State Budget Update from California Community Colleges' Vice Chancellor Erik Skinner - 7/01/2009:

Dear Colleagues,

Last night at midnight, the State Senate adjourned without passing the three bills that would have achieved over $5 billion in savings from the 2008-09 fiscal year--$3.3 billion of which would have come from K-12 schools and community colleges. Those bills, SB 64, SB 74, and SB 80, each failed narrowly on partisan votes.

It was a tense evening of charged public speeches and lengthy behind the scenes negotiations. Senators deliberated over the set of bills, previously passed by the State Assembly on bipartisan votes, that would have taken a bite out of the state's budget problem and averted the need for the state to issue IOU's beginning this week. Republican Senators and the Governor, however, contended that these bills were an incomplete solution to the budget crisis and vowed their opposition. In the end, no one blinked in this game of political chicken and as the clock struck midnight a visibly angry and tired Senate leader Darrell Steinberg dropped the gavel on the night's session.

With this development the state's budget crisis enters a new phase. Since both the legislative Democrats' plan and the Governor's plan relied upon the 2008-09 savings, both sides will need to restructure their proposals in order to achieve the required budget savings. As they do so, they will need to take into account a number of complex and politically challenging considerations:

1) Higher 2009-10 Proposition 98 Minimum Guarantee. Failure to reduce Proposition 98 spending for 2008-09, results in a higher spending requirement for 2009-10. According to the Administration, that increase is roughly $2 billion. State leaders may respond to this increased pressure in a number of ways. Some budget experts in the Administration and the Legislature contend that the 2008-09 Proposition 98 funding levels could be adjusted retrospectively. Under such an interpretation, a bill could be passed at any point to achieve the 2008-09 savings, including the reduced 2009-10 Proposition 98 spending requirement. While this interpretation is at odds with recent rhetoric about the need to act by June 30, it may be that pivoting on this point may be the most expeditious way for state leaders to solve this problem.

Another approach would be for state leaders to increase 2009-10 Proposition 98 spending by $2 billion above the levels previously proposed. This is highly unlikely given the severe budget impacts such a change would have on already ravaged health and welfare programs.

A third option would be for state leaders to suspend Proposition 98 for 2009-10. While this is always a hard vote for legislators, it may be viewed as necessary given the circumstances. It is likely that state leaders would attempt to negotiate such a suspension with education groups in order to minimize political backlash. The terms of such a negotiated suspension would likely be that Proposition 98 spending requirements would only be relaxed to the degree necessary to alleviate the added pressure resulting from the failure to capture 2008-09 savings.

2) Proposition 98 Maintenance Factor. In the days leading up to last night's showdown, state budget experts identified a previously unnoticed interaction between one of the current-year reduction bills and Proposition 98 calculations. The bill having the interaction is SB 80, which would have shifted $350 million from redevelopment agencies to K-12 schools. Without going into too much technical detail, the failure of SB 80 triggered a change in the Proposition 98 calculation for 2008-09, moving it from Test 1 (funding based on a fixed percent of State General Fund) to Test 3 (funding based on the change in per-capita State General Fund revenues). While this change resulted in a relatively small change in the calculated guarantee, it had a much more profound legal impact. Going back to February, there has been a dispute between the Governor and the Education Coalition about whether a "maintenance factor" is generated in a Test 1 year. A Proposition 98 maintenance factor is a funding obligation that accrues when funding for schools and colleges falls below a specified baseline level. Given ambiguity in the wording of the State Constitution, it is open to some interpretation whether a maintenance factor is accrued in a Test 1 year. The Governor contends that one is not accrued, the Ed Coalition contends one is accrued. Roughly $8 billion in future ongoing funding obligations hinges on the legal interpretation. This dispute is what led to Proposition 1B, the failed special election ballot measure that would have affirmed the states obligation to pay the maintenance factor. So, in an anticipated and accidental turn of events, the failure of SB 80 last night resolved this legal dispute and resulted in a maintenance factor of $8.2 billion, $3.6 billion of which is due to schools and colleges in 2009-10.

It appears evident that the state will not be able to honor that obligation in 2009-10. However state leaders will need to figure out how to address the issue. They could ignore the increased obligation and wait to be sued by the Education Coalition. Or they could negotiate an agreement with the education community to pay this obligation at some future point (such a provision was contained in the conference budget package). Or they could suspend Proposition 98 for 2009-10 (as noted above they would likely attempt to negotiate such a suspension with the education community).

3) Federal Maintenance of Effort Requirements. As a condition of receipt of federal stimulus funding, states must maintain certain minimum funding levels for K-12 schools and higher education. Based on the budget packages adopted by both the Conference Committee and the Governor, higher education, including community colleges, is already funded at the minimum allowable level for 2009-10. This should provide the colleges with some important protection.

Clearly these very technical and weighty concerns will make the work of state budget makers that much more difficult in the coming days and weeks.

This morning the Governor indicated his intention to declare another fiscal emergency in order to place pressure on the Legislature to act. For their part, legislative Democrats have been sending the Governor packages of bills, passed on a simple majority vote, that would close the budget gap. The Governor has vetoed these bills due to their reliance on increased fee and tax revenues. So the political circus appears far from over.

We in the State Chancellor's Office are well aware that the inability of state leaders to resolve the budget impasse undermines the ability of community college districts to plan. While there is not much can do to speed up resolution of the state budget, here a few observations to aid in your planning:

1. It is highly likely that the $85 million in cuts and $115 million in deferrals will in fact be implemented in some fashion. While it is uncertain whether state leaders may take the funds from 2008-09 or from 2009-10, they are unlikely to walk away from these budget savings.

2. The broad features of the community college budget have not been in dispute. So while there may be some changes, it is likely that the overall mix of categorical and general purpose cuts, categorical flexibility, workload adjustments, and student fee increases are likely to stick in the final budget deal.

We will continue to monitor developments. More updates to follow.

Regards,

Erik Skinner

Vice Chancellor for Fiscal Policy
California Community Colleges,
State Chancellor's Office