Soaring tax collections could trigger budget caps in 2015-16

Soaring tax collections could trigger budget caps in 2015-16

(Calif.) Despite assurances made last fall by the Brown administration that it would likely be years before conditions are met that would limit the amount of money school districts can squirrel away for tough budgetary times, there’s strong evidence that day may come as soon as this fiscal year.

Higher-than-expected state revenues could in 2015-16 trigger  a series of new legal benchmarks that would restrict the size of budget reserves districts could maintain in the following year.

Nearly universal opposition from California’s school administration community  is pointing to the unexpected quick trigger as yet another reason  state legislators should overturn the mandate.

“The triggers kicking in sooner than anticipated is definitely a concern,” said Jeff Vaca, spokesman for the California Association of School Business Officials. “That’s why there is urgency in our coalition’s efforts to repeal the statute.”

The reserve cap policy – enacted last summer in a last-minute state budget trailer bill – is tied to Proposition 2, the Rainy Day Budget Stabilization Act conceived by Gov. Jerry Brown’s administration and approved by voters last November.

The Constitutional amendment directs billions of dollars, beginning with the 2015-16 budget, into the state’s own emergency reserve account. It also created a new “rainy day” fund to support K-12 schools and community colleges during economic downturns.

District leaders oppose provisions in the measure that affect them for several reasons, including the fact that the rainy day fund for education would be created by withholding money to which they would otherwise be getting under Proposition 98 – also a Constitutional amendment approved by voters in 1998.

Further, they argue, the proposed restrictions come at a time when California class sizes are among the highest in the nation, per-pupil spending is still among the lowest, and most districts  are still recovering from the worst economic recession in decades.

Opposition to the reserve cap was boosted last week when the nonpartisan Legislative Analyst said the requirement should be repealed.

The timing of when the caps would kick in is based on a series of economic and political conditions.

Key among them is recognition of the share of state revenue schools will be getting next year based on the Prop. 98 guarantee.

The complex funding formula is expected to require the Legislature to use the “Test I” option – used only twice since 1988 – giving schools about 40 percent of revenues. Use of Test I is reflective of California’s strong economy and the collection of a large amount of capital gains taxes this year.

The second element of the cap triggers that appears to be happening unexpectedly is the requirement that the state pay off the “maintenance factor” – debt owed to schools from the many years that the state could not afford to make the full Prop. 98 payment.

The maintenance factor was recently estimated to be $6.6 billion but because of the growth in revenue collections the last three years, that goal is also within sight – it is estimated that the new maintenance factor will be just $1.9 billion by this spring.

The LAO has maintained that it would be several years before Prop. 2 conditions triggered the reserve cap but acknowledged last week it’s possible it could happen this year or next, depending on the revenue stream.

Ken Kapphahn, author of the LAO report released last week, said that had Prop. 2 been in effect a year earlier, it’s likely conditions in 2014-15 would have triggered the reserve cap.

School Services of California, a firm that has long specialized in business and financial management for school districts, has been telling its clients in budget presentations that they should prepare themselves for the probability that the reserve cap could be triggered as soon as this year as well.

Backed by last week’s LAO’s analysis, school leaders are prepared to argue that capping their reserve accounts would pose a number of risks including:

Difficulty maintaining programs in tight fiscal times – the reserve caps would allow most districts to maintain only a few weeks of payroll in reserve.

Difficulty addressing unexpected costs – emergency facility repairs and other unexpected costs would place districts with low reserves in a precarious position.

Greater fiscal distress – historically, districts with reserves below the caps have been about twice as likely to be flagged for fiscal intervention as their peers with higher reserves.

Higher borrowing costs – districts with lower reserves could have their credit ratings reduced, increasing the cost of borrowing money.

Another concern shared by the education coalition and voiced in the LAO report is that the caps become operative following any deposit into the state school reserve – even if the size of that deposit is much smaller than the triggered reduction in local reserves.

As for legislative support for repealing the statute, Republican Assembly leader Kristin Olsen, R-Modesto, plans to author a bill aimed at doing just that. It will be part of a package of education reform bills submitted by the Caucus, she said in a statement, “that will provide teachers room to grow and excel, and give schools back the flexibility to save for a rainy day.”

Passage, however, would be up to the Democratically-controlled Legislature, which is accused of approving the reserve cap language as a favor to teacher unions to “bring more money to the bargaining table” for salaries, a spokeswoman in Olsen’s office said. 

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