Current Legislative Updates

Last night, Senate Democrats were unable to reach an agreement with the Governor and Senate Republicans on budget reductions and policy reforms that would have included eliminating $1.3 billion in 2008-09 revenue limit and basic aid school district categorical apportionments. As reported previously, the revenue limit apportionments were the June payments to districts and county offices that had been deferred to July.

The inability to reach agreement was predicated on several factors. Democrats had wanted to deal with only one portion of the overall budget shortfall by passing bills that would have made cuts to the 2008-09 fiscal year and deferred funds into the subsequent fiscal year. The Democrats had supported several version of these bills but were unable to get Republican support in the Senate. The Democrats then passed the same bills with majority votes in the 3rd extraordinary session (which would mean the cuts could not go into effect for 90 days). This action passed both houses but the Governor immediately vetoed these bills indicating that they did not solve the entire budget problem. Midnight came and the new fiscal year started...and with it a new series of budget problems were added to the mix.

What Missing the Deadline Means for K-14 Education

The Legislature's failure to take action and reduce 2008-09 K-14 (Proposition 98) spending by a total $1.4 billion has two consequences for schools:

1. $1.3 billion in 2008-09 apportionments remain scheduled for payment to school districts later this month.
2. The Proposition 98 (K-14) spending level at the end of the 2008-08 fiscal year is now $1.4 billion higher than what the Governor proposed in May.

Senior Legislative staff believe that it is still possible for the Legislature to reduce 2008-09 K-14 education spending by taking action to retroactively lower the Proposition 98 guarantee and direct the Controller to not make the June apportionment payments to schools that have been deferred to July. In the absence of such an action, there will be significant pressure to achieve the same level of savings from K-14 education proposed by the Governor in May by reducing 2009-10 spending even further. Unfortunately, this will mean that the Legislature will be forced to suspend Proposition 98 in order to achieve the needed reductions in K-14 spending.

What Is the Increased Risk for K-12 Education

The Legislature's failure to act last night, should not be seen as a sign that education cuts will not be as deep as those proposed by the Governor in May. The size of the state budget deficit remains at $24.3 billion and may well be higher. The Governor's proposed two-year cuts to K-14 education spending were generally agreed to by all parties. When the Legislature takes the required action to reduce spending and address the budget shortfall, we should be prepared for reductions in education equal to or greater than what has been proposed by the Governor to date.

What Might Happen Next

The budget balancing proposal offered by the Democrats is approximately $21 billion in cuts. The Governor and Republican legislators are demanding solutions totaling $24.3. Democratic members have indicated they are completely unwilling to make the level of reductions in Cal Grants, CalWORKS and Healthy Families programs sought by the Governor. In order to bridge the gap between their cut level and the Governor, another $3 billion must be found. The Democrats have pushed for $2 billion in new taxes which have not been supported by either the Governor or legislative Republicans.

Where can they find the $3 billion? There have been discussion about two significant options. First, the Governor had proposed a $2 billion "borrowing" from local agencies - cities, counties and special districts - that so far has been rejected by both the Democrats and Republicans. There are indications that this cut may now be back on the table. Second, now that the new fiscal year has arrived, there is a need to suspend Proposition 98 in order to achieve the equivalent savings from the 2008-09 fiscal year, there is a real possibility that a suspension action could result in reductions of an additional $1.3 billion which would take the K-14 budget down to the federal maintenance of effort required to keep the stimulus funding. If the legislature combined these two "new" funding sources it could get them to the Governor's target amount of overall savings.

When Will Something Happen?

The short answer is no one knows right now. The various caucuses are meeting to determine what the next course of action will be. However, there remains huge pressure to find a solution. Treasurer Bill Lockyer has indicated that the cost of state borrowing if our credit rating is downgraded as a result of the use of IOUs, could cost the state up to $8 billion in increased interest costs. There is every reason to believe that time remains of the essence.

Next Report >>