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California Schools Feeling the Pinch

ALAMEDA, Calif. — California’s seemingly intractable budget and cash-flow problems have hit school districts hard, forcing many to enter into increasingly complex arrangements to keep cash flowing, experts said.

The large majority of California’s more than 1,000 school districts are heavily dependent on state funding for operations, and school funding takes the largest share of the state’s general fund budget pie.

That’s a problem for school districts because the state has less money to spend than it did three years ago. General fund spending in fiscal 2010 was $87 billion, down from $103 billion two years earlier, according to the Legislative Analyst’s Office.

For K-12 schools, budget writers and lawmakers have limited outright cuts by using deferrals — rescheduling to a later date payments the state is scheduled to make to school districts.

“In general, the deferrals have gotten larger and spanned longer periods of time,” said Standard & Poor’s analyst Gabriel Petek.

It’s not small change, either. The state plans to defer $7.4 billion of payments due to schools in fiscal 2011 until after fiscal 2012 begins July 1.

Gov. Jerry Brown took office this year pledging an honest and accurate budget, but school payment deferrals represent one can he plans to keep kicking down the road.

In fact, the budget proposal he made in January would add $2.1 billion in new deferrals shifted from fiscal 2012 to fiscal 2013, and defer some scheduled payments by seven months, according to an LAO report released in February. At the moment, the longest single deferral is for five months.

The deferrals have made it much more complicated for school districts to manage their cash flows. Typically, California’s districts smooth out cash requirements through the year by issuing tax and revenue anticipation notes.

But Trans issued for one fiscal year need to be repaid with revenue from the same fiscal year.

“If it crosses a fiscal year, then it becomes a debt,” Petek said, which means voters would have to approve it.

But when money a district is owed in one fiscal year is not paid until several months into the next, it’s hard to track.

“This is becoming increasingly complicated from a cash-flow perspective,” Petek said.

“We’re seeing situations where we see districts with more than one [Tran] issue outstanding at one time,” he said. “There’s an increased general level of complexity.”

It’s not hard to see why lawmakers resort to deferrals — it allows them to spend less money without requiring them to say they are cutting anything.

“If the state adopts a payment deferral rather than a cut, districts can continue to operate a higher level of program despite the one-time reduction in state spending,” the LAO wrote.

But as deferrals grow, it becomes increasingly hard to imagine that there will ever be a return to the “normal” schedule of transfers to schools from the state general fund.

“That will mean a doubling up of the expense for the state in a given fiscal year,” Petek said. “I don’t see that on the horizon.”

The LAO report suggested that there will be a reckoning somewhere down the line.

“The major problem with using payment deferrals as a budget solution is that they authorize school districts to operate a ­program the state cannot afford,” it said.

“To maintain higher levels of programmatic spending, school districts must use seemingly questionable accounting and borrowing practices,” the LAO said, noting that districts can only borrow as long as there are lenders.

“Ultimately, the districts will need to adjust the size of their programs to accommodate the reality of the level of funding they’re getting in the longer run,” Petek said. “Otherwise, there will be pressure on their financial position and credit.”

Many districts are already feeling pressure.

About 30% of California schoolchildren attend schools in districts facing financial jeopardy, according to a report released this week by the California Department of Education.

According to the semiannual report, 13 school districts received a negative certification — meaning they appear to be unable to meet their financial obligations either for the remainder of the current fiscal year or the next one.

Another 97 districts received a qualified certification. That means they may not be able to meet financial obligations for the current or two subsequent fiscal years.

“The emergency confronting California’s schools is widening and deepening,” said Tom Torlakson, the state’s superintendent of public instruction, when he released the report Monday.

That 110 school districts are on this week’s financial watch list points to the stress caused by several years of state budget shortfalls. Three years ago when the same report was released, only 36 districts were on the list.

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