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COVID-19 News and Resources

LAO report diverges from DOF estimates but still shows steep decline

Today, the Legislative Analyst released its Spring Fiscal Outlook which lays out issues and implications for the 2020-21 budget. According to the LAO, the state is in a deep economic recession due to the impact of COVID-19, however, there are many uncertainties about it – how long it will last, what the effect on revenues will be, and the extent of federal relief aid. 

Due to these uncertainties, the LAO has approached its estimates through two scenarios. In both cases, declines occur primarily in the 2020-21 fiscal year, reflecting the drop in General Fund revenues related to the recession.

According to fiscal updates from the LAO and from the Governor's Department of Finance, the state is facing a budget year – and probably a series of years – with budget deficits, and funding for K-12 education will likely suffer as a result. It is also clear that there is an unprecedented level of uncertainty over the state’s economy, tax revenues and budget circumstances, and that this uncertainty will need to be addressed as  the state budget is crafted.

In the two economic scenarios laid out by the LAO, the Proposition 98 guarantee would drop between $10.1-15.4 billion. While these estimates are substantially less than the Department of Finance estimates, they still show a dire school funding situation that requires serious state and federal intervention and mitigation. 

As
we reported yesterday, the DOF provided a Fiscal Update that anticipates a drop in state revenue of $54 billion and a corresponding reduction to the Proposition 98 guarantee for schools of $18.3 billion. As a precursor to next week’s May Revision of the Governor’s January Budget Proposal, yesterday’s news provides a look at the potential problem while withholding potential solutions until next week, either May 14 or May 15 according to varying announcements. The DOF document states that, “COVID-19 has caused a national recession, a precipitous decline in income, rapidly rising health and human services caseloads and substantial COVID-19 driven costs.”

Specifically, DOF projects that General Fund (GF) revenues will decline by a total of $41.2 billion from the projections provided in the January Governor’s Budget, as follows:
  • 2018-19: +$0.7 billion
  • 2019-20: -$9.7 billion
  • 2020-21: -$32.2 billion
This amounts to a total $33.4 billion decline in GF revenues below what was in the final budget for the current 2019-20 fiscal year. The bulk of this decline is due to a projected 25.5% decrease in personal income tax (PIT) revenues. Given that PIT generates almost 70% of GF revenues, it is no surprise that this decrease brings down the projected total for GF tax revenue.

DOF’s estimates from yesterday’s update are substantially larger than the higher range of the LAO estimate largely because DOF focused on gross changes to the budget’s bottom line while LAO estimates include the net effects of current law. In addition, the LAO notes that the DOF is projecting from a different starting point, including:
  • Slightly lower revenues than even the LAO 
  • Billions of dollars more in increased caseload-driven costs (e.g., social program costs related to the recession)
  • That the budget continues to include all the discretionary funding proposals that the Governor included in his January Budget
  • That spending for Proposition 98 remains unchanged from the January Budget
​​​​​​While the official budget proposal is next week’s May Revision, the real work and final solutions will be hammered out between release of the May Revision and the Legislature’s adoption of a budget by the June 15 deadline. However, another curve is the delayed deadline for personal income tax payments. Since personal income taxes are not due until July 15th, this year, the state will not know final revenues until late July or early August.

During these times schools districts and county offices of education are looking at how to finish this school year and reopen for the fall semester. So, it is imperative that CSBA and its members continue conversations with state and federal representatives about the critical importance of funding at a level far above the Proposition 98 minimum. CSBA will continue to advocate for the support, resources and funding needed to serve students in the age of COVID-19 and will provide additional information as it becomes available.