Legislature passes budget; Governor yet to agree

On June 13, the State Legislature sent its budget to the Governor for his consideration. The main budget bill, Assembly Bill 107 reflects the priorities of the Legislature in response to the Governor’s budget proposals. This will not be the final version of the budget since the Governor has yet to agree to all of the elements included in the budget bill. As such, negotiations between the Legislature and the Governor will continue. Once a final agreement is reached, it will be reflected in a second budget bill, typically referred to as a “budget bill junior.” That measure will amend the main budget bill to reflect the final agreement.

Importantly, although budget negotiations will continue, CSBA anticipates Proposition 98 funding for public education to remain in the final agreement as adopted in AB 107. If this remains the case, it is a positive reflection of CSBA advocacy and months of work by school board members across the state communicating and meeting with their respective state legislators to protect Prop 98 and fund public education.

Budget advocacy began prior to Governor proposing his January Budget

It was at CSBA’s 2023 Annual Education Conference (AEC) where CSBA members got their first glimpse of the coming budget fight. During an AEC workshop, the State Legislature’s non-partisan Legislative Analyst’s Office (LAO), informed attendees that state revenues were coming in far below projections and that the estimated budget shortfall was approximately $68 billion.

Heading into January and referring to his January Budget Proposal as a “normalization” and a “correction” of the “distortions” seen in prior year budgets during the pandemic, Gov. Gavin Newsom on Jan. 10 announced a substantially smaller-than-expected three-year budget shortfall of $37.86 billion. Acknowledging the volatile rise and fall in capital gains revenues, which were a significant contributor to the sharp increases in the 2021–22 and 2022–23 budgets, the Governor proposed to fully fund the Proposition 98 Minimum Guarantee at $109.1 billion.

January Budget included problematic Prop 98 “funding maneuver”

Upon release of the Administration’s budget trailer bill language, it became clearer that what the Governor was proposing was highly problematic. Due to delayed taxes being filed in November 2023, the state adopted the 2023–24 budget using estimated state budget revenues. As a result, the Proposition 98 Guarantee for the 2022–23 fiscal year was funded $8 billion above what it should have been. To address this $8 billion funding gap in the 2022–23 fiscal year — using optimistic outyear state revenue estimates — the Governor proposed a new “funding maneuver” to meet the estimated funding levels in the prior fiscal year by borrowing against future-year state General Fund revenues. Essentially, if adopted, the state would reclassify the $8 billion in the 2022–23 fiscal year as non-Prop 98 funding.

Although the Governor’s plan would have kept public education funding whole in the near term, it would have resulted in a permanent reduction to Prop 98 going forward, permanently lowering public education funding that schools would never see again. Additionally, if adopted, it would have also set a dangerous precedent allowing the state to use this “maneuver” again and again.

In response, CSBA submitted a letter to the Governor and the Legislature raising its objection to this proposal on the grounds it would undermine the spirit of Prop 98, violate the statutory and constitutional requirements enshrined in the law and reduce school funding in future years. Specifically, CSBA advocated the Legislature reject the proposed “funding maneuver” and ensure any efforts to reduce or alter education funding is in alignment with the statutory and constitutional provisions of Prop 98.

In May Revise, Governor doubled down on the proposed maneuver

On May 10, the Governor revealed in his May Revise announcement that the state budget deficit grew by $7 billion, from a projected estimate of $37.9 billion in January to $44.9 billion. Yet, due to early budget actions made by the Legislature and Governor earlier in April, the  current year deficit was reduced by approximately $17.3 billion, from $44.9 billion to $26.6 billion.

Rather than eliminate the proposed funding maneuver and present a revised approach to protecting Prop 98, as advocated by CSBA, the Governor doubled down on his commitment to the proposal and noted that its impact would increase to the tune of $800 million from $8 billion to $8.8 billion. Committing to the approach, he stated that he wanted to maintain public education funding and avert more layoffs but did not provide additional information beyond that.

CSBA advocacy kicked into high gear

In response to the Governor’s May Revise, CSBA advocacy immediately activated its action alert system, coordinated meetings between key legislators and their school board members, canvassed the halls of the Capitol, and issued statements to the press raising the public’s awareness of the maneuver. In less than two weeks, CSBA members generated nearly 30,000 emails to the Legislature and Governor, urging the rejection of the maneuver.

Governor responded to CSBA advocacy

Doing away with the proposal to reclassify $8.8 billion in Prop 98 funding as non-Prop 98 money, the Administration proposed changes intended to keep Prop 98 whole and maintain public education funding at current levels. Specifically, they included:

  • Protecting the integrity of Prop 98 by not reclassifying $6.2 billion in Prop 98 funding as non-Prop 98 funding
  • Suspending Prop 98 in the 2023–24 fiscal year, creating $5.5 billion in maintenance factor (debt), an initial maintenance factor payment in 2024–25 of $1.3 billion reducing the remaining amount owed to public education to $4.2 billion
  • Utilizing three year-over-year deferrals, each less than $3 billion
  • Exhausting the Prop 98 Reserve to help alleviate cuts to education in the current fiscal year, leaving a zero-balance next year

This was welcome news. It reflected CSBA’s advocacy to adhere to the Constitution and protect Prop 98. Although not perfect, it included components that ensure the principles of Prop 98 remain. CSBA did not take Prop 98 suspension lightly, but considered it preferable to alternatives that would undermine the integrity of the law and set the precedent of subverting Prop 98 whenever the Governor or Legislature deem it convenient. Significantly, the inclusion of a Prop 98 suspension aligns with the State Constitution and preserves the existing statutory framework available to the state. It also presents a better alternative to a permanent reduction in public education funding over both the short and the long term.

Legislature’s budget increases Prop 98 suspension amount

As negotiations continued, and in an effort to meet the constitutional deadline of June 15 to pass a balanced budget, the Legislature agreed in principle to the Governor’s revised Prop 98 proposals, but with some significant modifications. Using more optimistic outyear budget revenue projections and a revenue budget bill (SB 167) to accelerate tax revenues and help offset cuts to non-public education programs, the Legislature is generating an additional $5 billion in General Fund revenues in the near term.

This increase in revenues will result in increased Prop 98 funding of $1.9 billion in the 2024–25 budget year, but will also increase the suspension amount by an additional $2.8 billion compared to the Governor’s revised proposal, from $5.5 billion to $8.3 billion. However, this will also trigger a higher maintenance factor repayment in the coming 2024–25 budget year, by $4 billion, leaving a remainder of $4.3 billion owed to public education.

Compared to the Governor’s revised proposal, the Legislature’s budget also includes the following:

  • Changes to the deferral schedule, which includes the same $2.6 billion deferral from 2022–23 funds to 2023–24, but significantly increases the deferral from 2023–24 to 2024–25 to $4 billion, however this would be immediately paid off in 2024–25. A smaller deferral of approximately $360 million would be made from 2024–25 to 2025–26.
  • The Legislature also proposes to exhaust the Prop 98 reserve of $8.4 billion but includes a $1.1 billion deposit into the reserve in the 2024–25 budget year.

What does this mean for public education funding?

Although the suspension amount is higher, the immediate payment of $4 billion in 2024–25 in maintenance factor will result in generally the same amount of money remaining owed to public education at $4.3 billion when compared to the Governor’s revised proposal.

For the most part, local educational agencies can assume that funding in the current year and coming 2024–25 budget year will remain generally the same. Changes to the deferral schedule by the Legislature are welcome, as is a modest deposit into the reserve. Yet, outyear maintenance factor and deferral payments remain a concern.

Additionally, the use of optimistic budget revenues creates a great deal of uncertainty. If these revenues fail to materialize, it could interrupt the rate at which the Prop 98 maintenance factor is repaid and the ability to keep to the Legislature’s scheduled deferral amounts.

What else is in the budget and what is left?

With the Legislature sending its budget to the Governor on June 13, it did make a number of changes to other budget and programmatic proposals included in the May Revise. However, it also left many proposals untouched. CSBA expects unaddressed proposals to be included in a budget trailer bill, which the Legislature is striving to complete before summer recess.

Regarding the main budget bill, here are some notable elements included in the Legislature’s budget:

  • Adopts the proposed 1.07 percent cost-of-living adjustment for the 2024–25 fiscal year
  • Includes a rebenching of Prop 98 to reflect the third year of Universal Transitional Kindergarten expansion and continues the 1:12 adult-to-student ratio for the coming school year
  • Adopts the Governor’s proposal to eliminate $550 million in funding for the Transitional Kindergarten, Preschool and Full-Day Kindergarten Facilities Program
  • Adopts the Governor’s proposal to eliminate $875 million in General Funds for the School Facilities Program
  • Adopts the Governor’s proposal to increase funding for the Universal Meals Program by $120.8 million in one-time funding and $179.4 million in ongoing Prop 98 funding
  • Provides $983 million in Prop 98 funding as mandated by Proposition 28, the Arts and Music in Schools funding initiative
  • Provides $25 million in one-time funding for dyslexia screenings, including intent language to fund future screenings via the Unfunded Mandates Block Grant
  • Provides $20 million in one-time Prop 98 funding to establish an Ethnic Studies Block Grant to support local instructional materials adoptions
  • Rejects the Governor’s proposal to redirect $256 million in preschool funding for electric school buses
  • Rejects the Governor’s proposal to reduce funding for the Golden State Teachers Program by $60 million
  • Modifies the Governor’s proposed Instructional Continuity Program by retaining the short-term independent study program created during the pandemic and separating Instructional Continuity Plans from ADA funding
  • Allows a bachelor’s degree to meet the state’s basic skills requirement and further streamlines the use of transcripts to review and determine subject matter competency

Gov. Newsom now has until June 30 to sign or veto the budget bill. Many areas of contention still remain between the Legislature and Governor. As negotiations continue and more details emerge, CSBA will continue to keep members updated on the latest developments and opportunities for advocacy.