxpayers of California can celebrate. Both CalPERS and CalSTRS employee pay, benefit and pensions greatly exceed the private sector equivalent. And they take no economic risk.

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    • SS 4 weeks ago4 weeks ago

      Give it a rest. The average CalPERS pension is more like $2,500 to $3,000 per month, and that’s after many, many years of service and the employee/employer making contributions. The outliers are there, for sure, but let’s not get carried away.

      • Todd Maddison 4 weeks ago4 weeks ago

        "Average pension" is a useless number, because it includes people who did not work the full 20 or 30 years required to get a full pension. If one only worked the minimum period to qualify for a pension, of course one is going to get a minimal return from that. In reality, if one looks at people who have put a full career in - or at least a significant portion of a full career - the … Read More

        “Average pension” is a useless number, because it includes people who did not work the full 20 or 30 years required to get a full pension.

        If one only worked the minimum period to qualify for a pension, of course one is going to get a minimal return from that.

        In reality, if one looks at people who have put a full career in – or at least a significant portion of a full career – the number is much higher than “2500-3000/month”.

        Data from 2019 shows the average CalSTRS pension for people with 30+ years in the system is $75,992. For those with 20+ years it is $63,562.

        Even overall, including almost 30,000 recipients that spent less than 10 years in the system, the average is $50,698, or $4224/month.

        Here’s data on that in case anyone wants to see the real numbers…

        https://drive.google.com/open?id=1ssgJQ_l-oqezQB0kRTI0tfTsyizOQsfe

        • Craig Gordon 3 weeks ago3 weeks ago

          Here's a "real number" for you, Todd. I taught in public school for 24 years, and my STRS monthly gross amount, before taxes, is less than $3,100 or about $37,000 a year. The numbers you quote might actually allow "retired" teachers to retire, instead of continuing to substitute teach to afford the high cost of living in California that is enriching some and impoverishing many. Yeah, these exorbitant pensions are the real cause of … Read More

          Here’s a “real number” for you, Todd. I taught in public school for 24 years, and my STRS monthly gross amount, before taxes, is less than $3,100 or about $37,000 a year. The numbers you quote might actually allow “retired” teachers to retire, instead of continuing to substitute teach to afford the high cost of living in California that is enriching some and impoverishing many.

          Yeah, these exorbitant pensions are the real cause of the budget cuts and layoffs to schools that already crowd 32 students or more into a classroom, provide one counselor to 700 students and one nurse for 1500-2000 students. That, and of course, the massive salaries educators and other school workers pocket before cashing in on this golden parachute. It has nothing to do with billionaires and corporations paying less in taxes than most working class people do.

  9. Christopher Chiang 1 month ago1 month ago

    How will this effect basic aid districts? Any prediction?

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    • Jennifer Bestor 4 weeks ago4 weeks ago

      Did you want a quick answer? Most basic-aids will be shaken and somewhat stirred, but probably emerge from the upcoming chaos a little better positioned than they entered it. The wonky, thoughtful, complex answer: The effect on current basic-aid district student spending will depend on two major factors -- their local property markets and enrollment changes. (Basic-aids are districts funded primarily by those local property taxes that the Legislature did not hand off … Read More

      Did you want a quick answer? Most basic-aids will be shaken and somewhat stirred, but probably emerge from the upcoming chaos a little better positioned than they entered it.

      The wonky, thoughtful, complex answer:

      The effect on current basic-aid district student spending will depend on two major factors — their local property markets and enrollment changes. (Basic-aids are districts funded primarily by those local property taxes that the Legislature did not hand off to their local cities and county a year after Prop 13 (1978) — often but not always in higher cost and/or wealth areas.)

      Basic-aid revenues reflect a combination of (a) changes in local property prices, (2) Prop 8 (1978) decline-in-value requirements, (3) the base-year distribution of properties in a given area, and (4) the distribution of types of local properties.

      I have heard a 20% market drop bantered around among local Silicon Valley realtors. How might this play out in Silicon Valley basic-aid districts?

      Roughly 40% of local properties were sold in the past decade, thus their property tax assessments might be affected by the 20% drop. (The *assessed* value of the other 60% of parcels is generally below 80% of their current market value, thus their property tax payments will be unaffected by such a drop.) This 40% of recent sales contributes about 55-60% of all local property tax revenue. A rough cut would therefore suggest an 11-12% drop in funding (20% x 55-60%), while a more nuanced analysis of the last ten years of property value increases suggests somewhat less — about 5-6%.

      This assumes a uniform drop in values by property type. If a district is heavily dependent upon a single type of property — perhaps hotels and restaurants — the distribution of market change by type will really matter and any analysis would need to be weighted accordingly.

      A 5-6% drop also assumes that earlier base-year properties don’t sell during this period, with concomitant increases in their assessed values and tax payments. In fact properties do sell, and, looking at the Silicon Valley assessors’ reports for the years after 2008, the net effect can easily be a wash — that is, property tax revenues in basic-aid districts remained pretty stable through that downturn with new sales picking up much of the slack created by Prop 8 decline in values.

      That said, the state cut its funding to basic-aids by about $500/student, which did take a toll.

      Per-student funding (compared with overall revenues) also tended to fall slightly because enrollment grew in basic-aids. Some of this was local private school students switching to their public schools. Some was the effect of families moving from failing revenue-limit (now LCFF) funded districts. Increased enrollment diluted both property tax revenue and other local income (parcel taxes, ed foundations). Overall, a 5% drop would be a reasonable estimate. (Carmel Unified fell 10% from 2007-8 to 2011-12 — a case of the Silicon Valley sneezing and its vacation playground getting a cold.)

      Coming out of the last recession, however, basic-aid property tax revenues grew and enrollments flattened, so a *relatively* stable recessionary period has allowed them to since (merely) grapple with all the other problems facing education (teacher shortages, housing prices, pension payments). As a result, they have emerged slightly better positioned than their LCFF peers to attract new teaching talent, to fund facility improvements, to cope with new testing standards, and hopefully to weather this next disaster. (Considerably better positioned than LCFF districts in high-cost counties, given the flat LCFF funding statewide, which cripples low-income districts in those counties.)

      • Amoree Cole 4 weeks ago4 weeks ago

        @Jennifer Bestor - thank you for your thoughtful post. I would add another fine point lost on most related to Basic Aid districts. In the last recession, 70-80 districts that "fell into" Basic Aid status as a result of the state cutting their original entitlement rates, were also given the same $500/ADA haircut as their Basic Aid peer districts. Then, they were never given back the amount cut post-recession, and then "fell out" of Basic … Read More

        @Jennifer Bestor – thank you for your thoughtful post. I would add another fine point lost on most related to Basic Aid districts. In the last recession, 70-80 districts that “fell into” Basic Aid status as a result of the state cutting their original entitlement rates, were also given the same $500/ADA haircut as their Basic Aid peer districts. Then, they were never given back the amount cut post-recession, and then “fell out” of Basic Aid again when funding entitlements were recalculated for the new Local Control Funding Formula.

        I would call these districts “tweeners” because they are only Basic Aid when it suits the state’s financial position. They also never qualify for any of the new programs that legislators mandate, yet have students who require the services. I appreciate that you qualified your comments near the end. Thanks for acknowledging the pain everyone will feel. While neighboring high LCFF districts coughed up large raises and swollen pension contributions as a result of their new revenues – these tweener districts were left behind. We’ll see if anyone will remember the “fair share” of these districts.

  10. john gray 1 month ago1 month ago

    John,

    Well done as usual. For someone who never actually worked in the business office of a school district, your grasp of the highly technical aspects of school finance is remarkable. Keep up the excellent reporting!!

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    • John Fensterwald 1 month ago1 month ago

      Thanks, John. High praise from an authority on the budget.