Budgeting in a Difficult Economy...

1. Budgeting in a Difficult Economy... A California Perspective Presented to… Arizona Association of School Business Officials 25th Annual Spring Conference – Laughlin, NV April 4, 2009 Hardy Childers – AASBO President 1987 Deputy Superintendent/CBO (RET) Oak Grove School District San Jose, CA Acknowledgment… Certain of the technical data/slides provided by School Services of California and certain of the Arizona-specific background/slides provided by Paradise Valley and Mesa Public Schools

2. Agenda • What is happening in the economy? • In Arizona and the Nation • The California Perspective • How bad is it and how long will it last? • Okay, it’s bad… How do we deal with it? • Some critical things to do and a few strategies… • Choose your poison… some specifics… • Parting thoughts AASBO Annual Spring Conference - April 4, 2009

3. Is It A Recession??? “The Business Cycle Dating Committee of the National Bureau of Economic Research identified December 2007 as the peak month, after determining that the subsequent decline in economic activity was large enough to qualify as a recession.” OK… I guess that makes it official! AASBO Annual Spring Conference - April 4, 2009

4. Arizona’s Revenue Is Declining AASBO Annual Spring Conference - April 4, 2009

5. In Arizona… Recent Article in The Republic • “Many school districts in the Valley are planning big staffing and program cuts as they prepare to absorb millions of dollars of lost education funding.” • “State-imposed cuts are compounding budget problems for many districts, which are already dealing with failed bonds and overrides, decreased tax revenue, and funding cuts due to declining enrollment.” • “Districts are planning for the worst because they have to reduce costs in time to meet a fast-approaching budget deadline without knowing exactly by how much their state funding might be reduced.” AASBO Annual Spring Conference - April 4, 2009

6. K-12 Arizona Education Funding Has & Will Experience Cuts In 2008/09 K-12 education was cut $133 million. The estimated cuts to K-12 education in 2009/10 is estimated to be between $470 million and $1.4 billion AASBO Annual Spring Conference - April 4, 2009

7. Budget Cuts or Revenue Increases? “[House Appropriations Chair John Kavanagh said that he and most Republicans are unwilling to consider tax hikes, even temporarily, instead of further spending cuts.     “I’m not going down the tax road until the situation is so dire that there’s no other alternative,’’ he said. “And I’m not prepared to concede that at this point.’’ ” --East Valley Tribune, February 1, 2009 AASBO Annual Spring Conference - April 4, 2009

8. Potential State Education Budget Cuts • The following budget cuts have been proposed by state legislators: • Phase out of Career Ladder • Elimination of Young Learner and Full-Day Kindergarten • Eliminate annual increase of 2% in funding • Base Funding was decreased 2.6% this year and will be decreased even more in the next budget • Funding to offset utility bills may not be provided • Soft Capital will be eliminated or significantly cut AASBO Annual Spring Conference - April 4, 2009

9. The Budget Crisis Is Hurting All Sectors and States AASBO Annual Spring Conference - April 4, 2009

10. The “Bottom Line” in California For the combined budget years 2008-09 and 2009-10, A SHORTFALL IN FUNDING FOR THE $102B STATE BUDGET OF $41.6 BILLION… Yes, that’s a “B” AASBO Annual Spring Conference - April 4, 2009

11. Or Is There A “Bottom Line” in California??? On March 13th the Legislative Analyst released a report showing the recently adopted state budget as falling short by “BILLIONS of dollars…” Specifically, $8 BILLION dollars short of the projections which showed the state to be almost $42 BILLION short!!! Let me do a quick calculation… $42B + $8B = $50B AASBO Annual Spring Conference - April 4, 2009

12. Revenue Limit Adjustments The 2009 Budget Act enacted a series of reductions to the revenue limit, which makes 2008-09 and 2009-10 among the most complex years for California school finance It eliminates the 0.68% COLA funded in the 2008 Budget Act, resulting in a zero COLA It provides a zero COLA for 2009-10 It imposes cuts to the revenue limit for both 2008-09 and 2009-10 For a final result of… AASBO Annual Spring Conference - April 4, 2009

13. 2009-10 Deficit Applied • Apply 2009-10 deficit factorof 13.094% to your undeficited2009-10 RL per ADA Example for District “A” Funded RL = $6,638 x (1.0 – 0.13094) = $6,638 x 0.86906 = $5,769 $869 LESS than formula… AASBO Annual Spring Conference - April 4, 2009

14. Revenue Limit Deficit Factor AASBO Annual Spring Conference - April 4, 2009

15. Scope of the Adopted State Budget The 2009-10 Budget Act includes both 2008-09 and 2009-10 The actions proposed for the current year, 2008-09, are incorporated in the Budget The enacted 2009-10 Budget also meets statutory requirements as a completed Budget for 2009-10 This historic early adoption was necessary to conclude legislative agreements for both years simultaneously The state has met its obligation to adopt a 2009-10 Budget prior to June 30, 2009 But it is unlikely that this Budget will escape the need for significant revisions We are in uncharted waters as we watch the Legislature and the Governor deal with changes to a Budget that has already been enacted AASBO Annual Spring Conference - April 4, 2009

16. Major Revisions for 2008-09 New taxes and other revenues to be implemented as soon as possible; Increased borrowing to occur Reductions to all state-funded programs – especially education Some categorical program flexibility has been granted for the current year; cuts are now evenly split between revenue limit and categorical programs Schools lose the 0.68% cost-of-living adjustment (COLA) and more in the current year No relaxation of the Designated Reserve for Economic Uncertainties requirement AASBO Annual Spring Conference - April 4, 2009

17. Major Provisions for 2009-10 State continues to raise taxes, borrow, and cut programs Budget is dependent upon voter approval in a special election Education again loses COLA and more, and takes further reductions to categorical funding Flexibility in K-3 Class-Size Reduction (CSR) is much less than proposed by the Governor Other categorical flexibility continues Again, the cuts are split between the revenue limit and categorical programs Managing budgets will be difficult Partly because of known cuts and partly because of uncertainty regarding future modifications to the State Budget Cash management continues to be a growing issue County office of education (COE) oversight resources will be spread thin We will have the highest deficit factor in California’s history AASBO Annual Spring Conference - April 4, 2009

18. Per-ADA Revenue Volatility AASBO Annual Spring Conference - April 4, 2009

19. Other Factors The progress of the economy is key to recovery Job creation is essential as employment numbers get worse Uncertainty abounds relative to the federal stimulus package (American Recovery and Reinvestment Act) and how it affects education “in a specific way” How the losses to Proposition 98 are treated in the future is a huge factor – “PAY BACK” OR “NEW BASE”??? Neither California nor the feds have relaxed any student performance standards or expectations AASBO Annual Spring Conference - April 4, 2009

20. $41.6 billion General Fund Budget “Solutions” Oh yeah, it’s now $50B! AASBO Annual Spring Conference - April 4, 2009

21. Revenue Increases Revenue increases are broad based One-cent increase in state sales tax effective April 1, 2009 0.50% increase in the Vehicle License Fee rate (from 0.65% to 1.15%) Fee nearly doubles Reduction in Dependent Credit beginning with 2009 tax year Increase in the personal income tax rate beginning in the 2009 tax year Businesses are spared increases in direct taxes AASBO Annual Spring Conference - April 4, 2009

22. Borrowing and Transfers The Budget continues to rely on one-time revenues from borrowing to maintain ongoing programs This borrowing totals $11.4 billion $5.9 billion from a Revenue Anticipation Warrant (RAW) to be repaid in 2010-11 – or through use of federal stimulus dollars The Legislative Analyst’s Office (LAO) warns that this may violate Proposition 58, which prohibits borrowing for budgetary purposes Sufficient federal stimulus funds would cancel the RAW $5 billion to securitize the growth in Lottery revenues Voter approval of Proposition 1C is required and the credit markets must accept this $433 million from special fund loans and transfers that must be repaid AASBO Annual Spring Conference - April 4, 2009

23. Major Expenditure Solutions Education funding reduced from formula funding by Over $9 BILLION for 08-09 and 09-10… AASBO Annual Spring Conference - April 4, 2009

24. Special Election Ballot Issues Six propositions have qualified for the May 19, 2009, statewide special election ballot – the first three are most significant for local educational agencies (LEAs) Proposition 1A: State Finance Increases the size of the state’s “rainy day” fund and requires above-average revenues to be deposited into it Proposition 1A and 1B are joined at the hip If Proposition 1B is approved, a portion of the fund would be transferred to fund supplemental payments to K-14 education Proposition 1B: Education Finance Requires supplemental payments of $9.3 billion over time, commencing in 2011-12, in lieu of Maintenance Factor amounts related to fiscal years 2008-09 and 2009-10 If passed, this proposition guarantees that education funding will be restored If it fails, we must pursue reimbursement by other means Proposition 1C: California State Lottery Allows Lottery to be modernized to improve its performance LEAs would no longer receive funding based on Lottery sales, but would continue to receive per-ADA amounts equal to what they received in 2008-09 If this proposition fails, there is a $5 billion hole in the Budget Proposition 1D: Budget Act of 2008: California Children and Families Act: Use of Funds: Services for Children Temporarily allows the redirection of existing money to fund health and human service programs for children of up to five years of age Proposition 1E: The Mental Health Services Act: Proposition 63 Amendments Redirects specified Mental Health Services Act monies for fiscal years 2009-10 and 2010-11 to support a pre-existing mental health program AASBO Annual Spring Conference - April 4, 2009

25. Impact of Uncertain Election Results Much of the State Budget is contingent upon success of ballot measures If Proposition 1A, relating to the Budget Stabilization Fund, fails: K-14 schools will not automatically get the additional $9.3 billion in maintenance factor amounts Will pursue those monies through alternative means Temporary tax increases included in ABX3 3 will expire one or two years earlier than if voters approve Proposition 1A The Budget relies on issuance of Lottery securitization bonds to generate $5 billion – creates a shortfall if Proposition 1C fails But credit markets may not be interested Recent poll indicates that 61% of likely voters oppose the idea of borrowing against future State Lottery income Voters may not want to divert monies from initiatives they previously passed If Propositions fail, the May Revision could include more cuts AASBO Annual Spring Conference - April 4, 2009

26. May Revision Will Be Delayed Normally, the statutory May Revision is completed by May 15 of each year Includes updated economic data Statutory COLA for Proposition 98 is recomputed and finalized Governor amends his January Budget to reflect economic and other changes if desired Legislature uses the May Revision as a representation of the Governor’s final proposal before adoption This year will be different Special election on May 19 affects Budget significantly Budget has already been enacted State law amended to move statutory date for May Revision to as late as June 8 AASBO Annual Spring Conference - April 4, 2009

27. Risks to the Budget Oh yeah… and there is that additional $8 Billion shortfall projected by the LAO • The state and national economies continue to fall • Forecasters are expecting the downturn to last through 2009, rather than turn around later this year • State tax revenues, in turn, may drop below forecast • State voters may reject the securitization of the State Lottery (Proposition 1C) and the transfer of special fund money to the General Fund (Propositions 1D and 1E), which account for $5.8 billion • Caseloads in the state’s safety net programs could exceed budgeted levels, especially as residents lose jobs and income • Weakened credit markets may have no appetite for California’s Lottery borrowing or short-term bonds AASBO Annual Spring Conference - April 4, 2009

28. Agenda • What is happening in the economy? • In Arizona and the Nation • The California Perspective • How bad is it and how long will it last? • Okay, it’s bad… How do we deal with it? • Some critical things to do and a few strategies… • Choose your poison… some specifics… • Parting thoughts AASBO Annual Spring Conference - April 4, 2009

29. The Economy in Perspective The United States economy has been in recession since December 2007 A depression is a severe downturn that lasts several years The Great Depression was characterized by the following: Beginning in 1929, it lasted through the 1930s The unemployment rate reached 25% Wages fell 42% U.S. GDP fell 8.6% in 1930, 6.4% in 1931, and 13% in 1932 Despite the dismal state of the current economy, it is nowhere near the conditions of the 1930s Not the first “crisis” either… The Lonnnnng Depression of 1872-1897, The Panic of 1893, The Stock Market Crash of 1929, The OPEC Oil Crisis & Runaway Inflation of the 1970’s, The Savings & Loan Crisis and Recession of the 1980’s A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real Gross Domestic Product (GDP), real income, employment, industrial production, and wholesale/retail sales AASBO Annual Spring Conference - April 4, 2009

30. How Long Will It Last??? Remember the Business Cycle Dating Committee of the National Bureau of Economic Research??? They were asked “How long does the committee expect the recession to last?” The response??? “The committee does not forecast.” AASBO Annual Spring Conference - April 4, 2009

31. Implications of Employment Trends Employment is a broad measure of the health of the economy It reflects the number of people working and thus earning income California’s unemployment rate, which stands at 10.1%, fluctuates due to layoffs and hiring, but also as a result of the job market outlook Discouraged job seekers may withdraw from the labor market The recession of the early 1990s saw a loss of 624,200 jobs between June 1990 and February 1993, with the unemployment rate peaking at 9.9% It took six years to regain the June 1990 employment level California has lost more than 400,000 jobs since April 2008 Losses are expected to continue through 2009 AASBO Annual Spring Conference - April 4, 2009

32. Recent Employment Trends Source: Employment Development Department; Historical Civilian Labor Force, January 23, 2009 AASBO Annual Spring Conference - April 4, 2009

33. California’s Long-Term Employment Trends Source: Employment Development Department; Historical Civilian Labor Force, January 23, 2009 AASBO Annual Spring Conference - April 4, 2009

34. Agenda • What is happening in the economy? • In Arizona, the Nation, in California • How bad is it and how long will it last? • Okay, it’s bad… How do we deal with it? • Some critical things to do and a few strategies… • Choose your poison… some specifics… • Parting thoughts AASBO Annual Spring Conference - April 4, 2009

35. Some strategies/practices that workSometimes it’s “Back to Basics” • Communicate, communicate, communicate… • “No Surprises” • School/Department and Community Meetings • “The more they know the sooner, the better it will be for everyone” • Multi-Year Projections, Position Control and Enrollment Tracking • MYPs - “You’ll never get there if you don’t have a map” • Position Control - If you don’t control hiring, nothing else will help • Enrollment Tracking - It’s why we’re here and the lifeblood of our revenue stream • Budget Committee Process • “Getting stakeholder involvement is key – plus, it helps you survive the fallout” AASBO Annual Spring Conference - April 4, 2009

36. Reporting CycleThe “Public Formalities” Are Important • Preliminary Review of Assumptions – January/Early Spring • Review Budget Assumptions – May • District Budget Adopted – Late June • Prior Year Annual Report - September • First Interim – December (Actuals Thru October) • Budget Year Second Interim – March (Actuals Thru January) • Preliminary Review of Assumptions -– January/Early Spring Adopted Budget June 28, 20XX AASBO Annual Spring Conference - April 4, 2009

37. Face TimeGetting in Front of Stakeholders • School/Department Staff Meetings • Throughout the school year, EVERY year • Community Updates • Several times a year – EVERY year • “Superintendent’s Forums” • Key Committees/Operating Groups • Parent Advisory Groups • Staff Working Groups (Leadership Team) • Bargaining Units • Inform parents and community by periodic updates in school newsletters and website Adopted Budget June 28, 20XX AASBO Annual Spring Conference - April 4, 2009

38. Multi-Year Projections Are CRITICAL “Long-range planning does not deal with future decisions, but with the future of present decisions.” —Peter Drucker AASBO Annual Spring Conference - April 4, 2009

39. Purpose • To provide for effective distribution of resources and to promote ongoing fiscal stability, plan three to five years into the future • Deterrents • Lack of predictability in state actions • Potential state deficits • Variable local nontax income (e.g., leases, interest, foundations) • Difficult to predict the results of collective bargaining • Difficult to predict a “turning point” • More work (“just another way to be wrong”) • Two forecast realities: • A forecast “is not a mandate for the future” • All forecasts contain a “margin of error” AASBO Annual Spring Conference - April 4, 2009

40. Purpose • But financial projections can provide a basis for: • Evaluating service delivery options • Measuring the financial impact of major decisions made throughout the year • Analyzing the future-year impact of current-year decisions • Educating the community and district employees on critical issues • And be the cornerstone of the district's long-range financial plan, no matter which of the following stages the district is in or heading toward • Growth stage: revenues, enrollment • Maintenance stage: maintaining service and infrastructure • Retrenchment stage: cut-backs, reorganization AASBO Annual Spring Conference - April 4, 2009

41. Underscoring the View that MYP’s are Critical…In California, Fiscal Certification Now Requiredfor all District Employment Contracts • Superintendent and Chief Business Official must certify in writing • Costs of bargained agreement can be met for the term of the agreement • Certification shall itemize any budget revision necessary • Public document provided prior to final adoption of the agreement • If contract adopted, budget revisions “shall” be adopted with the next interim report • If revisions are not adopted, the county “shall” issue qualified or negative certification • The end of “illusory” cuts AASBO Annual Spring Conference - April 4, 2009

42. A Plan to Bridge and Build… During a prior budget crisis, based on MYP’s it became apparent that we needed a plan to “weather the coming budget storm” • Closing two schools, saving $900,000 per year in operating costs and, ultimately, generating $1 million in operating revenue • Reducing budgets – starting with a total of $2 million in cuts in next two years, and another $1.25 million in the third year, eliminating deficit spending over three years • Take advantage of State budget law “flexibility” options which allows a lower “reserve” (1.5% instead of 3%) for two years only – a “one time” source of funds • Bridge the shortfall by using “one time moneys” to cover the short term operating budget deficits AASBO Annual Spring Conference - April 4, 2009

43. Implementing the Plan Community and staff meetings – educate about budget, explain need for school closures, explain school closure process, explain how the school closures are just a component of the overall plan… Reorganize district level operations Adjust/reduce staffing to match enrollment; increase class sizes as necessary Generally… “Bridge” fund where possible, with goal of matching district expenditures to projected revenue Also important… Educate (lobby) local legislators regarding impacts of their decisions, meet with service clubs to enlist support of community business leaders, participate in public support rallies when appropriate AASBO Annual Spring Conference - April 4, 2009

44. The Budget Committee “An” Approach

45. Budget CommitteeCan be a valuable tool • Properly constituted and employed, a Budget Committee can better ensure… • The “reality” of proposed actions • The longer term “viability” of the budget plan developed • The “credibility” of the plan with the Board of Trustees and stakeholders AASBO Annual Spring Conference - April 4, 2009

46. “An” Approach to Use of a Budget CommitteeBudget Committee Membership EVERY operating area in the district was represented by managers and others to ensure full representation and clear understanding of impact of its recommendations… Community members (and Board members) are NOT included as members, as the Board members will make the ultimate decisions. Community input is gathered through community and committee meetings and brought to Budget Committee meetings… It is a committee of the superintendent, thus not subject to Brown Act (public meetings laws) AASBO Annual Spring Conference - April 4, 2009

47. “An” Approach to Use of a Budget CommitteeBudget Committee Philosophy • Provides for the future viability of the school district. All decisions reached in the current year must take into consideration the essential requirement that the future of the district must be preserved to ensure the availability of educational opportunities for the following years and future generations. In short, excessive "mortgaging" of the future of the Oak Grove School District is not acceptable. • Provides for quality instructional and support programs and operations essential to student success. We must REMEMBER WHY WE EXIST, and continually re-evaluate what the "essential" programs are and strive to preserve those programs. We need to try to make cutting “away from the classroom” a priority consideration, but recognize that in a serious financial crisis, it may not be possible to achieve the Committee’s objectives without making cuts which affect the instructional program. • Preserves essential jobs, provides competitive salaries, benefits and working conditions, and otherwise "values" our employees. People are what our organization is all about. We exist to serve people and all of our people - managers, certificated and classified staff alike - make it possible to provide for the children for whose educational benefit we ultimately exist. We must continue to evaluate staffing relative to program priorities and provide for staffing at the necessary and appropriate levels. We must recognize and show appreciation for the efforts of our employees, while recognizing that in difficult financial times it may not be possible to achieve "optimum" staffing levels or to "reward" staff to the extent truly deserved. As the budget development process is undertaken, the guiding philosophy of the Oak Grove School District will be to develop a budget which is in alignment with the District’s Vision and the Board’s Five Year Plan, and which meets the following basic objectives.... AASBO Annual Spring Conference - April 4, 2009

48. “An” Approach to Use of a Budget CommitteeBudget Committee Rules • CONFIDENTIALITY. Free and open discussion must be promoted in order to provide for an environment which will offer the greatest opportunity for generating the desired results. Accordingly, all discussion within the Budget Committee must be considered confidential except such information mutually agreed to be released as a "work product" of the Committee. Specific positions taken and/or comments made by individual members of the Committee are to remain confidential ‑ only Committee work products are to represent the efforts of the Committee. • PERSONALITIES. Discussions must not become "personal" in nature. Personal attacks will not be acceptable. In addition, Committee members must strive to deal with all issues within the context of the "greater good" of the Oak Grove School District and the District's ability to continue meeting it's mission and serve the students for which it exists as an entity. • TIMELINE. The Budget Committee timeline must be observed and all deliberations held with the timeline in mind. Committee members are encouraged to receive input from individuals/organizations not directly involved with the Budget Committee process, and, if determined to be appropriate and meaningful to the process, to bring such issues to the Committee for deliberation. However, "formal" opportunities to obtain such input will NOT be built into the Budget Committee timeline. • LEGAL ISSUES. Recommendations presented by the Budget Committee must follow known laws and regulations. • DIRECTION. The Budget Committee is a committee of the superintendent, with the "charge" to provide options and make recommendations to the superintendent who, in turn, will recommend a budget to the Board of Trustees. As such, the Committee may be provided additional direction and may from time to time be directed to deal with specific matters and/or undertake specific activities as determined by the superintendent. • MEETINGS/FORMAT. Meetings will be scheduled as needed. A facilitator will assist the chairman with planning and conducting meetings and will also serve as a participating member of the Committee. • DECISION-MAKING. Decisions will be made by consensus, i.e., everyone can "live with" the decision. The fallback decision-making process will be majority vote (with no vote count to be announced). AASBO Annual Spring Conference - April 4, 2009

49. “An” Approach to Use of a Budget CommitteeBudget Committee Parameters • The safety of students, staff and community must always be acknowledged as an overarching priority in the District. • Cuts should be kept as far away from the classroom as possible. • Layoffs of personnel should be avoided to the maximum extent possible. Personnel reductions should be handled through attrition and/or transfer to other open positions within the District whenever possible. • Efforts should be made to “balance” current recommendations for reduction with past recommendations which have been implemented. In addition to and/or in further support of guidance provided within the Superintendent’s charge, the Committee has traditionally agreed upon a number of parameters to be considered as it goes about the Charge. The Committee acknowledges that it is not always possible to meet the objectives implied by the parameters in a pure sense, but agreed that their consideration would be critical to the process. AASBO Annual Spring Conference - April 4, 2009

50. “An” Approach to Use of a Budget CommitteeSuperintendent’s “Charge” • Consistent with the principles and objectives embodied within the District vision, and in support of the Board/Superintendent Goals as reflected in the Five Year Plan, the Budget Committee is charged to... • Maintain and further develop awareness of the financial condition of the District, including an awareness of budget factors in recent years which have resulted in our current situation, as well as the specific status of the current year budget and the budget assumptions being applied in the development of next year’s budget. I am requesting that the Budget Committee review and discuss the implications of the identified factors and budget development assumptions relative to the multi-year projections and provide feedback and recommendations to the Superintendent through the Committee report. • Recommend and prioritize for consideration a combination of revenue increases and expenditure reductions which have the effect of improving the Unrestricted General Fund operating position for the budget year by no less than $750,000. I also request that deliberations continue in anticipation of the potential need for further cuts in subsequent school years, evaluating the potential to identify a total of $1.5 million in savings if that becomes necessary in the coming year(s). • Although given the severity of the budget crisis I still cannot ask that any programs be excluded from consideration, the class size reduction program (K-3 CSR), the Visual-Performing Arts programs (4-6 VPA) and after-school sports at the intermediate schools are to be considered high priorities for retention if at all possible. To the extent possible, personnel reductions should be handled through transfer to compatible positions and/or attrition. • 3) Share with constituents your knowledge of the district’s budget and financial condition (always in a manner consistent with what the Budget Committee deems appropriate and consistent with process). Recommend effective ways for the information to be shared on a district-wide basis. AASBO Annual Spring Conference - April 4, 2009