Today, May 14, 2020, Governor Newsom released a significantly revised state budget amid the coronavirus pandemic, which projects General Fund revenues decline over $41 billion over the current and budget fiscal years, and when combined with COVID-19 expenses, the projected budget deficit of about $54 billion that will need to be addressed.
The Administration is proposing a combination of actions to address the projected state deficit:
- Cancel $6.1 billion in program expansions and spending increases, including redirecting $2.4 billion in extraordinary payments to California Public Employees’ Retirement System (CalPERS) to temporarily offset the state’s obligations to CalPERS in 2020-21 and 2021-22.
- Spend down $16.2 billion in the Budget Stabilization Account (Rainy Day Fund) over three fiscal years and allocate $450 million from the Safety Net Reserve to offset increased health care costs in 2020-21.
- Borrow and transfer $4.1 billion from special funds.
- Suspend net operating losses and temporarily limit to $5 million the amount of credit a taxpayer can use in any given tax year, to generate new revenue of $4.4 billion in 2020-21 to support schools and colleges, and maintain core state functions. The proposal could potentially generate $3.3 billion in 2021-22 and $1.5 billion in 2022-23.
- Utilize $8.3 billion in federal CARES Act.
The Legislature has until June 15, 2020 to adopt a balanced state budget. To read the full Governor’s May Revision 2020-21 Budget Report, click here.
Proposition 98: Avoiding Permanent Decline
The state revenues shortfall creates a decline of $19 billion to Proposition 98 Minimum Guarantee from the Governor’s January Budget. In order to address this severe decline in resources, which is compounded by the impact of declining average daily attendance and declining per capita income, the Administration proposes to suspend for three-year net operating losses and limitations on business incentive tax credits to offset no more than $5 million of tax liability per year, which could generate $1.8 billion in benefits to Proposition 98 Guarantee.
Beginning in 2021-22, the Administration proposes to provide supplemental appropriations of 1.5 percent of General Fund revenues per year, in order to avoid a permanent drop in the Proposition 98 Minimum Guarantee and maintain the Guarantee at 40 percent of total state General Fund support.
Local Control Funding Formula & Deferrals
The May Revise proposes a reduction to the Local Control Funding Formula (LCFF) by $6.5 billion, or 10 percent, which includes the elimination of a 2.31 percent cost of living adjustment. The Administration indicates that should the federal government provide sufficient resources, these reduction could be backfilled. The May Revise also suspends the statutory cost of living adjustment for all eligible programs.
The May Revise proposes to defer $1.9 billion of LCFF apportionment to the 2020-21 fiscal year. For the 2021-22 fiscal year, the state defers a total of $5.4 billion as follows: $528 million in April 2021, $2.4 billion in May 2021 and $2.4 billion in June 2021 to an unspecified date.
The Administration plans to engage with the Legislature and stakeholders in the spring and summer to develop a process for the development and adoption of the local control and accountability plan (LCAP) due December 15, 2020. The Administration states that their focus is on equity for vulnerable students, stability for core instructional programs, learning loss mitigation and support for helping schools through this economic downturn.
Learning Loss Mitigation
The May Revise proposes a one-time investment of $4.4 billion in federal funds ($4 billion federal Coronavirus Relief Fund and $355 million federal Governor’s Emergency Education Relief Fund) for mitigation of students’ learning loss during school closures. These funds will be allocated to local educational agencies (LEAs) that offer instruction based on a formula which prioritizes students most heavily impacted by school closures, and may be used as follows:
- Summer programs
- Extending the instructional school year
- Providing additional academic services for students (such as materials and devices)
- Counseling or mental health services
- Professional development opportunities
- Access to school breakfast and lunch programs
California also received $1.6 billion in federal Elementary and Secondary School Emergency Relief (ESSER) funds, of which 90 percent will be distributed to LEAs through Title I-A funding for COVID-19 related costs. The May Revision proposes to use the remaining $164.7 million (10%) in the following manner:
- $100 million: Grants to county offices of education to support developing networks of community schools, mental health services, and ways to address barriers for high-need students
- $63.2 million for training and professional development
- $1.5 million for the Department of Education for operational costs due to COVID-19
The May Revise reallocates $2.3 billion paid to CalSTRS and CalPERS towards long-term unfunded liabilities to further reduce employer contribution rates in 2020-21 and 2021-22.
Changes from Governor’s January Budget
The May Revise rescinds the Governor’s January Budget Proposals as follows:
The May Revise keeps the Administration’s commitment from the January’s budget proposal to improve and support special education. With the reflection of the suspension of the 2.31 percent COLA, it brings the special education base rates to $645 per pupil, an increase of 15 percent from current year, apportioned on a three-year rolling average daily attendance (ADA) of local educational agencies’ ADA, and distributed to SELPA’s. Existing categoricals that are outside of AB 602 will be frozen until a finalized formula is adopted.
The May Revise includes $15 million in federal Individuals with Disabilities Education Act (IDEA) funds for the Golden State Teacher Scholarship Program to support increasing the teacher pipeline and $7 million to assist LEAs with developing different dispute resolution services and mediation services for cases arising from COVID-19 distance learning service delivery models.
The May Revise also keeps the two work groups as provided in the January proposal but replaces the $1.1 million that was originally proposed from Proposition 98 General Fund and uses federal IDEA funds instead. Two new workgroups are created to 1) study cost out-of-home care and 2) develop an IEP addendum for distance learning. These two new workgroups will be funded by an additional $600,000 received by federal IDEA funds.
K-12 Categorical Programs
The May Revise makes a total of $352.9 million in reductions to all of the following categorical programs:
- $100 million: After School Education and Safety
- $79.4 million: K-12 Strong Workforce Program
- $77.4 million: Career Technical Education Incentive Grant Program
- $66.7 million: Adult Education Block Grant
- $9.4 million: California Partnership Academies
- $7.7 million: Career Technical Education Initiative
- $3.5 million: Exploratorium
- $3 million: Online Resource Subscriptions for Schools
- $2.4 million: Specialized Secondary Program
- $2.1 million: Agricultural Career Technical Education Incentive Grant
- $1.3 million: Clean Technology Partnership
The Administration is committed to working with school districts and stakeholders to offer flexibilities that allow LEAs to make progress in closing the achievement gap of the most vulnerable students and intends to work with the Legislature and education stakeholders on other options to minimize the impact of reduced funding.
The May Revise includes the following programmatic and fiscal flexibilities:
- 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 August 1, 2020 to August 1, 2021.
Other K-12 Budget Issues
- Local Property Tax Adjustments. Increase of $84.5 million Proposition 98 General Fund in 2019-20 and $727 million Proposition 98 General Fund in 2020-21 as a result of lower offsetting property tax revenues in both years.
- Full-Day Kindergarten Facilities. Decrease of $300 million one-time non-Proposition 98 General Fund for construction of new, or retrofit of existing, facilities for full-day kindergarten programs. The May Revision proposes sweeping these unexpended program funds to facilitate budgetary resiliency.
- AB 1840 Adjustments. Increase of $5.8 million one-time Proposition 98 General Fund for Inglewood Unified School District and $16 million one-time Proposition 98 General Fund for Oakland Unified School District, amounting to 50 percent of the operating deficit of these districts.
- Categorical Program Growth: Decrease of $10.9 million Proposition 98 General Fund for selected categorical programs, based on updated estimates of ADA.
Early Education Programs
The May Revision proposes to utilize $350.3 million of federal CARES Act for COVID-19 related child care expenses as follows:
- $144.3 million for state costs associated with SB 89 expenses, family fee waivers, and provider payment protection.
- $125 million for one-time stipends for state-subsidized child care providers offering care during the pandemic.
- $73 million for increased access to child care services for at-risk children and children of essential workers.
- $8 million to extend family fee waivers until June 30, 2020.
The May Revision continues to propose to consolidate the state’s early learning and child care programs under the Department of Social Services, which maintains $2 million General Fund in 2020-21 to support this proposal.
Absent additional federal funds to mitigate these fiscal decisions, the state will reduce the following programs:
- $159.4 million General Fund to eliminate 10,000 slots scheduled to begin April 1, 2020 and 10,000 additional slots scheduled to begin April 1, 2021.
- $130 million Proposition 98 General Fund and $67.3 million General Fund to reflect a 10 percent decrease in State Preschool daily reimbursement rate.
- $20.5 million Proposition 98 General Fund and $11.6 million General Fund to reflect suspension of a 2.31 percent cost of living adjustment.
- $3.3 million Proposition 98 General Fund and $3 million General Fund to eliminate a 1 percent add-on to the full-day State Preschool reimbursement rate.
The May Revise proposes to reduce the following programs, which would be mitigated if the federal government provides sufficient funds to restore them:
- $363 million one-time General Fund and $45 million one-time federal Child Care and Development Block Grant funds from the 2019 Budget Act for child care workforce and infrastructure.
- $223.8 million General Fund to reflect a 10 percent decrease in the Standard Reimbursement Rate and the Regional Market Rate.
- $35.9 million General Fund to reflect lower caseload estimates in CalWORKs Stage 2 and 3 child care.
- $25.3 million General Fund to reflect suspension of a 2.31 percent cost of living adjustment.
- $10 million one-time General Fund from the 2019 Budget Act for child care data systems.
- $4.4 million one-time General Fund to reduce resources available for the Early Childhood Policy Council, leaving $2.2 million available for 2020-21 and 2021-22.
- $13.4 million in federal funds is appropriated through the Health and Human Services Agency to reflect the state’s 2020 Preschool Development Grant award.
What to Expect Next
We will report in more detail new and updated proposals when the trailer bill language is released, and will continue to share information on the development of the state budget as events and further analysis warrant.
- Monday, May 18, 2020 at 1:30 p.m.: Assembly Budget Subcommittee No. 2 on Education Finance: May Revise Overview of K-12 education and Early Education Programs. To view, click here.
- Monday, May 18, 2020 at 1:30 p.m.: Senate Budget & Fiscal Review Committee: Overview of Governor’s 2020-21 May Revise. To view, click here.
- Friday, May 22, 2020 at 10:00 a.m.: Assembly Budget Subcommittee No. 6: Budget Process, Overview & Program Evaluation. To view, click here.
- Monday, May 25, 2020 at 10:00 a.m.: Senate Budget & Fiscal Review Subcommittee No. 1 on Education Finance: May Revise. To view, click here.