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Governor's Budget for 2008/09

Released January 10, 2008

Governor Schwarenegger released his proposed budget on January 10, 2008 for the fiscal year starting July 1. The Governor also declared a fiscal emergency and called for some of the cuts to take effect before the July 1 start of the next fiscal year. More significantly for education funding, the Governor is requesting suspension of Prop 98. In 2004, the Governor Schwarenegger was able to suspend Prop 98 via a deal that was brokered prior to relase of 2004/05 budget. This deal occured one year after Governor Davis declared a fiscal emergency with looming deficits totaling $34 billion dollars. Governor Davis' proposed mid year cuts to 2002/03 were not enacted, however the 2003/04 education budget with a 0% increase for education funding contributed to $1.7 million budget reductions adopted by the AUSD for 2003/04.

The California School Board Association this review of the budget.

Schwarzenegger to propose sweeping state government cuts

By Dan Smith and Judy Lin , Sacramento Bee, January 10, 2008

Gov. Arnold Schwarzenegger on Thursday proposed a $101 billion spending plan that cuts virtually every function of state government to close a $14.5 billion budget gap.

"We are facing a very tough situation, but with tough times come historic opportunities," the governor said. "I am convinced the Legislature will help turn today's temporary problem into a permanent victory for the people of California by joining me to enact true budget reform."

The budget plan asks lawmakers to close state parks - including Sutter's Fort, the state Indian Museum and the historic Governor's Mansion in Sacramento - and to release prisoners, dramatically pare school funding, reduce Medi-Cal health services to the poor and reduce aid to the low-income blind, elderly and disabled.

A 10 percent across-the-board cut Schwarzenegger promised weeks ago would hit almost every department - even the Legislature and the courts - and save about $9 billion next year and $217 million for the remainder of this fiscal year.

Schwarzenegger declared a fiscal emergency and called for some of the cuts to take effect before the July 1 start of the next fiscal year. Failure to do so, said Finance Director Mike Genest, would require an additional $1 billion in cuts in the next fiscal year.

The budget anticipates a reduction of about 7,086 state employees over the next 18 months - 6,054 of them from the prison system.

The Republican governor's plan also would close 48 parks, reduce lifeguard service at some state beaches, and ask lawmakers to suspend schools' constitutional funding guarantee under Proposition 98 for $4 billion in savings for the fiscal year beginning July 1. He's proposing $400 million in cuts to schools in the current fiscal year.

Assembly Speaker Fabian Núñez said that resurrecting a spending cap that will harm education, public safety and low-income children is not reflective of California values.

"Let's be clear that any budget that continues the failed approach of cutting and borrowing doesn't get the job done," Núñez said.

"We would like to see a more compassionate budget than what the governor proposed," he said. "But I'm not prepared to draw a line in the sand. I think that would be the irresponsible thing to do."

Republican lawmakers were encouraged by the governor's main message for budget reform as a way to grapple Sacramento's spending problem. Conservative lawmakers said much of school funding never reaches local districts because it gets wasted on administrative overhead.

"About 60 percent of the money that goes to schools in Sacramento gets to the local districts - 30 to 40 percent is wasted somewhere up here," said Senate Republican leader Dick Ackerman of Irvine.

The suspension of Prop 98, which requires a two-thirds vote of lawmakers, has been done only once before – during the fiscal crisis of 2004 – and ultimately left Schwarzenegger reeling from accusations that he broke a promise to restore education funding in subsequent years.

"The reason you have to suspend 98 is it would give you more flexibility," said Senate Republican leader Dick Ackerman of Irvine. "If you recall, the formula in 98 is really squirrely and in years when we have very high incomes, sometimes it's funded at the lowest level. And one year when we had lower income, it was funded at the highest level."

"It makes no sense," he added.

Schwarzenegger also challenged the Legislature once again to reform the state's budgeting system. He proposed a constitutional amendment that would establish a rainy day fund and set up automatic spending cuts when the general fund fell below projections. The governor would reduce spending by 2 percent if a shortfall were less than 1 percent, and by 5 percent if it were greater than 1 percent. Such a move, he said, would help reduce such dramatic shortfalls in the future.

"The economy is not the villain here. The economy contributed a little bit to the problem but the problem is the system itself," the governor said. "On the spending side, the increases are automatic. Formulas in (student) population in K-12 drive that cost up without us doing absolutely anything."

Finance officials say the state's fiscal health soured when California's housing market began to weaken, slowing down the economy. Though the governor and Legislature passed what appeared to be a balanced budget last summer, tax receipts have weakened so much that the state's projected deficit for the upcoming fiscal ballooned from $6 billion to $14.5 billion.

"There's bad news in the economy from time to time," said Genest, the finance director. "Lately, it seems to be getting worse."

Adding to the problem is what Schwarzenegger described as "Sacramento's culture of spending." Even though personal income growth is still growing at a healthy annual clip of about 5 percent, state programs will rise by 7.3 percent.

California currently spends as much as $600 million more each month than the state takes in. In declaring a fiscal emergency, Schwarzenegger proposed that the Legislature address the current year shortfall of $3.3 billion by eliminating cost-of-living increases in social service programs and lowering school funding by $400 million.

The plan is certain to draw fire from the full range of advocates at the Capitol, particularly powerful education groups and teacher unions.

"By suspending Proposition 98 and making crucial cuts to education, the governor's budget will drive us even lower and reveals a shocking lack of recognition of the real needs of kids and schools," California School Boards Association President Paul H. Chatman said in a statement. "The education community will not agree to anything until and unless the governor and the Legislature put all of their cards on the table, including a debate about revenues as well as expenses."

"We would enlist all of labor to resist the cuts and to resist the suspension of Prop. 98," said Marty Hittelman, president of the California Federation of Teachers, which represents over 120,000 education employees. "We would consider it an assault on working families."

"He's going to have a fight on his hands," said Kevin Gordon, a school funding expert and consultant. "Proposition 98 isn't some mechanism to try to get decent funding for public schools; it is a minimum level."

As reported weeks ago, the plan calls for the early release of 22,159 prisoners classified as non-serious, non-violent and non-sex offenders. Also, changes in parole policy for non-serious, non-violent, non sex offenders is expected to reduce the prison policy by another 6,249 who would be otherwise be returned to prison. Both moves are expected to save $1.1 billion by June 30, 2010.

The releases would require "necessary statutory changes" and would begin in March. They would involve inmates who are in the last 20 months of their terms. Some 18,522 more released offenders would no longer be subject to parole supervision.

The cuts in the California Department of Corrections and Rehabilitation would force the layoffs of 6,054 correctional employees over the next two years. The administration says the early releases and staff cuts would save the state $17.9 million this fiscal year, $378.9 million in 2008-09 and $782.7 million in 2009-10.

The administration also is proposing to cut the corrections department's grant funding to local agencies by another $24.6 million. The grant would reduce funding for the popular Juvenile Probation and Camps Program providing services to offenders and their families in all 58 counties.

Schwarzenegger also is asking for $1 billion in Medi-Cal spending cuts by reducing providers' rates, eliminating adult dental services and tightening eligibility requirements.

"The savings come from people falling off the program," said Anthony Wright, executive director of Health Access, a statewide health care consumer advocacy coalition. "It's a cynical cut."

Four years ago, Schwarzenegger pledged to fund the basic needs of the California State University and University of California systems to keep up with enrollment in exchange for cuts that year. The governor said Thursday that because of that compact, he would not cut colleges by a full 10 percent. Instead, CSU would receive a 3 percent general fund cut of $98.5 million and UC would get a 3.3 percent reduction of $97.6 million.

Professors said the governor's proposal assumed a 10 percent student fee increase - the sixth in the last seven years, and warned the cuts will translate to course reduction, increased class size and longer times to graduate.

"If adopted, this budget will be a serious set back for the California State University," California Faculty Association President Lillian Taiz said in a statement. "Budget cuts of this magnitude will harm our more than 400,000 students while at the same time eliminating access to the university by 11,000 new students."

The governor also would recycle two social service proposals he's made before - cutting cost of living increases scheduled for low income aged, blind and disabled under the SSI-SSP program and cutting aid to families whose parents don't meet new federal work requirements under the CalWORKs program.

The plan also would borrow to help the state out of the hole by selling the remaining $3.3 billion in Economic Recovery Bonds authorized by voters in 2004. In addition, Schwarzenegger plans to defer the early debt payment on the bonds scheduled for 2008-09 for another $1.5 billion in savings.

Still, Schwarzenegger asked the Legislature to place $28.3 billion in bonds on the November ballot to join a $10 billion measure for high-speed rail: $6.4 billion for schools, $7.7 billion for higher education facilities, $11.9 billion for water facilities and $2 billion for court construction.

But taxes aren't part of the mix, although the governor's budget includes a 1.25 percent fee on homeowners insurance, as well as an $11 increase in vehicle registration fees, neither of which Schwarzenegger considers taxes.

"We cannot tax our way out of this problem," the governor said. "I do not believe in tax increases. I think the people of California are sending to Sacramento plenty of dollars, 130-some billions of dollars they are sending every year for us to function. If we cannot function with that money, then there is something wrong with the system rather than with the people."

It's a view not all observers share.

"There's been a lot of rumor around the Capitol these days that the budget would be so draconian, and so awful, that it might sort of shock everyone in the Capitol building to start thinking about options they haven't though about before, including tax increases," said Kevin Gordon, an consultant on education budget issues. "But the governor has been so adamant about repeating over and over again his view about taxes, it's hard for me to see how he gets out of his own corner."

Teachers unions called on the governor to consider some kind of tax increase, saying the proposed reductions in education spending would result in draconian measures in classrooms.

"When salaries are about 90 percent of school budgets ... you have to cut teachers and increase class sizes, reversing the gains we've been making," said Marty Hittelman, president of the California Federation of Teachers. "The other choice is to close the schools."

State workers called for tracking down $8.5 billion in taxes that have gone unpaid and uncollected to help fill the budget deficit. The Legislative Analyst's Office reported an estimated $6.5 billion in corporate and personal income taxes go unpaid each year. Another $2 billion in sales and use taxes was believed to be missing, according to a labor group.

"Across-the-board cuts in vital state services are fiscally irresponsible when the state's chief executive isn't keeping our financial house in order," Jim Hard, president of the Service Employees International Union Local 1000 said in a statement. "Why should Californians suffer the budget knife when the state isn't collecting billions in unpaid taxes?"

Schwarzenegger's proposed cuts would hit his own office - he'll find ways to trim $2.1 million. The spending plan also calls for a $26.5 million cut to the Legislature, $245.6 million cut to the judicial branch and $41 million to the Department of Justice.

California educators reeling by Schwarzenegger's proposed cuts

By Juliet Williams, Associated Press Writer, January 10, 2008

Gov. Arnold Schwarzenegger on Thursday dealt a blow to educators, proposing $4.8 billion in cuts to California's public schools and possibly restarting a fight that he hoped had ended with the state's largest teachers union.

Education advocates vowed to fight the cuts, which Schwarzenegger would accomplish by suspending the holy grail of California's education system: Proposition 98, the landmark school funding guarantee voters approved in 1988.

"This is going to be one of the most painful, vocal, public, fierce debates about education funding that we have ever seen," said Brian Lewis, executive director of the California Association of School Business Officials. "We are going to come out of the woodwork opposing any suspension of 98 and any further undermining of this minimal guarantee to kids."

Having to wield a budget ax over schools is a cruel irony for a governor who just months ago promised he would dedicate 2008 to wide-ranging education reforms in his "Year of Education."

"What a way to commence the Year of Education, by proposing to balance the budget on the backs of the students in the state of California," said David Sanchez, president of the California Teachers Association.

Schwarzenegger proposed a nearly 10 percent cut to K-12 spending in the fiscal year that starts this July — about $4.4 billion — as well as $400 million in cuts that could take effect as soon as this spring.

Schwarzenegger sought to downplay the midyear cuts, noting that he could have taken back as much as $1.4 billion in 2007-08 spending. That, he said, "would have been devastating. We must protect our children."

His plan was devastating enough, educators said.

"We're already at 43rd in the nation in per-pupil spending. We can't sacrifice our economic future because we're in a bad budget year," said John Affeldt, managing attorney for Public Advocates, a law firm that advocates for education equality.

In a national study released Wednesday, Education Week magazine gave the state a D+ for its education financing system and reported that it spends about $2,000 less per student than the national average, or 43rd among the states. Schwarzenegger's proposal would cut per pupil spending by another $300 a year.

His plan contradicts the advice of his own education panel, which recommended the state rewrite its school funding formula and add another $6 billion a year for its weakest students. The governor also noted in his State of the State address Tuesday that California schools have a third fewer teachers and half the school counselors than the national average.

His plan would leave few places to cut besides teachers and school staff, since about 90 percent of education spending goes to salaries.

Administration officials said the spending-cut proposal asks the Legislature to find unspent money to minimize the effect this year.

"Schools will be largely unharmed in the current year," said Jeannie Oropeza, a Department of Finance education budget manager.

Schwarzenegger's education secretary, David Long, said districts knew midyear cuts were coming and have been preparing.

Local officials, however, said they did not know where the money would come from.

"We can't stop educating kids or paying salaries in the middle of the year. We still have to buy books and paper and clean our classrooms," said Ardella Dailey, superintendent of the Alameda Unified School District.

California's schools, once among the highest achieving, rank below the national average on nearly all academic measures.

Superintendent of Public Instruction Jack O'Connell said it also has the most challenging students, more than half of whom come from poor families and a third of whom do not speak English fluently. Its population of 6 million students is higher than the total population of more than half the states.

"The governor's budget takes a giant step backward. I fear that the 'Year of Education' will become the year of education evisceration," O'Connell said. "This budget will not help us close the achievement gap that threatens the futures of our students and our state."

The California State University and University of California systems also would see cuts of about $1.1 billion in the 2008-09 fiscal year.

California Faculty Association President Lillian Taiz said those cuts would lead to "course reductions, increased class sizes and longer times to graduation. The loss, in the end, would not only be dollars, but the loss of the hope and optimism about the future that is an intrinsic trait of a society committed to broad educational opportunity."

Even some Republicans opposed the move to balance the budget by suspending Proposition 98. Sen. Jeff Denham, R-Merced, said he would fight it.

"After all the progress we have made in education, now the governor wants to punish our kids because he didn't make the spending cuts he needed to make last summer. I find it appalling," Denham said in a statement.

Schwarzenegger had sought to repair his fractured relationship with the education community in the wake of his disastrous special election in 2005. The California Teachers Association spent more than $50 million then to defeat his slate of ballot initiatives, which included a measure to cap state spending, partly rolling back Proposition 98.

And this year, some 400 of the neediest schools got the first payments from a $2.9 billion legal settlement the governor reached with the CTA after educators claimed he reneged on a budget deal he made shortly after taking office.

That money is slated for additional teachers and teacher training. Budget experts are divided over how much of that could be diverted to other programs in a fiscal emergency.

On budgets and leverage

By Daniel Weintraub, Sacramento Bee Columnist, January 10, 2008

Some thoughts on the governor’s budget proposal:

--It’s not real. I know, as Schwarzenegger said in his speech the other night, “Duh!” He knows and we know that there is no way the Democrats in the Legislature are going to suspend Prop. 98 and then cut $4 billion from the schools next year. Nor are they going to cut a similar amount from Health and Human Services. We’re talking here about real year-to-year reductions, not just shaving the rate of projected growth. It would mean teacher layoffs and larger classes in the schools, and real cuts in health and social services for the poor. Assuming cuts of that magnitude are going to happen on the Democrats’ watch is no more realistic than it would be to assume the Republicans are going to approve an increase in income taxes.

--So if it is not real, what is the real plan? He may not have one at this point. But I would guess he is using this document to try to force lawmakers from both parties to come up with something better. Some of the cuts – in prisons, parks, and schools – cut deeply into things the Republicans value. Perata even talked about restructuring the education budget to punish schools in districts represented by Republicans who vote against the budget. So there seems to be some effort afoot to engage Republicans by showing them that they can no longer vote “no” and still have their priorities funded.

--But what about the Democrats? Perata and Nunez were softies at their press conference today. Perata sounded as if he was on medication, and Nunez sounded as if he needed to be on drugs. Maybe they’re just sick. But their tone was so conciliatory toward the governor that it sounded as if they had promised him that they would not attack him personally. It sounded as if the three of them have a game plan of some kind for how they want this thing to roll out, and it does not include all-out partisan warfare.

--Another way? Even assuming the Republicans continue to balk at tax increases, I still think some form of short-term revenue relief is going to be part of the final package. Democrats dissed the governor’s lottery idea a year ago at budget time, and again in the context of health care. Today Nunez said it was worth another look. If Liz Hill’s trend line is accurate, it might make sense to do something along those lines: use a temporary measure to address one-time issues in the short term while agreeing to a long-term workout package that solves the problem as far as the eye can see.

--If Schwarzenegger is smart, he will insist that any short-term moves be tied to real, long-term change in the budget so that the problem is solved once and for all. Amazingly, all the stuff he proposed today still does not solve the problem. They are still forecasting deficits, though smaller ones, in the years ahead. Finance Director Mike Genest says the governor’s budget reform would fix that. But if so, it would do it by assuming that the Democrats are forced by his new spending limit to cut 5 percent from projected spending a couple of years from now. But it seems crazy to go through all this pain and still plan on using a formula to force cuts in a year or two. Why not just try to fix it now?

--Cash flow. Unlike in past years, this year the state is also facing a cash shortage. This is separate from the budget, and potentially scarier. The state borrows every year to smooth out the ups and downs in the annual flow of taxes into the treasury, which don’t line up neatly with the flow of spending going out. That borrowing must be repaid within the same fiscal year in which it is executed. This year’s amount is due in March, and will be repaid by the sale of the last of the deficit bonds voters approved in 2004. But the state will be out of cash again in July or August and will need another short-term advance on its tax receipts to pay its bills. The administration is proposing to solve that problem by pushing scheduled payments back later into the fiscal year to provide a cash cushion.

Democrats probably won’t object too much to that move, even though it will make things difficult for local agencies on the receiving end of that money, including schools, counties and transportation districts. But it’s possible that some Republicans might object, arguing that instead of deferring obligations the state should be making real, permanent spending reductions. If so, they would be in position to cause a real crisis, and a threat of default by the state, if they hold out on the budget well into July or August. Talk about leverage. Keep your eye on that one.

Governor Proposes Unprecedented Cuts to K-12 Funding

The Governor’s budget proposal, released today, addresses a current year shortfall of $3.3 billion, and a budget year shortfall of $14.5 billion. The Governor proposes to address these shortfalls with major spending reductions and a few fee increases, but no tax increases.

For K-12, the Governor notes that the Proposition 98 guarantee in the current year has dropped $1.4 billion from budget projections, due to lower than expected General Fund revenues. He proposes to reduce Proposition 98 funding by $400 million in the current year. Of this, $360 million would be applied to K-12 schools and county offices of education, and $40 million would be applied to community colleges.

Budget documents show that the $360 million mid-year reduction to K-12 funding would be applied to revenue limits. It is more likely, however, that the final legislation to make the cuts would apply them to specific programs. The California Department of Education (CDE) is currently reviewing all programs and appropriations to identify as much unspent and unencumbered money as it can to reduce the local impact of the cuts. CSBA will be working with the CDE, and Administration, and the Legislature to ensure the least disruption to current year programs.

For the budget year (2008-09), the Governor proposes a $4 billion, or 9.2 percent reduction from the Proposition 98 “workload” budget. The workload budget is defined as the prior year (in this case, 2007-08) budget as adjusted for changes in enrollment and a cost-of-living adjustment. In other words, the $4 billion reduction is applied to the amount we would receive if Proposition 98 were fully funded.

Since the Proposition 98 guarantee will grow by less than $4 billion next year, there will be an actual year to year reduction of $865 million. Accordingly, the budget documents show a reduction of total per pupil spending of $309 (2.6 percent), from $11,935 to $11,626. (Remember, “total” includes spending from all sources, not just Proposition 98.)

Major reductions include:

  • $2.6 billion from the K-12 revenue limit COLA (4.94 percent)
  • $1.1 billion from categorical program COLAs
  • $357.9 million from the special education COLA
  • $198.9 million from the Child Development COLA
  • $59.6 million from the Proposition 49 Before and After School Programs (this would require a ballot initiative that the Administration will propose)
  • $14.2 million from Child Nutrition Programs (by reducing the reimbursement rate from 21 cents to 19 cents)

The Administration also proposes further reductions to revenue limit funding (in addition to a zero COLA) that would create a revenue deficit factor of 6.99 percent.

In the current year, $555.6 million in one-time funding was used to support several ongoing programs, such as home-to-school transportation and deferred maintenance. The budget proposes to backfill these one-time funds with Proposition 98 funds in 2008-09.

Need we say there are no new programs proposed?

In an on-line article about the Governor’s budget proposal, the Sacramento Bee included the following quote from CSBA President Paul Chatman:

"By suspending Proposition 98 and making crucial cuts to education, the governor's budget will drive us even lower and reveals a shocking lack of recognition of the real needs of kids and schools," California School Boards Association President Paul H. Chatman said in a statement. "The education community will not agree to anything until and unless the governor and the Legislature put all of their cards on the table, including a debate about revenues as well as expenses."


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Last modified: Janaury, 2008

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