Not Exactly a Cut But Delayed School Payments Have a Cost

Among the budget-related bills approved by the Legislature March 16 was one that postpones $5.2 billion in state payments to public schools.

Since the fiscal year ending June 30, 2008, the state has shorted public schools $18.6 billion that schools are owed under the formulas dictating annual state support. More than $6 billion of the $18.6 billion was offset by one-time federal economic recovery aid.

During the same period, the state also postponed $6.3 billion in payments to schools, causing numerous school districts to cut staff or borrow at their own expense  – with interest – to cover their costs while waiting for the state to send its checks.

“We’re deferring close to 20 percent of school payments that we’re asking schools to spend in one year (and) we are paying for them in the next fiscal year,” Legislative Analyst Mac Taylor told the California State PTA on February 8. “That’s kind of crazy, really. And yet it’s a little like crack-cocaine – it’s hard to get off once you start doing it. And I don’t know how we ever unwind from this.”

Under Gov. Jerry Brown’s proposed January budget, the level of deferred payments climbs to 21 percent of total school payments.

Brown sought to postpone $2 billion more in payments to schools, which are supposed to be paid on a schedule in which 5 percent of the annual total arrives in July and August, and 9 percent in each of the remaining 10 months of the fiscal year.

The Legislature agreed.

In the last three years, the state’s payment schedule for schools has been stood on its head.

There were $1.1 billion in payments to school deferred during the fiscal year that ended June 30, 2008.

In the budget enacted in February 2009, lawmakers and then Gov. Arnold Schwarzenegger postponed $2.6 billion in payments from February until July, the following fiscal year.

These shifts allow the state to save money in one fiscal year although it incurs a like-sized loss the following year when the payments are made.

So — although Taylor puts it more colorfully — the state needs to keep deferring or pay off.

As a consequence, in July 2009, lawmakers and Schwarzenegger deferred $1.7 billion in payments.

In October of 2010 they increased the size of previous deferrals by more than $1.7 billion.

Initially, when the state began postponing school payments in the fiscal year ending June 30, 2002, the duration of the payment delay was a matter of weeks – money due in June was paid into July, the subsequent fiscal year.

But in the past three years, the length of the delays has widened significantly.

“More recent deferrals shifted payments by several months, placing a significant cash burden on school districts,” the Legislative Analyst wrote in a January 24 assessment of the impacts of postponed school payments.

The measure lawmakers sent to Brown March 16, SB 82, authorizes a variety of deferred payments but stipulates that a total of no more than $2.5 billion in delayed state payments to schools will be outstanding at one time.

The bill calls for the bulk of two $1.4 billion payments due schools in July and August to be deferred until January 2012. In September, the bill calls for $700 million of the postponed $2.8 billion to be paid.

An October payment of $2.4 billion is also postponed until 2012, totaling $5.2 billion in delayed payments in the bill.

The measure calls for the remaining $4.5 billion left after the $700 million September payment to be sent to schools in January 2012.

But the deferrals don’t stop there: In March 2012, $1.4 billion in payments are pushed off until the following month.

“(This bill allows) time (for districts) to plan for their needs before the beginning of the fiscal year,” Sen. Mark Leno, a San Francisco Democrat, told his colleagues in describing the bill.

The Legislative Analyst and school districts take a somewhat dimmer view of such deferrals.

Such postponements create a “large, ongoing out-year obligation” for the state because “repaying for prior-year deferrals becomes first call on current-year monies,” the analyst wrote in January.

And to keep from paying off, the state keeps postponing sending its checks.

“In short, the state has been continuing to use new deferrals to support programs in excess of available state funding,” according to the analyst.

The issue is more prosaic for schools. They must either cut programs or services or use reserves — lowering the amount of interest those monies can earn — or borrow from private or public lenders.

A November 2010 report by Moody’s Investors Service said the budget enacted in October would have a “negative influence” on the credit of school districts because of cash flow problems created by the state’s deferrals.

In February, for example, the Glendora Unified School District’s board approved up to $5 million in what are called Tax and Revenue Anticipation Notes, tax-exempt, short-term borrowing instruments.

While interest rates fluctuate, the district paid $50,000 — 1 percent — on $5 million in notes it took out in 2010.

Similar conditions exist throughout the state  — even in the state’s more affluent counties like Marin.

“Regardless of where we borrow – whether it’s a tax revenue anticipation note, a county loan or our funds – the interest rate and time line we’ll face is a big penalty to use and one that we had not anticipated,” Novato Superintendent of Schools Jan La Torre-Derby told the Marin Independent Journal in an August 25, 2010 interview.

“When the state gets money, they should be able to give us the money they owe in a timely manner.”

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