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.

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.

We will be using this presentation in the webinar.

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.

The "triggers"

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

Categorical flexibility

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.

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.

We have posted new budget scenarios and district impacts reflecting the adopted budget.

It could have been much worse. In the "all cuts" scenario, we would see a $502 million reduction in general fund money. During the six-month budget fight, a cut as high as $900 million was discussed.

That said, the budget adopted last night cuts $1.7 billion from higher education, on top of the deep 2009-10 cuts. If the optimistic tax projections don’t come through, another $302 million would be on the chopping block. The California that I have grown up in and deeply love is not one that cuts higher education by $2 billion ever, let alone in one year.

When I graduated from UC Davis School of Law in 2000, fees were $10,000 per year. The fees for this fall are scheduled to be $45,000, and UC said yesterday that fees will go up further with the additional cut added to last night’s budget. I’ll be honest–I wouldn’t be in this job if I paid fees (accrued debt) like that, and fewer law graduates are looking to public interest and public service.

It is highly likely that the "Tier 1" cuts will be triggered, meaning a $30 million cut and a fee increase to $46/unit effective January 1. Regardless of your position on community college fees, you have to admit that it is absurd to ask students to come up with $150 after they have already registered and that it will be an administrative nightmare. Tens of thousands, if not hundreds of thousands, will likely demand refunds and walk away from their education.

In the short term, better days are ahead in California. The budget is much closer to balance. However, our priorities have fallen out of whack. Our long term viability as a vibrant and diverse economy that provides access to quality jobs for a cross-section of the population is seriously threatened by this divestment from higher education. In fact, most of the new projected tax revenues, if they materialize, will be from income from technology IPOs and directed to a mostly white and already wealthy segment of our population.

For now, thank you for your advocacy throughout the year, and let’s prepare for some larger fights next year to get California back on the right track.

We fully expect enactment of the budget this afternoon or evening.

Here’s what we know for community colleges:

• Tier 0 (at least $3 of the $4 billion materializes): No cuts
• Tier 1 (between $2 and $3b of revenue materializes): $30 million apportionment cut, backfilled by an increase in fees of $10, to $46/unit
• Tier 2 (between $0 and $2b of new revenue materializes): Tier 1 cut and fee increase PLUS a $72 million additional apportionment cut (workload reduction assumed)

Obviously, the fee increase is a policy and practical nightmare. By the December 15 trigger date, many students will have already enrolled for spring term. We will work to fix this after the budget is enacted, even though it’s likely we will have to take the $30 million cut somewhere else.

The budget also assumes the $400 million apportionment cut, offset by $110 million in student fee revenue originally proposed in January, as well as the new $129 million deferral from spring 2012 until October 2012. We are working to make a technical adjustment to that deferral to assist districts in audit compliance.

We’ll keep you posted, and we’re regularly tweeting developments at twitter.com/ccleague.

That will be one of the ten advocacy points I give attendees at the Future Leaders Institute tomorrow. Only a few hours after talking to the Legislature and governor’s office about the need for advocacy on “Plan A” and asking you to hit the phones, Plan B has emerged.

At this hour, Democratic leaders and the governor announced a plan to approve a majority-vote budget that gives up on Republican budget votes and a vote to extended taxes. Instead, the plan likely to be voted on tomorrow will replace a handful of the more “creative” solutions included in the Democrats’ June 15 budget with higher revenues assumed with the state’s economic recovery. If the revenues do not materialize, $2.6 billion cuts to K-12, higher education public safety and in-home supportive services would be triggered.

While details are not being shared at this point, it is likely that the community college “risk” of the lower revenues could be around $150 million, or essentially moving community colleges from Scenario A to closer to Scenario B. We’re likely to have more details later tonight or tomorrow and we’ll post them to our Twitter stream at twitter.com/ccleague.

While the deal may leave us with a signficant out-year budget problem if the revenues either don’t materialize or are one-time (such as from a series of expected tech IPOs), it is much better than any of the “all-cuts” scenarios that have been considered throughout the year. Additionally, it is expected that initiatives will be put on the ballot next year to bring the long-term budget into balance unless revenue.

Again, thank you for your advocacy. It’s certainly not a “good” budget, but one that allows us to live to fight another day.

Nevertheless, now is not the time to rest on our laurels. The next five days could mean $2.5 billion over the next five years for community colleges, and deep, devastating cuts to the University of California and California State University systems that large numbers of our current students are counting on to complete their studies. We have one last shot at a balanced budget approach, or we’re likely going to see a mostly cuts budget.

I know you have wrote letters, made phone calls, and even visited your legislators’ offices. However, as typically happens down the budgetary stretch, things have gotten awfully quiet in the Capitol. But, with the suspension of pay to legislators, this year is like none other before, and we fully expect a budget, some budget, by the end of the week.

Will you join me and our counterparts in higher education in making one more advocacy push for a balanced approach?

1. Call the swing legislators.
2. Call your own legislators.

We’ve made it easy, and you can make a huge difference by giving us 15 minutes of your time. If you can’t do it from work, how about using the commercials time during The Bachelorette tonight? It’s a two-hour show, so that’s LOTS of commercial time!

Again, thank you for your advocacy. While it has been fantastic during this six-month budget campaign and has likely taken the worst cuts off the table this year, significant threats remain and are almost certain to be resolved this week.