California schools' budget windfall may provide only temporary relief

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A state budget boost for California public schools may only offer districts temporary relief, Fitch Ratings said in a report last week.

Moody’s Investors Service called the proposed increase in minimum funding levels for K-12 public schools and community colleges a credit positive in another report last week.

So far, the budget summaries from the Legislature as it heads into conference committee retain the record amount of education funding outlined in Gov. Gavin Newsom’s budget proposal. The Senate version shifted an additional $300 million to the schools from reserves.

Newsom’s May revision to his proposed budget would increase funding and temporarily decrease costs for California school districts, but Fitch Ratings said these “proposals may provide only temporary relief to those districts that face fiscal challenges despite the increased funding in recent years.”

Some school districts have experienced increasing deficits, Fitch wrote, because of rising pension costs and cost of living wage pressure.

Newsom’s revised May revenue forecast anticipates additional revenues of close to $2 billion in both fiscal 2019 and fiscal 2020, according to Moody’s.

“With the higher revenues, the state will appropriate over $650 million in additional minimum funding for K-12 and community colleges,” Moody’s wrote.

The governor’s budget proposal provides $3.1 billion in funding to the California State Teachers Retirement System outside the state's Proposition 98 school funding formula. That would pay a portion of a district’s required contribution for the next two years and pay down some of the unfunded liability.

The proposal also budgets $81.1 billion in funding under Proposition 98 — the state's main public school funding formula — providing a 3.46% cost of living increase. The state’s minimum funding levels for K-12 and community colleges would increase by $278.8 million in fiscal 2019 and $389.3 million in fiscal 2020.

“The governor’s proposals remain subject to legislative approval and may change, but K-12 and community college districts almost certainly will benefit from the state’s strong revenue growth,” wrote Moody’s analyst Helen Cregger.

The $4 billion increase — including the funding aimed helping to alleviate CalSTRS costs — represents an unprecedented level of discretionary funding over amounts dictated constitutionally through Proposition 98, Cregger wrote.

Both rating agencies noted that the CalSTRS contribution slows growth to 16.7% of salaries in fiscal 2020 from the 17.1% included in the January budget.

Legislation in the budget proposal that improves governance, transparency and accountability at charter schools could also slow charter school growth, which could slow declining enrollment at traditional schools, according to Fitch.

The Legislature has until June 15 to pass a state budget.

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