California's Economy Is Booming. Why Are So Many Districts Struggling?

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Facing a $36 million deficit and a possible state takeover, the top budget officer at the Sacramento City Unified School District has a sober message for his counterparts around California.

Sacramento is “just one of the first dominoes,” said John Quinto, the district’s chief business officer.

By any measure, Sacramento City’s distress is worse than the vast majority of California school districts.

But Quinto’s warning hints at looming problems for many more: The costs of pensions, health care and special education outpace new revenue they’re receiving from the state and they put some schools on a trajectory for red ink.

“Those things combined are finding most school districts in a budget-cutting mode, and it’s a shocker in what has been a growing economy,” said Kevin Gordon, a lobbyist whose firm, Capitol Advisors Group, represents large school districts.

Those stresses are driving education advocates to put forward proposals that would ask Gov.-elect Gavin Newsom to set aside more money for K-12 schools. A rush of new funding wouldn’t necessarily spare Sacramento City, but it could put off a reckoning for many other districts.

So far, the options on the table include:

  • Assembly Bill 39 by Assemblyman Al Muratsuchi, D-Torrance, which would swell education spending by $35 billion. For context, California budgeted $78.4 billion in state and local funds for K-12 school in this financial year.
  • A pledge by Assembly Democratic leadership to help schools pay their rising pension bills, which could take the form of a direct payment to the state’s two largest pension funds or an unrestricted funding boost for school districts. Assembly Budget Committee Chairman Phil Ting, D-San Francisco, included that goal last month when he previewed the party’s objectives for upcoming budget negotiations.
  • A general appeal from K-12 advocates asking Newsom to put more money into education than law requires. To them, more is better, but they’d consider anything over the minimum to be a win.

Gavin Newsom’s Priorities

It’s not clear yet whether Newsom will get behind any of the proposals.

His education platform centered on expanding preschool for youngsters, helping families open college savings accounts and offering Californians two years of tuition-free courses at community colleges.

The preschool program he favors is a particularly big-ticket item, and could run north of $1.8 billion, according to an outline he released to news organizations.

But education advocates think they have a good case, particularly when the state budget is on track to fill its “rainy day” fund and other reserves with $16 billion, and notch another $14.8 billion surplus that lawmakers could use for practically anything. Brown significantly increased education spending over the past years, but also prioritized building reserves to prepare the state for a recession.

The state’s education budget is governed by Proposition 98, the 1988 initiative that sets school funding based on a formula that accounts for the overall state general fund, student attendance and growth in personal income.

That netted K-12 schools $78.4 billion in the budget outgoing Gov. Jerry Brown signed in June, up from $56.6 billion in 2007-08. The Legislative Analyst’s Office in a November report projected another $2.4 billion increase in the 2019-20 budget.

Despite the revenue boost, schools from Sacramento to San Diego are reporting shaky finances.

Sacramento’s troubles were laid bare in a December report from the state’s Financial Crisis and Management Assistance Team, which warned of growing deficits for the foreseeable future.

The Paso Robles superintendent resigned in December when his school district reported that it faced a $3 million budget shortfall over two years.

And, teachers are preparing to strike in Los Angeles on Jan. 10, where their union is advocating for more hiring despite warnings from the Los Angeles County Office of Education about potential deficit spending. Similar conflicts have played out recently in Fresno and in San Diego.

Sen. John Moorlach, R-Costa Mesa, said the pressures driving up education expenses are real, but he warns against a blanket bailout of school districts. He published a report in November that ranked the financial health of California’s public school districts based on their annual financial reports. Some of the biggest districts in the state—Los Angeles, San Diego, Fresno, Long Beach and Sacramento—are in the worst shape.

He said he’d support increasing education spending if he had some assurances that unions would give ground on negotiable benefits like retiree health care.

“We can’t just give districts that have not been good stewards more money. You have to ask for something in return,” he said.

Rising Bills From CalSTRS, CalPERS

The factors driving up school expenses are well known. Since 2014, California schools have been required to chip in an increasing amount of money to secure the pensions of current teachers and to pay down unfunded liabilities for retirees at California State Teachers’ Retirement System and the California Public Employees’ Retirement System.

In 2013, schools kicked in 8.25 percent of a teacher’s earnings to help fund pensions. That rate is climbing to 19.1 percent by 2020.

Many California schools are recording slight declines in student enrollment, too, which leads to funding reductions. Meanwhile, they’re spending more on special education programs and seeing climbing health care costs.

That combination led WestEd, a San Francisco nonprofit, to declare in an April report that California schools faced a “silent recession.”

“California has significantly increased education funding in the last seven years. However, many school districts have not been able to keep up with even larger increases in their bills. That’s why we need to renew our commitment to K-12 funding as the state’s top priority,” said Muratsuchi, the assemblyman behind the bill that would boost education funding by tens of billions of dollars.

The funding proposals from Assembly Democrats conveyed to some education lobbyists that lawmakers were serious about giving schools some relief, particularly on their pension costs.

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“For years, the Legislative Analyst’s Office has highlighted how rising pension rates are coming to a head with an impending economic correction. It is heartening to see Assembly leaders proposing to apply one-time surpluses towards school pension liabilities. It’s just smart budgeting and keeps money in the classroom,” said Derick Lennox, a lobbyist at Capitol Advisors Group who focuses on school pensions.

Quinto, from the Sacramento city school district, doesn’t expect a big windfall from the state budget anytime soon. He anticipates that Newsom will be careful in figuring out how we wants to use the state’s surplus, which could mean flat revenue for schools in the near future.

“We’re all struggling with the same challenge,” he said. “I’m here to be part of the team that rights the ship.”

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