The Legislative Analyst’s Office released its annual Fiscal Outlook report on Nov. 17, revealing an estimated $31 billion surplus fueled by rapidly rising revenues and a projected surge in funding for schools in the next budget cycle. Released every fall, the fiscal outlook gives the LAO’s assessment of the state budget conditions for upcoming years, including revenues, potential surpluses and the conditions for schools under Proposition 98.
Proposition 98 Guarantee rises; $20 billion available for new commitments
The LAO estimates that the Proposition 98 Guarantee is estimated to be 2.6 percent above the 2021–22 guarantee, for a total of $105.3 billion. After the consideration of various ongoing expenses such as contributions to the Prop 98 reserve fund, cost-of-living adjustments and one-time funds, the LAO estimates there will be $9.5 billion available for new commitments in 2022–23.
Also projected is an additional $10.2 billion in one-time funding due to increases in the guarantee in the last two years — however, the amounts available may differ when accounting for interactions with the State Appropriations Limit.
State Appropriations Limit reached
As the Legislature and Governor consider another historic budget surplus, California is also projected to reach the State Appropriations Limit (SAL). Also known as the Gann limit, the SAL limits how the state can use revenues that exceed a specific threshold. The limit will apply to an estimated $14 billion in 2020–21 and 2021–22 and $12 billion in 2022–23. Under these circumstances, the Legislature can meet the SAL requirements in three ways:
- Lowering tax revenues.
- Spitting the excess revenues between additional school/ community college district spending and taxpayer rebates.
- Appropriating more money for purposes excluded from the SAL, including subventions to local governments, capital outlay projects, debt service, federal and court mandates, and certain kinds of emergency spending.
The effects for schools will depend on how the state decides to meet the requirement.
Prop 98 Reserve deposits required and local reserve cap triggered
Under the LAO’s current projection, the state will need to make deposits into the Prop 98 reserve in 2022–23 ($3.1 billion) and 2023–24 ($1.1 billion), bringing the total balance in the reserve to $9.4 billion. The state would not make any deposits or withdrawals in the following two years.
Under these conditions, the local reserve cap will be triggered beginning in 2022–23. CSBA-sponsored legislation in 2017 exempted all small school districts (those with average daily attendance of 2,500 and below) as well as all basic aid districts from the cap and limited the cap to assigned and unassigned reserves. For districts for which the cap does apply, the LAO notes that they “could designate their reserves for specific purposes, seek temporary exemptions from their county offices of education, or spend down their reserves.”
Program costs expected to rise
The LAO also makes several projections related to program costs. For 2022–23, the statutory cost-of-living adjustment (COLA) is estimated at a 15 year high of 5.35 percent, reflecting the recent rise in prices. The projected COLA for the following years assumes more moderate inflation levels and average increases of 3.5 percent in 2023–24, 3 percent in 2024–25 and 3 percent in 2025–26; though higher costs could ensue if higher inflation persists.
Program commitments made in the 2021–22 budget will also contribute to rising costs of $2.3 billion in 2022–23 and $8.2 billion by 2025–26. While the minimum guarantee was adjusted to reflect the expansion of transitional kindergarten in the LAO fiscal outlook, no such adjustment was made for commitments to the Expanded Learning Opportunities Program, TK staffing, school meal reimbursements and special education.
Finally, the LAO expects that ADA will drop in 2021–22 but makes assumptions that ADA will rise over the following four years due to a recovery in pandemic attendance and the expansion of TK. It estimates statewide attendance of 5,925,000 students in 2025–26, bringing the total to slightly above the pre-pandemic level.
District considerations highlighted
The LAO highlights three considerations facing districts that the Legislature and Governor should keep in mind:
- Declines in attendance: With the expiration of the ADA hold harmless implemented during the pandemic, the LAO’s outlook projects an attendance-related 2.5 percent ($1.8 billion) drop in the Local Control Funding Formula of about $1.8 billion (2.5 percent) in 2022–23.
- Pension costs: The pension relief provided by the state in 2019–20 and 2021–22 is set to expire, and the cost of district contributions are expected to rise $1 billion (2.2 percent of pay in 2022–23 for CalSTRS and $600 million (3.2 percent) for CalPERS.
- Unspent one-time funds: California has received more than $23 billion in one-time federal relief funding since March 2020, the majority of which must be spent by September 2024. As of September 2021, less than 15 percent of funds have been expended.
LAO suggestions for allocating funds
Finally, the LAO lays out several options for how the Governor and Legislature could allocate funds this budget cycle, including:
- Accelerate Expanded Learning Opportunities Program: Funds could be dedicated to ramp up the ELP, which funds before-/after-school programs and summer programs, ahead of its original full implementation timeline of 2025–26.
- Equalize LCFF add-ons: The state could use some of the available ongoing funds to equalize add-ons to the LCFF; specifically, the report suggests ensuring all districts receive a minimum amount per student, regardless of previous allocations as one option.
- Fund implementation of special education reforms: The budget could use one-time or ongoing funds to implement some of the recommendations laid out in studies the state has commissioned to examine the delivery of special education to students with disabilities.
- Address pension liabilities and costs: The state could use funds to provide pension cost relief for districts or otherwise improve the funding status of the pension systems.
- Improve climate resiliency and emergency preparedness: The state could consider funding grants for districts to assess their vulnerability to climate change and improve their resiliency, such as conducting emergency response planning, purchasing emergency equipment and retrofitting buildings.
- Make optional Proposition 98 Reserve deposit: Finally, the LAO suggests making an additional one-time deposit into the Proposition 98 Reserve to protect ongoing programs in the event of an economic downturn or set aside funds temporarily for future programs.