Where Has All the Surplus Gone? Gone to Classrooms Everywhere

Public schools will be the biggest beneficiary by far of the revised budget Gov. Jerry Brown unveils May 14, receiving the bulk – if not all — of the $4.5 billion in unexpected revenue the state has received this year.

The Democratic governor wants to use the money to both augment the budgets of the state’s more than 1,000 school districts and erase several billion of the remaining $8.2 billion in postponed payments to schools made in past budgets.

Paying off those deferrals would effectively place more money in school coffers during the new fiscal year, which begins July 1.  

Since January, Californians have paid $4.5 billion more than Brown expected in the $138 billion spending plan he unveiled in January.

This spike in tax receipts could be a one-time cash-out to escape higher federal rates that took effect this year. It could stem from increased state taxes approved by voters in November’s Proposition 30. A recovering economy could be  the trigger.

Perhaps it’s a combination of all three. Neither Brown nor legislative budget writers know for sure.

But they do know most of the new cash will be sent to schools and community colleges.

Under a series of formulas approved by voters in November 1988 as Proposition 98, schools and community colleges are guaranteed at least 40 percent of all dollars flowing into the state’s general fund.

Forty percent equals $1.8 billion of the $4.5 billion in unanticipated revenue.

Budget writers in both the Legislature and the Brown administration have warned since January that schools and community colleges could get far more than $1.8 billion.

“These additional revenues raise a number of challenging questions for the updated budgetary forecasts to be released in mid-May,” the Legislative Analyst said May 1.

“The corresponding improvement to the state’s financial bottom line may be more limited than suggested by the $4.5 billion. This is because a large portion of the additional revenues may be required to be allocated to schools and community colleges.”

In February, the analyst said “higher revenues in (the fiscal year beginning July 1, 2012) could have substantial benefit for schools and community colleges but provide little, if any, benefit for other state programs.”

Here’s why:

Proposition 98 requires repayment of money the state has shorted schools, which is estimated at some $9 billion.

Repayment of the debt is limited by Proposition 98 limits to years when the state is financially flush.

“Flush” is defined as when general fund revenues grow at a greater clip than annual growth in personal income.  When that happens the percentage of new state revenue sent to schools climbs to 55 percent.

This is one of those “flush” years.

The general fund for the fiscal year that ended June 30, 2012 was $84 billion. Brown said In January the general fund during the current fiscal year would be nearly $93 billion, a 9 percent increase.

California is now $4.5 billion above that number – roughly $98 billion. That’s more than a 14 percent increase.

In March, the Bureau of Economic Analysis at the U.S. Department of Commerce said personal income growth in California was 4 percent in 2012.

This year’s spike in state revenue probably won’t occur next year. If it doesn’t, schools won’t be owed as much for the fiscal year starting July 1.

One way the Democratic governor can keep school funding at or above current levels is by using a chunk of the $4.5 billion to eliminate some of the state’s $8.2 billion in deferred payments to schools.

Brown has already proposed to retire $1.9 billion in deferred payments in the budget he introduced in January. He plans to pay off the remaining deferrals by June 30, 2017.

He will likely earmark some of the $4.5 billion to eliminate more deferrals.

The more deferred payments retired during the current fiscal year, the more cash schools will have in-hand next year when the state’s obligation is lower.

It is possible that the entire $4.5 billion will be sent to schools since the state must make up the difference if other sources of revenue for schools fall short.

More than $13.7 billion of school funding this year comes from local property taxes.

In his January budget, Brown predicts that local property taxes will be $618 million lower for the fiscal year beginning July 1. The state is picking up that $618 million shortfall.

If local property tax collections are even lower than predicted, which appears to be the case, the state must cover that amount as well, eating up more of the $4.5 billion.

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