Budget Update - LAO Releases Fiscal Outlook Report

As you know, the most important fiscal news prior to the introduction of the Governor's Budget in January each year is the non-partisan Legislative Analyst's Office (LAO) forecast of the state's fiscal condition released each November. Today the LAO announced a fiscal picture, particularly for K-12 education, that is optimistic for the coming year. The Executive Summary is found below, courtesy of the very capable Ken Kapphahn of the LAO's office. The full report is available here.

The main takeaway for next year is that there is enough funding to substantially exceed what is necessary to cover the projected COLA of 1.79%. In fact, the Analyst estimates that we would have as much as $2.1 billion more in ongoing funding beyond COLA for other priorities including increased relief on STRS, PERS and Special Education.

Governor Gavin Newsom issued a response to the report in which he highlighted the state's efforts to strengthen the social safety net while also preparing for an economic downturn.

We will provide further analysis as the details are shared with us this week by the LAO on their projections and methodologies.

EXECUTIVE SUMMARY

Relatively Strong Growth Projected in School and Community College Funding.Each year, the state calculates a “minimum guarantee” for school and community college funding based upon a set of formulas established by Proposition 98 (1988). Under our outlook, the 2020‑21 minimum guarantee is up $3.4 billion (4.2 percent) over our revised estimate of the 2019‑20 guarantee. The state could use $1.1 billion of this increase to cover a 1.79 percent statutory cost‑of‑living adjustment (COLA) for school and community college programs and changes in student attendance. The state also would be required to deposit $350 million into the Proposition 98 Reserve. After accounting for these and other adjustments, we estimate the state would have $2.1 billion available for new commitments in 2020‑21.

Legislature Faces Key Trade‑Offs in Upcoming Budget Decisions.The statutory COLA rate is relatively low compared with the cost pressures that districts are facing. 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. The Legislature could help districts address these cost pressures by using a portion of the $2.1 billion for a larger COLA. Alternatively, the Legislature could take a more targeted budget approach—for example, equalizing per‑student funding rates for special education (an area of longstanding legislative concern). The Legislature also could consider prioritizing one‑time spending. In part because certain indicators suggest the chances of an economic slowdown are higher than normal, 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.