Resources > Charter Currents > Charter Currents: Coronavirus-19 Update #11: It’s Official: The Recession is Here and Dampening Tax Revenues
Editor’s Note: CSDC is offering these Coronavirus-19 updates for public viewing, to members and non-members alike, and in front of our usual member’s only “paywall” as a service to the larger charter school community. We hope nonmembers will consider joining CSDC.
The Recession Is Here, State Financial Picture Deteriorates
Sacramento, CA—Massive job losses and an abrupt halt to economic activity make it clear that we have entered a recession, according to Legislative Analyst Gabriel Petek, speaking at last Thursday’s surreal hearing of the new Senate Special Budget Subcommittee on COVID-19 Response. Just a handful of senators and staff sporting homemade surgical masks assembled in the Senate’s largest, yet near-empty, hearing room. Petek and staff from Governor Newsom’s Administration presented via video from what appeared to be their home offices. The hearing started approximately one hour late after heavy use apparently crashed the Senate’s website.
Senator Holly Mitchell (D-Los Angeles) chairing budget subcommittee hearing on April 16.
While neither the Analyst nor Newsom’s staff offered specific figures, they did offer the following key points:
- The State of California is “likely facing a potentially significant budget problem” and revenues will be “insufficient to cover existing service levels.”
- The sudden nature of the economic downturn, combined with its late spring timing and the delay in the income tax filing deadline from April to July 15, will make it difficult for the state to estimate its revenues during this important budgeting season.
- Hope for a short, “V-shaped” recession where the sudden downturn is followed by a rapid recovery are fast fading.
- Past experiences with recessions indicate that the recession “will last several budget cycles” starting with the current 2019-20 fiscal year and perhaps lasting beyond 2020-21.
- A recession reflecting typical post-war economic cycles would cost the state an estimated $50 million in revenues. Preliminary data on this new recession, however, indicates that the new recession could be significantly worse than a typical one, and perhaps on par with the Great Recession during 2008-10, costing the state $35 billion in the current year and $85 billion in subsequent years.
- The extent of the economic downturn is likely dependent on two major, unknown factors: (1) the path taken by the Coronavirus and (2) the federal government’s response.
- A more optimistic scenario would result in a “U-shaped” recession curve, where the virus dissipates over the summer and the economy recovers sharply starting late this year.
- A less optimistic scenario is where the virus initially dissipates, but roars back in the fall leading to a longer, “L-shaped” recession curve with a more delayed recovery.
- The federal response, principally including the CARES Act’s $2.2 trillion stimulus, is helpful and further federal aid could prove critical to economic recovery. The federal role is critical because the federal government can both borrow and print money whereas the state is prohibited from doing so per the California Constitution.
As we’ve noted in our prior COVID-19 updates (see update #10 and view our early “fiscal prepping” webinar, if you haven’t already done so), school funding is in a very precarious situation in California, notwithstanding the state’s substantial budget reserves. Though it’s still much too early to know the specific impact that COVID-19 will have on school funding, the following points seem increasingly clear:
- Substantial funding cuts for public schools in California are a distinct possibility.
- The specific depth and timing of the cuts is unknown.
- Preliminary indications are that the new recession could be as bad as the Great Recession of 2008-09.
- The Great Recession resulted in K-12 education funding cuts in the range of 20 percent, along with substantial intra- and inter-year funding deferrals.
- Due to the lack of information about state revenues and the depth/severity of the new recession, the state likely will develop and adopt a “workload” budget in May and June for the 2020-21 fiscal year. It likely will substantially revise the budget after the start of the fiscal year, perhaps in August, after the deferred April 15 income taxes are due in July.
- Given this odd budgeting cycle, schools will likely need to adopt budgets this spring with very limited revenue data.
- Some of the impact of the recession may be mitigated by recent (see below) and future federal aid, though the amount and targeting of future aid remains unclear. Schools that do not participate in the federal Title I aid program should not count on any federal aid unless our advocacy efforts to broaden the targeting of this aid are successful.
- Other potential mitigation measures might include deferring planned pension (CalSTRS and CalPERS) contribution increases, reducing various mandates (we’ve suggested eliminating the Beginning Teacher Support and Assessment and other mandates, and others. To date, none of these has been enacted nor proposed in official legislative action.
- CSDC continues to strongly recommend that charter schools sharpen their cash flow and multi-year financial modeling capacity.
- Where CSDC previously suggested modeling relatively modest cuts assuming a “V-shaped” recession curve, CSDC now suggests modeling a “less pessimistic,” zero COLA scenario and a “more pessimistic” (e.g., 10-20 percent cut) range for 2020-21, until the revenue picture clarifies.
- To avoid over-appropriating the constitutional “Prop 98” funding guarantee, CSDC presumes that the state will need to defer some state aid from the current, 2019-20 fiscal year into the 2020-21 year. As such, we presume the usual May and/or June Principal Apportionments could be subject to delay. If so, we hope any such deferrals would be short, into very early July.
- Based on our discussions with Newsom Administration and CDE staff, we presume that the Governor will soon issue an executive order suspending the upcoming local control accountability plan (LCAP) adoption mandate, instead shifting it to late this calendar year. Stay tuned for a forthcoming and more detailed update from CSDC on point.
Federal CARES Act Funding
The federal CARES Act allocated $13 billion for an Elementary and Secondary School Emergency Relief Fund, part of a larger Education Stabilization Fund. We anticipate that these will provide an 83 percent boost to schools’ 2019-20 federal Title I, Part A entitlements, thereby providing some significant initial relief to those schools. Direct-funded charter schools should receive these funds directly. Locally-funded charter schools, however, will need to work with their sponsoring district to ensure that they receive their fair share of these funds.
Based on our discussions with federal officials, CSDC anticipates and is advocating for the federal government to enact additional economic stimulus legislation. The specific level of funding, allocation formulas, etc., are unknown at this time. CSDC is advocating for all schools, including those that opt not to participate in the bureaucratic Title I program, should share in funding and that if the funds are to be targeted towards disadvantaged students, for using family income rather than Title I allocations as the basis for allocating the funds. Schools may want to suggest the same to their congressional representatives.
Charter Facilities Grant Funding Shortfall Growing
The California School Finance Authority (CSFA) issued a memo noting that they anticipate deeper deficits in funding for the Charter School Facilities Grant Program. This popular program reimburses up to 75 percent of two types of costs: (1) rent/lease costs and (2) other lease-related costs (i.e., specified remodeling, maintenance, improvements, etc. costs), not to exceed a per-ADA cap ($1,184/ADA for 2019-20) for schools serving communities with high proportions of low-income students.
The fixed, $136 million appropriation contained in the 2019-20 state budget was the only item in the state budget this year that was not augmented by the legally mandated cost-of-living adjustment (COLA). This funding is insufficient to fund the approximate $161 million in estimated claims, according to CSFA. Law calls for first reimbursing the lease/rent cost pool, then using remaining funds to reimburse “other” costs. If funds fall short, reimbursements for the “other” costs pool are shorted on a pro-rata basis. If funds remain short after zeroing-out “other” costs reimbursement, rent/lease costs are pro-rated down to the level of available funding.
For the 2019-20 fiscal year, CSFA currently estimates that zero “other” costs will be reimbursed while an estimated 95 percent of rent/lease costs will be reimbursed. These figures are estimates and are subject to change. While CSDC anticipates that reimbursements will be a bit higher than CSFA’s current estimates given their slightly conservative methodology, the 95 percent figure is sound for conservative budgeting purposes.
For the upcoming, 2020-21 fiscal year, the Governor’s January budget proposal included a COLA (but not backfilling the prior year deficit). Whether the COLA will be funded seems increasingly suspect given deterioration in the state’s finances. As such, CSDC suggests assuming zero reimbursement of “other” costs and reimbursement of 90 percent of “other” costs for the 2020-21 fiscal year.
CDE/SBE Apply for Multi-Pronged Federal Waiver
The California Department of Education and State Board of Education are applying for a multi-part waiver to the U.S Secretary of Education. If granted, the waiver would:
- Flex the usual cap on schools’ ability to carrying-over federal Title I funding across fiscal years. Under normal rules, schools generally may only carry over up to 15 percent of their Title I funding, with exceptions allowed once every three years. The waiver would flex the once-in-three-years limitation.
- Flex needs assessment, content-area spending, and technology spending limitations of the Title IV program.
- Flex professional development spending limitations in the Title II program, presumably giving LEAs additional flexibility to spend the funds on training staff to provide distance learning.
Secretary DeVos appears to be granting such waivers liberally and we anticipate California’s request will be reviewed and approved soon. CDE is hosting a webinar on April 23 to discuss the waiver—click here to register for it.