Budget analysis: State should continue prioritizing pension payments amid escalating costs

28 Jan
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A new report from the Legislative Analyst’s Office suggests it is vital that California lawmakers provide school districts with more financial relief in next year’s state budget to mitigate declining enrollments and escalating costs as an economic downturn likely looms.

Though Gov. Gavin Newsom’s proposed 2020–21 budget contains $3.3 billion in new Proposition 98 funding, $1.9 billion of that total reflects one-time spending that largely focuses on addressing teacher shortages, stubborn achievement gaps and inadequate resources for students living in poverty.

In “The 2020–21 Budget: School District Budget Trends,” Legislative Analyst Gabriel Petek concludes that while the overall split of new ongoing and one-time Prop 98 spending is “reasonable,” there a number of alternatives that could have a significant positive impact on school districts’ cost pressures. Suggestions include the Legislature dedicating a portion of new ongoing funding to help districts address increases in their special education costs, for instance, or funding a higher cost-of-living adjustment for the Local Control Funding Formula than what Newsom has proposed (2.29 percent).

The analyst reports that supplemental pension payments would be the best use of one-time funds to benefit districts’ financial health. This year’s state budget designated more than $3 billion from the General Fund to buy down districts’ long-term pension liabilities and to help with immediate payments they owed to CalSTRS, but the LAO noted that districts’ pension payments to CalSTRS and CalPERS will rise $800 million next year.

“Of all the Legislature’s options for one-time initiatives, we believe making supplemental pension payments would provide the greatest sustained fiscal benefit for districts,” wrote Petek. “By comparison, most of the Governor’s one-time Proposition 98 proposals would require districts to implement new programs or expand existing services.”

Enrollment is declining while staffing costs are rising

Any number of factors can significantly impact a district’s budget. Rural districts often face higher transportation costs ensuring children in remote, sparsely populated areas make it to campus each day, while their urban counterparts may struggle to offer teacher salaries attractive enough to make up for higher costs of living.

Recent trends in student enrollment have also proven problematic for districts attempting to balance their budgets. The most drastic declines have been in Los Angeles County, which had about 100,000 fewer students in 2018–19 compared to 2013–14; Orange County, with a decline of about 20,000 students in that time; and Santa Clara County, which declined by about 10,000 students.

The LAO notes that enrollment rates have increased in some counties since the overall decline began in 2014–15, but as birthrates in California continue to drop and more people leave the state than migrate to the coast, school enrollment is projected to continue declining.

As districts face declining enrollments, they are also seeing an increase in the number of children identified for special education. Over the past 10 years, the share of students identified for special education services in California has increased from 11 percent to 13 percent. The share of students identified with autism alone has increased from 1 in 600 students in 1997–98 to about 1 in 50 students in 2018–19. The jump requires districts to provide intensive support, often with aides and specialists, to more students.

The levels of school support staff, which include teacher aides, counselors, psychologists, social workers, nurses, office staff and custodians, is at a historic high following a 21-percent increase between 2013–14 and 2018–19, according to the LAO report.

The report also pointed to growing employee pension and health care costs as a major burden on district budgets. Analysts estimate that total school district pension contributions will be approximately $7.9 billion for 2019–20 and increase by an additional $800 million to $1 billion for 2020–21. District contributions to CalPERS are likely to continue increasing at a steady pace for the next several years. Retiree health liabilities are another area of fiscal concern. Most districts defer setting aside money during an employee’s tenure to cover retiree health care costs, thereby contributing to an unfunded liability of more than $24 billion statewide. Though the majority of this is attributable to about a dozen large school districts, nearly all districts that offer retiree health benefits have at least some unfunded liability.

Few districts in financial trouble now, but the list could grow rapidly

There is some good news: most districts in the state currently have positive budget ratings. Only 30 districts are considered “chronically distressed,” meaning they have received either two or more qualified or negative ratings since 2016–17 or two consecutive negative ratings in 2018–19.

Chronically distressed districts vary drastically in size (Los Angeles Unified has an average daily attendance of more that 410,000 compared to Feather Falls Union Elementary with an ADA of nine), though many tend to be relatively large districts.

The report noted, however, that with districts relying predominantly on funding sources that fluctuate with the state’s economic health, more schools could quickly see themselves added to the list of those facing serious financial troubles.

California schools currently rely heavily on Prop 98 funding — which accounted for almost 70 percent of the $101 billion schools received in 2018–19, according to the LAO report. The 1988 initiative set a minimum state spending level for K-12 school and community colleges but takes state economic conditions into account. Steep budget cuts during the Great Recession, for instance, reduced Prop 98 K-12 funding per pupil by almost 15 percent from its 2007–08 peak. Should the state face the effects of another recession as is predicted, far more schools are likely to fall into financial distress if per-pupil funding declines amid increasingly high costs to serve all students.

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