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

California's Education Shield: How Billions Were Found to Protect Schools Amidst a Budget Crisis

In a move that defied widespread expectations of deep cuts, California's 2024-25 state budget has managed to shield its K-12 schools and community colleges from the austerity measures impacting other government operations. This significant achievement, announced as the legislative session nears its close, represents a complex financial balancing act, leveraging billions in funding and intricate budget maneuvers to preserve educational commitments.

A Promise Kept, But at What Cost?

Governor Gavin Newsom's administration has successfully navigated a challenging fiscal landscape, ensuring that funding for transitional kindergarten through 12th grade and community colleges remains flat. This decision upholds the governor's pledge to protect these vital institutions, continuing substantial, multiyear investments in initiatives like community schools and expanded before- and after-school programs.

The final budget agreement, a product of intense negotiations between the governor and legislative leaders, even incorporates an additional $2 billion in revenue that was not part of the initial January or May budget proposals. This unexpected influx of funds provided crucial breathing room as officials grappled with a $211 billion general fund spending plan, facing a deficit that necessitated difficult choices across state government.

The Art of Fiscal Gymnastics

While the protection for schools is a significant victory, the methods employed to achieve it have raised eyebrows among fiscal watchdogs. To balance the budget, state leaders have resorted to a series of financial strategies that push the boundaries of conventional accounting. These include the creation of a $6 billion debt that will take over a decade to fully repay the state treasury.

Furthermore, the budget agreement involves draining the $8.4 billion education "rainy day fund," a critical reserve intended for unforeseen fiscal challenges. The deal also necessitates delaying payments to schools and community colleges, a move that could impact their immediate cash flow.

Suspending the Sacred Trust: Proposition 98

Perhaps the most consequential maneuver is the temporary suspension of Proposition 98 obligations for the current school year. This constitutional amendment, passed by voters in 1988, mandates a minimum level of state funding for K-12 schools and community colleges, typically around 40% of the general fund. This is only the third time in its 36-year history that Proposition 98 has been suspended.

The intention behind this suspension is to provide immediate fiscal relief, with the understanding that the suspended funds will be repaid quickly. Rather than penalizing schools for money already allocated or spent, the budget establishes a $6.2 billion debt that the general fund, not the educational institutions themselves, will repay over a decade, beginning in the 2026-27 fiscal year.

The remaining $2.6 billion represents a "deferral" – an unfunded obligation pushed forward to the 2023-24 fiscal year. This complex shuffling of funds aims to prevent deeper cuts to other state services while preserving the core funding for education.

A Mixed Bag for Higher Education

While K-14 education received robust protection, the state's university systems, the University of California (UC) and the California State University (CSU), face a more challenging outlook. Although their situation is improved from initial proposals, they will not be entirely insulated from budget adjustments.

Both UC and CSU will receive a 5% budget increase in 2024-25, totaling $227.8 million for UC and $240.2 million for CSU. This increase is intended to support enrollment growth for California residents. However, a promised 5% increase for 2025-26 has been postponed by a year.

Additionally, both systems will experience one-time cuts in 2024-25 – $125 million for UC and $75 million for CSU – which are slated for restoration in 2025-26. Further impacting their budgets, both CSU and UC will face a 7.95% reduction in administrative expenses in the 2025-26 fiscal year.

Targeted Restorations and Shifting Priorities

The final budget also includes the restoration of some K-12 and child-care cuts that were proposed in earlier revisions. These adjustments reflect a delicate negotiation process, balancing fiscal realities with policy goals.

Key Restorations and Adjustments

• Golden State Teachers Program: $60 million has been restored to this program, which offers scholarships to aspiring teachers. However, a new means test may limit eligibility for some candidates, potentially affecting $10 million in funding.
• Preschool Expansion: $100 million is being allocated to help preschools prepare classrooms and train staff to accommodate more children with disabilities. This is a scaled-back version of more ambitious expansion plans.
• Child Care System: The existing commitment to serve an additional 200,000 children in the state-subsidized child care system remains in place. However, the timeline for full implementation has been extended to 2028.
• Electric School Buses: A significant $895 million in one-time funding previously earmarked for electric-powered school buses has been rescinded. This money will now be redirected to help alleviate some of the late payments of state funding to schools.

Underlying Financial Pressures for Districts

Despite the overall protection of state funding, many school districts will continue to face financial headwinds. The primary funding mechanism for districts, the Local Control Funding Formula (LCFF), is tied to daily student attendance and a yearly cost-of-living adjustment (COLA). Districts experiencing declining enrollment and high absenteeism rates will likely feel the pinch.

The COLA for 2024-25 is set at a meager 1.07%, a figure determined by a federal formula that does not account for regional cost variations, such as the high cost of housing in many parts of the state. This low COLA will necessitate continued belt-tightening for many districts.

A Ban on Layoffs

In a significant move for educators and staff, the budget prohibits late summer layoffs. State law typically allows for an additional round of layoffs in August when the COLA falls below 2%. However, at the urging of public employee unions, Governor Newsom and legislative leaders have included a clause to prevent this, demonstrating a commitment to workforce stability.

Expert Reactions: A Delicate Balance

The initial reactions from veteran K-12 budget observers highlight the complexity and precariousness of the final agreement. Kevin Gordon, president of Capitol Advisors Group, described the budget as "remarkable" for insulating K-14 funding from cuts, adhering to constitutional repayment requirements, and providing a modest COLA, all while facing a record budget shortfall.

Conversely, Rob Manwaring, senior policy and fiscal adviser with Children Now, expressed caution. While acknowledging that the budget might be the best outcome achievable given the fiscal challenges, he voiced concerns about the substantial $8.3 billion suspension of Proposition 98. He noted that while schools will eventually be repaid, these deferrals introduce "increased school funding volatility and uncertainty until they are paid back."

The Proposition 98 Juggling Act

The balancing act for schools and community colleges is intrinsically linked to the multiyear management of Proposition 98 shortfalls. The current budget relies on navigating deficits across three fiscal years, where solutions for one year create challenges for the next.

A significant drop occurred in 2022-23 when the Legislature "over-appropriated" the Proposition 98 guarantee by $8.8 billion, coinciding with a decline in state revenue from the post-pandemic tech and stock market boom. The delay in tax filing deadlines due to winter storms obscured these warning signs.

Under Proposition 98's mechanics, the funding level from 2022-23 becomes the base for 2023-24. To address the resulting deficit and the $2.6 billion deferral from the prior year, all but $1 billion of the $8.4 billion education rainy day fund will be depleted.

The Impact of Suspension

The suspension of $8.3 billion in Proposition 98 funding for 2023-24 effectively lowers the minimum guaranteed funding level. This provides immediate fiscal flexibility, allowing for the restoration of child-care and preschool cuts that Governor Newsom had initially proposed. The architects of Proposition 98 intended to discourage such suspensions, requiring a declaration of fiscal emergency and a commitment to prioritize repayment when new revenue becomes available.

The 2024-25 budget anticipates sufficient new revenue to repay at least $4 billion of the suspended $8 billion, with the possibility of more. However, if revenue projections fall short, districts may not receive the full amount they are entitled to, with no fixed repayment date.

A Calculated Gamble and Revenue Acceleration

This budget represents a calculated gamble for schools and community colleges, relying heavily on future revenue growth. Adding another layer to the revenue generation strategy, the Legislature has accelerated the temporary suspension of two tax benefits for medium and large businesses: net operating loss deductions and tax credits. This suspension, initially planned for three years, will now begin one year earlier, in 2024-25.

This acceleration is projected to generate $5 billion, with $2 billion specifically directed towards Proposition 98 funding to help pay down deferrals. Combined with the anticipated $4 billion repayment for suspended funding, the Proposition 98 minimum guarantee is expected to reach a record $115.3 billion in 2024-25.

As the legislative session concludes, the details of this complex budget will be scrutinized. The governor and legislative leaders anticipate that lawmakers may seek further adjustments when they reconvene. The ultimate success of this financial strategy hinges on the state's ability to generate the projected revenues, ensuring that the promises made to California's schools and community colleges are indeed kept.