As expected, both houses approved a 2012-13 budget bill today, along with several “trailer bills” to implement the spending plan. The votes were partisan on AB 1464, with three Democrats and all Republicans dissenting. The education trailer bill was not brought up today, and the language is not yet available.
Democrats and the governor are still not in agreement, as the governor reportedly wants $250 million more in savings and stronger limits on CalWORKs, the state’s welfare-to-work program. It is unclear if the governor will veto the budget, as he did last year, or whether he will just ask for additional bills to be passed. Regardless, the Legislature has now met its Proposition 25 mandate, and lawmakers will continue earning their salary and per diem payments.
The Legislature is still on track to approve the state budget on a partisan vote tomorrow, although the differences between the Democratic leaders and the governor have yet to be reconciled.
For community colleges, there are a couple of differences to the budget approved by the Senate Budget Committee on Tuesday:
- If the tax measure passes, the deferral buy-down would be only $213 million (rather than the $313 million).
- If the tax measure does not pass, the “trigger cut” would be increased to $338 million (rather than $286.5 million.
These two changes overnight were after a recalculation of the proceeds of the tax measure and distribution of resources between K-12 and community colleges. Obviously, this is very disappointing news, and would increase the workload reduction if the tax measure fails to about 7.5%.
The good news is that we have received full backfill guarantee on both the current and budget year proceeds of redevelopment agency wind down.
I have updated the e-mail sent out Tuesday night with these new figures.
We’ll be updating the scenarios on the website after the budget is adopted, and will post developments leading up to the budget’s passage on the League’s twitter stream.
The Senate Budget Committee just adjourned, having acted on most parts of the state budget today. This sets the stage for floor consideration by the Senate and Assembly on Friday, which is the deadline by which lawmakers either pass a budget or don’t get paid.
In an unexpected twist, the Assembly Budget Committee held an “information only” hearing and declared that no votes would be taken. While nothing official has been released, most observers believe that the Assembly will wait for the Senate to send over its bills and pass it, rather than having separate versions of the budget that must be reconciled by a conference committee.
Governor Jerry Brown sent an email statement to reporters this afternoon saying that, while Democrats had agreed to many of the cuts he proposed, they had not reached agreement with him yet. Specifically, he cited the rejection by legislative Democrats of significant cuts to the CalWORKs welfare-to-work program. However, the actions by the Senate today for community colleges are very likely to reflect the final budget for community colleges.
Here are the major components:
Current year (2011-2012)
- Student Fee Revenue Shortfall: The Senate took no action on our request to backfill the estimated student fee revenue shortfall of $100 million in the current year.
- Redevelopment: The Senate adopted the governor’s reduction of $116.1 million General Fund for assumed redevelopment revenues, but only with a commitment by Department of Finance that community colleges will be protected “dollar for dollar” and that no more General Funds will be taken than are actually received by communtiy colleges from redirected redevelopment property tax revenues.
Budget year (2012-2013)
- Overall: The Senate adopted the proposed use of proceeds of the November tax measure for deferral buydown of
$283.8$213 million (this has fallen from $313m). While we had previously supported a “positive trigger” with programmatic spending, the revelation over the last week of a huge cash flow shift and associated risk suggested that the deferral buydown is the best option for community college districts.
- Redevelopment: The Senate adopted the governor’s reduction of $341 million General Fund for assumed redevelopment revenues, but only with a commitment by Department of Finance that community colleges will be protected “dollar for dollar” and that no more General Funds will be taken than are actually received by communtiy colleges from redirected redevelopment property tax revenues.
- Apportionment flexibility: The Senate rejected language to repeal the SB 361 per-student funding formula.
- Categorical flexibility: The Senate rejected language to provide increased flexibility among categorical programs.
- Mandates: The Senate adopted a compromise mandates block grant, under which districts could opt to either 1) receive $28/FTES and opt out of claims or 2) use the existing claims process.
- Cal Grants: The Senate rejected the proposal to increase GPA requirements for Cal Grants, but accepted the governor’s proposal to repeal the recent Student Aid Commission decision to allow community college transfer entitlements to students who don’t transfer immediately from a community college to a four-year institution.
The Bottom Line
- If the November tax measure passes, the community college budget increases
$283.8$213million, and the money will be used for deferral buydown.
- If the November tax measure fails, the community college budget will be cut the
$283.8$213million added to next year’s budget for deferral buydown, plus an additional $286.5$338million workload reduction cut, for a total of $570.3$551 million trigger cut.
- Under both scenarios, a large amount of cash will be deferred from July-November until later in the year as the state manages a significant cash flow problem. In 2011-12, community colleges received $1.7 billion from July through January. In 2012-13, community colleges will receive either $1.0 or $1.1 billion in the same time frame, depending respectively on whether the tax measure does not pass or does pass.
Thank you to Theresa Tena, the League’s Director of Fiscal Policy, my partner in budgetary crime, who has done an outstanding job on your behalf on a state spending plan with increasing complexity, and to our community college partners including system Vice Chancellor Dan Troy.
A major component of the governor’s proposed 2012-13 budget is the assumption that community colleges will receive $341 million in 2012-13 in redirected redevelopment revenues. This is on top of $116 million estimated for 2011-12.
While community colleges will eventually receive revenue from the wind-down of redevelopment agencies, independent observers believe the amounts projected in the budget are far too high. Join us in calling for a “hold harmless” provision to ensure community colleges do not take an unexpected midyear cut.
Community Colleges Hit by February Surprise
of Unexpected Additional $149 Million Budget Cut
Additional cut brings total 2011-12 reductions to $564 million; relief would maintain access
Already reeling from $313 million in cuts in the 2011-12 enacted budget and $102 million in "triggered cuts" in January, California’s 112 community colleges learned late Thursday that they will likely face an additional $149 million cut in the current fiscal year. The latest cuts amount to an additional reduction of $135 per student and threatens more class cuts.
Before the latest cuts, community college were operating with $996 million (23%) is less funding since 2008-09, and have reduced enrollment by nearly 284,000 students at a time when demographically they should have significantly increased enrollment. Even with the reduced enrollment, funding per student has dropped by $554, or 9.3%.
"It is unconscionable that the state continues to foreclose on educational opportunity at this time of record demand and high unemployment," said Scott Lay, President and CEO of the Community College League of California. "These latest cuts threaten the elimination of even more classes and more faculty and staff layoffs."
The surprise cut came when districts were provided the first state community college financial update of the year, which showed that revenue from state-determined student enrollment fees were $106 million below projections, and that property tax revenues included in the budget lagged state estimates. This resulted in insufficient resources for the state to meet its promised per-student funding and instead a determination that the funding should be deficited by 3.4%.
"We call on the Legislature to quickly pass legislation to address this unexpected cut," said Theresa Tena, the League’s Director of Fiscal Policy. "By fulfilling this funding commitment by June, we can ensure that students will have access to summer school classes in many parts of the state where access is threatened and avoid further layoffs."
"This latest development brings the one-year cut to California’s three segments of public higher education to over $2.1 billion, and demonstrates why it is essential to support the governor’s plan to ask taxpayers to support a balanced approach that gets our state’s budget back on the right track," said Lay.
The Community College League of California is a nonprofit association of California’s 72 community college districts, serving the districts in governmental relations, leadership development and district services.
Over the last week, we have provided you with a lot of analysis on the impact of the state budget directly on our colleges, but there are some nasty details in another part of the budget that will hurt our students.
The governor’s budget proposes to cut Cal Grants by $302 million, and proposes to use $736.4 million in federal welfare funds for the program, reducing the amount of funds available for the social safety net.
Specifically, the major changes include:
Increase minimum GPAs
- impact: $131.2 million; 26,600 students
- Cal Grant A: raise GPA from 3.0 to 3.25
- Cal Grant B: raise GPA from 2.0 to 2.75
- Cal Grant Community College Transfers: raise GPA from 2.4 to 2.75
Reduce grants for students attending independent, non-profit institutions to the California State University maximum.
- impact: $111.5 million; 30,800 students
Reduce grants for students attending private, for-profit colleges to $4,000.
- impact: $59.1 million; 14,900 students
For community college students, we are most concerned about the changes to the GPA changes for Cal Grant B and Community College Transfers, and the cap on grants for independent, non-profit institutions. The reductions would eliminate about 30% of Cal Grant entitlement recipients. Most of these are community college students, with an average parental income of $19,184, who receive the grants to buy books and assist with living expenses. They are disproportionately African-American and Latino students.
The governor’s budget cites the increasing costs of the Cal Grant program for the need to dramatically change eligibility. Doesn’t that sound familiar? We have fought several battles to eviscerate Pell Grants at the federal level because record enrollments and skyrocketing fees are making students eligible for more aid.
Let’s be clear that this isn’t really about eligibility, but the consequence of a decade of disinvestment from higher education and a great recession that has citizens turning to education in place of non-existent jobs. And, the enrollment bubble was fully expected–this is the Tidal Wave 2 for which we were supposed to prepare.
Even under the rosiest budget scenario, the Cal Grant program will likely take some cuts. The proposed cuts, however, go too far and will eliminate access to many of our poorest students, both while they are studying in our colleges and after they transfer to a four-year institution. We will aggressively fight these cuts.
Some of my best mentors have reminded me to "sleep on it" before responding. After a few hours of shuteye, here is a little more information on the state budget and its impact on community colleges.
The big picture
The state’s economy is improving, and much work has been done to reduce the structure deficit. Instead of a double-digit structural shortfall, we are down to $5.1 billion. Additionally, we are carrying into 2012-13 a $4.1 billion deficit from the 2011-12 (current) fiscal year. So, the starting point deficit for next year is $9.2 billion. Absent policy changes, that deficit dwindles to $1.9 billion by 2015-16.
The spending plan has $2 billion in combined cuts to CalWORKs, Medi-Cal and In-home Supportive Services, as well as deep cuts ($300 million) to Cal Grants, mostly to students attending proprietary and nonprofit colleges.
The governor’s tax plan
To address the structural deficit, the governor has proposed a temporary increase in the sales tax and personal income tax rates on higher income earners. According to the governor, this would bring in $6.9 billion in 2012-13. While earmarked for the "Education Protection Account," the increased revenue will only increase the Proposition 98 guarantee by $2.4 billion. The remainder of the new tax revenue will supplant existing Proposition 98 general fund dollars, making them available for new purposes.
The tax increases would be considered by the voters at the November 2012 general election.
If the voters do not approve the tax plan, the governor proposes $5.4 billion in automatic cuts. Of these, $4.8 billion would be to Proposition 98 funding for schools and community colleges. While the guarantee would only drop by $2.4 billion, the governor proposes an additional back-door cut by shifting $2.6 billion in non-Proposition 98 general obligation bond debt service for schools and community colleges into the guarantee. This would allow for an additional $2.6 billion in cuts to schools and community colleges.
The community college budget
The governor proposes the following budget increases for community colleges, if the tax package passes:
- $218.3 million to partially "buy back" the accounting deferral on the state’s books. This would provide no additional program funds for community colleges in 2012-13, but could reduce district borrowing costs.
- $12.5 million to establish a block grant to reduce the backlog of state reimbursable mandates to community colleges
- additional accounting adjustments for shortfalls in student fee revenue and property taxes
The governor proposes a massive overhaul of K-12 and community college categorical programs. For community colleges, this would take all eighteen categorical programs–from the smallest, the statewide Academic Senate, to the largest, EOPS–and place them in one block grant of $411.6 million.
Now, before you jump on the bandwagon, jump up and down screaming, or jump off a cliff–based on your perspective–we have not seen the language to implement this flexibility. Since the budget was released early, the budget bill language that we ordinarily see the day after budget introduction is not yet available. The governor’s budget summary provides:
The Budget proposes to consolidate nearly all categorical programs and provide flexibility to CCC to use “flexed” funds for any categorical program purpose. This proposal will improve student access and success and will provide the colleges with more local control, flexibility, and decision-making authority. The Administration will review the recommendations of the forthcoming Student Success Task Force report and explore other possibilities for expanding flexibility—including fee policy changes and loosening operational restrictions—for inclusion in the May Revision.
The triggers and community colleges
If the voters do not approve the temporary taxes, the community college budget would likely change as follows:
- The $218.3 million in new money for the "buy down" of the deferral would be cancelled.
- The $12.5 million in new money for the mandates block grant would be cut.
- An additional unspecified base cut of $300 million would also likely occur, as the community college share of the $2.6 billion in existing Prop. 98 money is used instead for general obligation debt service.
Thus, the total "at stake" for community colleges in the November tax plan is essentially 11% of $4.8 billion, or over $525 million.
*While the governor’s documents discuss the $2.6 billion cut as "equating" to a three-week reduction in the K-12 school year, it is very likely that community colleges will be expected to share in the reduction proportionate to their share of the guarantee.
Where are we?
This is my eighteenth state budget and I know to neither panic nor get too excited upon the opening salvo. The governor has met the legal responsibility of proposing a balanced budget. He has done with fewer gimmicks than we have been accustomed to and now it will be considered by the Legislature.
Republicans are going to balk at the tax assumptions in this budget and Democrats will be hard-pressed to support the deep cuts to health and human services programs, particularly given the election year.
Clearly, elements of this plan are problematic for community colleges. Does it really make sense to send the $338,000 used to support the statewide Academic Senate to 72 districts and then ask them to send it back up to maintain the state office, which has many legal functions? What about categoricals that make us eligible for matching funds or are locked up in district-specific contracts? Does it make sense to use almost all of the new money to "buy down" an accounting deferral, or would voters be more interested in supporting the temporary taxes if they knew community colleges would be able to serve more students?
There are lots of questions, and we will have time to have a dialog and advocate for the smartest plan possible for community colleges.
The Legislature returns on Monday for a four-week sprint to the end of session. While we don’t anticipate budget will be a serious subject of the session, members will certainly be talking about the bad news that came out yesterday–July revenues were $539 million below forecast. And, that was before the stock market turmoil that we have all been watching.
For this reason, we advise community college districts to prepare for mid-year cuts totalling $127 million, which is a deficit to the general apportionment of about 2.3%.
This accounts for the Tier 1 cuts ($30m), the Tier 2 cuts ($72m) and the anticipated structural apportionment shortfall of ($25m). While the former two are specified in the budget trailer bill, the latter could vary up or down, although is highly likely to be at least $25 million. This also assumes that we are successful in our efforts to change the student fee increase to summer 2012 to minimize enrollment disruptions and administrative burdens on the districts.
Now, into the weeds…
In July, the state’s corporate taxes came in $69 million (-19.3%) below forecast, sales taxes came in $139.4 million (-12.5%) below forecast. While personal income taxes came in $89 million (2.9%) above forcast. The bulk of the "miss" in July’s numbers was in "other revenues," mostly from city’s delaying the forfeiture or "ransom payment" of redevelopment funds. Thus, the headline number of July is illusory, although the underlying economics call the state’s anticipated revenue into serious question.
Personal income tax (PIT), even with the January 1 sunset of the temporary tax surcharge, outperformed collections in July 2010. However, non-agriculature employment was only up 1.1% between June 2010 and June 2011, which is not enough to explain the surge in PIT revenues. Rather, the revenues are largely a function of large wealth generation in the stock market and the high-tech sector. With the latest market roller coaster, this may not be sustainable, and we might actually have to "give back" some of that money if people decide to swap out capital gains for capital losses taken over the last week. As of right now, the market is off 14.8% from its spring highs.
While the market will bounce around, it is the uncertainty of the roller coaster that will likely hit California and will cause the budget triggers to be pulled when the $4 billion in new revenue doesn’t come in. Most of that $4 billion was speculative revenue that assumed that Facebook, Twitter, Zynga and a handful of other California-based high tech companies would go public this fall. However, in a market like this, all of these companies are reconsidering their plans and will push off their IPOs to the spring or even next fiscal year. The later in the state’s fiscal year an IPO occurs, the less likely the state is to receive PIT revenues from the IPO. (Insiders and venture firms are often prohibited from selling as part of the IPO contract with underwriters.)
Meanwhile, the non-tech economy and regional economies away from the Bay Area are in bad shape. The housing market continues to be abysmal with all three major indicators–median home price, sales, and new units–all down from a year ago. We are in a modest recovery, although the uncertainty of the stock market is shaking consumer confidence and is causing economists to bring up the most feared phrase–"double-dip recession."
In community colleges, it’s painful to prepare for another round of cuts. However, if we plan early for the 2.3% cuts that we know about, it’ll be much easier than a January surprise.