A new Legislative Analyst’s Office report supports the Education Coalition’s call for increased revenues, and warns of inaction as the state budget deficit could hit $27.8 billion.

In a dire threat to schools that solidifies the Education Coalition’s call for new sources of state revenue to prevent further education cuts, the new LAO report warns that the state budget deficit could reach $27.8 billion over the next 20 months and that it’s no longer possible to resolve the staggering budget crisis without raising taxes.

It didn’t take long for the newly appointed Legislative Analyst Mac Taylor, who took over for the retired Elizabeth Hill, to jump right into the budget deficit fray with his analysis of the governor’s proposal for a special session.

The Legislative Analyst’s Office noted immediately that the revenues in the state are plummeting quickly and will continue to plummet if the Legislature fails to act quickly. Further, the deficit has become a monumental problem and now equals almost $28 billion over a 20-month period.

The Education Coalition had warned that the “borrowing” budget approved by the governor and the Legislature in September would just push the state’s fiscal problems down the road, but the road turned out to be very short. While the Education Coalition does not agree with all of the recommendations by the LAO, the need for new revenues is imperative. Public schools and our students’ futures should not be sacrificed to balance the budget.

Gov. Schwarzenegger has proposed an initial budget plan to address the situation. The LAO praised the governor’s long-term approach of examining permanent revenues and taking a balanced approach to solving the budget deficit. However, the LAO also urged lawmakers to act early and reach a solution now. Failure to solve the deficit early will cause the state to make huge cuts in the 2009-10 budget year. In addition, the failure to act early will cause the state to make severe reductions to current services in the 2008-09 budget year.

Public schools have been cut by more than $3.5 billion this year. Those cuts have led to larger class sizes, the layoffs of thousands of teachers and critical education support staff, and the further elimination of art, music and vocational education programs.

Many cash-strapped school districts are now at the financial tipping point. Any additional cuts to education will be disastrous for students, putting their futures at risk. California was already ranked 46th out of 50 states in the nation in per-pupil spending before the September spending plan gutted school funding even more.

LAO analysis of governor’s proposal

The LAO believes that the governor’s estimates are reasonable. California, much like the rest of the nation, is facing a struggling and slowing economy, which has caused a major reduction in expected revenues. The state’s spending problems are magnified by a reduction in local property taxes for schools because of the housing market crash. The loss of local property taxes makes schools more reliant on state funding. 

The LAO notes that if the governor’s proposal is implemented as is and the deficits are solved for the 2008-09 fiscal year and the 2009-10 fiscal year, the state will end the 2009-10 fiscal year with a $168 million reserve. However, the long-term outlook is less rosy. The governor’s proposal cuts the projected ongoing deficit in half, but still leaves a deficit of almost $10 billion a year after the 2010-11 budget years.

As for Proposition 98 funding, the LAO notes that the governor proposes a mid-year reduction to K-12 funding of $2.2 billion that comes mostly from base reductions to K-12 revenue limits through a rescission of the 0.68 percent COLA, and $132 million captured from child care and other K-12 programs with lower-than-expected expenditures.

The LAO notes across a two-year period – 2008-09 and 2009-10 – the governor’s proposed cuts to Prop. 98 will equate to a total reduction of $3.2 billion from the funding levels assumed in the 2008 Budget Act that was signed just a few weeks ago.

While finding areas of agreement with the governor’s proposal, the LAO suggested an alternative approach revolving around several themes.

First, taking action early and saving money in the current year will carry over into the 2009-10 budget year and help mitigate the adverse effects of any necessary reduction for 2009-10. Acting early will also help mitigate the state’s cash flow demands. Second, any actions by the Legislature such as raising taxes or cutting expenditures will have an adverse effect on the economy.

Since any of the actions could adversely affect the economy, the Legislature should look toward developing a permanent fix to the budget problems. Finally, the state should push for any federal assistance that may come from a federal stimulus package.

Proposition 98

The LAO concedes that making mid-year cuts the magnitude of those proposed by the governor cannot be realistically accommodated by local districts. Instead, the LAO suggested taking a more modest approach to mid-year cuts. The LAO’s approach would include the following:

Mid-year cut of $1 billion by:

• Suspending COLA.

• Sweeping up unexpended resources from programs that had lower than expected usage.

• Suspending several programs including professional development, maintenance and instructional materials.

• Scoring any current year Prop. 98 spending that exceeds the calculated guarantee or the “over-appropriation” as “settle-up” dollars.

• Educational Revenue Aug-mentation Funds Redevelopment Pass-Through Payments Increase current-year amount by $50 million and make the pass-through requirement permanent. This would offset part of the annual revenue loss K-14 districts experience due to redevelopment.

The LAO urges the Legislature to act now to implement any midyear cuts because of the magnitude of the cuts and the potential impact on school districts.

Further, the LAO encourages lawmakers to link reduced state funding either to reduced local costs or increased local revenue. Taylor also believes the state should preserve K-12 revenue limits and instead make targeted, transparent cuts by identifying low priority categorical programs and cutting them directly.

Revenue options

The LAO proposes several options to raise revenues or make additional program reductions or revisions. Some examples of these are as follows:

• Raise the vehicle license fee from 0.65 percent to 1 percent, the same level as other property taxes, and use the revenues to realign state programs.

• Consider a smaller one-cent sales tax increase.

• Impose a temporary 5 percent income tax surcharge on all personal income taxpayers.

ACSA will keep members apprised as developments continue to occur. If you have any questions, please e-mail ACSA Legislative Advocate Adonai Mack at amack@acsa.org.