LAO warns economic winter may be coming

LAO warns economic winter may be coming

(Calif.) The nonpartisan Legislative Analyst warned Wednesday that lawmakers should prepare for lower revenue projections later this spring as a result of changes on both Main Street and Wall Street.

In its annual assessment of the governor’s proposed 2019-20 spending plan for K-12 schools and community colleges in advance of budget negotiations, the LAO said legislative leaders should consider setting more money aside.

“Economic events occurring after the development of the Governor’s budget suggest that estimates of the guarantee could be revised down somewhat in the coming months,” the LAO said. “Coupled with our estimate of higher program costs, the Proposition 98 budget could be tighter by May.

“To prepare, the Legislature may want to begin identifying proposals it would be willing to reject or reduce,” according to the LAO. “We also think the Legislature should consider building a budget cushion by replacing some of the Governor’s new ongoing commitments with one-time initiatives.”

Indeed, this week the state controller’s office said that revenues collected during the month of January fell almost $2 billion short of expectations—a surprisingly high number since the projections were made by the governor’s staff only a few weeks before.

Over the first seven months of the fiscal year, the controller said that the state has collected almost $3 billion less than anticipated.

In November, the LAO noted that under favorable economic conditions, the Proposition 98 minimum funding guarantee could grow by $10 billion over current levels through 2023.

The agency also noted, however, that if conditions are less than ideal, the allotment to K-12 schools and community colleges might only be about $6 billion.

The deep sell-off in the stock market during December and much of January along with less rosy projections overall for the national economy may prove the most likely scenario.

Overall, the LAO didn’t have any major disagreements with the administration over how much state services are likely to cost next year, or where Gov. Gavin Newsom wants to direct state education resources.

As the LAO has already said, the governor’s plan to provide $577 million in additional support for early learners enrolled in special education programs is unlikely to succeed because districts will have discretion over how to use that money and will likely use it to bring down the overall cost of serving students with disabilities.

The LAO repeated its suggestions that lawmakers either put money into early learner programs or bump up allocations for special education overall.

On another key although technical issue, the LAO wants the Legislature to look closely at the governor’s plan to provide a cost-of-living increase for some education programs. The LAO reminded lawmakers, that even small changes in the COLA rate will add to the minimum funding guarantee.

For instance, a 0.5 percentage point change in the rate would change the total cost of COLA for school and community college programs by about $370 million, the LAO concluded.

“Assuming no other changes in the Proposition 98 budget, a COLA cost increase of that size would mean the state could no longer fund many of the Governor’s Proposition 98 proposals other than COLA,” according to analysts Conversely, a COLA cost reduction of that size would almost double the amount of Proposition 98 funding available for augmentations other than COLA.”

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