LAO issues mixed bag report on fiscal outlook

The Legislative Analyst’s Office has released their five-year fiscal outlook for California and it’s a good news/uncertain news scenario for K-12 education. The good news is that in the short term, no foreseeable budget cuts appear to be coming to schools in 2017-18. The uncertain news is that the state’s education budget is still held hostage to volatile conditions, and predicting those conditions in out years is uncertain at best.

The LAO report commends the state for building its budget reserves. If current conditions continue, the state would end 2017-18 with $11.5 billion in reserves. This would greatly assist the state in weathering a mild recession, should that occur. Building a budget reserve was a big priority for Gov. Brown, and thanks to a recovered economy he has been able to deliver on that.

But because projecting the budgetary situation for out years is a hazy proposition, the LAO report looks at two different scenarios: continued growth and a mild recession. With the growth scenario, the LAO sees the state continuing to grow its budgetary surplus. With a mild recession, the state still has enough reserves to cover operating deficits through 2020-21. The LAO cautions though that these projections are based on not increasing its spending and the federal government not implementing any major policy changes, something the report notes could indeed take place with the recent presidential election.

The report also takes note of the rising cost of pensions over the five-year timeframe. The LAO sounds a cautionary note that district contribution rates will grow by close to $6 billion annually by 2020-21.

For purposes of planning, the LAO predicts the minimum guarantee will grow in 2017-18 by $2.6 billion. Almost half - $1.2 billion – of this figure would be covered with local property tax revenues. This is attributed to a 5.3 percent increase in assessed property values.

The LAO notes that California could nearly reach the full implementation goals of the Local Control Funding Formula in 2017-18 if the revenue projections materialize and the governor and Legislature opt to appropriate $2.5 billion of ongoing funding to LCFF. They can also choose to appropriate the money in other ways.

The report tempers the funding optimism by noting that the volatility of the funding source for Prop. 98 could affect the minimum guarantee by as much as $500 million, should revenues decline. That volatility is exacerbated by short term factors such as the stock market and long term factors such as property values. This makes looking much further than a year down the road a difficult proposition. In fact, the LAO specifically notes that their mild recession scenario “serves as a cautionary tale about the volatility of Proposition 98 funding.”

The out year funding projections include the benefits attributed to the passage of Prop. 55, which extended current tax levels on the highest wage earners. The provisions of this Proposition will go into effect in 2018 when the original Prop. 30 sunsets.

Lastly, the LAO report warns that any COLA will remain low, around 1 percent. They also predict statewide K-12 attendance will continue a very slow decline, mirroring the drop in birth rates.

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