Prop. 98 guarantee could reach $80B by 2020

Prop. 98 guarantee could reach $80B by 2020

(Calif.) The minimum funding guarantee for K-12 schools and community colleges is expected to surge to $77.5 billion by the 2019-20 school year – marking a five-year cycle of increases that will total more than $14 billion, according to a forecast released Wednesday by the nonpartisan Legislative Analyst.

Economic uncertainties could threaten the rosy outlook but in its annual report on the general condition of the California economy and the picture moving forward over the next five years, the LAO suggested the state’s fiscal health couldn’t be much better.

In fact, “the state budget is better prepared for an economic downturn than it has been at any point in decades,” the Legislature’s chief financial adviser said.

For public education the news is also welcomed, tempered only in the sense that Gov. Jerry Brown’s efforts to pay off outstanding debts run up over the past 10 to 15 years, has reduced  – at least in part – the requirement that all new state income be shared dollar-for-dollar with schools.

Indeed, the LAO projected that the state will end the 2015-16 fiscal year with an additional $3.6 billion in revenue above the forecast used in last summer’s budget process. Although some of those unanticipated dollars will be available for spending, the lion’s share will go into the state’s new rainy day fund that was created by voters in 2014 with the passage of Proposition 2.

The analyst predicted that by the end of 2016-17, state reserves would reach close to $11.5 billion.

If the restrictions imposed by Proposition 2 have few loopholes to allow new spending, the message from the governor Wednesday shows Brown has not changed his tight-fisted approach to money management.

“The strong economy is good news for California, but the recession scenario outlined by the Legislative Analyst is a sobering reminder that we must continue to pursue fiscal discipline, pay down liabilities, and build up our Rainy Day Fund during these fleeting good times,” said Michael Cohen, director of the governor’s Department of Finance, in a statement.

Based on historical data, the current economic expansion – now at 77 months – is probably closer to the end than the beginning, the LAO concluded. The average length of an upswing in California has been 58 months dating back to 1945, according to the report.

The growth in personal income tax – a key driver of state revenues – has been on a tear of late but is likely to slow in the coming years. From an increase of 11.8 percent last year, the LAO said growth will fall to about 6.4 percent this year and then to 3 percent in 2016-17; 4.5 percent in 2017-18, and 1.7 percent in 2018-19.

The decrease in personal income tax, the LAO pointed out, assumes that the Proposition 30 hike on the state’s wealthy will expire as scheduled in 2018; if the reauthorization measure passes in 2016, the outlook would look considerably brighter.

From a technical standpoint, says the LAO, Proposition 98 funding for 2014-15 was based on Test I – generally operative in strong economic times and requiring schools to receive a minimum percentage (or a dollar-for-dollar increase) of revenues.

In 2015-16, the LAO believes school funding will move to Proposition 98’s Test 2,  typically in play during normal economic conditions and calling for schools to get what they got last year either from the state or local property taxes.

One heavy burden the state has carried for many years that is close to being lifted is the “maintenance factor” – the accumulated debt owed whenever the minimum guarantee falls below an historic level. During the last recession, the maintenance factor grew as high as $14 billion in 2012.

But Brown’s careful management of the education budget has reduced that bill to just $195 million and with that payment this year, the LAO said the state will be without a maintenance factor obligation for the first time since 2005-06.

With the lifting of that debt and expected changes in the economy, the LAO said the state will for the first time in many years, be able to share more revenue with other services and programs outside education.

“In 2015-16, the (Proposition 98) guarantee is relatively insensitive to changes in revenue,” the LAO reported. “Under our main scenario, with Test 2 the operative test and no further maintenance factor payments required, the 2015-16 guarantee no longer depends directly on growth in state revenue. We estimate that General Fund revenue could increase by as much as $8 billion above our projections with no corresponding increase in the guarantee.”

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