For K-12 education, the main takeaway is that the Governor proposes to fully fund an 8.22% cost-of-living adjustment (COLA), proposes essentially no cuts to existing ongoing programs, and adds some additional resources to cover the costs of the Universal School Meals program. Updates to capital gains revenues in the current and prior year (despite lower overall tax revenues) also require additional deposits into the Proposition 98 reserve fund. To pay for these adjustments to the January budget, the Governor proposes additional cuts to one-time K-12 block grants provided in the last Budget Act: the Learning Recovery Emergency Block Grant (LRE Block Grant) and the Arts, Music, and Instructional Materials Discretionary Block Grant (Arts/Music Discretionary Block Grant). For those who are interested, a printable version of this update can be found here.
Significantly, Governor Newsom made no mention of the Senate’s proposal to raise corporate tax revenues to avoid budget cuts and delayed spending. In response to a question at his press conference, the Governor noted that in the past 24 months the state enjoyed a massive budget surplus and is still in the process of sending tax rebates back to some taxpayers. It is fair to say he strongly disagrees that the state needs to raise additional revenues to handle its current fiscal challenges. The Legislature will now have a chance to weigh in on the Governor’s approach as it works with him to finalize the 2023 Budget Act by the end of June. Hanging over the entire process is the uncertainty created by the extension of the tax filing deadline to October.
For K-12 education, below are the highlights from the May Revision:
- Proposition 98 Guarantee for 2023-24 – Projected to be $106.8 billion, roughly $2 billion lower than estimates in the January budget
- 8.22% COLA for LCFF, County Office Funding and Select Categorical Programs – The Administration proposes fully funding the statutory COLA, which increased by less than one-tenth of a percent compared to January estimates. This applies to both the LCFF and other categorical programs that receive a COLA.
- Additional Funding for Universal School Meals – Recognizing that costs are exceeding initial projections, the Administration proposes roughly $300 million in additional funding for universal meals.
- Increase for County Office Juvenile Court Schools – The Governor proposes an increase of $80 million ongoing Prop 98 funds for county offices of education (COEs) that educate students in alternative education settings, including juvenile court.
- Implementation/Expansion of Newer Programs Maintained – The Governor continues to prioritize the implementation and expansion of programs consistent with actions in the last few budget acts.
- Significant Cuts to One-Time Block Grants – The Arts/Music Discretionary Block Grant and the LRE Block Grant are cut by a total of about $4.3 billion to account for increased deposits to the Prop 98 reserve and to support the LCFF COLA in current and budget years.
General Fund Revenues, Expenditures and Reserves
General Fund (GF) revenues are forecast to be a bit lower than projected in January, resulting in the budget shortfall compared to the 2022 Budget Act increasing from $22.5 billion in January to almost $32 billion in the May Revision. The additional $9.3 billion shortfall is separate from the issue of decreases to the Prop 98 Guarantee, discussed below.
The May Revision adjustments to close the shortfall include additional non-Prop 98 spending reductions and pullbacks of unallocated funds, delayed spending, fund shifts, and some additional revenue from the Managed Care Organization (MCO) tax. While these adjustments are fairly modest, the Governor noted increased risk to revenues from the federal debt limit impasse, higher interest rates and instability in financial institutions, as well as the general uncertainty caused by delaying tax filing deadlines to October 2023. These risks may not impact the 2023 Budget Act, but could have implications for future budgets or even result in mid-year adjustments to this budget.
With a prior year balance of more than $24 billion, revenues are sufficient to support total GF expenditures of about $224 billion.
There is little change to the overall level of GF reserves compared to January. Not including Prop 98 reserves, the May Revision projects a total of just over $27 billion in GF reserves, with $22.3 billion in the Budget Stabilization Account (BSA), $3.8 billion in the state’s operating reserve, and $450 million in the Safety Net Reserve (this includes a withdrawal of $450 million from the Safety Net Reserve only). The Governor does not dip into the BSA, which has now reached the mandatory deposit limit of 10%. Also, please note that despite the risks to GF revenues and the economy generally, the May Revision does not forecast a recession. But the Department of Finance has modeled a moderate recession, and such a recession could result in a loss of $40 billion in 2023-24 alone (with multi-year losses topping $100 billion).
Proposition 98 and Reserves
We continue to be in Test 1 throughout the three-year budget period, meaning that the Prop 98 Guarantee is based on a percentage of GF revenues and is not adjusted for changes in enrollment. Factoring in the “rebench” of Prop 98 to account for TK expansion, the Test 1 percentage is 38.5% of GF revenues. The Prop 98 Guarantee for the budget period is estimated at $110.6 billion in 2021-22, $106.8 billion in 2022-23, and $106.8 billion in 2023-24. The decrease in the Prop 98 Guarantee compared to the January budget is $2 billion for both 2023-24 and the cumulative change over the three-year budget period, and about $6.7 billion compared to the 2022 Budget Act. As discussed more below, the Administration proposes to cut current year one-time expenditures and repurpose those funds to support ongoing programs and provide a full COLA despite the reduction in the Prop 98 Guarantee.
The January budget projected a Prop 98 reserve balance of $8.5 billion, about $1 billion less than what was projected in the 2022 Budget Act. Based on an increased share of GF revenues from capital gains, deposits to the Prop 98 reserve are increased and will result in a balance of roughly $10.7 billion. The balance reaches the constitutional cap for the 2023-24 fiscal year. Note that the Prop 98 reserve balance of $9.9 billion in 2022-23 continues to trigger school district reserve caps in 2023-24.
LCFF, COLA and Equity Multiplier
The 2023-24 statutory COLA has been updated to 8.22%, an increase of less than one-tenth of a percent from the January estimate of 8.13%. The Administration proposes to fully fund the COLA, which applies to both school district/charter school and county office LCFF models. The May Revision also includes an ongoing increase of $80 million to support county offices serving students in juvenile court and other alternative school settings. This funding, along with the increase in the base grant allocation for county office work related to differentiated assistance proposed in January, are the result of strong advocacy work by county office advocates and the County Superintendent’s Association.
Despite a lukewarm reception in the Legislature and concerns raised by equity groups and the Legislative Analyst’s Office, the Governor continues to propose a $300 million equity multiplier as an add-on to the LCFF. As laid out in January, this proposal would allocate funds based on school-site eligibility using a more targeted approach than the existing supplemental grant eligibility. The May Revision retains January proposals to improve K-12 accountability through amendments to the LCAP and Differentiated Assistance processes.
Cuts to One-Time Block Grants to Fund COLA and Increased Deposits to Prop 98 Reserve
As discussed in January, significant one-time spending in the current year allowed the Governor to maintain existing ongoing programs and support a large COLA despite a slight decline in the Prop 98 Guarantee. In January, the Administration proposed a cut of about $1.2 billion to the Arts/Music Discretionary Block Grant to support funding the projected 8.13% COLA. Now, with a slightly higher COLA of 8.22% and, more importantly, additional deposits to the Prop 98 reserve of about $2.2 billion, the Administration proposes additional reductions to current year one-time block grants.
Specifically, the May Revision proposes an additional $607 million reduction to the Arts/Music Discretionary Block Grant and, more significantly, a $2.5 billion reduction to the LRE Block Grant. While these reductions may be more palatable than cuts to ongoing programs or not fully funding the COLA, they will cause some challenges for districts that have already budgeted (and perhaps bargained over) these funds.
Maintaining Recent Programs and Investments
Consistent with the January budget proposal, the Governor protects funding levels for the implementation and expansion of several newer programs created in the last couple of budgets. Following are some adjustments and changes to these programs.
Universal School Meals
Acknowledging that the cost of providing universal meals has exceeded initial projections, the May Revision includes an additional $301 million Prop 98 funding ($110 one-time +$191 million ongoing) to fully fund implementation of the program in the 2022-23 and 2023-24 fiscal years.
Universal Transitional Kindergarten (UTK)
The May Revision proposes to continue fully funding the rollout of UTK but notes declines in the estimated uptake of the program and, accordingly, reductions in the funding allocated to the program. Specifically, the following adjustments for UTK are proposed:
- To cover the first year of the additional two months of age eligibility for TK expansion (happening in the current year; children turning 5 between September 2 and February 2), the January budget proposal included $604 million. Due to reduced TK enrollment, the May Revision adjusts the funding downward to $357 million.
- The first-year cost to add one additional certificated or classified staff to TK classrooms in the January budget proposal was estimated to cost $337 million. That number has similarly been reduced to $283 million in the May Revision.
- For the second year of UTK expansion (children turning 5 between September 2 and April 2), which will begin in the 2023-24 budget year, the January Budget proposed $690 million. The May Revision reduces that number to $597 million.
Reminder that the $597 million for the second year of UTK expansion is GF because the Prop 98 Guarantee will be “rebenched” to cover the TK expansion. Because the Prop 98 Guarantee will be Test 1 in the budget year, this is accomplished by bumping the Prop 98 share of General Fund dollars up from 38.3 percent to 38.5 percent.
- The second-year cost to support the addition of one certificated or classified staff to TK classrooms remains unchanged from the January budget proposal ($165 million).
Expanded Learning Opportunities Program (ELOP)
The May Revision maintains the $4 billion investment in ELOP from the Governor’s January Budget but proposes statutory language to extend the expenditure deadline for the ELOP funds LEAs have already received, to June 30, 2024. According to the Governor, this extension is intended to give LEAs more time for planning and implementation.
New Resources for Identification of Reading Difficulties
LEAs would need to screen students in grades K-2 to assess their risk factors for reading difficulties, including dyslexia, by the 2025-26 school year under one of the few new proposals included in the May Revision. The Administration is proposing $1 million to assemble an “independent panel of experts to approve a list of screening instruments for these assessments.” The Administration also states an intention to fund professional development in future budgets, and will require LEAs to provide supports and services to students with, or at risk of, reading difficulties. Additional detail is required to know what the Administration means by professional development, and what supports and services will be required and/or allowed.
We will also have to wait to see if Senator Portantino, and other supporters of SB 691 will consider this proposal adequate, or if they continue to push the bill that would also mandate dyslexia screening in early grades. Given the alignment of the two proposals, it’s possible that the Senator worked with the Administration to include this in the budget discussions. Both the Governor and Senator have dyslexia, and with this proposal in the May Revision, it feels likely that something is going to happen in this policy area this year which is almost certain to require additional screening in schools.
State School Facilities Program
There is no change from $2 billion GF proposed in January for the School Facilities Program (SFP) in 2023-24. While there continues to be a $100 million decrease to the intended investments for the SFP agreed to last year, the Governor remains committed to funding this program at the same time the Legislature continues to discuss the viability of placing a statewide school facilities bond on the 2024 ballot.
Educator Workforce
Rather than proposing additional monetary investments for the educator workforce, the May Revision proposes a host of statutory changes to residency programs, assessment flexibility, and the credentialing of out-of-state teachers. Specifically, the May Revision includes the following:
- Increasing the Teacher and School Counselor Residency Grant Program per-candidate allocation to grantee local educational agencies. These statutory changes also require a minimum stipend or salary be provided to residents to better enable candidates to afford to pursue this exemplary pathway and districts and preparation programs to better support their successful implementation.
- Allowing residency candidates to complete their service requirements in eight years instead of five years, and providing flexibility for candidates to fulfill their service requirement by teaching in schools outside of the sponsoring district.
- Allowing teachers who were unable to finish their credential because they could not take the Teaching Performance Assessment during the COVID-19 pandemic to meet this requirement through completion of a Commission-approved induction program or through two years of satisfactory teacher evaluations.
- Authorizing the Commission on Teacher Credentialing (CTC) to issue a comparable California credential to any U.S. military service member or their spouse who possesses a valid out-of-state teaching or services credential to provide instruction or services in the public schools of the state of issuance when the candidate is relocated to California on military orders.
- Requiring the CTC to evaluate how transcript reviews can be conducted to assess basic skills and subject matter competence for teaching candidates to complete their credentialing requirements without the need to take state-mandated exams to prove competence.
California State Preschool (CSPP)
The May Revision contains the following adjustments and programmatic changes to CSPP:
- Reflects recent legislation that allows CDE to use $4.4 million GF and $5.3 million Prop 98 from the 2022 Budget Act to continue the wavier of family fees from July 1, 2023, through September 30, 2023.
- Also reflects recent legislation that authorizes CDE to use $112 million available federal funds to provide temporary employee stipends to the CSPP.
- Provides decrease of $54.3 million GF to reflect revised estimates of the GF resources needed to support recent reimbursement rate increases that are currently supported by limited-term federal funds.
- Applies the revised 8.22% COLA (as compared to 8.13% in January) to CSPP reimbursement rates, however the May Revision assumes the number of estimated CSPP contractors opting to use the Standard Reimbursement Rate will be lower, so the cost to fund the increased COLA is actually reduced by $52 million Prop 98, and $28 million GF.
What’s Next?
The May Revision has been sent to the Legislature for their consideration. Things will move quickly at this point as lawmakers have until June 15 to send a balanced budget to the Governor. We will know the final budget sometime between then and July 1, the first day of the next fiscal year. Most of the contentious budget debate will be outside of K-14 because the overall level of spending for K-14 is mandated in the Constitution (Proposition 98).
Budget Workshops
We’ll provide more information on the May Revision, the state’s revenue uncertainties, and the policy and political aspects impacting the budget process at the Budget Perspectives Workshops offered by county superintendents across the state at no cost. The workshops are presented by our firm in partnership with CSBA, ACSA, SSDA and Climatec – you can register here.
Thanks,
Abe Hajela
Partner | Capitol Advisors Group