(Photo by Julie Leopo/EdSource)

A fraction of 1 percent is creating stress for school superintendents.

California districts have been building their budgets for next year under the assumption they’ll get a 3 percent cost-of-living adjustment. Instead, Gov. Gavin Newsom has included an adjustment of only 2.29 percent for K-12 schools in 2020-21.

Districts are complaining that the difference — while less than three-quarters of 1 percent — is compounding an already financially fraught year, in which there’s not enough money to cover basic operating expenses. They argue they’re already facing steadily rising employee pension expenses, higher special education costs and the impact of an increase in the minimum wage. And half of the state’s districts have experienced a decline in enrollment over the past decade, compounding their dilemma, since revenue is tied to student attendance.

For a district like Elk Grove Unified, the state’s fifth-largest with about 60,000 students, the gap between the COLA that districts expected and what they’ll likely receive is $4.5 million. Statewide, it’s an average of $72 per student. To make up that $72 difference and a larger revenue shortfall, districts like Elk Grove that have squirreled away enough funding will likely deficit spend and draw down reserves. (For now, Elk Grove has a more immediate challenge. On Saturday, it became the first district to cancel school, for a week, after family members, but no students, had tested positive to the virus and were placed in quarantine.)

Some of those without adequate reserves are giving preliminary layoff notices to teachers by the March 15 statutory deadline. They include Sacramento City Unified, which will serve notices to 50 teachers, Oakland Unified, which will lay off up to 100 central office and other positions, and West Contra Costa Unified, which plans to notify 230 teachers their jobs may be eliminated. The state doesn’t formally collect data on initial pink slips, so it’s not clear how many districts plan to lay off staff.

To ease their burden, school districts and the organizations representing them are clamoring for Newsom to include more money for basic expenses in the revised budget he’ll release in May. A 2.29 percent COLA would provide $1.2 billion to the Local Control Funding Formula for K-12 schools. A 3 percent COLA would require $450 million more.

To accommodate a larger increase, Newsom would have to divert some of the one-time funding he wants to spend on recruitment programs to address teacher shortages, such as teacher residency programs. He was also planning one-time funding to fix the state’s lowest-performing schools and on expanding community schools. That’s what Elk Grove Superintendent Christopher Hoffman said Newsom should do. He favors converting some one-time funding into ongoing operating revenue; a second choice would be to use one-time funding to pay down districts’ unfunded pension liabilities for a year or two, which would free up money for districts to use as they want.

Steve Ward, legislative analyst for Clovis Unified, agrees with Hoffman. “If you polled districts, what would they prefer?” he asked. “There is a need for more trained teachers but there’s an immediate need for more operating dollars.”

The California Department of Finance uses a federal index measuring the cost of purchasing goods and services to set the annual COLA for K-12 schools. The state budget the Legislature passed in June for the current fiscal year included the COLA for 2019-20 and the forecast for two following years. The department revised the forecast in Newsom’s January budget, and will update it again in May. The Legislative Analyst’s Office is predicting the COLA will end up lower still, about 2.1 percent.

Michael Fine, CEO of the Fiscal Crisis Management and Assistance Team, or FCMAT, a state agency that assists districts with financial matters, said that a 2.29 percent COLA is consistent with previous COLAs.

The problem is that COLAs no longer are big enough for districts to cover their expenses. They don’t match increases in mandated spending for employee pensions the Legislature imposed, or for the growing numbers of students with high-cost disabilities, mainly autism.

For most districts, the break-even point would require a 4 percent increase in base revenue, Fine said. Investments in new programs for all students and salary increases would be in addition to that. Critics of the Local Control Funding Formula have charged that districts have been siphoning extra money dedicated for English learners, low-income, homeless and foster youth to cover base expenses and raises.

Ward said he had predicted this dilemma. In the first half-dozen years after the Legislature passed the funding formula in 2013, former Gov. Jerry Brown put much more than a COLA into the funding formula. Brown set yearly targets for spending for all districts to reach pre-recession levels in seven years, what the law defined as “full funding.” So it didn’t matter what the COLA was. In 2015-16, Brown boosted the funding formula by a record 13 percent. The post-recession economic boom and a surge in revenue from higher taxes on the wealthiest Californians made that possible.

But since the funding formula reached “full funding” in 2018-19 — two years ahead of schedule — funding has switched to cost-of-living increases. “We could see on the horizon that districts would be in trouble under COLA-only, when fixed costs kept growing,” Ward said.

Last year, the Legislature was on the verge of establishing a new set of yearly revenue targets for the funding formula, with the goal of substantially raising the state’s per-student funding to at least the national average. But there was no accompanying tax or revenue proposal, and the author of Assembly Bill 39, Assemblyman Al Muratsuchi, D-Torrance, withdrew the bill to have discussions with the Newsom administration. Muratsuchi hasn’t revealed the result of the meetings, but he told EdSource he plans to proceed with the bill this year.

Under the current budget, the COLA is 3.26 percent. But Newsom also dipped into the state’s general fund to provide $700 million in relief from payments to CalSTRS, the teachers pension fund. Half of that amount would go toward 2020-21. Sara Bachez, the assistant executive director of governmental relations for the California Association of School Business Officers, said her organization is encouraging Newsom to increase pension relief to free up more operating revenue for districts.

Despite the gloomy predictions, by one closely watched measure the state’s districts appear to be doing fine. Twice a year, FCMAT releases a list of school districts that acknowledge problems balancing current and future budgets. The latest report, issued last month, lists 38 districts with a “qualified” rating, meaning they could go insolvent over the next two years. It gave a “negative” rating to five districts, including Sacramento City Unified and Sweetwater Union High School District, which could face a state takeover this year or next year. That’s the same number of negative ratings and four fewer qualified ratings than a year ago.

But the latest report was filed before Newsom released his budget in early January with the revised COLA. John Gray, president of School Services of California, a Sacramento-based consulting firm for districts, said that many districts settled labor contracts based on projections of a higher COLA. The lower COLA, he said, “will strain a lot of budgets, and we can expect more districts will show up in financial distress.”

Initial numbers for the second financial report should be out later this month.

Story originally published by EdSource.

John Fensterwald