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New LAO report predicts rapidly rising costs will undercut strong Prop 98 growth

The Legislative Analyst’s Office today issued a mixed forecast for California public schools in its new 2020–21 budget report. The Fiscal Outlook for Schools and Community Colleges offers good news in the form of encouraging growth projections for K-12 and community college funding. The LAO predicts the 2020–21 Proposition 98 guarantee will increase by approximately 4.2 percent, or $3.4 billion. The office, however, is less optimistic about the amount of money that will be left for schools once rising costs are considered.

If the LAO’s estimates hold, the state would be required to deposit $350 million into the Proposition 98 reserve fund. In addition, the LAO suggested the state could use $1.1 billion of the anticipated $3.4 billion increase to cover a 1.79 percent statutory cost-of-living adjustment, or COLA. This COLA likely understates the cost pressures schools face as expenditures rise for employer pension contributions, health care, special education, transportation and other programs and services. The report states that, “If the Legislature were to provide no other ongoing increase in general purpose funding, most districts likely would need to dedicate nearly all of the increase to covering their higher pension costs.” 

In the scenario the LAO outlines, the state would have $2.1 billion remaining for new commitments in the upcoming fiscal year. The report notes that the state can help districts cope with rising costs by allocating some of that $2.1 million toward a higher COLA adjustment. The report also presents another option — equalizing per-student funding rates for special education as was called for in Assembly Bill 428 (Medina, O’Donnell et al.), CSBA co-sponsored legislation currently sitting in the suspense file. 

The report also considers the benefit of using one-time spending to hedge against a potential economic slump that would dampen revenues and depress the Proposition 98 guarantee. Specifically, the LAO recommends using one-time funding to pay down employer pensions, writing that, “… we encourage the Legislature to set aside at least half of the $2.1 billion for one time spending. This approach creates a buffer that helps protect ongoing programs in case the guarantee drops in 2020–21 or 2021–22. Using one time funding to pay down districts’ pension liabilities more quickly would be particularly beneficial, as these payments would improve the funding status of the pension systems and likely reduce district costs on a sustained basis.”

CSBA was one of the first organizations to highlight the relationship between rising employer pension contributions and a reduction in the resources needed to provide all students with a high-quality education. Our 2017 report
The Impact of Pension Cost Increases on California’s Schools used data from CSBA members to show how skyrocketing pension costs prompted local educational agencies to cut programs and services or dip into their reserves. CSBA’s advocacy helped secure more than $3 billion in pension relief for schools in the 2019–20 state budget.

CSBA would object to the use of Proposition 98 funds to pay down pension debt. We worked with the administration in this year's budget process which allocated one-time state general fund money (non-Proposition 98) to help pay down a portion of the school pension debt. That is a much more meaningful way to help LEAs which also have many programmatic demands. It's important to note that the LAO also recommended that excess state general fund revenues be used for one-time purposes.  

The LAO report is the beginning of official budget discussions for the 2020-22 fiscal year, but the real process begins in January with the release of the Governor's budget proposal. 
We will continue to advocate for pension relief and other components of our Full and Fair FundingSM work during the upcoming budget conversations.