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With state revenues already falling below expectations, the state will dip into its education rainy day fund for the first time to cover a projected $2.6 billion deficit for schools and community colleges for the fiscal year starting July 1, 2023, the Legislative Analyst’s Office stated Wednesday in its annual budget prediction.
Schools will fare better than the overall state budget, which the LAO is predicting will face a $25 billion shortfall.
But the state’s “precarious” financial picture would worsen if California falls into a recession in 2023. While there is “an elevated risk” of that, LAO is not assuming it. Instead, an erosion of economic conditions will lead to a significant decline in state revenues in 2022-23, with a recovery starting in 2024-25.
The LAO’s annual budget forecast in November is the starting point for budget planning that will culminate with adoption of the next state budget in June. And it’s the first sign of what Gov. Gavin Newsom is likely to adopt in the 2023-24 budget, which he will present in the first week of January.
Newsom began signaling caution for next year when he vetoed bills in the fall that would have required future spending. “With our state facing lower-than-expected revenues over the first few months of this fiscal year, it is important to remain disciplined when it comes to spending, particularly spending that is ongoing,” Newsom wrote in vetoing a bill to create mandatory kindergarten.
Except for a very short downturn following the emergence of Covid in spring 2020, revenues for Proposition 98, the formula that determines how much state revenue must go to TK-12 and community colleges, have risen annually for the past decade. Between 2019-20 and 2020-21, the LAO noted, the Prop. 98 minimum jumped $31.3 billion (39.5 percent) — the biggest increase over any two-year period since the funding law was adopted in 1988. About 40% of the state’s general fund is allocated to schools and community colleges.
But that burst has ended. The LAO is projecting that state revenues will come up $5.3 billion below the $110.3 budget for Prop. 98 the Legislature passed in June. However, schools shouldn’t see a cut, because school attendance, which is the basis for funding, will be down, and the state won’t have to pay $2 billion that it optimistically assumed it would have to pay into the Prop. 98 reserve fund this year. This will be the first year that the state will adopt a formula that factors in the drop in attendance from the pandemic.
In 2023-24, the state will start drawing money from the reserve, because the Prop. 98 funding level will be more than $2 billion lower than it approved in the current budget. Schools and community colleges would have enough money to cover a projected 8.7% increase for inflation – but none for new programs. And Gov. Newsom could take back some unspent one-time money from this year, perhaps from the $8 billion approved for learning recovery, if the deficit is bigger, the LAO said.
Over the next three years, the $8.7 billion in the Prop. 98 reserve fund that the state has accumulated will be drained, the LAO said, but will once again begin to build, starting in 2026-27.
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