STATE OF CALIFORNIA JACK SCOTT, CHANCELLOR

CHANCELLOR's Office
1102 Q street
Sacramento, Ca 95814-6511
(916) 445-8752
http://www.cccco.edu

July 28, 2009

TO: Chief Executive Officers

FROM: Jack Scott, Chancellor

SUBJECT: Budget Update

Today Governor Schwarzenegger signed into law a package of at least for the time being. The Governor used his blue pencil liberally to compensate for roughly major revisions to the state budget that should stabilize California's fiscal crisis, $1.1 billion in revenues that were rejected by the State Assembly in its final actions (the rejected revenues include: approximately $1 billion from redirected gasoline taxes earmarked for local transportation projects and $100 million from authorizing offshore oil drilling at one specific location off the Santa Barbara coast). No vetoes were made to the community colleges or to the Cal Grant program. The most notable veto in higher education was $6.3 million shaved from administration funding for the California Student Aid Commission in an attempt to force a restructuring of Cal Grant program administration.

California Community Colleges' Budget

For the California Community Colleges, the revised budget generally mirrors the budget adopted by the Legislative Conference Committee on June 16.

• Departures from conference version:

o $85 million in proposed 2008-09 cuts were not adopted.

o The deferral of an additional $115 million from 2008-09 to 2009-10 was not adopted.

o An augmentation of $10 million to SB 70 CTE programs relative to the Conference version. This augmentation was accomplished by redirecting $10 million previously committed to a general purpose one-time block grant under SB 1133. (Note, the Conference version cut $20 million from SB 70 CTE funds, leaving $38 million. The adopted package brings the total to $48 million.)

o The deferral of general apportionments from 2009-10 to 2010-11 was increased by $48 million over the Conference version, bringing the total inter-year deferral to $703 million. (Note: the deferral from 2008-09 to 2009-10 was $540 million. The Conference version increased the deferral by $115 million. The adopted package adds another $48 million.)

• Major features of the revised CCC budget:

o Student fees increased from $20 to $26 per credit unit effective fall 2009 (this increase generates $80 million in revenues that is used to mitigate cuts to the community colleges)

o An estimated allocation of $130 million in federal funds provided through the State Stabilization provisions of ARRA. The actual amount of funding received by the community colleges will be determined in the coming weeks based on a formula-driven calculation.

o Elimination of all growth funds

o No COLA

o $333 million in cuts to categorical programs (a $140 million one-time backfill is provided using federal ARRA funds and fee revenues, bringing the net reduction to $193 million). Cuts to specific categorical programs vary from no cut to total elimination with most programs facing cuts of between 16 and 32 percent, after accounting for the one-time backfill. Specific categorical cuts are as follows:

§ No cuts: Student Financial Aid Administration, Foster Care Education

§ 16 percent cut: CalWORKs services, Basic Skills, Disabled Students Programs and Services, EOPS & CARE, Fund for Student Success, Nursing

§ 17 percent cut: SB 70 CTE (total funding cut from $58 million to $48 million)

§ 20 percent cut: Telecommunication/Technology

§ 32 percent cut: Academic Senate, Apprenticeship, Child Care Tax Bailout, Economic Development, Equal Employment Opportunity, Transfer Education and Articulation, Matriculation, Part-time Faculty Compensation, Part-time Faculty Health Insurance, Part-time Faculty Office Hours

§ Elimination: Physical Plant/Instructional Equipment, California High School Exit Exam (CAHSEE)

o $120 million reduction to general purpose funds (in lieu of the proposal to reduce funding rates for physical education courses).

o A budgeted 2009-10 local property tax shortfall of $53 million (the total budgeted property tax shortfall is $116 million, but $63 million in relief is provided).

o A budgeted 2009-10 student fee shortfall of $21 million.

o Language authorizing the Chancellor to reduce base workload measures in proportion to cuts in general apportionment funding. This provision will bring the enrollment expectations used in the apportionment process in line with the level of funding provided by the state. Legislative intent language states that districts should, to the greatest extent possible, make reductions in course sections in areas other than workforce training, transfer, and basic skills.

o Language authorizing community college districts to transfer funds out of certain categorical programs and into any other categorical program included in the state budget. A public board meeting is required before making such a transfer.

Major Policy Issues

• Student Fee Increase. AB 2xxxx contains a provision increasing community college student fees to $26 per credit unit effective fall 2009. This change is now in effect as AB 2xxxx as an urgency measure.

• Workload Adjustment. AB 1xxxx includes a provision which authorizes the Chancellor to adjust districts' base workload measures commensurate with reductions in general apportionments. This action will reduce base workload expectations for purposes of apportionment calculations and make it easier for districts to make necessary cuts to course sections. Language states intent that reductions in course sections, to the greatest extent possible, be achieved in areas other than basic skills, CTE, and transfer. My office is preparing guidance for districts on this matter and will provide that to districts within the next week.

• Full-Time Faculty Obligation. While the revised budget package does not explicitly modify the requirements for districts to employ certain numbers of full-time faculty, the loss in funded credit full-time equivalent students that is likely to occur as the result of budget cuts will, for most districts, lead to a decline in the number of full-time faculty required to be employed. My office will endeavor to provide timely and complete information on this topic as it unfolds.
  
  Fifty-Percent Law. The revised budget does nothing to change the obligation of districts under the Fifty-Percent Law. However, it is likely that the deep cuts contained in the revised budget will place new strains on districts as they attempt to maintain core student services and baseline administrative functions. The Board of Governors has authority to waive Fifty-Percent Law penalties for an individual district in the event of fiscal hardshi

• Categorical Flexibility. AB 2xxxx contains language that provides districts with increased discretion in the use of some categorical funds. Specifically, districts would be able to redirect funds from any of the categorical programs subject to the 32 percent reduction (see above) to support any other categorical program funded in the state budget. Before exercising flexibility, districts would be required to discuss the redirection of funds at a regularly scheduled public meeting. This flexibility applies to fiscal years 2009-10 through 2012-13.

The Challenges Ahead

While I would like nothing more than to tell you that we anticipate a strong recovery of the state budget in the near future, this is not the case. California's fiscal crisis is rooted first and foremost in the worldwide economic collapse. While the world and U.S. economies have shown some signs of turnaround in recent months, all indications are that the recovery will be slow and take an extended period of time. Further, the California economy, the epicenter of the foreclosure crisis, appears to be on an even slower course to recovery than the rest of the nation. Until the economy regains its strength, the California state budget will continue its struggles. Below are some specific threats to the community colleges:

• Uncertainty Regarding Federal ARRA Funds. The revised budget package assumes that the community colleges will receive $130 million in federal ARRA State Stabilization Funds. However, the actual amount of funding received by the community colleges will be determined in the coming weeks based on a formula-driven calculation. To the extent the funds provided fall below the estimated level, cuts to categorical funds will be deeper than identified above. We should know the actual amount of ARRA funding available to the community colleges within the next few weeks and will provide additional information as soon as it is available.

• Mid-Year Cuts. While no one knows for certain what will occur, it is quite likely that continued sluggish economic performance will lead to further deterioration in state revenues and resulting midyear cuts during 2009-10. Proposition 98 and the federal maintenance of effort requirements under ARRA should provide the community colleges with some protection; however, a significant drop in state revenues could open the door to additional cuts. The relatively small size of the state's budget reserve makes such a threat more likely to occur.

• Property Tax Shortfall. The revised budget for 2009-10 assumes that local property taxes will fall $116 million below February estimates, but provides only $63 million to address this deficit. The remaining shortfall of $53 million results in a cut to districts' general purpose apportionments used to support student enrollments. Given the continued struggles in the housing markets and continued reports of downward reassessments in property values, it is very possible that we will see further erosion in local property tax revenues below current estimates.

• Structural Imbalance in the State Budget. Despite the tough choices contained in the budget packages for 2008-09 and 2009-10, the state has failed to bring its spending and revenues into true alignment. State leaders have not been willing to make the deep cuts or raise the revenues necessary to put the budget on stable ground. As a result, borrowing and gimmicks continue to hold the budget together. The Legislative Analyst's Office forecasts that the state's structural shortfall will reach $20 billion by 2012-13 and reach $26 billion by 2013-14. Until this structural problem is resolved, each year's budget will be fraught with peril and uncertainty.

Focusing on Key Priorities

As we move forward though these difficult times, the work of the California Community Colleges has never been more important. Unemployed Californians rely on the community colleges for the retraining they need to find employment and advance in their chosen professions. Students displaced from UC and CSU due to budget cuts will come to our doors to begin their higher educations. California businesses depend on the community colleges to provide the skilled workers needed to compete and prosper in the today's global economy. While the budget cuts we have experienced will make it harder for us to meet these needs and there is no question our overall capacity to serve students will diminish, we must do what we can with the resources we are provided to meet these critical needs.

As you work to modify your local budgets to reflect the revisions to the state budget, I call on you to do all you can to protect core instruction in basic skills, transfer, and workforce training as well as the core student services needed to support these efforts. These are tough times for the California Community Colleges and for the state as a whole. These tough times will not last forever, however. When we look back, the test of our worth will be how well we managed to meet the critical educational needs of Californians during challenging fiscal times and how well we preserved the core instructional and student support infrastructure of our colleges. In the weeks and months ahead, I assure you that I will be doing everything possible to look out for the interests of the community colleges in the state budget process and will provide you with timely and accurate updates concerning new developments.