The intent of this write-up is to provide advisory notes for school districts across the state of California as they execute their budgets for FY 2022-23.
At present, gas prices are at record levels, inflation is above the 9% threshold, housing prices are in uncharted territory, and the Federal Reserve is anticipating raising interest rates – again. The stock market has endured major losses since January and the COVID pandemic alarms are still sounding after two years. Supply chain issues persist and economists are predicting a recession in the next few months. This doesn’t paint a very encouraging picture as the new school year starts in a few short weeks.
Numerous districts are experiencing declining enrollment, and labor shortages for both certificated and classified employees. Many employees have retired or are considering retirement causing changes in senior leadership as superintendents, assistant superintendents, and individuals in other management positions retire. This phenomenon has contributed to a major “brain drain” for districts.
Conversely, California state tax revenues have exceeded expectations; providing the state with plenty of cash to support and aide public entities like school districts. With the approval of the FY 2022-23 California state budget, K-12 public education has received significant ongoing and one-time funding support in numerous areas. The following list illustrates these funding increases:
- Local Control Funding Formula (Cost of Living Adjustment): Approx. 13% ongoing increase
- Learning Recovery Emergency Block Grant: Approx. $2,400/Average Daily Attendance (ADA) one-time increase
- Arts, Music, and Instructional Materials Discretionary Block Grant: Approx. $666/ADA one-time increase
- Expanded Learning Opportunities Program: Approx. $2,750/ADA or $1,250/ADA one-time increase depending on the district’s unduplicated pupil percentage
- Other Areas Receiving Additional Funding Support: Transportation, school facilities, universal transitional kindergarten, and special education
ADVISORY NOTE 1
These initiatives will generate significant revenue increases for districts. Those experiencing financial difficulties will most likely be made “whole” with this additional funding, and they will also be able to reduce, if not eliminate, any deficit spending. However, these initiatives will also generate an equal if not greater demand on the expenditure side of the ledger. The pressure to increase expenditures will come from multiple fronts. District fixed costs will continue, e.g., step and column increases, and health and welfare benefits. Pension liability increases will also continue for the foreseeable future. Materials and supplies, operating expenses, and professional services will also be subject to inflationary pressures that school districts will have to absorb. Lastly, with inflation above 9%, organized labor will put tremendous pressure on school districts to transfer these revenue increases directly onto the salary schedule and pay for the increases to health and welfare benefits.
ADVISORY NOTE 2
The issue of declining enrollment, which usually manifests itself as deficit spending, will temporarily be masked by the additional revenue and healthy reserves. Because of declining enrollment, districts should be evaluating/reviewing their staffing to ensure they are not overstaffed. In preparation for FY 2023-24, and in order to avoid the “layoff gauntlet,” districts should be exploring potential retiree positions not being backfilled as well as review all temporary employment contracts. Another effective way to provide a soft landing for staffing reductions is to explore retirement incentives in order to reduce staffing without layoffs. In summary, even though the state of California has adopted a solid budget for K-12 public education in FY 2022-23, the seeds of financial distress are usually planted when there is an abundance of funding.
Be vigilant and remain cautiously optimistic.
