Governor Newsom’s inventive strategies to prevent budget cuts to schools and community colleges in the state.

Gov. Gavin Newsom’s pledge will be upheld in the 2024-25 budget pact announced by the Legislature on Saturday, sparing TK-12 and community colleges from the cuts that other state entities will endure, a commitment that will be ratified this week.

One of the highlights is that TK-12 funding will remain stagnant, preserving Newsom’s substantial investments in multiyear initiatives worth billions of dollars, such as community schools and expansion of before- and after-school programs.

The budget will also incorporate several billion dollars in additional revenue that Newsom hadn’t requested earlier in the year. This was achieved by Newsom and legislators navigating a $28 billion increase in general fund spending from the $211 billion budget.

However, safeguarding schools and community colleges involves risks. To ensure budget equilibrium, Newsom and legislative leaders have resorted to financial tactics that would cause concern for any meticulous accountant.

These tactics involve establishing a $6 billion debt that the state treasury won’t fully reimburse for another 12 years and depleting the $8.4 billion education rainy day fund.

In addition, the agreement stipulates deferring payments to schools and community colleges and suspending Proposition 98 obligations for the current academic year, marking only the third time in its 36-year history that such a suspension has occurred – with the presumption that the funds will be promptly repaid.

Instead of penalizing schools for funds already utilized, the budget legislation introduces a $6.2 billion debt that will be repaid by the general fund, not by schools and community colleges, over the course of a decade starting in 2026-27. The remaining $2.6 billion will be considered a deferral of Proposition 98 obligations, rolled over to 2023-24.

Although the California State University and the University of California won’t receive the level of funding they had hoped for in the budget agreement, it surpasses Newsom’s initial proposal from January, despite a decline in state revenues since then. Both institutions are allotted a 5% increase in their 2024-25 budgets, equivalent to $227.8 million for UC and $240.2 million for CSU, to support the enrollment of California residents this autumn.

Furthermore, a promised 5% budget increase for both systems in 2025-26 will be postponed by one year. UC and CSU will also confront temporary budget reductions in 2024-25 amounting to $125 million and $75 million, respectively, which will be reinstated in 2025-26.

Additionally, both CSU and UC will encounter a 7.95% reduction in their administrative expenditures in 2025-26.

The reform of the Cal Grant program is deferred to 2024-25, but the ongoing funding of $637 million for middle-class scholarships, as mandated by the Legislature, will continue, with an additional one-time injection of $289 million.

Late spending changes

The final budget will also reverse some of the proposed cuts to TK-12 and child care that Newsom outlined in his May budget revision, while maintaining others. Some of the revisions include:

• Restoring $60 million to the Golden State Teachers Program, offering $20,000 in scholarships to aspiring educators, though a new means test might trim eligibility by $10 million.
• Reinstating $100 million for programs that assist preschools in readying classrooms and training teachers to enroll more children with disabilities, while scaling back broader plans for program expansion.
• Maintaining the existing pledge to accommodate an additional 200,000 children in state-subsidized child care, albeit delaying full implementation until 2028.
• Revoking $895 million in prior one-time allocations for electric-powered school buses that were previously prioritized by Newsom. Instead, these funds will now go towards alleviating some of the delayed payments in state aid to schools.

The bulk of school district funding is derived from the Local Control Funding Formula, which hinges on daily student attendance and an annual adjustment for cost of living. Consequently, although overall state funding won’t be reduced, districts facing declining enrollments and high absenteeism rates will encounter financial hurdles.

The cost-of-living adjustment (COLA), calculated based on a federal formula tied to the cost of goods and services but overlooking regional expenses like housing, is set at just 1.07% for 2024-25, necessitating further fiscal prudence. One recourse typically available to school districts, issuing layoff notices to staff, has been ruled out. While state law permits additional layoffs in August during years when the COLA falls below 2%, Newsom and legislative leaders have inserted a clause, in response to pressure from public sector unions, prohibiting late summer layoffs.

Initial responses from seasoned TK-12 budget observers were mixed. Kevin Gordon, president of Capitol Advisors Group, a consultancy specializing in school issues, remarked, “This budget remarkably shields K-14 funding from cuts, adheres to constitutional mandates for future funding restorations, and even offers a modest cost-of-living adjustment, all amidst a significant budget deficit. Quite impressive.” On the other hand, Rob Manwaring, senior policy and fiscal adviser at Children Now, a nonprofit advocacy group, expressed caution, stating, “While the final budget is perhaps the best schools could anticipate given the budget challenges, we worry about the size of the suspension for schools, $8.3 billion. Schools will eventually get paid back those funds in future years on top of the minimum guarantee, but these payments will result in increased school funding volatility and uncertainty until they are paid back.”

In the event of a revenue downturn next year, schools and community colleges will no longer have access to a rainy day fund; it is projected to be depleted by the conclusion of 2023-24, with a potential replenishment of $1.1 billion in 2024-25.

Proposition 98 juggling act

The projected 2024-25 budget for schools and community colleges, if revenue forecasts hold true, will be balanced by navigating three years of Proposition 98 shortfalls, with each year’s solution paving the way for the next year’s challenge.

The significant decline occurred in 2022-23, when the Legislature “over-appropriated” the minimum Proposition 98 guarantee by $8.8 billion, coinciding with a drop in state revenue from the post-Covid market turbulence and tech sector fluctuations. Due to winter storms shifting the tax filing deadline from April to November, legislators failed to heed the warning signs.

As per Proposition 98 mechanics, the funding level in 2022-23 establishes the baseline for 2023-24, even though the state lacks the revenue to cover the expenses. Thus, nearly all of the $8.4 billion from the education rainy day fund will be utilized to address part of the 2023-24 deficit and rollover the $2.6 billion deferral from the previous year.

Furthermore, the budget agreement calls for suspending $8.3 billion in Proposition 98 funding for 2023-24, effectively reducing the guaranteed minimum funding by that amount and allocating the freed-up resources to avert deeper cuts in other state functions. This strategy enables the Legislature to reverse certain cuts related to child care and preschool in 2024-25, a proposal initially made by Newsom.

The authors of Proposition 98 designed it to dissuade the Legislature from circumventing the law. Hence, the Legislature must declare a fiscal emergency and prioritize repaying the suspended funding as soon as new revenue becomes available. The 2024-25 budget anticipates that the state will generate adequate revenue to repay at least $4 billion of the suspended $8 billion, and possibly more. However, in the event of revenue shortfalls, districts may not receive their entitled funding, without a specified repayment timeline.

Consequently, the agreement poses a gamble for schools and community colleges.

Another twist in the plan involves accelerating the temporary three-year suspension of two tax benefits for large and medium-sized corporations – net operating loss deductions and tax credits. This suspension, slated to commence in 2024-25, a year ahead of schedule, is projected to yield $5 billion in revenue, with $2 billion directed towards Proposition 98 – these funds will be utilized to reduce deferrals.

With this new injection of funds and the anticipated $4 billion reimbursement for suspended financing, the anticipated Proposition 98 minimum guarantee for 2024-25 is projected to reach a record $115.3 billion.

As with all budget negotiations nearing deadlines, legislators will have a maximum of three days to review a myriad of budget details encompassed in 16 separate bills. Newsom, along with Senate President pro Tempore Mike McGuire, D-Healdsburg, and Speaker of the Assembly Robert Rivas, D-Hollister, anticipate that legislators will propose adjustments upon reconvening from their August break.