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  • Newsom’s $8 billion fix to spare cuts to schools, community colleges may face tough sell

    Newsom’s $8 billion fix to spare cuts to schools, community colleges may face tough sell


    Gov. Gavin Newsom announces his 2024-25 state budget proposal, including his plans to deal with a projected deficit in Sacramento on Jan. 10.. Credit: Brontë Wittpenn / San Francisco Chronicle / Polaris

    Gov. Gavin Newsom buoyed the hopes of school district and community college educators this month when, despite a sizable three-year decline in state revenue, he promised to protect schools and colleges from cuts and to uphold future spending commitments.

    They might want to hold their applause until after the last act, when the Legislature passes the 2024-25 budget in June.

    In an analysis of the state budget, the nonpartisan Legislative Analyst’s Office (LAO) cautioned that there are questions about how Newsom plans to close $8 billion of a huge revenue shortfall facing schools and community colleges.

    Beyond meeting this challenge, the LAO also urged legislators to start planning for education spending beyond 2024-25, when flat or declining revenues are expected to raise difficult financial choices. They could pit funding of ongoing expenses against sustaining ambitious programs like summer and after-school programs for low-income students, additional community schools, money for teacher training in early literacy and math, and confronting post-pandemic learning setbacks.

    “The state faces significant operating deficits in the coming years, which are the result of lower revenue estimates, as well as increased cost pressures,” the analyst said.

    But the immediate enigma is Newsom’s strategy for the $8 billion.

    Newsom is projecting that state revenues to run schools and community colleges will be short $14.3 billion over three years: the budget year that ended in 2022-23, the current budget year of 2023-24, and the coming year. That number is calculated as revenue through Proposition 98, the formula that determines the proportion of the state’s general fund that must be spent on schools and community colleges — about 40%.

    Proposition 98 revenues are sometimes close but never exactly what a governor and the Legislature assume when they approve a budget. Revenues for the past and current years exceed or fall short of what they projected and not what they predict for the year ahead.  

    Budget analysts were particularly handicapped when calculating the 2023-24 budget. They didn’t anticipate the shortfall from 2022-23 and didn’t discover it until fall 2023, because of a six-month delay in the filing deadline for 2022 tax returns.

    Newsom is proposing to divert $5.7 billion from the Proposition 98 rainy day fund to fill in the current year’s deficit as well as what’s needed to sustain a flat budget, plus a small cost of living increase, for 2024-25. Draining the rainy day fund would require the Legislature’s OK.

    The remainder — and biggest piece — is the $9 billion revenue shortfall from 2022-23, which would be $8 billion after other automatic adjustments. That shortfall is technically an overpayment beyond the statutory minimum Proposition 98 funding guarantee. It fell dramatically from what the Legislature adopted in June 2022 to $98.3 billion that revenue actually produced. The biggest decline was in income tax receipts on the top 1% of earners.

    School districts have already spent funding from 2022–23, including on staff pay raises that they negotiated with good faith estimates. Newsom and the Legislature could try to deduct that overpayment from the current and 2024-25 budgets, but such a move “would be devastating for students and staff,” Patti Herrera, vice president of the school consulting firm California School Services, told a workshop last week with more than 1,000 school district administrators in Sacramento.

    As an alternative, Newsom proposes to find reductions from the non-Proposition 98 side of the general fund, which covers higher education, child care and all other non-education expenses, from prisons to climate change programs.

    “We are super grateful there will be no attempts to claw back” the money given to school districts in a past year’s budget, Herrera said.

    Newsom’s challenge is to make districts and community colleges financially whole without increasing the minimum Proposition 98 guarantee. Raising Proposition 98 could create a bigger obligation in the future, including potential deficits after 2024-25 — unless the Legislature raises taxes, a nonstarter in an election year.

    How Newsom is going to do this is a mystery. The one-sentence reference to it in his budget summary says only, “The Budget proposes statutory changes to address roughly $8 billion of this decrease to avoid impacting existing LEA (school districts) and community college district budgets.”

    Both the LAO and School Services said it’s their understanding from the Department of Finance that the payments from the general fund to cover the Proposition 98 overpayment would be made over five years, starting in 2025-26.

    “We have some questions about that proposal. Probably the most pressing one is how is the state going to use revenue that it’s not going to collect for several years to address a funding shortfall that exists right now,” said Ken Kapphahn, the LAO’s principal fiscal and policy analyst for TK-12 education.

    The questions are legal and political. The proposed statutory language, which may be released in a trailer bill in the coming weeks, will reveal how the state Department of Finance will finesse postponing balancing the 2022-23 budget that’s $8 billion out of kilter. Budget hearings next week in the Capitol may indicate how receptive legislative leaders are to further reducing general fund spending, which also is feeling a financial squeeze.

    A search for the extra $8 billion

    Additionally, Newsom is proposing several billion dollars of accounting maneuvers that will book spending in 2024-25 but delay and defer payments for programs and some state salaries until early 2025-26.  Included are $500 million in deferred reimbursements to the University of California and California State University for the 5% budget increase that Newsom committed to funding in 2024-25.

    “Many of these solutions involve moving costs to next year. That is one reason we have the state looking at a large deficit, not just this year, but the following year,” Kapphahn said. “I can’t recall another situation quite like this.”

    Barring a recession, which neither LAO nor the Newsom administration is forecasting, both Newsom and the administration are projecting general fund deficits averaging about $30 billion annually in the three years after 2024-25. Pushing the $8 billion solution for the 2022-23 Proposition 98 deficit, along with other general fund delays and deferrals into those years will compound difficult choices, according to the LAO.

    “Overall, the governor’s budget runs the risk of understating the degree of fiscal pressure facing the state in the future,” the LAO analysis said.

    The LAO suggested other options for resolving the 2022-23 deficit. It recommended applying the remaining $3.8 billion from the Proposition 98 reserve fund that Newsom hasn’t touched and looking for reductions in unallocated one-time funding such as an unused $1 billion for community schools and canceling $500 million for electric school buses. 

    Even with no cuts to Proposition 98 next year, many school districts and charter schools will likely face their own deficits in 2024-25. That’s because the projected cost-of-living adjustment for next year will not be enough to cover the loss of revenue from declining enrollments. The COLA, tied to a federal formula measuring goods and services bought by state and local governments and not consumer products, is currently projected to be 0.76%; it would be the lowest increase in 40 years, with one exception, the year after the Great Recession, in 2009. This would come on the heels of two years of near record-high COLAs of 6.6% and 8.2%.

    The analyst’s office projects the COLA may inch up to 1% by June, when the budget is set. At that rate, a hypothetical school district with 10,000 students would see declining revenues with an enrollment decline of only about 100 students.

    Paso Robles Joint Unified School District in San Luis Obispo County, with about 6,000 students, is among those with declining enrollment since the pandemic. As a result, the district, with about 800 full-time employees, anticipates a reduction of five full-time staff members in 2024-25 and perhaps 40 layoff notices the following year, said Brad Pawlowski, the assistant superintendent for business services.

    Pawlowski said he came away encouraged after School Services’ presentation that schools will be spared cuts in the next budget, while acknowledging it’s a long time between now and the budget’s adoption.

    “We have seen a common message between the governor and the Legislature to protect education. And that does make me feel good,” he said. But doing so, he added, “will mean finding other ways to make that up outside of Prop. 98. That’s going to be the real challenge.”





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  • Newsom again pledges to spare cuts for TK-12 and community colleges, but not for CSU and UC

    Newsom again pledges to spare cuts for TK-12 and community colleges, but not for CSU and UC


    Gov. Gavin Newsom unveils his revised 2024-25 state budget during a news conference in Sacramento on May 10, 2024.

    Credit: AP Photo / Rich Pedroncelli

    Despite a further deterioration in state revenues, Gov. Gavin Newsom again pledged Friday to protect ongoing funding and the large-scale initiatives for TK-12 schools that he has set in motion.

    “I just don’t want to see education cuts,” Newsom said during a news conference on the revision to the proposed 2024-25 state budget he presented in January. “Right now, I want to see us preserve the progress we have made on community schools, on preschool, on after-school-for-all, summer school — all the work we’ve been doing.”

    Newsom’s comment during a two-hour session with reporters reflected the challenge of writing annual budgets subject to volatile revenue fluctuations dependent on the incomes of the top 1% of earners. Receipts from capital gains taxes that soared to $349 billion in 2021-22 dropped to $137 billion in 2023-24. The current fiscal year ends June 30.

    As a result of the projected shortfall, other state operations could face additional cuts. Newsom didn’t make the same promise he made for schools to higher education, leaving California State University system officials on edge. In a statement, CSU Chancellor Mildred Garcia said she was “deeply concerned” about a revised state budget that would grant no increase next year, then a 2% increase in 2025-26, instead of a 10% increase over two years as promised in January.   

    “As the institution that educates the evolving workforce of California, this budget places us in a position of making difficult decisions,” Garcia said.

    It was not clear whether the University of California would face similar cuts, although Newsom typically treats both systems similarly. UC officials would not comment on the issue. In a statement Friday, UC President Michael Drake said that the system is hoping to “finalize a budget that sustains the University’s research, public service, and education mission.”  

    The summary of revenue reductions and spending cuts Newsom released lacked the details that usually accompany a May budget revision; however, more information is expected by Tuesday, the deadline for statutory budget language. 

    Some TK-12 advocates expressed relief, nonetheless. 

    “Given the magnitude of the fiscal crisis, that the governor could put together a budget that largely protects K-12 is remarkable,” said education consultant Kevin Gordon, president of Capitol Advisors.

    Derick Lennox, senior director of governmental relations and legal affairs with the California County Superintendents, was more cautious. “We can appreciate the governor’s commitment to hold schools harmless to the extent he can, but so much will all depend on the details for Proposition 98 and what is available,” he said, referring to the portion of the general fund that determines funding for TK-12 schools and community colleges. 

    Newsom said general fund revenues were expected to decline an additional $7 billion for a total of $27.6 billion for the three-year period from 2022-23 through 2024-25. The total deficit would be nearly twice as big, but the Legislature has made a combination of cuts, savings, and deferred spending since January.

    The shortfall for TK-12 and community colleges, due to lower Proposition 98 funding, would be about $4.2 billion. Although details are scant, Newsom would make up for it mostly by emptying nearly all the remaining $9 billion rainy day fund for schools and community colleges.

    Newsom said the average TK-12 per-student funding for 2024-25 would be $17,502 — $151 per student less than proposed in January. Despite that, funding would include a 1% cost of living increase, a smidge higher than in January. 

    The May revision lists about $1 billion in cuts for early education through high school. Most of the programs are funded by the general fund, not Proposition 98. It would preserve ongoing funding for the expanded transitional kindergarten program for 4-year-olds and long-awaited pay raises for child care providers.

    Cuts would include:

    • $425 million to the Children and Youth Behavioral Health Initiative out of a $4 billion investment, which Newsom said would reflect directing more funding to wellness centers at school sites. Carl Pinkston of the Black Parallel School Board expressed concern. “In the aftermath of the pandemic, many students continue to display signs of trauma, adversely affecting their academic performance and overall well-being,” he said. The initiative “is a critical program that champions equity, aiming to improve behavioral health outcomes for children and youth.”  
    • Delayed funding for additional slots for state-funded child care. Instead of funding 146,000 as planned, the state will continue funding 119,000 new slots funded so far. “Delaying access to child care for the next two years to our youngest Californians is deeply troubling,” said Mary Ignatius, executive director of Parent Voices CA, an advocacy group. “Their childhoods do not pause. Their undiagnosed speech or other developmental delays will make it harder for them two years from now.” 
    • Elimination of $550 million in facilities funding for preschools, transitional kindergarten and full-day kindergarten programs. Newsom suggested funding could be included in a statewide school facilities bond. He said Friday that negotiations were continuing with legislative leaders for a bond on the statewide ballot in November.
    • A cut of $60.2 million to the Golden State Teacher Grant Program, which pays up to $20,000 to teacher candidates enrolled in credential programs who commit to working for years in priority schools. 
    • Elimination of $48 million in 2025-26 and $98 million in 2026-27 for increased payments for state preschools that serve additional students with disabilities.  
    • A cut of all but $100 million in ongoing funding for the Middle Class Scholarship Program, which previously received more than $600 million annually. In past years, more than 300,000 students across UC and CSU have received scholarships, which are available to students whose families earn up to $217,000. 

    Criticism of a key fix to the shortfall

    Newsom’s solution for minimizing cuts to schools and community colleges would rely on a controversial maneuver. He would fill in the biggest piece of the shortfall — $8 billion in an unanticipated drop in Proposition 98 revenue in 2022-23 — by treating it as an overpayment of the state’s funding obligation.  Since schools and community colleges have already spent the money, he’d fill in the gap by cutting the general fund — but not until 2028-29, when the state’s revenue picture presumably would have improved. Since Newsom announced the idea in January, the repayment obligation has grown to $8.8 billion.

    An accounting move of that magnitude hasn‘t been done before. The Legislative Analyst Office (LAO) has questioned the tactic, and so did the California School Boards Association in a statement Friday in which it implied it might sue.

    The association’s logic reflects the complexity of the Proposition 98 formula for determining funding. The school boards association asserts that the 2022-23 funding level was not a voluntary overpayment but rather a constitutional obligation on which subsequent years’ levels of funding are set.

    “This accounting gimmick would lower the baseline for calculating education funding in subsequent years, subjecting California schools to lower revenue for the foreseeable future,” school boards association President Albert Gonzalez said. “This sets a terrible precedent that potentially destabilizes education funding and undermines the voters’ intent when they passed Proposition 98 more than 35 years ago.”

    The California Department of Finance has insisted that the solution is legal. However, on Friday, Newsom did acknowledge that Proposition 98 is complicated.

    “You need not only a Ph.D., but a physics degree, an engineering degree and everything else to unpack its complexities,” he said.





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  • Gov. Newsom’s twists and tricks to spare cuts to schools and community colleges in state budget

    Gov. Newsom’s twists and tricks to spare cuts to schools and community colleges in state budget


    Gov. Gavin Newsom answers a reporter’s question about his revised 2024-25 state budget during a news conference in Sacramento on May 10, 2024.

    Credit: AP Photo/Rich Pedroncelli

    True to Gov. Gavin Newsom’s promise, the 2024-25 budget compromise that the Legislature announced Saturday and will pass this week will spare TK-12 and community colleges from cuts that other state operations will bear.

    TK-12 funding will be flat and will continue Newsom’s major commitments to multiyear, multibillion-dollar programs, including community schools and before- and after-school expansion.

    Update: State Budget Signed

    On June 26, Gov. Newsom signed Assembly Bill 107, the main budget bill, and Senate Bill 154, the Proposition 98 suspension bill. On June 28, Newsom signed SB 153, the education trailer bill.

    The budget will even throw in a couple of billion in new revenue that Newsom didn’t call for in January or in his May budget revisions. Newsom and legislators, meanwhile, struggled to squeeze an additional $28 billion out of a $211 billion general fund spending.

    But protection for schools and community colleges will carry risk. To balance the budget, Newsom and legislative leaders rely on budget maneuvers that would give a button-down accountant acid reflux.

    They include creating a $6 billion debt that won’t be fully repaid to the state treasury for a dozen years, and draining the $8.4 billion education rainy day fund.

    The deal also requires delaying payments to schools and community colleges and suspending — for only the third time in its 36-year history — Proposition 98 obligations for the current school year, on the assumption the money will be repaid quickly. Proposition 98, a constitutional amendment voters passed in 1988, established a formula for determining the minimum level of general fund spending on transitional kindergarten through grade 12 and community colleges — generally about 40%.

    Rather than punish schools for money already spent, the budget bill creates a $6.2 billion debt that the general fund, not schools and community colleges, will repay the state treasury over a decade, starting in 2026-27. The remaining $2.6 billion will be a Proposition 98 obligation pushed ahead to 2023-24; that unfunded amount is called a deferral.

    The California State University and the University of California won’t fare as well in the budget deal, although better than Newsom had proposed in January, even with a drop in state revenues since then. Both will get a 5% budget increase in 2024-25 that Newsom had proposed delaying, equal to $227.8 million for UC and $240.2 million for CSU, to support enrollment growth of California residents this fall. 

    Another promised 5% budget increase for both systems in 2025-26, however, will be put off a year. UC and CSU also face one-time cuts in 2024-25 of $125 million and $75 million, respectively, which will be restored in 2025-26.

    Both CSU and UC will also face a 7.95% cut in their administrative expenses in 2025-26.

    There will be no reforming the Cal Grant program in 2024-25, but, at the Legislature’s insistence, the $637 million ongoing funding for middle-class scholarships will continue, with a $289 million one-time increase.

    Late spending changes

    The final budget will also restore some TK-12 and child-care cuts that Newsom had proposed in his May budget revision while maintaining others. They include:

    • Restoring $60 million for the Golden State Teachers Program, which provides $20,000 in scholarships to teacher candidates, although a new means test may pare back $10 million in eligibility.  
    • Restoring $100 million in funding to help preschools prepare classrooms and train teachers in order to enroll more children with disabilities, while withdrawing larger plans to expand the program.
    • Continuing the existing agreement to serve 200,000 more children in the state-subsidized child care system but pushing back the timetable for full compliance to 2028.
    • Rescinding $895 million in one-time spending on electric-powered school buses that Newsom had made a priority. Instead, the money will be used to reduce some of the late payments in state funding for schools.

    School districts receive the bulk of their funding through the Local Control Funding Formula, which is based on daily student attendance and a yearly cost-of-living adjustment. So, even though overall state funding won’t be cut, many districts with declining enrollments and high absenteeism rates will face financial challenges.

    The cost-of-living adjustment (COLA), which is based on a federal formula tied to the cost of goods and services but does not factor in regional costs, including housing, will be only 1.07% for 2024-25, forcing further belt-tightening. One option for school districts, giving layoff notices to staff, will be off the table. State law allows an additional round of layoffs in August in years when the COLA is less than 2%, but, at the urging of public employee unions, Newsom and legislative leaders included a clause prohibiting late summer layoffs. They have done the same statutory override before.

    The initial reaction from two veteran TK-12 budget watchers was mixed. “This budget remarkably insulates K-14 funding from cuts, abides by constitutional requirements to restore funding in the future, and even provides a modest cost-of-living increase, all amid a record budget shortfall. Pretty amazing,” wrote Kevin Gordon, president of Capitol Advisors Group, a school consultancy firm.

    Rob Manwaring, senior policy and fiscal adviser with the nonprofit advocacy organization Children Now, was cautious. “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,” he wrote. “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.”

    And if revenues falter next year, schools and community colleges will no longer have a rainy day fund to turn to; it will be depleted by the end of 2023-24, with the possibility of replenishing it by $1.1 billion in 2024-25.

    Proposition 98 juggling act

    The proposed 2024-25 budget for schools and community colleges will be balanced, if revenue projections hold true, by juggling three years of Proposition 98 shortfalls, with one year’s solution creating the next year’s dilemma.

    The big drop was in 2022-23 when the Legislature “over-appropriated” the minimum Proposition 98 guarantee by $8.8 billion, while state revenue from the post-Covid stock market and the tech sector plummeted. Legislators didn’t see the warning signals because winter storms had pushed back the tax filing deadline from April to November.

    Under the mechanics of Proposition 98, the funding level for 2022-23 becomes the base level for 2023-24, even though the state still lacks the revenue to pick up the tab. So all but $1 billion of the $8.4 billion in the education rainy day fund will be drained to cover some of the 2023-24 deficit and the $2.6 billion deferral from the year before.

    On top of that, the budget deal calls for suspending $8.3 billion of the Proposition 98 funding for 2023-24. That has the effect of lowering the minimum guaranteed funding by that amount, while freeing up money to avoid deeper cuts in other state operations. That’s how the Legislature can restore cuts in 2024-25 for child care and preschool that Newsom had planned.

    The architects of Proposition 98 wanted to discourage the Legislature from suspending the law. So it requires the Legislature to declare a fiscal emergency and to make the suspended funding a priority for repayment as soon as there is new revenue. The 2024-25 budget assumes the state will have enough new revenue to pay back at least $4 billion of the suspended $8 billion, maybe more. But if revenues falter, districts won’t get what they’re entitled to, with no set date for repayment.

    That’s why the deal is also a gamble for schools and community colleges.

    There’s one more wrinkle. To raise revenue quickly, the Legislature has accelerated the temporary, three-year suspension of two tax benefits for large and medium-sized businesses: net operating loss deductions and tax credits. The period will start in 2024-25, one year ahead of schedule. It will yield a projected $5 billion, with $2 billion going to Proposition 98 — funding that will be used to pay down deferrals.

    Between this new money and the $4 billion payback for suspended funding, the Proposition 98 minimum guarantee is expected to rise to a record $115.3 billion in 2024-25.

    As with all deadline negotiations, legislators will have at most three days to review hundreds of pages of budget details spread over 16 separate bills. Newsom, Senate President pro Tempore Mike McGuire, D-Healdsburg, and Speaker of the Assembly Robert Rivas, D-Hollister, are expecting that legislators will demand some changes when they return from vacation in August.  





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