Officials project school budget deficit of $19B

The overall projected state general fund budget deficit of $68 billion could also jeopardize 5% annual increases for the University of California and California State University systems that Gov. Gavin Newsom had agreed to, as well as children’s services not covered by Proposition 98.

The projected shortfall is the largest financial challenge schools and community colleges will face since the Great Recession budget of 2009. However, the LAO said that schools are better positioned now because of an education rainy-day fund that the Legislature was required to sock away in the record-high revenue years of the past half-decade.  

Edgar Zazueta, executive director of the Association of California School Administrators, cautioned that state leaders must avoid the sort of harsh cuts made during the Great Recession. They included forcing districts to borrow billions of dollars with the expectation they would be repaid later.

“Fortunately, we have tools, including the Proposition 98 reserve, that we can leverage to protect Proposition 98 funding levels,” he said. “Even during fiscal times like these, public education must be prioritized and protected. We must continue to build on our state’s great momentum and investments that have been made these past few years.”

The LAO report lays out several options to balance school spending, some of them jarring for schools and community colleges.

One option is for the Legislature to preserve TK-14 funding approved last June and find the full $68 billion in cuts in the general fund. That would spare schools, but other programs for children outside of Proposition 98 funding would more likely be hit, including support and subsidized costs for child care.

The opposite approach — the most painful to schools and community colleges and politically risky for legislators — would be to revise the 2022-23 and the current 2023-24 Proposition 98 funding downward to meet the minimum required by law. That would slash funding by $9 billion from 2022-23 and $6.3 billion for the current year, with a ripple effect of lowering the minimum guarantee for 2024-25 by $3.5 billion.

The Legislature could ease the burden by draining the $8.1 billion rainy day fund. That would still leave about $10 billion in cuts. Billions of dollars in one-time funding, whether unspent so far this year, or allotted by the Legislature for the next several years, could be targets. These could include $1 billion as yet unallocated for developing community schools or money set aside for learning recovery and for after-school extended learning time. It could be politically unpopular for legislators to make significant school cuts in an election year. And they would have to approve a resolution that there is a fiscal emergency to reduce the Proposition 98 appropriation.

The third alternative is somewhere in the middle — cuts to K-14 and cuts from other general fund programs.

The Legislature had an inkling that economic conditions were worsening but no hard numbers when they passed the 2023-24 budget in June: The deadline for paying state and federal income taxes had been extended from April 15 to Oct. 16. So they didn’t know the impact on state revenues in 2022-23 and 2023-24 from slowing home sales, a drop in new startups in Silicon Valley, and from declining income of the top 1% of earners, who contribute 50% of the personal income tax receipts.

The LAO cautioned that economic conditions are volatile, and revenues will remain unpredictable. A graph of its revenue outlook shows slow growth in 2024-25, with a large gray penumbra of uncertainty above and below that line.

Kevin Gordon, president of Capitol Advisors Group, an education consulting company based in Sacramento, said he was pleased that the LAO listed several options and did not recommend resetting funding to meet the Proposition 98 minimum, with “devastating cuts.”

“The numbers are worrisome, but the approaches laid out are significant efforts to demonstrate how lawmakers might work to protect basic investment in education funding,” he said.