California School Budgets Set to Implode Next Year

California’s school budget situation is an early signal of how much budgets are going to dominate the education discussion in 2011. As newly elected Gov. Jerry Brown prepares to takes office, he will face the worst education budget situation since he was last governor and had to cut spending after the passage of Prop 13. In fact this may be worse because it comes after several of budget reductions. And, while policy wonks speculate over whether ESEA will be reauthorized in 2011, education budgets will quickly become the focus of education discussion in the year ahead. And, given that California educates one out of every seven kids in this country, this situation should scare everyone a little.

During the dot-com bubble, the state cut taxes and expanded program dramatically. When the bubble burst in 2001, California’s state budget went out of balance and a combination of Democrats protecting program expansions, and Republicans protecting tax cuts has lead to a decade of out of balanced budgets in which the state kicked the can down the road piecing together budgets with accounting gimmicks and one-time solutions. With the onset of the great recession, things got even worse. Fortunately, the federal government came to the rescue with stimulus funding that allowed the state to piece together a couple more quick fix budgets. But now the day of reckoning approaches. In putting together the 2011-12 budget, Gov. Brown will help decide the fate of schools for the decade to come.

How bad is it? To start with, school budgets have already been cut dramatically in the last couple of budgets. And despite the infusion of federal stimulus funds and edu-job funds, districts have already increased class sizes that were already the largest in the country except Utah. And many districts have shortened the school year. For example, LA Unified has reduced the school year by 7 days in the current year. And these cuts were made when the state’s education budgets were propped up with federal stimulus funds and edu-job funds. Since most of those funds will be used up by the end of this school year, California schools were facing an austere 2011-12 budget year even before looking at the state’s budget situation.

Yesterday the legislator’s fiscal advisors released the budget forecast for next year. The headline will read that the state faces a $25 billion deficit. For an $84 billion General Fund budget, the budget gap is over 30 percent of the total budget. The fiscal situation is actually worse, and should be characterized as almost a $30 billion hole (35% of the budget) because of the way the forecast reflects education budgets. (The forecast also does not address any of the $136 billion in unfunded pension liabilities that the state faces. And, those obligations are expected to grow in the near future when the state adopts more reasonable rate of return for their investments).

School funding in California is driven by a constitutional funding formula, Proposition 98, that determines a minimum funding guarantee for schools. It is based upon various economic factors including the growth in the economy and state revenues. Because several temporary taxes are set to expire in 2011-12, the state’s revenue falls, and so does the funding guarantee for schools. In fact, the Analyst’s forecast assumes that school funding is $5 billion less than the current spending level. So, from the school’s perspective the state faces a $25 billion budget gap only after education has taken a $5 billion hit (over 10% of their budget). If K-12 shares in solving any part of the $25 billion budget gap, then schools would see reduction of much more than 10 percent.

Schools were already facing a funding cliff created by the end of the one-time stimulus funding. This forecast would likely push them over that cliff and then some.

In an ironic twist, the Public Policy Institute of California released a couple of papers yesterday proposing a plan to transition the way the state distributes K-12 funding. It proposes transitioning to a weighted pupil funding model from the archaic system the state currently uses.  It is a timely paper because Brown has said that he would like to make such a transformation to the state’s school finance system (here). The paper suggests that absent additional tax revenues, the state could make this transition over the next 20 years using the natural growth in the Proposition 98 funding guarantee to pay for it. This 20 year estimate is of course not based on the new budget forecast, so it would take even longer (here and here). Just because it took 30 years to get it so screwed up, doesn’t mean districts should have to wait another 30 years to fix it.