K-12 Education Funding Decisions in the 2010-12 Biennium

1. K-12 Education Funding Decisions in the 2010-12 Biennium Virginia Association of Counties • Prepared by • James J. Regimbal, Jr. • Fiscal Analytics, Ltd. • November 2009

2. 2009 Fiscal Condition Survey Revealed a Deteriorating Local Financial Condition • Biggest local concerns for FY 2011: • Expiration of the federal stimulus and its impact on the state's • ability to maintain funding for localities and school districts. • Continued erosion of real and personal property values that will place significant upward pressure on tax rates. • Many localities have reserves. 74 of 106 localities responding reported reserves greater than 10 percent of FY 2010 spending.

3. Local Revenues Are Declining(Number of Localities Responding)

4. * APA Comparative Report FY 1990 to FY 2008; VML/VACO survey results extrapolated for FY 2009 and FY 2010

5. Federal K-12 Stimulus Funding Prevented Layoffs and Education Program Reductions in FY 10

7. Education Funding is Greatest Concern • Commonwealth has already reduced FY10 K-12 general funds by almost $800 million – partially offset by federal stimulus funding. • Expect additional K-12 cuts. • - K-12 is 35 percent of GF and 70 percent of local aid. • State and local revenue problems will be compounded when federal K-12 stimulus funding ends – beginning in FY11. • Localities are holding Virginia’s public education system together to meet SOA and SOL standards by spending $3 billion more per year than required to match state $. • - In total, localities spend 82 percent more than required by state. • - This excess pays for22 percent of all K-12 spending. • Without state and/or local tax increases, major policy changes will be required to align K-12 spending levels with revenues, even with only minimal re-benchmarking costs ($138 mil. for biennium). • - Restoring “support cost” funding would require an additional $754 million in the next biennium.

8. State Budget Summary (Setting the Stage for January) • On August 19, Governor announced a $300 mil. FY 09 GF revenue shortfall and an additional $1.2 billion GF revenue shortfall for FY 10. • On September 8, Governor announced $1.35 bil. budget reduction plan. Only for FY 10 - does not solve 2010-12 budget problems. • Expect an even tougher 2010-12 budget due to a weakened state balance sheet (e.g. Rainy Day fund drawdown), lack of new debt capacity, expiring federal stimulus $, and a weak economic recovery. • Medicaid and other HHS cost pressures will continue, putting additional strain on the 2010-12 state budget. Medicaid growth could consume all additional 2010-12 biennium GF revenues. • State aid to localities will continue to be reduced in the 2010-12 biennium. • Falling real estate and car values, sales taxes, business taxes will make it difficult for localities to continue backfilling declining state support.

9. GF Revenues Not Expected to Exceed FY 06 until FY 12

10. Dismal 1st Quarter FY 2010 GF Revenues

11. FY 2010 GF State Aid Cuts to Localities

16. Significant Additional General Funds Will be Necessary to Maintain Current Services When Federal Stimulus Ends *Federal ARRA stimulus funds used by Virginia to offset general fund cuts ** DMAS forecast presented to Senate Finance Committee 10/22/09

17. General Fund Tax Changes Over Last 10 Have Neutralized 2004 Tax Increase

18. New Debt Capacity Is Limited…If Virginia Wants to Keep its AAA Rating 5% Debt Capacity Advisory Committee Policy Source: Evelyn R. Whitley, Director of Debt Management Presentation to Joint Subcommittee on Public Safety, May 21, 2009.

19. Preliminary K-12 Re-benchmarking of $138 Million Reflects the Recession* • Major Inputs that Decreased Cost Compared to 2008-2010: • Funded Instructional Salaries • Funded Support Salaries • Special Education Child Counts • Statewide Average SOL Failure Rate • Inflation Factors • Health Care Premium • Textbook Expenditures • Major Inputs that Increased Cost Compared to 2008-2010: • Enrollment Projections • Free Lunch Eligibility • Federal Revenue Deduct Per Pupil Amount • Pupil Transportation * Re-benchmarking was about $800 million for the 2008-10 biennium Source: July 22, 2009 DOE Presentation

20. 2010-12 Budget Outlook 2010-12 GF budget FA outlook assumes FY 2010 current services appropriations with four exceptions: 1) A seven percent utilization growth rate in Medicaid funding. 2) Rebenchmarking increases in public education funding (Did not restore support position funding; July preliminary: $60 mil. FY 2011; $79 mil. in FY 2012) 3) Planned GF debt service cost increases 4) General funds necessary to offset loss of federal stimulus funding

22. State and Local Revenue Shortfalls Make It Likely K-12 Policies Will be Altered • There are seven key components to the SOQ funding formula: • - Number of students • - Staffing ratios for teachers and other funded positions • - Salaries of teachers and other funded positions • - Fringe benefit rates • - Standard and prevailing support costs • - Inflation factors • - Prevailing federal revenues related to support costs • Approximately 79 percent of SOQ funding is for salaries and benefits • FY10 state budget reduced support cost funding by $341 mil. -- increasing to $376 mil. in FY 11 - not likely to be restored in 2010-12.

23. Other Policy Alternatives • Seek local government/school district efficiencies (e.g. merge HR, finance, transportation maintenance, IT, procurement, other operations functions). • Reduce mandates (e.g., limit SOL testing to minimum NCLB amount required, change class size mandates depending on at-risk student concentration) • Include car tax reimbursements as part of any “flexible” state aid reduction base. • Revisit tobacco taxes, sales tax dealer discount, prior tax reductions, and other income and sales tax policies. • Increase local option tax authority. • Hope for new federal aid initiatives for Medicaid and education!