BILL ANALYSIS �
SENATE COMMITTEE ON EDUCATION
Alan Lowenthal, Chair
2011-2012 Regular Session
BILL NO: SB 1491
AUTHOR: Negrete McLeod
INTRODUCED: February 24, 2012
FISCAL COMM: Yes HEARING DATE: April 18, 2012
URGENCY: No CONSULTANT: Daniel Alvarez
SUBJECT : Education Finance: Fairness in Educational
Deferral Funding Act.
SUMMARY
Requires any inter-year (i.e., across fiscal years) K-12
apportionment deferral to be calculated in a manner that
would lessen the amount of the deferral for school
districts that have higher percentages of students that are
eligible for the free and reduced lunch program. In
addition, the bill would reimburse school districts for the
lending costs of any deferral, as specified.
BACKGROUND
Due to the state's fiscal crisis, cash management at the
state level has become a major component to balancing the
budget. In order to have more cash on hand, the state
enacted a series of apportionment deferrals for school
districts and local governments. These deferrals are
scheduled to continue, with some changes. For example, SB
82 (Chapter 12, Statutes of 2011) a budget trailer bill to
the 2011 Budget Act, implemented an additional $2.2 billion
in inter-year deferrals for K-14 education.
The state has enacted two types of deferrals: inter-year
(across fiscal years) and intra-year (within the fiscal
year). Inter-year deferrals defer payments required to be
made in one fiscal year to the subsequent fiscal year. For
example, in 2011-12, the state moved specified monthly
payments for K-12 schools from April 2012 to August 2012
and from March 2012 to August 2012. According to the
Legislative Analyst Office (LAO), in the current year a
total of $10.4 billion in Proposition 98 (K-14) payments
are inter-year deferrals.
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Intra-year deferrals defer state payments within a fiscal
year. For example, prior to the enactment of the cash
management legislation in the 2008-09 fiscal year, the
state paid school districts at several points in the year,
with large allocations occurring in July, October, and
March. Legislation enacted in 2009-10 deferred these
payments to later in the same fiscal year, which allows the
state to conduct less internal borrowing for the purposes
of having available cash.
ANALYSIS
This bill requires the Superintendent of Public Instruction
(SPI), to calculate any inter-year (i.e., across fiscal
years) K-12 apportionment deferral in a manner that would
lessen the amount of the deferral for school districts that
have higher percentages of students that are eligible for
the free and reduced lunch program. More specifically:
1) Requires the Superintendent of Public Instruction
(SPI) to determine the deferral amount for each school
district in the following manner:
a) Calculate a poverty factor equal to 100
percent minus the percentage of pupils in the
school district who are eligible for the federal
Free and Reduced Lunch program divided by 10.
b) For all school districts, calculate an
equal per average daily attendance (ADA) amount,
known as the base deferral amount, so that the
sum for all the school districts of this base
deferral amount, multiplied by the school
district's poverty factor, multiplied by the
school district's ADA, will equal the new
deferral amount.
1) Specifies that if a school district does not receive
the necessary state funds for the deferral, as
specified in any measure that required the deferral,
the SPI may defer the necessary amount from any budget
allocation or allocations for that school district to
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make sure the total amount for that school district is
deferred.
2) Requires, for any new deferral, the state to include a
lending cost apportionment to reimburse school
districts for lending cost of the deferral. The
lending cost shall include all appropriate costs,
including interest costs. The SPI determines whether
the lending cost apportionment is sufficient to
reimburse schools for their costs. If the SPI
determines the lending cost is insufficient, the SPI
may reduce the time period of the deferral
accordingly, as specified.
3) Prohibits categorical programs from receiving both a
deferral and a reduction in the same year, as
specified.
4) Specifies if local property tax revenues are increased
after January of a fiscal year because of actions by
state agencies or officials, any resulting reduction
in apportionments to school districts before January
because of this increase shall be treated as a
deferral.
STAFF COMMENTS
1) Need for the bill . According to the author, this bill
is needed to make sure that all school districts are
treated equally and insure that the state pays for
lending cost associated with deferrals. This is
especially important during these difficult fiscal
times when our schools have to make sacrifices in
order to solve the state's cash flow problem. Without
this bill the school districts with the neediest
student will pay more than their fair share.
2) Deferrals versus cuts, there is a difference . The
state has relied on deferring K-12 and community
college payments as a way to achieve budgetary savings
in difficult fiscal times and avoid further
programmatic reductions. Deferrals have been used by
the state to limit the necessity for making on-going
permanent reductions to K-12 and community college
districts. However, these payment delays place a
larger cash management burden on school districts. To
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access cash, districts can use existing budget
reserves or special funds. If internal resources are
insufficient, districts can borrow from private
lenders, their county offices of education, or their
county treasurer. If districts borrow from other
agencies, they are responsible for covering all
transaction and interest costs. Underlying all this is
the fact that school districts that receive a larger
proportion of their funding from the state bear a
larger burden of the deferral - the state cannot defer
what it does not allocate.
3) Unfortunately, the State's cash flow problems reign
supreme . The purpose of the deferrals, among other
things, is to improve the State's cash position
throughout the fiscal year, provide a higher level of
certainty to state bondholders, preserve external
borrowing capacity and affordability for the State's
bond programs, and provide a level of predictability
to affected programs and entities where deferral or
delays are required.
Persistent state budget deficits throughout most of
this decade led to the 2003 enactment of a deferral of
revenue limit apportionments to school districts and
county offices of education; this "inter-year"
deferral pushed apportionment payments that the state
was obligated to make into the subsequent fiscal year,
thus creating a one-time budget savings for the state
equal to the amount of the deferral. Deferrals such
as this have been used through the rest of the decade
as a tool to deal with budget shortfalls.
More recently the state has enacted "intra-year"
deferrals that push state obligations to school
districts, county offices of education and charter
schools to a point later in the same fiscal year.
Such intra-year deferrals do not cross fiscal years
and thus do not generate a direct budget savings;
intra-year deferrals, however, do reduce cash flow
pressure on the state, reduce the need for the state
to borrow in the short-run to bridge past that cash
flow pressure, and thus reduce the state's debt
service. The down side to intra-year deferrals is
that the cash flow pressure is transferred from the
state to school districts and other recipients of
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apportionments, since revenues are received on a
deferred schedule even though current expenditure
obligations remain. In most cases a school district
would react to this increased cash flow pressure by
borrowing either from i) other internal fund sources,
ii) the county office of education, or iii) the
private capital market.
4) Limited exemptions to deferrals . Current law includes
a hardship waiver process for local education agencies
(LEASs) who might not be able to meet financial
obligations if payments are deferred. In order to be
eligible for a hardship waiver, LEAs would need the
certification of the county office of education that
the deferral payments will result in the school
district being unable to meet its expenditure
obligations for the time period during which warrants
are deferred. The school district must demonstrate
that it has exhausted all internal and external
sources of borrowing and will need a state emergency
loan in order to meet its financial obligations. A
school district that is qualified or negative in
certification status is not deemed to automatically
meet the necessary criteria. A cash flow projection
of the school district must be included in
documentation requesting a waiver.
5) Proposed 2012 Budget begins process of undoing some
deferrals . The 2012 budget proposes to reduce K-14
deferrals by $1.8 billion, which lowers the total
ongoing inter-year deferrals to approximately $8.6
billion. This would help mitigate some of the
existing cash management problems that many school
districts and community colleges face as a result of
the state's late payments.
6) Redistribution of deferrals is better ? This bill
attempts to lessen the amount of deferrals of school
districts that have larger shares of "poverty" as
defined as larger percentages of pupils eligible for
free and reduced price meals (FRPM). Based on the
findings and declarations, if school districts with
higher percentages of pupils eligible for FRPM were to
receive a 10 percent reduction in their deferral, than
by default other districts with lower levels of pupils
of FRPM would need to make up the difference of any
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total deferral amount. Further using FRPM as a proxy
for poverty may not capture true economic distress in
an area - high school districts have historically
lower FRPM rates, not necessarily because of
ineligibility to the FRPM program, but rather due to
social and peer pressure factors of teenagers wanting
to participate in the program. In addition, some
school districts have high levels of FRPM, yet have
greater local revenues. Therefore, promoting equity
through greater redistribution of an "inequity" is not
truly a solution to the general issue, not enough
funding for education. By reallocating the deferral
burdens - additional program reductions or increased
borrowing fall to other districts. Though it would be
ideal to not have any deferral, redistributing the
overall deferral amount is not a true solution.
In addition, this bill provides that basic aid
districts must receive a proportion share of any
statewide deferral, based on the new criteria. Under
current practice, basic aid districts do have some of
their apportionments deferred. A general issue that
arises is that if the calculated deferral is too
large, the state may be in violation of the State
Constitution which requires these districts receive
approximately $120 per pupil. The state has generally
counted funding for categorical programs toward the
minimum $120 per pupil amount.
However, shifting the state's cash burden to school
districts is increasing the lending costs imposed on
school districts - as long as the school district is
borrowing in order to sustain educational programs.
Arguably shifting the cost of borrowing from the state
to school districts seems unfair, particularly since
the state is reaping the cash flow benefits. It would
not seem unreasonable that a portion of a school
district's lending costs should be borne by the state.
If it is the desire of the committee to move this
bill, staff recommends the following amendments:
a) Narrow the scope of the findings and
declarations consistent with the recommended
amendments.
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b) Clarify that for any new deferral enacted
after January 1, 2013, a portion of the lending
cost shall be reimbursed by the state at a level
not to exceed the State Pooled Money Investment
Account (PMIA)
c) Strike out remaining provisions of the
measure.
7) More information on cash options for school districts .
To alleviate cash shortfalls, many school districts
consider the following options:
a) Interfund borrowings . Current law provides
that moneys held in any fund or account may be
temporarily transferred to another fund or
account for payment of obligations, with certain
limitations, such as repayment of any transferred
funds in the same fiscal year, or in the
following fiscal year if the transfer takes place
within the final 120 calendar days of a fiscal
year. (Education Code � 42603)
b) Short-term borrowings from external sources .
If it is not possible to alleviate temporary
cash shortfalls by interfund borrowing, it may be
necessary for LEAs to borrow funds on a
short-term basis from external sources. Following
are some possible sources:
i) Tax Revenue Anticipation Notes .
Tax Revenue Anticipation Notes (TRANs) are
short-term, interest bearing notes issued
by a government in anticipation of tax
revenues that will be received at a later
date. The notes are retired from the tax
revenues to which they are related. Many
LEAs issue TRANs for cash flow management
purposes every year.
ii) County Office of Education .
Current law authorizes county offices of
education to loan funds to school
districts. The funds must be repaid either
within the fiscal year or within the next
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fiscal year, depending on the type of loan
that is granted. Certain other
restrictions apply, as indicated in the
applicable statutes. Such loans are
discretionary and are subject to
availability of funds at the county office
level. (EC � 42621 and 42622)
1) K-12 principal apportionments . Approximately 80% of
state payments to school districts are distributed
through the principal apportionment system. Under this
system, school districts receive payments for 21
programs, with funding distributed according to
monthly payment schedules set by law. The
apportionment schedule for most school districts is
generally uniform throughout the year, but has smaller
payments in July and August. (Current law also
authorizes two alternative payment schedules that
provide larger payments in the beginning of the fiscal
year. These schedules are used for small school
districts that receive a large percentage of their
funding from property taxes and, therefore, are more
cash poor at the beginning of the fiscal year.)
State revenue limit payments, which provide general
purpose funding for districts, represent about 80% of
the principal apportionment payment. In addition,
current law requires that 15 specified categorical
programs be paid using the principal apportionment
system. At its discretion, SDE makes payments for five
other categorical programs through the principal
apportionment.
SUPPORT
EdVoice
Public Advocates
San Bernardino City Unified School District
OPPOSITION
None on file.
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