The 2018-19 Budget: Proposition 98 Outlook

The 2018-19 Budget: Proposition 98 Outlook MAC TAYLOR LEGISLATIVE ANALYST NOVEMBER 15, 2017 Executive Summary Substantial Funding Available for Schools and Community Colleges in Coming Budget Cycle. Each year, the state calculates a “minimum guarantee” for school and community college funding based upon a set of formulas established by Proposition 98 (1988). Under our near-term outlook, we estimate that the 2017-18 guarantee is up $651 million (0.9 percent) from the level assumed in the June budget plan and the 2018-19 guarantee is up $2.6 billion (3.4 percent) over the revised 2017-18 level. After accounting for growth in the minimum guarantee and backing out prior-year one-time spending, among other adjustments, we estimate the Legislature would have $5.3 billion in uncommitted Proposition 98 funds to allocate in 2018-19. The state could use this funding to reach full implementation of the Local Control Funding Formula (estimated to cost $2.7 billion) and provide select K-14 programs a 1.8 percent cost-of-living adjustment (estimated to cost $228 million). Even after making these augmentations, the state would have another $2.4 billion available. A key decision for the Legislature will be the amount of this funding to allocate for ongoing versus one-time activities. Ongoing augmentations would help districts manage various cost pressures, including notable increases in pension contributions, whereas one-time funding would provide a buffer in case the guarantee drops in 2019-20. Having such a buffer would mitigate possible future cuts to ongoing K-14 programs. Table of Contents Executive Summary ...................................................................1 Introduction .........................................................................2 Calculating the Minimum Guarantee .......................................................2 Key Economic and Revenue Assumptions ..................................................3 2016-17 and 2017-18 Updates ..........................................................3 2018-19 Budget Planning ..............................................................4 Outlook Through 2021-22 ..............................................................7 Key Trends ..........................................................................7 analysis full gutter 2018-19 BUDGET Introduction with increases in property tax revenue usually reducing General Fund costs dollar-for-dollar. Though the state Report Provides Our Fiscal Outlook for Schools can provide more funding than required, in practice it and Community Colleges. State budgeting for usually funds at the guarantee. With a two-thirds vote schools and the California Community Colleges is of each house of the Legislature, the state can suspend governed largely by Proposition 98, a constitutional the guarantee and provide less funding than the amendment approved by California voters in 1988 and formulas require that year. modified in 1990. The measure establishes a minimum “Maintenance Factor” Payments Required funding requirement, commonly known as the minimum in Certain Years. In addition to the three main guarantee. In this report, we describe our outlook tests, the Constitution requires the state to track an for the minimum guarantee over the next several obligation known as maintenance factor. The state years. The report has six sections. First, we explain creates a maintenance factor obligation when Test the formulas that determine the guarantee. Next, we 3 is operative or when it suspends the guarantee. describe the key economic and revenue assumptions The obligation equals the difference between the underlying our near-term outlook. Third, we explain how actual level of funding provided and the Test 1 or Test our estimates of the 2016-17 and 2017-18 guarantees 2 level (whichever is higher). Moving forward, the state differ from the estimates included in the June budget tracks and adjusts the maintenance factor obligation plan. Then, we estimate the 2018-19 guarantee and each year for changes in K-12 attendance and per identify the resulting funding that would be available capita personal income. In subsequent years, when for new commitments. After focusing on the near-term General Fund revenue is growing relatively quickly, the outlook, we estimate changes in the minimum Constitution requires the state to make maintenance guarantee through 2021-22 under two economic factor payments until it has paid off the obligation. The scenarios and conclude by highlighting a few key trends magnitude of these payments is determined by formula, over this period. (For the outlook for other programs in with stronger revenue growth generally requiring larger the state budget, see The 2018-19 Budget: California’s payments. Fiscal Outlook.) Calculating the Minimum Guarantee Figure 1 Minimum Guarantee Three Proposition 98 “Tests” Calculation Depends on Various Inputs and Formulas. The State Test 1 Test 2 Test 3 Constitution sets forth three main Share of General Change in Per Change in General tests for calculating the minimum Fund Revenue Capita Personal Fund Revenue Income (PCPI) guarantee. These tests depend upon several inputs, including K-12 General PCPI Fund average daily attendance, per capita ADA ADA personal income, and per capita 40% General Fund revenue (see Figure 1). Prior-Year Prior-Year The operative test that sets the Funding Funding guarantee is determined formulaically depending on these inputs. In most years, Test 2 or Test 3 is operative Guarantee based on share Guarantee based on prior- Guarantee based on prior- and the guarantee builds upon the of state General Fund year funding level adjusted year funding level adjusted revenue going to K-14 for year-over-year changes for year-over-year changes level of funding provided the previous education in 1986-87. in K-12 attendance and in K-12 attendance and California PCPI. state General Fund revenue. year. The state meets the guarantee through a combination of General Fund and local property tax revenue, ADA = average daily attendance. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET Estimates of the Guarantee Can Change After in the upcoming months of December, January, and the Adoption of the Budget. The state does not April. finalize the minimum guarantee until the fiscal year is 2016-17 and 2017-18 Updates over. When the state updates the relevant inputs, the guarantee can change from the level initially assumed 2016-17 Proposition 98 Funding Level in the budget act. If the revised guarantee exceeds the Unchanged Despite Small Drop in Guarantee. The initial estimate, the state makes a one-time payment June budget plan set overall Proposition 98 funding to “settle up” the difference for that year and uses the at $71.4 billion in 2016-17. At the time, the state higher base for calculating the guarantee the following estimated that this allocation exceeded the minimum year. If the revised guarantee is below the initial guarantee by $479 million. Due to a small reduction in estimate, the state can allow funding to remain at the General Fund revenue, we estimate the guarantee has higher level or make mid-year adjustments to reduce dropped by $56 million. Despite this drop, we assume funding to the lower guarantee. Either action affects that the state maintains total Proposition 98 funding at the ongoing level of the minimum guarantee moving the June level. forward. Increase in 2016-17 Property Tax Revenue Reduces General Fund Costs. Though we assume Key Economic and Revenue total Proposition 98 funding remains unchanged in Assumptions 2016-17, our estimate of local property tax revenue Near-Term Outlook Assumes Continued is up $404 million (see Figure 2 on the next page). Economic Expansion. Our outlook through 2018-19 is The increase reflects updated property tax data for based on a September 2017 consensus forecast of 2016-17. The higher property tax revenue reduces the U.S. economy prepared by Moody’s Analytics. Proposition 98 General Fund costs on a dollar-for-dollar This forecast anticipates continuing expansion of the basis. U.S. economy. Using the data underlying this national 2017-18 Guarantee Up $651 Million From forecast, we develop projections for near-term trends in Budget Act Estimate. For 2017-18, the June budget the California economy. Our California projections make plan funded at the minimum guarantee as estimated assumptions about growth in employment, wages, and at that time. We now estimate that the guarantee is the stock market. In particular, we expect job growth to up $651 million (see Figure 2). This increase is due continue, but at a slower pace compared with recent primarily to our assumption of higher General Fund tax years. We think this trend should result in rising wages revenue. The additional revenue requires the state to and salaries over the next year or two. We also assume make a $1.4 billion maintenance factor payment, an that stock market prices, which have risen substantially increase of $858 million over the amount estimated in over the past two years (2016 and 2017), will stagnate June. Such a payment would leave the state with no over the coming two years. (Short-term trends in the outstanding maintenance factor obligation. Offsetting stock market, however, are particularly challenging to some of the increase due to the higher maintenance predict.) factor payment is a roughly $200 million downward Near-Term Outlook Assumes Growth in State adjustment due to an estimated decline in K-12 Revenue. Consistent with our economic assumptions, attendance. we estimate that state General Fund revenue will grow Bulk of 2017-18 Increase Covered by Higher in the near term. The personal income tax accounts Property Tax Revenue. Of the increase in the 2017-18 for most of the revenue growth, increasing nearly guarantee, $516 million is covered by higher property $8 billion (9.5 percent) in 2017-18 and nearly $5 billion tax revenue. Most of this increase is attributable to (5.4 percent) in 2018-19. Revenue from the sales and the higher property tax revenue in 2016-17 carrying use tax and the corporate tax also increases, albeit forward. In addition, data from county assessors show more slowly. Our revenue projections specifically assessed property values increasing by 6.2 percent in assume the strong stock market growth experienced in 2017-18, about 0.5 percentage point higher than the 2017 will result in an increase in quarterly tax payments rate assumed in the June budget plan. www.lao.ca.gov 3 analysis full gutter 2018-19 BUDGET Figure 2 Updating Prior- and Current-Year Estimates of the Minimum Guarantee (Dollars in Millions) 2016-17a 2017-18 June November June November Budget Plan LAO Change Budget Plan LAO Change Minimum Guarantee General Fund $50,488 $50,084 -$404 $52,631 $52,766 $135 Local property tax 20,902 21,306 404 21,892 22,408 516 Totals $71,390 $71,390 — $74,523 $75,175 $651 a Includes General Fund provided on top of the minimum guarantee. 2018-19 Budget Planning addition, we estimate that another $2 billion is freed up inside the guarantee as a result of: Under Our Outlook, 2018-19 Guarantee Grows $2.6 Billion Over Revised 2017-18 Level. As Figure 3 • Expiring One-Time Funding. The shows, we estimate the minimum guarantee will 2017-18 budget plan allocated $1.1 billion for grow from $75.2 billion in 2017-18 to $77.7 billion in one-time initiatives (the largest allocation was for 2018-19, an increase of $2.6 billion (3.4 percent). Test 2 is operative, Figure 3 with the change in the guarantee Proposition 98 Near-Term Outlook attributable to an increase in per (Dollars in Millions) capita personal income, partially offset by a modest decline in K-12 2016-17 2017-18 2018-19 attendance. State General Fund and Minimum Guarantee local property tax revenue each cover General Fund $50,084 $52,766 $54,079 about half of the $2.6 billion increase. Local property tax 21,306 22,408 23,666 The increase in property tax revenue Totals $71,390 $75,175 $77,745 is due to an estimated 5.9 percent Change From Prior Year increase in assessed property values, General Fund $659 $2,682 $1,313 combined with somewhat slower Percent change 1.3% 5.4% 2.5% growth in several smaller property tax Local property tax $1,627 $1,102 $1,258 Percent change 8.3% 5.2% 5.6% components. (In the nearby box, we Total guarantee $2,287 $3,785 $2,570 discuss how the guarantee would Percent change 3.3% 5.3% 3.4% change if General Fund revenue General Fund Tax Revenuea $121,067 $130,138 $136,281 comes in higher or lower than our outlook assumptions.) Growth Rates K-12 average daily attendance -0.2% -0.3% -0.5% $5.3 Billion Available for Per capita personal income (Test 2) 5.4 3.7 4.0 Proposition 98 Priorities in Per capita General Fund (Test 3)b 2.7 7.3 4.6 2018-19. Our $77.7 billion Operative Test 3 2 2 estimate of the 2018-19 guarantee is $3.2 billion higher than the Maintenance Factor $74.5 billion provided for schools Amount created (+) or paid (-) $1,279 -$1,395 — and community colleges in 2017-18 Total outstandingc 1,350 — — under the June budget plan. In a Excludes non-tax revenue and transfers, which do not affect the calculation of the minimum guarantee. b As set forth in the State Constitution, reflects change in per capita General Fund plus 0.5 percent. c Outstanding maintenance factor is adjusted annually for changes in K-12 attendance and per capita personal income. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET K-12 discretionary grants). These initiatives do not State Could Reach Full Implementation of LCFF continue in 2018-19, freeing up the associated in 2018-19. In recent years, the state has dedicated a funding. large portion of the increase in Proposition 98 funding • Declining K-12 Attendance. Most funding for to implementing LCFF. The state reached 97 percent of schools flows through the Local Control Funding the formula’s target level in 2017-18 (see Figure 4 on Formula (LCFF) and is adjusted automatically to the next page). Under our outlook, the state could reflect changes in K-12 attendance. We estimate reach full implementation of the formula in 2018-19. that lower attendance will reduce LCFF costs by Specifically, we estimate closing the remaining LCFF more than $500 million. gap would cost $2.7 billion. Under this scenario, year-over-year per-pupil LCFF funding would increase • Proposition 39 Requirement Ending. by 4.8 percent. Proposition 39 (2012) required the state to allocate funding for energy efficiency projects State Could Fund Additional Ongoing for five years. The state decided to meet this Augmentations. Under our outlook, the state would requirement by funding school and community have $2.6 billion for other Proposition 98 priorities college projects. This requirement ends in even after fully implementing LCFF. One of the 2018-19, freeing up $423 million in Proposition 98 state’s priorities the past several years has been to funding. (Under legislation adopted earlier this provide a cost-of-living adjustment (COLA) for certain year, grant recipients have until June 30, 2019 to K-14 programs. For 2018-19, we estimate the K-14 spend down previously appropriated energy COLA rate to be 1.8 percent. Providing this COLA to efficiency funds.) the K-14 programs that received one last year would cost $228 million. This amount consists of $122 million These changes, in combination with the $3.2 billion for community college apportionments, $69 million increase in the minimum guarantee, result in the for special education, $20 million for preschool, and state having $5.3 billion in uncommitted funds for $17 million for various other K-14 programs. Another Proposition 98 programs in 2018-19. of the state’s priorities the past few years has been Effect of Changes in State Revenue on the Guarantee Higher Growth in State Revenue Unlikely to Increase the Guarantee. We examined the effect on the guarantee if General Fund revenue came in a few billion dollars above our outlook estimates in 2017-18 or 2018-19 (or in both years). None of these scenarios resulted in a higher minimum guarantee in 2017-18 or 2018-19. This dynamic is due primarily to the state having paid off its entire maintenance factor obligation under our outlook, such that additional revenue beyond what we assume does not trigger a higher maintenance factor payment. Moreover, the guarantee in both years is determined by growth in per capita personal income, with the guarantee unaffected by further increases in General Fund revenue. Counterintuitively, certain revenue increases could lead to lower minimum guarantees. For example, if revenue were to surge by a few billion dollars in 2017-18 but none of the increase carried forward into 2018-19, the slower year-to-year growth rate could result in a different test becoming operative and the guarantee in 2018-19 falling from the estimate under our outlook. Lower Growth in Revenue Likely to Reduce the Guarantee. We also examined the effect on the guarantee if General Fund revenue comes in below our estimates for 2017-18 or 2018-19 (or both years). Though we found that a modest revenue drop (up to roughly $1 billion in either or both years) likely would have no effect on the guarantee, further drops likely would reduce the guarantee. The reductions in the guarantee could be in the range of 40 to 50 cents for each dollar of lower revenue, with the specific amount depending on the timing and magnitude of the drop. www.lao.ca.gov 5 analysis full gutter 2018-19 BUDGET implementing a multiyear agreement to increase the entire $5.3 billion for ongoing programs, it tends funding for the State Preschool Program. For 2018-19, to designate a portion of new Proposition 98 funds we estimate this agreement will require an additional for one-time purposes. The past five years, the state $34 million. Finally, the Legislature recently established has allocated an average of 15 percent of new funds a program known as the California College Promise, for one-time purposes. Such an approach provides which authorizes various community college activities a measure of protection against future volatility in the to support college preparation, participation, and minimum guarantee. If the guarantee experiences completion, including providing fee waivers for first-year, a year-over-year decline, the expiration of one-time full-time community college students. The Chancellor’s funding provides a buffer that reduces the likelihood of Office estimates that providing these fee waivers in cuts to ongoing programs. 2018-19 would cost $31 million. Were the Legislature State Usually Signals How It Wants One-Time to contemplate further ongoing augmentations, it might Funding Spent. In recent years, the state has signaled choose to augment base LCFF rates and community its priorities but ultimately given school districts college apportionments, as such an approach helps substantial discretion in deciding how to use one-time all districts accommodate higher base costs (due, for funding. Specifically, the state has deemed providing example, to rising pension costs). professional development, purchasing instructional State Usually Funds a Mix of One-Time and materials, upgrading technology, and addressing Ongoing Initiatives. Although the state could allocate deferred maintenance to be high priorities for one-time Figure 4 State Could Reach Full Implementation of the Local Control Funding Formula in 2018-19a (In Billions) $70 Target Gap Funding Base 60 100% 44% of gap 55% of gap funded of gap funded 53% funded 50 of gap 33% funded of gap 12% funded 40 of gap funded 30 20 10 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19b 73% 83% 90% 96% 97% 100% Percent of Target Funded a Numbers are final through 2016-17 and estimated thereafter. b Assumes the state provides a $2.7 billion augmentation to reach full implementation. 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET funding. Many school districts indicate they have spent 40 percent of General Fund revenue. The state’s recent one-time funds on these priorities. A few districts practice is not to create any maintenance factor in indicate using one-time funding to address retirement Test 1 years, so the period ends with no maintenance liabilities, in some cases achieving a significant factor outstanding despite the drops in the guarantee. reduction in their future costs. Regarding community Under this scenario, the state likely would need to college districts, the state has required most one-time make reductions to ongoing programs, though it could funds be spent for specified purposes, including respond in various other ways, such as fund swaps deferred maintenance and special student support or payment deferrals. The magnitude of the reduction initiatives. Though the state has granted community in the guarantee (more than $7 billion over two years) colleges less control over one-time funding, community highlights the importance of allocating at least some of colleges face similar cost pressures to school districts. the increase in 2018-19 funding to one-time activities. Most notably, both school and community college Such action would mitigate the need for steep districts are facing large unfunded retirement liabilities. reductions to ongoing programs under the recession scenario. Outlook Through 2021-22 Key Trends Many Economic Scenarios Possible Over the Period. Over the next four years, state General Property Tax Revenue Projected to Rise Steadily. Fund revenue will change due to various economic In contrast to General Fund revenue, which tends to be developments, such as changes in employment and highly sensitive to changes in the economy, property fluctuations in the stock market. Changes in General tax revenue typically grows at a steadier pace. Under Fund revenue, in turn, likely will have a significant the growth scenario, property tax revenue grows from effect on the minimum guarantee. In this section, we $22.4 billion in 2017-18 to $27.4 billion by 2021-22. describe how the guarantee would change through In this scenario, the $5 billion increase covers about 2021-22 under two economic scenarios. The growth 40 percent of the increase in the minimum guarantee scenario assumes the California economy experiences over the period. Property tax revenue projections steady increases in personal income and a mostly flat are driven primarily by assumptions about growth in stock market over the next four years. The recession assessed property values. We assume assessed values scenario assumes a moderate recession begins early grow by about 6 percent per year, reflecting strong in 2019-20. These scenarios are illustrative, and growth in real estate prices in recent years and the neither represents a specific prediction about the future continuation of a modest recovery in new construction. direction of the economy. We also assume that revenue shifted to schools and Under Growth Scenario, Minimum Guarantee community colleges from former redevelopment Rises Steadily. The minimum guarantee increases agencies will increase more quickly as the debts and steadily under the growth scenario from $75.2 billion obligations of these agencies are retired. Under the in 2017-18 to $87.3 billion in 2021-22 (see recession scenario, property tax revenue could grow Figure 5 on the next page). The average annual somewhat less quickly, though historically it has been increase is 3.8 percent. Under this scenario, the much less sensitive to economic downturns than the state could fund modest COLAs for school and minimum guarantee. community college programs. With remaining funds K-12 Attendance Projected to Decline. K-12 (roughly $2 billion per year), it could address other attendance grew at an average annual rate of cost pressures facing districts, enhance or expand 2.4 percent from the late 1980s to early 2000s, programs, and/or support one-time initiatives. remained essentially flat from 2004-05 through Under Recession Scenario, Minimum Guarantee 2013-14, and began declining in 2014-15. We Drops Sharply. The minimum guarantee declines project this decline will continue over the period (see under the recession scenario by $5 billion (6.4 percent) Figure 6 on page 9). The primary attributing factor in 2019-20 and a further $2.4 billion (3.3 percent) in is our outlook for birth rates. Over the past decade, 2020-21. Test 1 is operative over the last three years births have dropped from a peak of about 560,000 in of the period, with the guarantee receiving about 2007-08 to about 490,000 in 2015-16. We assume www.lao.ca.gov 7 analysis full gutter 2018-19 BUDGET births remain roughly flat at this lower level and that slightly in 2013-14, this provision insulated the the school-age population declines as smaller cohorts guarantee from declines in 2014-15 and 2015-16. of students gradually replace larger previous cohorts. In 2016-17, however, declining attendance began Our outlook also assumes low and relatively stable affecting the guarantee, and we assume it continues rates of migration from other states and countries. to affect the guarantee throughout the period. Over The minimum guarantee does not drop for declining the coming years, declining attendance also would attendance unless attendance also has declined result in somewhat lower costs for LCFF and other the two previous years. Given that attendance grew attendance-driven programs. Figure 5 Proposition 98 Outlook Through 2021-22 Under Two Economic Scenarios (Dollars in Billions) 2017-18 2018-19 2019-20 2020-21 2021-22 Growth Scenario Minimum Guarantee $75.2 $77.7 $80.7 $83.8 $87.3 Year-to-year change — $2.6 $2.9 $3.1 $3.5 Percent change — 3.4% 3.8% 3.9% 4.2% General Fund Tax Revenuea $130.1 $136.3 $142.1 $148.5 $155.8 Key Growth Rates Per capita personal income (Test 2) 3.7% 4.0% 4.8% 4.5% 3.7% Per capita General Fund (Test 3)b 7.3% 4.6% 4.2% 4.4% 4.9% Operative Test 2 2 3 3 1 Maintenance Factor Amount created (+) or paid (-) -$1.4 — $0.5 $0.1 -$0.6 Total outstandingc — — 0.5 0.7 0.1 Recession Scenario Minimum Guarantee $75.2 $77.7 $72.7 $70.4 $74.2 Year-to-year change — $2.6 -$5.0 -$2.4 $3.9 Percent change — 3.4% -6.4% -3.3% 5.5% General Fund Tax Revenuea $130.1 $136.3 $125.7 $116.0 $122.9 Key Growth Rates Per capita personal income (Test 2) 3.7% 4.0% 1.7% 0.7% 3.9% Per capita General Fund (Test 3)b 7.3% 4.6% -7.8% -7.8% 5.9% Operative Test 2 2 1 1 1 Maintenance Factor Amount created (+) or paid (-) -$1.4 — — — — Total outstandingc — — — — — Comparison of Scenarios Minimum Guarantee Growth scenario $75.2 $77.7 $80.7 $83.8 $87.3 Recession scenario 75.2 77.7 72.7 70.4 74.2 Difference — — $7.9 $13.4 $13.1 a Excludes non-tax revenue and transfers, which do not affect the calculation of the minimum guarantee. b As set forth in the State Constitution, reflects change in per capita General Fund plus 0.5 percent. c Outstanding maintenance factor is adjusted annually for changes in K-12 attendance and per capita personal income. 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET Community College Enrollment Projected to Pension Rates and Costs Rising Over the Period. Decline. Whereas K-12 attendance is driven primarily Over the next several years, school and community by state demographics, community college enrollment college districts are set to experience continued is driven by a more complex set of factors—including increases in their contribution rates for the California demographics, the economy, and the state budget. State Teachers’ Retirement System (CalSTRS) and Regarding demographics, the traditional college-age population has Figure 6 been essentially flat in recent years. K-12 Attendance Projected to We anticipate this population will Decline Each Year of the Period decline over the period, with 170,000 Annual Percent Change fewer individuals in 2021-22 than 2016-17 (reflecting a 4 percent drop). 2014-15 15-16 16-17 17-18 18-19 19-20 20-21 21-22 Regarding the economy and the state budget, these two factors often work -0.1 in countervailing ways. For example, during economic expansions, more -0.2 individuals are employed and less likely to seek education and training. -0.3 Nonetheless, the state budget tends to be strong during economic -0.4 expansions, with enrollment growth often a high priority. This dynamic -0.5 has been at work in recent years, with enrollment dropping nearly -0.6 1 percent between 2015-16 and Projections -0.7% 2016-17 despite the state funding enrollment growth. Given all of these factors, we project a decline of a few percentage points in community college enrollment over the period. Figure 7 Community college enrollment does Statutory COLA Projected to not affect the guarantee directly, but Remain Low Over the Period it does affect Proposition 98 funding available for other K-14 priorities. 2.0% Projections Statutory COLA Likely to Hover 1.8 Around 1 Percent. The statutory 1.6 COLA for applicable K-14 programs 1.4 is based upon a national price index for state and local governments. 1.2 This index, calculated by the federal 1.0 government, measures changes in 0.8 employee compensation and other 0.6 costs that affect governments around the country. Based on estimates 0.4 provided by Moody’s Analytics, we 0.2 assume the COLA remains low— hovering around 1 percent per year 2014-15 15-16 16-17 17-18 18-19 19-20 20-21 21-22 after 2018-19 (see Figure 7). COLA = cost-of-living adjustment. www.lao.ca.gov 9 analysis full gutter 2018-19 BUDGET the California Public Employees’ Retirement System pension costs over next three years would equate to (CalPERS). CalSTRS administers pension benefits for roughly 40 percent of the increase in the guarantee teachers and other certificated employees, whereas under our growth scenario. Under our recession CalPERS administers pension benefits for classified scenario, pension costs would rise even as the employees. The 2014-15 budget included a plan to guarantee dropped, magnifying the difficult decisions fully fund the CalSTRS pension system within about schools and community colleges would face. 30 years. Under the plan, district contribution rates Other Factors Drive Local Cost Pressures. increase from 8.3 percent of payroll in 2013-14 to Districts confront many cost pressures during their 19.1 percent by 2020-21. The governing board of budget development and collective bargaining CalPERS also is taking action to address its liabilities. processes. Most notably, districts often face local Over the same seven-year period, it expects district pressure to increase salaries and, in some cases, contribution rates to increase from 11.4 percent to reduce their student-teacher ratios. Additionally, 23.8 percent. As Figure 8 shows, district contributions districts are experiencing rising health benefit costs. to the two pension systems have doubled over the past Though all districts face these pressures, districts vary four years, increasing from $3.4 billion in 2013-14 to widely in how they respond to them. In recent years, $6.8 billion in 2017-18. Over the next three years, some districts have granted relatively large salary the CalSTRS and CalPERS boards expect combined increases and hired additional staff, whereas others contributions to increase by another $3.6 billion, have granted smaller increases and hired fewer staff. reaching $10.4 billion in 2020-21. Districts in the former group, in turn, are seeing greater Effect of Pension Cost Increases Varies Notably growth in their pension costs than those in the latter Under Two Outlook Scenarios. The increase in group. Figure 8 School and Community College Pension Costs Rising Over the Period Annual Employer Contributions (In Billions) $12 Projections CalPERS 10 CalSTRS 8 6 4 2 2013-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21 CalSTRS = California State Teachers’ Retirement System and CalPERS = California Public Employees’ Retirement System. 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET www.lao.ca.gov 11 analysis full gutter 2018-19 BUDGET LAO PUBLICATIONS This report was prepared by Kenneth Kapphahn and reviewed by Jennifer Kuhn. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 12 LEGISLATIVE ANALYST’S OFFICE