LAO sees a near $3b bump in Prop 98 funding next year

LAO sees a near $3b bump in Prop 98 funding next year

(Calif.) Under favorable economic conditions, schools could expect to see the minimum funding guarantee grow to nearly $90 billion by the 2022-23 fiscal year–a jump of $10 billion above this year’s appropriation, according to a forecast from the non-partisan Legislative Analyst.

A far less optimistic scenario projects a recession by 2020 and growth in the Proposition 98 allotment would then be restricted to only about $6 billion over the next four years from the $78 billion provided to schools and community colleges in the 2018-19 fiscal year.

Looking at just the near-term, the LAO expects the funding guarantee to increase by just over 3 percent next year, which would add about $2.4 billion. When adjustments for other funding issues are taken into account, the number would grow to $2.8 billion.

The LAO’s 2019-20 forecast for state coffers is generally upbeat.

“We expect wages and salaries in California to grow at an above-average rate over the near term, similar to growth over the past few years,” the agency said in its annual economic report to the Legislature in advance of the governor releasing his January budget. “We assume that job growth continues but at a slower rate, similar to the slowing trend over the past few years. These wage and job trends are due, in part, to record low unemployment.”

The LAO, however, is less confident that the longest-running bull market in the history of the New Stock Exchange will continue.

“Regarding the stock market, the consensus forecast assumes that stock prices—which grew rapidly for several years but have been volatile recently—will grow much more slowly moving forward,” they said.

A top off in the stock market would be important for lawmakers to keep an eye on because of the strong link between investor profits and California’s tax collections.

During booming stock market cycles, the state collects billions in capital gains—the bull market of 1999-2000, for instance, generated close to $130 billion in net capital gains. On the flip side, when the market slides, California coffers suffer—such as 2009-10 when only about $20 billion in capital gains was taxed.

Even more to the point, the state collected $17.4 billion in January, almost $2.4 billion more than the governor’s Department of Finance has estimated would come in that month just a few weeks before.

Although the markets have struggled since the beginning of the year, the Standard & Poor’s Index still stands more than 2000 points ahead of where the record run started in March, 2009.

Assuming the LAO is largely on target for next year, lawmakers have about $500 million in unrestricted funds that could be used for special projects.

Overall, most of the additional money coming in next year will likely go toward a cost-of-living adjustment the Legislature typically provides schools, an allocation likely to cost about $2.3 billion.

After that, the Legislature would probably fulfill a commitment made in September to provide distress grants to Oakland Unified and Inglewood Unified, which is likely to cost about $28 million.

Incoming Gov. Gavin Newsom may weigh in on using another $27 million to open about 3,000 slots in the state’s all-day preschool program. Newsom made early learning a key component of his election campaign.

Regardless of how lawmakers decide how to spend the leftovers, districts will still have pension clouds looming over them. The LAO estimates that statewide, districts will spend $5.7 billion on retirement benefits next year. Costs are expected to go up another $900 million in 2019-20, and $600 million more in 2020-21.

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