Other Voices: Worst still ahead for schools?
Over the past couple of years, California’s school agencies have had a piling on of negative fiscal surprises. Just when we think it can’t get worse, it does. Planning has becoming increasingly challenging, and it is reasonable to believe additional negative surprises are around the corner. But when? And how much? And will there be any more flexibility or offsets? And what happens if we just can’t cut any more?
These are all legitimate questions that every school district has to answer. We have provided advice on some of the “knowns,” for example, the dollar value of the negative cost-of-living adjustment (COLA) and the per-ADA impact of the Governor’s proposed $1.5 billion deduction. Planning for these is easy: Use the numbers in the SSC Dartboard and pay attention as we revise it throughout the budget development process.
But what about the risks and uncertainties that go beyond the “knowns”? We divide those uncertainties into groups and each district needs to consider the applicability of these factors to its own situation as a first step in planning.
Economic risk affects all districts in that the state of the economy has a profound effect on jobs, taxes of all kinds, and revenues to the state and to districts. What are we seeing in this area? While the national news is filled with voices of encouragement, the raw data has not yet improved much. Employment numbers are still dismal, gains in the Gross Domestic Product have been slow in materializing, and the risk that the recovery could be stalled by further downward momentum is a very real concern.
We think it is unlikely that the recovery will be swift, sure, or uninterrupted. The appropriate local agency response to this risk is reserves, contingency plans, and very conservative budgeting. While districts may hope for a quick recovery, we recommend that they plan for a long hard road back.
How much is needed for this contingency?
The risk associated with local factors includes such things as student achievement issues, declining enrollment, reserve levels, deficit spending, use of one-time money, losses or gains from district of choice, collective bargaining issues, and myriad other factors that affect the local district. They are different for every district and, with the exception of the local county office of education (COE), it is unlikely that anyone outside the district is very familiar with the specific factors and impacts affecting any individual district.
As a result, these factors are more readily identifiable for local management and can be dealt with on a district-by-district basis. You can calculate the revenue loss for each unit of ADA from declining enrollment, for example. We recommend you do a risk assessment that covers the specific local issues you face and try to attach an estimate of the maximum and minimum exposure presented by each of the local factors and think through your options if things go with you or against you.
State budget risk is real and there is a high probability that there will be more negative surprises. The governor continues to plan for stabilization and growth in current and out year revenues. That plan has turned out to be overly optimistic since the beginning of the recession and we have no tangible evidence yet that it will improve significantly.
The 2010-11 proposed budget continues to rely on a variety of mechanisms to close the budget gap, many of which seem unrealistic at this time. New fees, lower costs, voter approval of special fund transfers, significant federal contributions, and more social services budget cuts-especially with a Democrat-controlled Legislature – all bear some risk. Not all of the assumptions will turn out to be right. Denial of the federal funding requested by the governor alone could result in a loss of hundreds of dollars per ADA, and that isn’t the only variable.
How much should you set aside for this contingency? Any specific dollar factor we mention will ultimately be proven wrong, but we think we can offer a range based upon recent history. For example, over the past two years, 2008-09 and 2009-10, the average district has lost more than $800 per ADA, an average of about $400 per year.
Thus far, the average reduction proposed by the governor for 2010-11 is about $225 (loss of COLA and cuts). Do we believe we will not be cut as much for 2010-11 as we were for each of the past two years? How much confidence do we have in that belief? What are our fallback positions if we are wrong?
Take for instance, the governor’s proposal to receive an additional $6.9 billion in federal funding. Should this funding not materialize – which there is strong indication that only a fraction will be realized – and the governor’s trigger proposals to make additional cuts to health and human services among other actions, are not enacted, further cuts to education could occur.
If we assume that the governor and Legislature treat education as they have in the past, these cuts could range from $175 per ADA (bringing us up to the average of cuts sustained over the past two years) or upward of $300 per ADA (assuming that education must make up for its share of 40 percent of the unrealized federal funding).
There is currently no proposal by the state to make an additional cut to K-14 revenues, but at this time last year, there wasn’t either. Nor was there the year before. But later in the spring and all the way through final adoption of the State Budget, there were additional cuts in both years.
Right now, the feds have a lot of problems of their own. The president’s federal budget proposal of $3.8 trillion has an estimated deficit of $1.6 trillion. That is a deficit of more than 40 percent! What is the likelihood that the feds will provide more money to states over the near term, given the size of the federal deficit?
Even the much-vaunted Race to the Top initiative promises very little near-term funding. A competitive grant of $500 million to $700 million, with half retained in Sacramento for specified activities, might provide on average $40 to $50 per student over four years; about $10-$12 per student per year. Welcomed funding, but not a lot of dollars.
The risk factor is that reliance on a federal bailout leaves us very vulnerable if the funds don’t ultimately come through. And there is not much a district can do about it.
What is our message? Our message is meant to be clear-risk and uncertainty must be balanced with reserves and options.
What options? Plan the size of layoffs and other cost-saving methods so there is flexibility if there is more bad news. Continue to plan for further cuts in state support, using a range like the one we provide above. Then, think through what the next cut might be if more bad news arrives.
Don’t spend down reserves in the early part of the multiyear projections. Ongoing budget cuts keep on saving; reserves can only be spent once. Cuts are the primary vehicle; reserves are the backup option. Hold onto reserves.
We think (hope) that we only have another year or two to get through and we know the depth of the cuts that have already been made. We are not suggesting that you make cuts now for the contingencies we listed above, but we are suggesting you do some sensitivity analysis and make some plans.
In the end, the state and the nation will recover and we will be poised for the next wave of exponential growth that will occur in all facets of our society. But it won’t be this year, so plan accordingly.
Sheila Vickers, Robert Miyashiro, John Gray, Jannelle Kubinec and Ron Bennett with the School Services of California Inc.
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