State Issues – November 19, 2009

The bad budget news continues for California.

Less than six months ago, the state faced a $26 billion deficit. In July, Governor Schwarzenegger and the Legislature passed a budget that cut more than $680 million from community colleges, and raised student fees from $20 per unit to $26.

Both the Governor and the Legislative Analyst’s Office say California is again facing a similar problem.

Governor Schwarzenegger put the shortfall in the current budget between $5 billion to $7 billion, plus another $7.4 billion deficit in the 2010-11 budget year that begins July 1. He told reporters, “I think there will be across-the-board cuts again,” and “we are not going to go and pick and choose” between programs. “I think that we always have to go and cut across the board.”

On November 19, the Legislative Analyst’s Office (LAO) released its annual Fiscal Outlook and predicted an even bigger budget deficit. The report does bring some good news about state revenues and economic performance. But the bottom line is that California still faces a budget crisis because of continued structural shortfalls.

Below is a summary of the report prepared by the California Community Colleges Chancellor’s Office:

Highlights

• California faces a projected $20.7 billion budget shortfall over a two-year period (fiscal years 2009-10 and 2010-11).

• This shortfall results primarily from increases in projected expenditures compared to the enacted State Budget.

• Sluggish State General Fund revenues represent a relatively small part of the problem.

• While still lagging the nation, California’s economy has likely hit bottom and is beginning a recovery. LAO points to slowing job loss and rising home prices as indicators that California’s economy is beginning to turn around.

• LAO states that “Addressing this large shortfall will require painful choices—on top of the difficult choices the Legislature made earlier this year.”

Proposition 98

• Despite the state’s worsening budget outlook, the 2009-10 Proposition 98 minimum guarantee has increased by $1 billion since the 2009-10 State Budget was enacted. The 2009-10 State Budget provided a total of $50.4 billion for K-12 schools and community colleges. Due to changes in the factors used in the Proposition 98 calculation, the state’s constitutional funding obligation is now $51.4 billion and, as a consequence, the state owes community colleges and K-12 schools $1 billion more than provided in the 2009-10 State Budget.

• This counterintuitive increase in the Proposition 98 minimum guarantee is the result of a downward adjustment in 2008-09 State General Fund revenues. Because the Proposition 98 calculation drives off the year-to-year change, a downward adjustment to the 2008-09 revenue figures made the funding guarantee increase.

• LAO recommends that the Legislature wait until May to decide how to address the $1 billion increased obligation. LAO justifies that recommendation on the grounds that the Proposition 98 calculation will likely change again once revenue estimates are update in April. If the $1 billion obligation is still in effect at that time, LAO suggests that the Legislature could suspend Proposition 98, negotiate a multi-year payment plan for the funds, or simply provide the funds in the current year.

• Given the magnitude of the state’s fiscal woes, it seems unlikely that the $1 billion would be paid to schools and colleges this year. Perhaps the biggest benefit of this increased obligation is that, with the state already spending less on Proposition 98 than required by the State Constitution, it will be politically more difficult for the Legislature or Governor to propose mid-year cuts to community colleges and K-12 schools.

Current-Year Budget (2009-10)

• California faces a projected current-year deficit of $6.3 billion. This estimated budget shortfall is due to the following factors:

  • $1.4 billion due to the failure of the California Department of Corrections to achieve planned expenditure reductions.

  • $1 billion due to an increase in the Proposition 98 funding obligation (described above)

  • $1 billion due to state’s failure to sell the State Compensation Insurance Fund

  • $900 million due to failure to achieve planned savings in Medi-Cal

  • $800 million due to courts blocking redirection of Public Transportation Account funds to generate state savings

  • $451 million due to General Fund revenues trailing below estimates

2010-11 Budget

• California faces a $14.4 billion operating shortfall for 2010-11. Major factors include:

  • $7.4 billion in one-time solutions that were used to balance the 2009-10 State Budget. These solutions included borrowing, deferring payments, accelerating revenue collections, and temporary tax increases. Because these solutions will no longer be available, the result is a hole in the 2010-11 state budget.

  • $3.5 billion due to updated revenue estimates.

  • Continuation of many of the new liabilities identified in the current year (see above).

2011-12 through 2014-15

• LAO forecasts that, absent state action, operating shortfalls will increase in 2011-12 and persist into 2014-15. Projected shortfalls are as follows:

  • 2011-12 $21.3 billion

  • 2012-13 $23 billion

  • 2013-14 $20 billion

  • 2014-15 $18.4 billion

• The large increase in operating shortfalls beginning in 2011-12 is due to the expiration of temporary tax increases adopted as part of the February budget deal (some of the tax increases sunset at the end of the 2009 tax year).

The report offers a sobering assessment of California’s fiscal condition. State leaders will face tough choices to bridge the $21 billion budget gap. As noted above, the one-time fixes and accounting maneuvers are only stop-gap fixes for long-term structural problems.

All signs point to another year requiring consistent, coordinated, and vocal advocacy on the part of all community college constituents – faculty, staff, students, administrators, trustees, alumni and community partners. As the necessary details are filled in, and resulting strategies developed, we will call upon you to help. Together we can ensure the Governor and the Legislature understand the vital role community colleges must play in California’s economic recovery. An investment in our students is an investment in our state’s future.