May Revision cuts LCFF, drops COLA, introduces proposals in effort to mitigate impact

Reflecting California’s pandemic-induced $54 billion budget deficit, Gov. Gavin Newsom presented his May Revision on May 14 featuring a blend of proposals aimed at mitigating the dire financial straits of the state’s K–12 schools.

“Coupled with a 10 percent cut to LCFF — the primary source of funding for K-12 education — the May Revision impairs the ability of schools to serve all students and to resume on-campus instruction safely,” said CSBA President Xilonin Cruz-Gonzalez. “This budget would be insufficient in ordinary times and is less than what is required for most schools to reopen safely during a pandemic — and if schools don’t reopen, our economy can’t fully reopen.”

Absent from the May Revision is a cost-of-living increase to the Local Control Funding Formula for already distressed local educational agencies that are now experiencing the rising costs of the COVID-19 crisis. Yet, with the May Revision estimating that the Proposition 98 guarantee will decline by $19 billion, Gov. Newsom outlined several proposals that he said could mitigate the impacts of dramatic revenue decline on state funding. “We are not just going to roll over and accept $19 billion of cuts to public education,” he said.

These proposed pieces include a one-time investment of $4.4 billion in federal funds to LEAs to address learning loss related to COVID-19 school closures and, importantly, the redirection of $2.3 billion paid to CalSTRS and CalPERS toward long-term unfunded liabilities to further reduce employer contribution rates in 2020–21 and 2021–22.

Overall, the Governor’s budget presentation reflected the state’s unexpected, rapid and dramatic departure from strong financial footing. When Gov. Newsom released his initial $222.2 billion spending package in January, California was enjoying a significant budget surplus. At the time, Newsom proposed $3.4 billion in new revenue to public schools. Overall, the proposed Proposition 98 guarantee for K-14 education was $84 billion, an increase of $2.9 billion over the enacted 2019–20 guarantee. Though there were concerns at the time, they were balanced by several highlights and proposals that were applauded by CSBA and its members. In stark contrast, the Department of Finance’s May 7 fiscal update generated significant anxiety with an estimated drop of $54 billion in state revenue and a corresponding reduction to the Proposition 98 guarantee for schools of $18.3 billion over the course of three years.

“Schools understand the financial pressures presented by COVID-19 response — we’ve been dealing with them at the local level every day,” said CSBA CEO & Executive Director Vernon M. Billy. “For that reason, it is frustrating to see a May Revision that reduces support for schools when we are dealing with unprecedented challenges and expenses related to the pandemic.

“The May Revision cuts the budget for already underfunded schools and does it at a time when costs have skyrocketed for pensions, health care, special education, transportation and other items,” Billy continued. “Even before the COVID-19 crisis, nearly 70 percent of California schools were deficit spending and 40 percent were contemplating layoffs as they coped with rising costs. In addition, schools are working to accommodate the demands of distance learning and a future where social distancing measures will need to be applied on campus. Sadly, California’s education funding undermines this goal and means that many schools will find it difficult, if not impossible, to reopen safely and effectively in the fall — a circumstance that would have disastrous effects for our society and our economy.”

The May Revision bettered the most pessimistic predictions but still poses the most significant financial challenge to California schools in recent memory. The following is a summary of the biggest takeaways from the budget proposal and how it will impact California’s schools.

Cost-of-living adjustment off the board for now

Chiefly, the budget includes a 10 percent ($6.5 billion) reduction to the LCFF. The reduction includes the elimination of a 2.31 percent COLA. However, Gov. Newsom said additional federal funding — such as the newly introduced HEROES Act — could backfill that dramatic cut. “If the federal government does what it must do under the circumstances to help states large and small across this nation, these cuts would go away,” Newsom said.

CSBA has been an ardent supporter of the call for federal funding beyond the $13.5 billion delivered in the CARES Act. This week, CSBA was among the California education organizations and county and district leaders who signed onto a letter sent to Congressional leadership making the case for $175 billion in additional federal funds.

Plan for temporary revenue increases, federal funds, pension relief

The budget proposes the temporary three-year suspension of net operating losses and limitation on business incentive tax credits to offset no more than $5 million of tax liability per year. According to a budget summary, these measures, along with more minor tax changes, will generate $4.5 billion in general fund revenues, of which approximately $1.8 billion would go to the Proposition 98 guarantee in 2020–21.

While the push is on for additional federal stimulus funding, the May Revision calls for $4.4 billion ($4 billion from the federal Coronavirus Relief Fund and $355 million from the federal Governor’s Emergency Education Relief Fund) in already allocated one-time money to address learning loss.

Gov. Newsom said the money would “help with the flexibility that districts are going to need to consider on their own — on a district-by-district basis — what they feel is best for them to address the learning loss … this will be discretionary money to substantively address some of the short-term anxiety.”

California also received $1.6 billion in federal Elementary and Secondary School Emergency Relief funds, of which $1.5 billion will be allocated to LEAs to address COVID-19 related costs in proportion to the amount of Title I-A funding they receive.

On the topic of pensions, the budget proposes redirecting $2.3 billion paid to CalSTRS and CalPERS toward long-term unfunded liabilities over 30 years to further reduce employer contribution rates in 2020–21 and 2021–22 to aid school budgets now. The reallocation would reduce the CalSTRS employer rate from 18.41 percent to approximately 16.15 percent in 2020–21 and from 18.2 percent to 16.02 percent in 2021–22. The CalPERS Schools Pool employer contribution rate will be reduced from 22.67 percent to 20.7 percent in 2020–21 and from 25 percent to 22.84 percent in 2021–22.

“We appreciate that, given the financial pressures related to COVID-19, Gov. Newsom chose to direct $4.4 billion from the federal CARES Act toward public education and that he is allocating $2.3 billion to defray pension contributions for school districts,” said Cruz-Gonzalez. “This is a welcome development that affirms the importance of public schools.”

In what the administration describes as a way to “avoid a permanently depressed level of funding for K-14 schools,” the May Revision seeks to provide supplemental appropriations above the constitutionally required Proposition 98 funding level, beginning in 2021–22, and in each of the next several fiscal years, in an amount equal to 1.5 percent of General Fund K-12 revenues per year, up to a cumulative total of $13 billion.

The May Revision also reflects the withdrawal of the approximately $524 million in the Public School System Stabilization Account, a reserve account.

Special education base rate increase still in the plans, many new programs not

Calling the matter a “point of pride,” Gov. Newson outlined that one of the few surviving education proposals from his January budget is the increase to special education base rates. The proposal calls for a base rate increase to $645 per pupil apportioned on a three-year rolling average of LEA ADA. The new rate is a 15 percent increase in the Proposition 98 General Fund contribution to the base formula funding compared to last year.

While the special education increase stands, much of the new spending proposed in January is no longer included in the May Revision due to the state’s sudden downturn. The following are the higher-cost education proposals withdrawn from the budget: $350 million toward Educator Workforce Investment Grants; $300.3 million in Opportunity Grants; $300 million for Community Schools Grants; $250 million for a Special Education Preschool Grant; $193 million in Workforce Development Grants; $175 million toward a Teacher Residency Program; $100 million for a Credential Award Program; $70 million for Child Nutrition Programs; $64.1 million to the Classified Teacher Credential Program.

Absent additional federal funds, to limit further reductions to the LCFF, the May Revision also includes $352.9 million in reductions to K-12 categorical programs. Impacted programs include After School Education and Safety, K-12 Strong Workforce Program and the Career Technical Education Incentive Grant Program.

Deferrals and flexibilities in the cards

Similar to previous economic downturns, the May Revision reintroduces apportionment deferrals into the mix to help the state with its cash flow challenges. The proposal includes a deferral of $1.9 billion in the current year June apportionment, which would be repaid to LEAs in July of 2020; the amounts would triple in the 2020–21 fiscal year to $5.3 billion. The 2020–21 deferrals would include $528 million from the April 2021 apportionment, $2.4 billion from the May 2021 apportionment and $2.4 billion from the June 2021 apportionment. All of these would be paid to LEAs early in the following fiscal year.

Recognizing the severe budget challenges faced at the local level, the May Revision also outlines a number of proposed flexibilities around areas such as apportionment deferrals, pension payments and borrowing limits:

  • Exemptions for LEAs if apportionment deferrals create a documented hardship.
  • Authority for LEAs to exclude state pension payments on behalf of LEAs from the calculation of required contributions to routine restricted maintenance.
  • Subject to public hearing, increases on LEA internal inter-fund borrowing limits to help mitigate the impacts of apportionment deferrals.
  • Authority to use proceeds from the sale of surplus property for one-time general fund purposes.
  • Options for specified special education staff to utilize technology-based options to serve students.
  • Extension of the deadline for transitional kindergarten teachers to obtain 24 college units of early childhood education, from Aug. 1, 2020 to Aug. 1, 2021.

“The Administration intends to work with the Legislature and education stakeholders on other options, including expanded flexibility, to protect core services and minimize impacts on students in the context of reduced funding,” the budget summary reads.

CSBA will continue to keep members informed of any developments and advocate for a budget that supports schools in the effort to serve all students and respond to COVID-19.