California School Finance and Management Conference 2013-14

1. San Leandro Unified School District California School Finance andManagement Conference 2013-14 Board Meeting August 13, 2013 Presented By Song Chin-Bendib Associate Superintendent, Business & Operations

2. Themes for the Budget – 2013-2014 • This is going to be a good year for schools! • Passage of Proposition 30 ensures no cuts to education • The State Budget is legitimately balanced for the first time since 2002 • The structural deficit has been eliminated for the duration of Proposition 30 • New tax rates on highest-income earners – married tax payers at $500,000 or above beginning in 2012 through 2018 (7 years) • Increases state’s sales tax rate by one-quarter cent beginning this year through 2016 (4 years) • Common Core Standards (CCSS) have been adopted • Local Control Funding Formula (LCFF) is the cornerstone of the Governor’s budget • The Governor is on a roll • He has stabilized the state’s budget • He enjoys a two-thirds majority in the Legislature • He has the support of the voters 2

3. The National Economy Pluses: • The U.S. economy is continuing its “slow-jam” recovery • Historically low interest rates; housing recovery well underway • Optimism is building as personal consumption rates improve Challenges: • Recovery is fragile • While imports have increased, driven primarily by consumer spending, exports have slowed: • Recessions in Europe and Japan • Slower growth in China • First quarter Gross Domestic Product (GDP) growth revised downward from 2.4% to 1.8% • Federal sequestration in both 2012-13 and particularly in 2013-14 has reduced spending and investment • Higher payroll and income taxes and Affordable Care Act (ACA) have left many consumers uncertain about the future 3

4. The California Economy • California has followed an uneven path to economic recover • Median home prices have increased 22.5% last year • Unemployment rate is expected to fall to 8.1% (1% higher than the 2014 projected U.S. rate) • Strong Revenue performance in May and June 2013 • Bifurcated path of the state economy • The inland regions are characterized by continuing high unemployment and ailing housing markets • The coastal regions enjoy relatively low unemployment, improving housing markets, and higher average incomes 4

5. Budget Risks Are Few in 2013-2014 • Compared to prior years, the proposed 2013-14 State Budget faces considerably less risk • Unlike the 2012-13 spending plan, it is not dependent upon voter approval of a major tax initiative • Unlike the 2011-12 State Budget, it is not dependent upon an unrealistic revenue projection • The plan does not rely on an infusion of federal funds to maintain programs • E.g. Federal Stimulus money; Jobs Bill • Yet, the Governor’s May Revision (ultimately became the final 2013-14 State Budget Act) lowered the revenue outlook for 2013-14 by $1.3 billion because of expected drag that federal budget policy would have on the economy • Sequestration cuts would reduce federal spending • Higher tax rates for high –income earners and expiration of the federal payroll tax holiday would depress consumer spending • The LAO’s revenues were forecast to exceed the May Revision by $3.2 billion Note: Thus far, May and June state revenues exceeded forecast 5

6. Is the Administration and Department of Finance’s Forecast Reasonable? • In order to assess the risks of the DOF’s revenue forecast, not just for 2013-14 but through 2016-17, School Services of California, Inc., (SSC) commissioned Capitol Matrix Consulting (CMC) to perform an independent analysis of the DOF forecast • Brad Williams, a partner with CMC, served as the LAO’s senior economist for 12 years and was recognized by the Wall Street Journal as the most accurate California forecaster of the 1990s • The SSC/CMC analysis finds that the DOF forecast is reasonable, with greater upside potential than downside risks • We assume that: • The U.S. expansion will continue at a moderate pace for several years • California personal income will rise from 3.4% in 2013-14 to an annual average pace of 5.5% through 2016-17 • Payroll jobs will grow at an annual average rate of about 2.2% 6

7. Confidence Intervals and the Forecasts Source: General Fund Revenues and Proposition 98 Forecast, CMC, July 2013 7

8. Conclusions About the DOF Forecast • Based on the independent analysis conducted by CMC, the DOF forecast is reasonable and falls within the +/- 1 SD confidence interval • There is more upside potential that actual revenues exceed the Administration’s forecast than downside risks that revenues will fall short • The Administration’s General Fund revenue forecast, therefore, provides a reasonable basis to project Proposition 98 revenues • The Proposition 98 projections, therefore, provide a reasonable basis to project revenues available to fund the LCFF • Revenues available to fund the LCFF allow districts to estimate revenues for purposes of their multiyear budget projections 8

9. Proposition 98 Forecast 9

10. Proposition 98 • Proposition 98 sets the minimum funding level for K-12 education and community colleges • Adopted by state voters in 1988, this is a constitutional guarantee • The measure specifies only the minimum funding level, it does NOT determine what programs will be funded • The State Budget implemented several changes from the May Revision 10

11. Proposition 98 and LCFF Proposition 98: • It is important to remember that Proposition 98 establishes the minimum funding level for K-14 education • The Legislature and the Governor decide on an annual basis at what level to fund the various education programs Local Control Funding Formula (LCFF): 8-year implementation phase until 2020-21 • The LCFF is the model by which state funds are allocated to school districts, charter schools, and county offices of education (COEs) • Unlike revenue limits and Tier III categorical programs, there are no state statues that specify an annual appropriation to support the LCFF • This makes multiyear planning very difficult • A district’s annual LCFF entitlement will be determined by “any available appropriations” (Education Code Section [E.C.] 42238.03[b][3] 11

12. Proposition 98 and LCFFcontinued… • The eight-year (2013-14 to 2020-21) implementation phase is not set in statute and can be longer or shorter than eight years, depending upon the annual LCFF appropriation • The different demographic composition of student populations will result in vastly different revenues (significant revenue volatility will be imposed on districts with high proportions of students eligible for supplemental/concentration grants) • The statutory COLA no longer determines out-year funding increases (individual districts are not guaranteed a funding increase equivalent to the COLA adjustment) 12

13. Differential Risks Under the LCFF • School districts will face vastly different levels of risk during the implementation phase of the LCFF • School districts experiencing significant annual funding gains can face major declines as well • While the statutory COLA is forecast to average 2.3% between 2013-14 and 2016-17, some districts could see gains under the LCFF of 6% to 8% annually • Multiyear contracts that assume high annual increases in LCFF revenues could fall out of balance when/if state LCFF appropriations fall • In 6 years over the last 20, the state either provided no increase to fund the statutory COLA or cut funding levels due to downturns in the economy and revenues • It is simply a matter of time when the next downturn occurs 13

14. Differential Risks – An Example 14

15. Conclusions About Multiyear Budgeting • Because of the differential risks under the LCFF, all school districts, but especially high-funded districts, will have to make prudent out-year revenue assumptions • There is no longer a statewide standard for expected revenue growth in the form of an expected inflationary adjustment • Each district will have to carefully assess its demographic projections • The total projected ADA • The demographic composition of the ADA, i.e., low-income students, English learners, and foster youth • State Budget priorities can change from year to year with no guarantee that LCFF growth will be provided or that the LCFF will be fully funded • The statutory protection of annual COLAs is eliminated • Local conditions and budget decisions will be more important than ever in maintaining each district’s solvency 15

16. LCFF • The Governor’s policy goals to reform the state’s school finance when he unveiled the Weighted Student Formula in January 2012, the precursor to the LCFF • Increase transparency and reduce complexity • Reduce administrative burden • Improve funding equity across school districts • Improve local accountability • To attain these goals, the LCFF • Eliminates revenue limits and almost all categorical programs, except those established by state initiative, federal statutes, or court orders or settlements • Establishes base grants for four grade spans • Establishes supplemental & concentration grants to provide supplemental services to low income and English learner students • In general, a school district is better off under the LCFF if: • Its base year funding is below the statewide average • The proportion of students qualifying for supplement/concentration grants is above the statewide average • The state provides a significant amount for LCFF growth in a given year 16

17. Elements of the Formula Base grant targets: • K-3 CSR: add-ons equal to 10.4% of base grant • 24-student average must be reached at full implementation of the LCFF (planned for 2020-21) • During the intervening years, districts are to meet intermediate targets • A district’s failure to meet the target at one school site would result in the loss of all K-3 CSR funds districtwide • CTE: 2.6% for grades -12 • 20% supplemental grant • 50% concentration grant (for eligible students exceeding 55% of enrollment) 17

18. LCFF – K-3 CSR and CTE Adjustments 18

19. Common Core State Standards (CCSS) • CCSS is a nationwide initiative to establish a single set of standards for K-12 education in English language arts and mathematics to ensure college and career readiness • The State Budget provides $1.25 billion in one-time funds from 2012-13 for the implementation • Funds will be allocated based on prior-year enrollment • Estimated to be about $200 per student (about $1.7 M for SLUSD) • Funds will be apportioned in July 2013 (50%) and August 2013 (50%) • LEAs can encumber funds any time during the 2013-14 and 2014-15 school years • Funds can be spent on: • Professional development For teachers, administrators, and paraprofessional educators or other classified employees involved in the direct instruction of pupils that is aligned to the CCSS academic content standards 19

20. Common Core State Standards (CCSS)continued… • Instructional and supplemental instructional materials • Technology Integration of the content standards through technology-based instruction for the purposes of improving the academic performance of pupils including but not limited to: the administration of computer-based assessments and providing internet connectivity to support computer-based assessments • Develop and adopt an expenditure plan detailing how the funds shall be spent; a public hearing must be held on the plan • On or before July 1, 2015, a detailed expenditure report to CDE 20

21. Other Programs Special Education • The Governor vetoed a $30 million augmentation for special education equalization: • The veto message noted that implementing special education would reduce available funds to implement the LCFF and pay off deferrals in the out years • Several changes to AB 602 funding formula Adult Education • Adult Education is an important program that has been jerked all over the planet! • It is part of the LCFF • Allowed school districts to continue existing education programs for two years • The Enacted State Budget is far more prescriptive, requiring LEAs maintain the same level of Adult Education expenditure in 2013-14 and 2014-15 as were expended in 2012-13 • $30 million in 2013-14 for two-year planning and implementation grants Regional Occupation Centers/Programs • It is part of the LCFF 21

22. Balances, Reserves, and Planning • The LCFF revenue model leads to an entirely new way of thinking about revenues, reserves, balances, and planning for the future • Gone are the anchors of the past: base revenue limit, deficit factor, current-year COLA, etc. • They are replaced with a “commitment” by the state to make a contribution to “closing the gap” each year • But there is no statutory calculation for how much the state will contribute – and no obligation to fund any certain amount • This has huge implications for districts • Many districts will need to maintain much larger reserves • Much of the “new money” will still be tied to expenditures for specific programs 22

23. There is No Such Thing as a Good Budget That Does Not Have an Adequate Reserve! • Good budgets have good reserves; but how much is really needed? • Under revenue limits, the State Board of Education (SBE) set reserve levels as a percentage of expenditures based on district size – that won’t work anymore • Some districts will have much more risk and volatility than similar-sized districts – they may need ten times the amount of the state’s recommended reserves • All state-recommended reserve levels will now be too low 23

24. Volatility Increases Reserve Requirements • Under the old rules, all districts could plan for similar changes in revenue limits – not so under the LCFF • Every district has its own starting point and its own unique goal • Some districts will project very large increases and others very modest increases • And while the percentage contributed by the state toward the goal is said to be consistent, the actual dollar differences are huge • A good year, with a very high percentage contribution, will drive expenditures higher • But what happens when times are not so good and there is no increase or even another cut? • By the way – this just in – there will be another recession! • Districts will need a larger buffer to provide time to make ongoing budget adjustments 24

25. Things to Do • Get your 2013-14 budget squared away • Update your projections using the SSC Dartboard, the SSC Simulator, and your own MYP • Budget for the CCSS one-time revenues, and start planning smart expenditures • Bring stakeholders along; help them to understand the new system • Get ready for negotiations • Be prepared to spend time training on both sides of the table • Create clear, concise, and transparent displays of financial information • Both parties need to spend a lot of time listening and developing trust • Get out into the school communities • The Local Control Accountability Plan (LCAP) requires community involvement • Start those processes now 25

26. Things to Do • Review your cash flow • The decisions on deferrals for 2012-13 came too late, but we should see the results of continued buy downs and less need for borrowing • Plan for implementation of CCSS • Two-year period for use of one-time funds • Technology, instructional materials, and professional development all need to be addressed • Plan a balanced recovery for your district; deal with: • Structural budget deficits • Higher need for reserves • Restoration of compensation and positions • Don’t try to do it all at once, but get started • Re-think instructional delivery at your lowest performing schools • You will have more money for that purpose • But remember, you have an obligation to all students! 26

27. Appendix

28. The Local Control Accountability Plan (LCAP) Then and Now • LCAP • May Revision . . . • Local goals focused on improved student outcomes • Goals aligned with annual spending plan • Adopted every five years and updated annually LCFF • Enacted State Budget . . . • Annual goals and specific actions based on state priority areas for the district and each school in the district • Description of expenditures implementing specific actions • Adopted every three years and updated annually 28

29. Oversight Responsibilities Then and Now • County and State Superintendent Oversight • May Revision. . . • Technical assistance • Approval and disapproval of local plans • Review data on eligible student counts • Stay and rescind actions of a local governing board LCFF • Enacted State Budget . . . • Technical assistance • Approval and disapproval of local plans based on adherence to SBE-adopted template and sufficiency of funds allocated for implementation of Local Control Accountability Plan (LCAP) • COE approval of plans and posting of plans for each district and each school in each district or a link to each plan on the COE website • Stay and rescind authority granted solely to Superintendent of Public Instruction (SPI) upon approval of the SBE 29

30. State Requirements Then and Now • State Requirements • May Revision . . . • Performance expectations • Expenditure requirements • Proportionality rule • MOE requirement until full implementation of LCFF LCFF • Enacted State Budget . . . • State priority areas explicitly stated • SBE will update standards and criteria for local budget adoption and make changes to API based on the LCFF • Proportionality rule less rigid allowing for schoolwide and districtwide expenditures subject to regulations to be adopted by the SBE • No mention of an MOE requirement 30

31. What Do I Have to Do and When Do I Have to Do It? • On or before July 1, 2014, and every three years thereafter, LEAs must adopt the LCAP using the template adopted by the SBE • The LCAP must include a description of the following: • Annual Goals • Based on state priorities for all students and “numerically significant subgroups” • Numerically significant: defined as 30 students with valid test scores at the school or school district – with the following exceptions • Foster youth – 15 or more students • Schools or districts with 11 to 99 students – defined by the superintendent with approval of the SBE 31

32. What Do I Have to Do and When Do I Have to Do It? • Specific Actions • What steps the LEA will take to accomplish the annual goals • Districtwide actions and actions by school site • Description of Expenditures • For each fiscal year of the plan, list and describe expenditures implementing specific actions included in the LCAP • List and describe expenditures serving “unduplicated” students and students re-designated as fluent English proficient 32

33. Adopting and Updating the LCAP • Changes from the May Revision: 4 3 2 1 • Adoption of the plan: • Adopted concurrent with the LEA’s budget • Submitted to COE for approval • Posted on district website • COE posts LCAP for each district/school or a link to the LCAP • Opportunity for public input: • Notice of the opportunity to submit written comment • Public hearing • The superintendent must respond in writing to comments received • Present for review and comment to: • Parent advisory committee • English learner parent advisory committee • The superintendent must respond in writing to comments received • Consultation with: • District Assistance and Intervention Team • Teachers • Principals • School personnel • Pupils 33