Transcript Communicating Bad News

Small School Districts Association
Summer Conference Shell Beach
July 9, 2010
Budget Update
Joel Montero, FCMAT
Overview
• The Economic Environment—How It’s Changing the Game
• The Current Status
• Strategies for Stabilizing the Budget
• Cash
• AB 1200 In Times of Crisis
• Education and California Spending
• Question
California Economics-A Moving Target
• Revenues Stabilizes but Assumptions Fail
• Consumer Confidence Improves in 2010…but
• Housing and Property Taxes
• Unemployment
• Recovery and the Lag
• Why Small Districts are Disproportionally Impacted
Signs of Recovery
• Median Home Prices have risen for 11 consecutive months
($250,000 to $310,000)
• Sales Tax Revenue has exceeded estimates for four consecutive
months ( up 2.5% for 2009-10)
• General Fund Revenue ~$1 billion above estimates for January
• General Fund Revenues now $1.7 billion above estimates for 2009-
10.
What’s The Status?
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There is a economic crisis
Our state has a structural deficit that is growing
State revenues seem to be stabilizing
The May revise still has approximately $2 billion
reduction to education
• June revenues up again by $200 million
The Current Status—May Revision
• $19.1 billion deficit at June 30, 2010
• Significant downside risk on Revenue Assumptions
• Readjust $6.9 billion from Feds (Politics!)
• CalWORKs Welfare to Work, Home Health Care,
Childcare (Impact to Prop. 98)
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2010-11 Negative COLA -0.39%
Gas Tax Swap
$1.1 billion Property Tax Offset
Elimination of “Admin. Cuts” Language
Cash Deferrals Alive and Well
Testing and Data Management
California Rankings
• CA has 2nd highest student to teacher ratio in the
nation
• Spending per ADA was $8605 in 2008-09 placing CA
at 44th in the nation
• Teacher salaries in CA average $68,093 compared to
a national average of $54,319
• Californians spend $14 per $1000 in personal income
on education, 45th in the nation
• CA is 3rd in the nation in spending on prisons, 3rd in
police and fire protection and 11th on health/hospitals
Source: National Education Association annual report: “Rankings and Estimates for 2010 ”
Comparison of Major General Fund Expenditure Areas
1998-99 Through 2010-11
(Dollars in Billions)
1998-991
2010-112
% Increase
K-14 (Prop. 98) Expenditures3
$35.2
$49.9
41.8%
Health & Human Services
$15.3
$21.0
37%
Business, Transportation & Housing
$0.4
$.9
125%
Corrections
$4.4
$7.9
80%
Resources
$1.0
$1.7
70%
General Fund Revenues
$57
$89.3
57%
1Legislative Analyst’s Office. State spending Plan: 1998-99. October 1998, Page 4, Revenues & Expenditures; p. 26 Proposition 98
2Departemnt of Finance. Governor’s Budget Summary, January, 2010 (includes all proposed budget solutions)
3Includes Local Property Taxes and General Fund Spending
June Cash Figures
• June receipts rose by $200 million above the estimate
in the Governor’s January budget
• PIT equals $600 million above the May Revision
estimate
• Corporate tax collections fell about $100 million in
June
• State cash is deficit at June 30th at $17.9 billion
• Sales and Use Tax receipts generally strong since
November 2009 but have been flat for the past three
months
AB 1200 Issues for Small School Districts
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Budget Adoption 2010-11
The May Revise and Budget Revisions
Qualified and Negative Certifications at 2st Interim
The Watch List continues to grow
Emergency Apportionments for 2010-11?
Why Districts Fail
The Top 5
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Overly aggressive estimates of enrollment, attendance, and ADA
Loss of control of staffing costs—total compensation
Bad decisions in collective bargaining
Chronic, unplanned deficit spending
Board/staff dysfunction
Cash Is The Name Of The Game!
Overview
• What’s the big deal about Cash?
• Finding Cash when you need it
• The consequences of running out of cash
• Recognizing trouble
Budget
• The budget is a stack of papers with numbers that are
a virtual representation of how much you will earn
(income/revenue), how much you plan to spend
(expenditures), and the balance (negative or positive)
when it’s all done.
• The budget may represent the policy and conceptual
priorities of the organization.
• There is “really” no cash in the budget!
What is Cash?
• Cash is what you have liquid or available on demand
• Funds in the County Treasury
• Funds in banks
• Funds in revolving accounts
• Funds with fiscal agents
• Funds in funds?
What is Simple Cash Flow?
• The difference between the available cash
balance at the beginning of an accounting
period compared to the available cash balance
at the end of the accounting period.
• Cash flow is the actual inflow and outflow of
funds.
• Negative cash flow can be mitigated by
borrowing
What is Cash Insolvency?
• Generally speaking Cash Insolvency occurs when the
cash in payroll exceeds the cash available in the
county treasury (or other possible sources of cash)
and all options for borrowing have been exhausted.
• Cash insolvency is a limited function of deficit
spending, erosion of fund balance, and sustained
negative cash flow over time.
So, What’s the Big Deal?
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The old days…..
Loss of revenue and cuts
Cash deferrals
Changes in apportionment schedules
Erosion of fund balance and reserves in all funds
Limited borrowing options
Finding Cash When You Need It
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LEAs can borrow to meet cash flow demands both internally and externally
There are rules!
• Cash flow loans are short term—generally within the fiscal year
• Proceeds from borrowing can be used for any operational purpose
Internal borrowing—EC 42603
• Term—within the fiscal year, or……
• Only 75% of the cash in the “donor” fund
• The receiving fund must earn enough to pay back the loan?
• But what about Fund 21??
External borrowing
• Tax and Revenue Anticipation Notes (TRANs) GC 53852
• From your COE—EC 42621, EC 42622
• From your County Treasurer—EC 42620 (last Monday in April)
The Consequences of Cash Insolvency
• If you run out of cash, it’s “game over”
• You can receive an authorization for an emergency
appropriation, but…..
• The local governance options is lost
• The superintendent loses their job
• It’s expensive!
• AB 1200/2756
K-12 Inter Year Deferrals
June to July
$1.4 B
February to July
$2.6 B
May to August
$1 B
April to August
$679 M
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
New Intra Year K-12 Deferrals
July ’09 to December ‘09
$1 B
Aug ’09 to Oct. ‘09
$1.5 B
Nov. ’09 to Jan. ‘10
Blue – 2009-10
Red – 2010-11
$1 B
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
July ’10 to Sept. ‘10
Up to $2.5 B
October ’10 to Jan. ‘11
Up to $2.5 B
March ’11 to May ‘11
Up to $2.5 B
Jan
Collective Bargaining
• There will be no new money in 2010-11 and probably beyond
(total RL deficit 18.355%--SSC Dartboard)
• Categorical flexibility will be volatile—consider as one-time
money (for a duration of 5 years)
• Costs for health benefits will continue to rise
• You must bargain to shorten the school year
• Beware multi-year contracts and “COLA”
Negotiations Process
What Can Districts Do Now in Anticipation of an
Uncertain Fiscal Environment
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Plan—Current plus at least two years and five years if possible
Review your Assumptions regarding Interest Income
Spend Restricted Dollars First and Conserve Cash
Stay Current With Enrollment and Staffing
Build Reserves/Fund Balance If Possible
Be Careful About Debt including OPEB Bonds
Manage Cash
Forego Big/Expensive Budget Decision Where Possible
Don’t Put All of Your Hopes In the Flexibility Basket
Remember, This Is a Multi-Year Issue!
Stabilizing Budgets For Small Districts
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Budget for the core program
Close tier 3 categoricals
Re-evaluate categorical administrative ratios
Instructional services must compete
Review all funds
Collective bargaining
What’s Likely?
• Additional reductions/corrections in 2010-11?
• Additional cash deferrals?
• Receipt of more stimulus (ARRA) dollars?
• Additional categorical program impacts?
• Recovery soon?
What’s Next?
• The July 1st Budget
• Waiting for the State to adopt a budget—when?
• When can we reasonably expect a positive COLA
• What numbers do we use to build the 2010-11 budget
• Recovery?
Final Considerations
• Budget Risks Remain to the Downside
 2009-10 revenue strength not sufficient to override questionable 2010-11 revenue
assumptions
 Loss of Temporary Tax Revenue in 2011
• Assess and Establish Local Priorities
 Budget Reductions
 Categorical Program Flexibility
• Protect and Maximize Your “Local Control”
• Leadership in Challenging Times
 Promoting an Ethical Environment
 Acting with Authenticity and Transparency
 Developing Trust
Summary
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The fiscal management game for public agencies has changed in CA.
The state’s budget situation is tenuous but improving?
Community Colleges are vulnerable in this budget.
In the final analysis fiscal failure is still caused by the same old things.
Community colleges are now and will continue to be the destination of
choice for most post-secondary students.
Cash flow and Cash insolvency are misunderstood by most administrators
and governing boards.
We are far away from an adopted budget for 2010-11.
As always conservative planning is key.
FCMAT is an group designed to assist education agencies