The 2020-21 Budget: School District Budget Trends

The 2020-21 Budget: School District Budget Trends GABRIEL PETEK LEGISLATIVE ANALYST JANUARY 21, 2020 analysis full gutter 2020-21 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Executive Summary Report Focuses on Addressing School Districts’ Cost Pressures. From 2013-14 through 2019-20, per-student funding grew significantly. Under the Governor’s recently released budget plan, per-student funding remains strong—projected to grow 4.1 percent in 2020-21. With such strong growth in funding, the vast majority of districts are on a positive fiscal footing and have found ways to address the myriad cost pressures they face. A few districts, however, are on a precarious footing. In this report, we examine school districts’ key cost drivers and fiscal health. As part of our analysis, we look back at school districts’ actual experiences to date and look ahead at what districts’ experiences could be over the next few years. We end the report by identifying a few options for helping districts address their cost pressures moving forward. Trends in Cost Drivers Overall School Attendance Has Been Declining, Projected to Continue Declining. Student attendance in California has declined every year since 2013-14. The decline is partly attributable to a drop in the number of births in California and partly to a net out-migration of school-aged children. We project that student attendance will continue declining throughout the coming decade. Some areas of the state, including Los Angeles, Orange, and Santa Clara Counties have been, and are expected to continue, experiencing particularly large declines. Other areas of the state, however, have been growing. For example, Kern, Fresno, Sacramento, Placer, El Dorado, and San Francisco Counties have seen their attendance increase. Given demographic projections, some of these counties may see slower growth or even declines over the next decade. Likely Less Pressure to Increase Teacher Workforce, More Pressure to Increase Support Staff. The statewide student-to-teacher ratio has been dropping over the past several years. In 2018-19, it stood at about 21:1—comparable to the level prior to the Great Recession. With declining student enrollment also occurring, the pressure to hire additional teachers and reduce class sizes is likely to subside over the coming years. Whereas school districts increased their teacher workforce by 6.4 percent since 2013-14, they increased their support staff by 21 percent, with notable increases in teacher aides, counselors, and psychologists. Some of this increase likely is a response to the growing share of students with disabilities. Given the growth trend in students with disabilities, pressure to increase support staff is likely to remain, at least over the next several years. Pressure to Increase Compensation Likely to Remain Significant. Districts have been increasing staff salaries, and we expect them to continue facing pressure in this area given increases in the cost of living in California. Regarding health care benefits, districts have been taking actions, such as capping employer contributions, that have helped contain their rising costs. Pension costs have been the most significant compensation pressure facing districts. Since 2013-14, districts’ pension costs have increased by $4.7 billion—more than doubling. For 2020-21, we expect total school district pension costs to increase by at least another $800 million. Looking beyond the budget year, district contributions to teacher pensions are scheduled to level off, whereas pension costs for other school staff are expected to continue increasing. www.lao.ca.gov 1 analysis full gutter 2020-21 BUDGET Most School Districts Have Positive Budget Ratings, a Few Are Fiscally Distressed. The vast majority of districts in California currently have positive budget ratings. Of the nearly 1,000 districts currently operating, the number with poor budget ratings is near a historic low. We identified 30 districts, however, as being in fiscal distress. Most of the county officials and superintendents we interviewed indicated that governance and management issues are common among these fiscally distressed districts. Breakdowns in governance, management, and contract negotiations generally are exacerbating these districts’ ability to respond to fiscal challenges. Options for Addressing Cost Pressures Notable Growth Projected in School Funding in 2020-21. The Governor’s budget plan contains a total of $3.3 billion in new Proposition 98 (1988) funding for school districts ($1.4 billion ongoing and $1.9 billion one time). The Governor uses most of the ongoing funding increase to provide a cost-of-living adjustment (COLA) for the Local Control Funding Formula (LCFF). The Governor has many one-time initiatives, but the largest are focused on addressing longstanding workforce shortages, student poverty, and student achievement gaps. We think the Governor’s proposed overall split of new ongoing and one-time Proposition 98 spending in 2020-21 is reasonable, but we think the Legislature has alternatives it could consider for addressing school districts’ cost pressures. Though the options we cover in this report are not exhaustive, they link to many of the core cost pressures districts are facing. Options for Using New Ongoing Funding to Help Districts Address Cost Pressures. One option the Legislature could consider is funding a higher COLA for LCFF. This action would help all districts address ongoing compensation-related pressures. It also would be simple to administer—avoiding the extra layer of start-up costs associated with creating new ongoing programs. Another more targeted option would be for the Legislature to dedicate a portion of new ongoing funding to help districts address increases in their special education costs. A first step would be to “level up” funding rates for the lowest funded Special Education Local Plan Areas. (The Governor has a proposal in this area that we are in the midst of analyzing.) Options for Using One-Time Funding to Help Address Cost Pressures. Of all the Legislature’s options for one-time initiatives, we believe making supplemental pension payments would provide the greatest sustained fiscal benefit for districts. The Legislature, however, has other options. One would be to provide one-time grants conditioned on districts using them for unfunded retiree liabilities. Another would be to use one-time funding to smooth out pension rate increases over the near term. Though inferior to the supplemental pension payment option, these other options would still help districts address existing liabilities and, in some cases, could improve district fiscal health. By comparison, most of the Governor’s one-time Proposition 98 proposals would require districts to implement new programs or expand existing services. Lastly, we discourage the Legislature from using one-time funding to provide special aid to fiscally distressed districts, as we believe a more effective strategy would be for the state and county offices of education to continue working with these districts to improve their budget practices. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET INTRODUCTION School Funding Projected to Grow in school funding in recent years, a few school Moderately Over Next Few Years. From districts have shown signs of fiscal distress. Were 2013-14 through 2018-19, school funding in growth in school funding to slow in the coming California grew significantly by historical standards. years, more districts would face greater challenges Over this period, annual growth in per-pupil funding balancing their budgets. In this report, we examine averaged 5.9 percent—substantially higher than district budgets—both looking back at actual the long-run average of 3.8 percent (dating back to experiences to date and looking ahead at what 1988-89). In 2018-19, funding per student was at experiences could be over the next few years. an all-time high of $11,690—$2,125 (22 percent) This report has four sections. First, we provide higher than 30 years earlier (after adjusting for background on districts and their budgets. We then inflation). As detailed in our report, The 2020-21 discuss trends in districts’ main cost drivers. Next, Budget: The Fiscal Outlook for Schools and we examine overall district fiscal health, with a Community Colleges, we project somewhat slower particular focus on districts in fiscal distress. In the growth in school funding moving forward. From final section, we identify some ways the Legislature 2019-20 through 2023-24, we project per-pupil could help school districts address their cost funding to grow at an average annual rate of pressures moving forward. The primary objective 4.6 percent—slower than the past several years but of this report is to provide the Legislature with still higher than the historical growth rate. important context as it builds the 2020-21 state Report Focuses on School Districts’ Cost budget. Pressures. Even with the exceptional growth OVERVIEW OF DISTRICT BUDGETS Schools Rely Heavily on Proposition 98 Proposition 98 accounted for nearly 80 percent Funding. In 2018-19, schools received $101 billion of total funding. Key developments explaining in total funding, accounting for all fund sources. the growth in non-Proposition 98 funding include Proposition 98 funding—a combination of state (1) the state’s increasing contributions to school General Fund and local property tax revenue— pension and facility costs (both funded outside of comprised almost 70 percent of that funding. Proposition 98), (2) the reduced vote threshold and Proposition 98 (1988) established a minimum additional authority school districts gained in the annual funding level for schools and community early 2000s to raise certain local revenues, and colleges commonly known as the minimum (3) a higher level of federal involvement in education guarantee. In most years, the state funds schools as compared with the 1980s. at or near the guarantee. School District Attendance Ranges From Other Funding Sources Have Grown Very Low to Very High. In 2018-19, California Somewhat in Importance. In 2018-19, the had 944 public school districts serving 5.9 million remainder of school funding came in roughly students. School districts vary greatly in terms even shares from other state sources (notably, of student attendance, with the smallest district non-Proposition 98 General Fund and special (Lincoln Elementary) serving 4 students and the fund monies such as lottery revenue), other largest district (Los Angeles Unified School District local sources (such as parcel tax revenue), and [LAUSD]) serving more than 400,000 students. the federal government. Though schools rely A total of 553 districts are relatively small—each heavily on Proposition 98 funding, the share serving fewer than 2,500 students. By comparison, of funding from other sources over the past the largest 35 districts in the state each serve several decades has increased. Thirty years ago, more than 25,000 students and together educate www.lao.ca.gov 3 analysis full gutter 2020-21 BUDGET nearly 30 percent of all public school students in Los Angeles County court schools. Unlike LCFF, California. (These numbers exclude charter schools, special education funding rates are not consistent as discussed below.) across the state, with rates in 2018-19 ranging from Charter School Attendance Has Increased $481 to $928 per student. Rates vary for historical Significantly. Charter schools are public schools reasons. Periodically, the state has provided funding that operate under locally developed agreements to increase the rates of the lowest funded SELPAs. (or “charters”) that determine what educational Geography Also Affects School District programs they will provide to students. In exchange Budgets. In California, some school districts for following these agreements, they are exempt are located in remote areas, whereas others from many of the state laws governing school are in highly urbanized areas. Some are located districts. Most charter schools have their charters in hot desert areas, whereas others are in cold authorized by their local school district, though mountainous areas. Eastern Sierra Unified in some charter schools are authorized by their Mono County, for example, covers 2,700 square county office of education (COE) or the State Board miles with a total student population of less of Education. Charter schools have operated in than 400. By comparison, Bellflower Unified California since 1992-93. Currently, California has in Los Angeles County covers only 7 square 1,299 charter schools. Charter school attendance miles, has a total student population of nearly has grown over time—reaching nearly 11 percent of 12,000 and is surrounded by more than a dozen total public school attendance in 2018-19. other school districts within a 10-mile radius. Most School Funding Is Linked to Student These types of geographic attributes can affect Attendance. School districts and charter schools districts’ (1) student attendance rates; (2) costs receive the bulk of their funding through the state’s for home-to-school transportation, utilities, and Local Control Funding Formula (LCFF). The formula internet connectivity; and (3) teacher recruitment, provides districts and charter schools with a certain retention, and compensation. Compared to rural amount of funding per student. Each student districts, urban districts can have lower per-student generates base funding. Base per-student funding costs in some budget areas, such as transportation rates generally increase across the grade spans, with and internet connectivity. They can have higher high school students generating the highest rate. costs in other areas, such as teacher pay, given Students who are English learners (EL), low income urban zones tend to have more competing job (LI), foster youth, or homeless generate an additional opportunities and higher living costs. Various 20 percent of the base rate. Districts with more than factors, including pay, climate, and remoteness, 55 percent of their enrollment EL/LI also receive can, in turn, affect teachers’ willingness to work 50 percent of the base rate for each EL/LI student in certain areas of the state, with rural areas and above that threshold. Because most district funding high-poverty areas typically having a more difficult is tied to student attendance, district budgets are time finding teachers than other areas of the state. particularly sensitive to fluctuations in attendance. Districts Are Responsible for Making Key To help school districts adjust to declining student Staffing Decisions. Each school district in attendance, the state funds districts at the higher of California is governed by a locally elected board. their current- or prior-year attendance levels. Local governing boards set key district policies, Special Education Is a Notable Part of School including their staffing terms that can have a big District Budgets. After LCFF, special education impact on district budgets. In developing staffing is the next largest state-funded K-12 program. terms, school districts (typically represented by the The state allocates funding to Special Education district superintendent, chief business officer, and Local Plan Areas (SELPAs) on a per-student basis. other senior administrators) negotiate with employee Currently, the state has 132 SELPAs—consisting unions. They negotiate staffing levels, class size, of 81 regional SELPAs (typically collaboratives of salaries, health care benefits, work year, and small and medium-sized districts), 45 single-district professional development days, among other items. SELPAs, 5 SELPAs consisting exclusively of charter Staffing and salary decisions, in turn, affect pension schools, and 1 unique SELPA serving students in costs which are set as a percentage of payroll. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Charter Schools Usually Set Their Own 80 percent and 99 percent of the premium. The Staffing Terms. When they open, charter schools remaining 20 percent of teachers participate in decide their governance structure, which affects plans where the district pays a smaller share. the level of autonomy they have from the school Most School Employees Are Eligible for districts that authorize them. Nearly 75 percent of Retiree Health Benefits. Most medium and charter schools are incorporated as independent large school districts and about one-third of small nonprofit organizations. These charter schools school districts provide health benefits to retirees. receive funding directly from the state and operate Typically, the district provides retiree health benefits with a large measure of autonomy. Most of if the employee has (1) worked in the district for a these charter schools are not unionized, with the minimum number of years (typically 10 to 15) and management of these schools determining salaries (2) reached a minimum age (typically 55). Districts and other terms of employment. In contrast, the generally provide health benefits until the retiree remaining 25 percent of charter schools have reaches age 65 and qualifies for Medicare. A few a closer relationship to their authorizing school districts, however, provide lifetime health benefits. districts. In some of these cases, charter schools Most districts cover the cost of these benefits on receive their funding directly from their authorizing a pay-as-you-go basis, with only a few districts district and adhere to the same collective pre-funding benefits as employees earn them. As bargaining agreements. a result, some districts have very large unfunded School Employees Are Part of One of Two retiree health liabilities. Charter schools rarely Pension Systems. The California State Teachers’ provide retiree health benefits unless they have Retirement System (CalSTRS) administers pension a close relationship with their authorizing school benefits for school teachers, administrators, and districts. other certificated employees (such as nurses, State Sets Minimum and Maximum Local librarians, and counselors), whereas the California Reserve Levels. The state expects districts Public Employees’ Retirement System (CalPERS) to keep a minimum level of local reserves. administers pension benefits for noncertificated The minimum local reserve level varies based employees (such as clerical staff). Of school on district size. Specifically, the minimum employees in these pension systems, about reserve ranges from 1 percent of total annual 60 percent are members of CalSTRS, with the expenditures for the state’s largest school districts remainder members of CalPERS. CalSTRS to 5 percent for the smallest school districts. members generally are not part of the federal Social In 2014, Proposition 2 established a state-level Security retirement system, whereas CalPERS Proposition 98 reserve. The state also for the first members generally are a part of that system. time set a maximum local reserve level. Local Some part-time and charter school employees do reserves are capped the year after the balance in not receive pension benefits through CalSTRS or the state Proposition 98 reserve equals at least CalPERS, but they may be part of Social Security. 3 percent of total annual Proposition 98 school Most School Employees Receive Health funding. When this threshold is met, medium and Benefits. In addition to pension benefits, active large school districts (those with 2,500 or more school employees typically receive health benefits students) are limited to having local reserves (specifically medical, vision, and dental care) that amount to no more than 10 percent of their as part of their compensation. School districts annual expenditures. Smaller districts, districts that vary, however, in terms of the share of cost they receive most of their funding from local property tax cover. Approximately half of teachers and other revenue (“basic aid” districts), and districts that can certificated employees participate in a health plan demonstrate “extraordinary fiscal circumstances” for which the district pays 100 percent of the are exempt from the cap. (About 60 percent premium. (Employees covered by these plans still of districts fall into the first or second of these pay some costs out of pocket, including copays.) exemption categories.) To date, the cap has not Approximately 30 percent of teachers participate been operative. in plans for which the district pays between www.lao.ca.gov 5 analysis full gutter 2020-21 BUDGET CORE COST DRIVERS Below, we discuss trends in districts’ main cost declined by about 10,000 students (4 percent). drivers: student attendance, staffing levels, and staff In other parts of the state, student attendance compensation (salaries, pensions, and health care). has been growing notably. The most pronounced growth in numerical terms has been in Kern Student Attendance County, which had about 15,000 more students Overall Attendance Has Been (8.3 percent) in 2018-19 compared to 2013-14, Declining. Student attendance grew at an average and in San Joaquin County, which had about annual rate of 2.4 percent from the late 1980s 10,000 more students (7.4 percent). to early 2000s, remained essentially flat from More Counties Projected to Decline Over 2004-05 through 2013-14, and began declining the Next Decade. Under our projections, most in 2014-15. A drop in the number of births (and counties that have been declining in recent underlying birth rates) has been one factor driving years would experience even greater declines declines in the state’s school-aged population. in the future, and many counties that have been Total births in the state fell from 550,000 in 2008 to growing would begin to experience small declines 500,000 in 2014 to 450,000 in 2018. Another (Figure 2). For example, we project student factor that has driven declines is migration patterns. attendance in Los Angeles County in 2027-28 to California has experienced net out-migration of be approximately 210,000 students (15 percent) school-aged children every year since 2013, with lower compared to 2018-19. Orange and Santa the annual decline deepening almost every year Clara Counties likewise experience large declines— from 2013 through 2018. dropping 66,000 students (14 percent) and 34,000 Overall Attendance Is Projected to Continue students (13 percent), respectively. In contrast to Declining. Our projections have student attendance their recent growth trends, Kern and San Joaquin declining throughout the coming decade (Figure 1). Counties also begin experiencing declines, Our projections assume that birth rates in California though at much slower rates than other counties. remain at historically low levels. In addition, we (Demographic projections extending a decade into assume the state continues to experience a net the future are subject to a relatively high level of out-migration of school-aged uncertainty. Under alternative assumptions, such children at levels consistent with the past few years. Figure 1 Attendance Trends Vary K-12 Attendance Is Projected to Continue Declining Among Counties. The overall Percent Change From Prior Year trend in student attendance 5% masks significant regional Projections variation. In some parts of the 4 state, student attendance has 3 been decreasing notably. The most pronounced attendance 2 declines in numerical terms have 1 been in Los Angeles County, which had about 100,000 fewer students in 2018-19 compared -1 to 2013-14 (a 7.4 percent decline); Orange County, which -2 declined by about 20,000 1988-89 1993-94 1998-99 2003-04 2008-09 2013-14 2018-19 2023-24 2027-28 students (4.7 percent); and Santa Clara County, which 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Figure 2 Most Counties Projected to Experience Declining Attendance Projected Change in Student Attendance, 2018-19 to 2027-28 Blue indicates growth in student attendance, with darker shades of blue indicating greater growth. Red indicates decline in student attendance, with darker shades indicating larger decline. www.lao.ca.gov 7 analysis full gutter 2020-21 BUDGET as those the Department of Finance makes for its statewide identified for special education services projections, enrollment does not decline as quickly has increased from 11 percent to 13 percent. and a higher share of counties experience growth.) Much of this increase is attributable to the growing Some Districts Have Seen Large Changes prevalence of autism, a disability that typically in Attendance. Consistent with county-level requires districts to provide intensive support, often attendance trends, the district with the largest with aides and specialists. The share of students attendance decline is LAUSD, which had about identified with autism has increased from 1 in 600 77,000 fewer students in 2018-19 compared students in 1997-98 to about 1 in 50 students in to 2013-14 (Figure 3). During the same time, 2018-19. Many medical experts expect autism rates San Diego Unified and Long Beach Unified each to continue increasing, thereby placing continued declined around 8,000 students. Whereas the cost pressure on schools. districts that had the greatest declines were Identification Rates Vary Notably Among located in urban areas mostly in and around Los SELPAs. Overall special education identification Angeles, the districts with the largest growth rates among SELPAs range from 4.5 percent were spread across several areas of the state. to almost 20 percent. The range is large for (The counts shown in Figure 3 exclude all charter the incidence of students with mild disabilities school attendance, even for the charter schools and the incidence of students with severe that receive funding directly from their authorizing disabilities. Whereas the incidence of students with district. We discuss charter attendance below.) relatively mild disabilities (such as stuttering and In Some Districts, Charter School Attendance dyslexia) ranges across SELPAs from 4 percent Is Growing. The district trends noted above mask intradistrict Figure 3 attendance shifts from district-run schools to charter schools. Since Certain School Districts Have Experienced 2013-14, slightly more than a Notable Changes in Student Attendance quarter of districts (26 percent) have 2018-19 Attendance Relative to the 2013-14 Level experienced increases in charter Overall Change school attendance. Overall charter School District County in Student Attendance school attendance in the state Largest Declines increased by 143,000 students Los Angeles Unified Los Angeles -76,995 from 2013-14 through 2018-19— San Diego Unified San Diego -8,107 raising charter school attendance Long Beach Unified Los Angeles -7,919 from 8 percent to 10.5 percent of Santa Ana Unified Orange -6,754 overall public school attendance. Garden Grove Unified Orange -4,782 Despite the overall growth in charter Montebello Unified Los Angeles -4,651 attendance, 10 percent of districts Fontana Unified San Bernardino -3,767 Compton Unified Los Angeles -3,686 saw a decline in charter school Pomona Unified Los Angeles -3,268 attendance, and 65 percent of Capistrano Unified Orange -3,105 districts still do not have a single Largest Increases charter school located within their Irvine Unified Orange 4,823 boundaries. Dublin Unified Alameda 3,628 Statewide Special Education Kern High Kern 3,284 Identification Rates Have Been Lammersville Joint Unified San Joaquin 2,551 Increasing. School districts Clovis Unified Fresno 2,446 are not only affected by overall Salinas Union High Monterey 2,313 student attendance but by the Beaumont Unified Riverside 2,207 Ceres Unified Stanislaus 1,829 share of students identified for Fremont Unified Alameda 1,501 special education. Over the past Santa Maria-Bonita Santa Barbara 1,428 ten years, the share of students 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET to 15 percent, the incidence of students with Staff Compensation relatively severe disabilities (such as having multiple Average Teacher Salary Has Been on the disabilities, including autism) ranges from less than Rise. In addition to hiring more teachers, most 0.5 percent to 5 percent. districts have been increasing staff salaries. We Staffing Levels estimate that the average salary of a school district teacher in 2018-19 was approximately $82,000, Overall Teacher Workforce Has Been an increase of about $4,000 (5 percent) over Increasing. School districts had about 295,000 the inflation-adjusted 2013-14 level (Figure 4). full-time equivalent (FTE) teachers in 2018-19, In 2017-18 (the most recent year for which an increase of about 18,000 (6.4 percent) over cross-state data are available), California had the 2013-14 level. Coupled with the effects of the second highest average teacher salary in the declining student attendance, the statewide nation—topped only by New York. (California’s student-to-teacher ratio, in turn, has been dropping ranking drops if adjusted for cost of living. over the past several years. In 2018-19, it stood Using the federal Bureau of Economic Analysis at about 21:1—comparable to the level prior to cost-of-living adjustments [COLAs], California ranks the Great Recession. Similarly, by 2018-19, the as the tenth highest state.) statewide student-to-administrator ratio (237:1) had Salary Changes Have Varied Among dropped below pre-recession levels. Given the return Districts, but Pressure Likely to Remain for of staffing levels to pre-recession levels, coupled All. About two-thirds of districts experienced with declining student attendance, the pressure to growth in teacher salaries between 2013-14 hire additional teachers and reduce class sizes is and 2018-19 (after accounting for inflation). The likely to subside over the coming years. smallest districts, especially those with fewer than Greatest Growth Has Been in School 12 teachers, were prone to the largest fluctuations. Support Staff, Pressure Likely to Remain. Inflation-adjusted salary changes in these small The levels of school support staff, which include districts ranged from a 38 percent increase to a teacher aides, counselors, psychologists, social 24 percent decline. Changes in larger districts workers, nurses, office staff, and custodians, during this time were more moderate but still is at a historic high. School districts had about notable. For example, among the 25 largest school 242,000 FTE support staff in 2013-14, compared districts, inflation-adjusted salary changes ranged to 294,000 in 2018-19—a 21 percent increase. from a 9 percent increase to a 5 percent decline. This increase includes about 19,000 more teacher aides, 7,300 more office staff, 2,600 more counselors, and Figure 4 1,300 more psychologists. Some Average Teacher Salary and Benefits of the increase in support staff Have Grown Over Time likely is due to adding back staff 2018-19 Dollars positions eliminated during the Great Recession. Some of the $120,000 increase also is likely a response to a growing share of students 100,000 with disabilities. Districts tend Benefits 80,000 to hire additional teacher aides and specialists to support these Salary 60,000 students. Given the recent growth trend in special education, this 40,000 staffing cost pressure is likely to 2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 2014-15 2016-17 2018-19 remain, at least over the next few years. www.lao.ca.gov 9 analysis full gutter 2020-21 BUDGET Despite these variations in recent salary trends districts spent more than $1 billion on retiree health among districts, we expect most, if not all, districts benefits. This amount is likely to grow more quickly to face pressure moving forward to increase than inflation moving forward as districts pay the teacher (and other staff) salaries because housing obligations associated with their unfunded liability. and other personal costs of living in California are The few districts that have prefunded their retiree likely to remain relatively high. health benefits, by contrast, are expected to face School Districts Have Been Taking Actions to smaller cost increases moving forward. Contain Rising Health Care Costs. Two decades Pension Costs Have Been Growing, but ago, the cost of health benefits was one of the Slower Growth Expected Over Next Few Years. biggest cost pressures facing districts. Between Like many other pension systems around the 2000-01 and 2003-04, districts’ average benefit country, CalSTRS and CalPERS have unfunded costs rose by 10 percent each year after inflation. liabilities. As with retiree health liabilities, unfunded Between 2004-05 and 2012-13, districts’ cost pension liabilities occur when assets on hand are increases slowed to an average annual increase of less than the estimated cost of benefits earned 2.5 percent after inflation. Between 2013-14 and to date. In 2013-14, the Legislature enacted a 2018-19, districts’ cost increases slowed further plan to pay down the CalSTRS unfunded liability to 1 percent after inflation. Some districts have within about 30 years by ramping up pension moderated their spending on health benefits by contributions from districts, teachers, and the implementing certain cost-containment measures, state. Over the same period, district contributions including capping employer contributions. In to CalPERS also have increased to address recent years, districts’ health care cost increases unfunded liabilities. For 2019-20, we estimate have been about 1 percentage point lower than total school district pension contributions will the increase in total statewide spending on health be approximately $7.9 billion, an increase of care—indicating their cost-containment measures $4.7 billion over the 2013-14 level. For 2020-21, are having some effect. we expect total school district pension costs to Districts Face Retiree Health Liabilities. increase by another $800 million to $1 billion. The Because most districts have not set aside money exact amount depends on various factors, including during their employees’ working careers to cover districts’ salary decisions and future investment their retiree health costs, they have unfunded retiree returns. Looking beyond the budget year, district health liabilities. By deferring these payments, contribution rates to CalSTRS are scheduled under we estimate school districts have accrued an current law to level off. District contributions to unfunded liability exceeding $24 billion statewide. CalPERS, however, are likely to continue increasing Though the majority of this liability is attributable at a steady pace for the next several years—likely in to approximately a dozen large school districts, the range of a few hundred million dollars per year. nearly all districts that offer retiree health benefits (These estimates account for the additional pension have at least some unfunded liability. In 2017-18, payments the state made on districts’ behalf as the latest year for which data are available, school part of the 2019-20 budget plan.) DISTRICTS IN FISCAL DISTRESS School Districts Have Budgets Reviewed and core indicators of district fiscal health, including Rated. Before the start of each fiscal year, districts reserve levels and changes in salary and benefit are required to submit their locally developed costs. During the fiscal year, districts are required budget plans to their respective COEs for review. to submit two budget updates (or “interim reports”) COEs are tasked with approving, conditionally to their COE—one in the fall and the other in approving, or disapproving these budgets. In the spring. For each of these budget updates, making their determinations, COEs consider ten COEs assign a positive, qualified, or negative 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET certification. A positive rating indicates a district will consistent focus on good management practices. meet its financial obligations in the current year and Most districts, for example, have accurate budget subsequent two years. A qualified rating indicates projections and deliberately plan for cost increases a district might not meet its obligations over this in key areas such as pensions and special period, whereas a negative rating indicates a education. district will be unable to meet its obligations in the Only a Few Districts Are Chronically current year or following year. Distressed. Though more than 150 districts have Districts With Poor Budget Ratings Receive received a negative or qualified rating at least once Intensified COE Support and Intervention. since 2013-14, few districts receive poor ratings Districts with qualified and negative budget consistently. Several consecutive poor budget ratings are subject to escalating COE oversight ratings, however, can signal substantial district and intervention. If a district ultimately is unable problems and potentially even have implications to pay its bills, its local school board may request for the state budget were one of these districts an emergency state loan. If the Legislature and to require an emergency state loan. For these Governor decide to approve the request, the loan reasons, we undertook a deeper analysis of is authorized through a state appropriations bill. “chronically distressed” districts. We defined a Upon receiving a state loan, the local governing chronically distressed district as one that received board loses its authority and an administrator is (1) two or more qualified or negative ratings since appointed to run the district. The applicable county the first interim report of 2016-17 or (2) two superintendent of schools, with the concurrence consecutive negative ratings in 2018-19. Figure 6 of the state Superintendent of Public Instruction (see next page) shows the 30 districts meeting one and the president of the State Board of Education, of these criteria. appoints the administrator. The administrator Chronically Distressed Districts Come in All typically cedes power back to the district gradually Sizes. As Figure 6 shows, among the 30 chronically over several years after the local board has distressed districts are the state’s largest district and demonstrated good management in five specified some of its smallest. Chronically distressed districts, areas (including financial management and facilities however, tend to be relatively large. In 2018-19, management). student attendance in the median chronically School Districts With Poor Budget Ratings distressed district was 3,383, compared to 1,525 Are at Historically Low Levels. The vast majority for all other districts. About one-third of chronically of districts in California have positive budget ratings. Of the Figure 5 nearly 1,000 districts currently School Districts in Fiscal Distress at operating, only five received a Historically Low Levels negative fiscal rating in the spring Share of Districts With Poor Budget Ratings 2018-19 reporting cycle. An 20% additional 27 received qualified ratings. As Figure 5 shows, the share of districts currently in 15 distress is near a historic low Qualified and significantly below the peak 10 during the Great Recession. The historically strong growth in school 5 funding since 2013-14 likely Negative is one reason so few districts have poor budget ratings today. 2002-03 2006-07 2010-11 2014-15 2018-19 Another reason is likely that many districts are well managed, with a www.lao.ca.gov 11 analysis full gutter 2020-21 BUDGET distressed districts enrolled more than 10,000 Chronically Distressed Districts Have Two students, compared to 15 percent of all other Other Common Student Characteristics. districts. Of all public school students in the state, Whereas about 60 percent of all districts in 13 percent attend chronically distressed districts. California are experiencing declining student attendance, more than 80 percent of chronically distressed districts are declining. Excluding Figure 6 LAUSD, chronically distressed districts, however, A Profile of tend to decline at rates similar to other declining 30 Chronically Distressed Districts districts. In 2018-19, student attendance in the 24 chronically distressed districts with declining Average Daily Attendance attendance (apart from LAUSD) was an average of District Name (2018-19) 11 percent smaller compared to 2013-14 levels, almost identical to the drop among all other Elementary School Districts Feather Falls Union Elementary 9 declining districts in the state. (LAUSD declined by Bangor Union Elementary 99 16 percent over this period.) In addition to being Sausalito Elementary 108 more likely to have declining student attendance, San Miguel Joint Union Elementary 590 chronically distressed districts tend to have slightly Gold Trail Union Elementary 629 larger shares of EL/LI students and foster youth Cascade Union Elementary 990 than other districts. In 2018-19, 64 percent of Santa Rosa Elementary 3,424 students in chronically distressed districts fell into Alum Rock Union Elementary 8,835 at least one of these categories, compared to High School Districts 60 percent of students in all other districts. West Sonoma County Union High 1,703 Governance and Management Are Key Issues Santa Rosa High 10,101 Sweetwater Union High 36,930 in Chronically Distressed Districts. Most of the county officials and superintendents we interviewed Unified School Districts over the past several months indicated that Klamath-Trinity Joint Unified 899 governance and management issues are common Black Oak Mine Unified 976 Yosemite Unified 1,464 among chronically distressed districts. One notable Mountain Empire Unified 1,617 issue is high turnover among executive staff and Gateway Unified 2,101 poor executive relations. In a review of the most Bonsall Unified 2,311 recent available interim reports from 23 chronically Calaveras Unified 2,648 distressed districts, nearly half reported turnover Southern Kern Unified 3,343 in their district superintendent or chief business Newark Unified 5,549 officer within the past 12 months. Another Inglewood Unified 7,407 common characteristic is a lack of fiscal expertise. Vallejo City Unified 10,877 Burbank Unified 14,540 Chronically distressed districts often make poor Oceanside Unified 16,697 budget projections—overestimating their enrollment Coachella Valley Unified 16,916 and underestimating their costs—and sometimes San Marcos Unified 20,086 enter into labor agreements that they cannot Temecula Valley Unified 26,649 sustain on an ongoing basis. Although all districts Oakland Unified 32,513 in the state face fiscal pressures, chronically Sacramento City Unified 38,190 distressed districts—with deadlocked, inconsistent, Los Angeles Unified 410,133 or otherwise ineffective leadership—are less likely to have the tools needed to respond to these challenges. 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET OPTIONS FOR ADDRESSING COST PRESSURES Governor’s Budget Takes Certain Approaches Proposition 98 funding is available, one key to Addressing School Districts’ Cost Pressures. decision the Legislature faces is how much of the The Newsom Administration recently released its new funding to provide through LCFF. Allocating 2020-21 budget plan for school districts. The plan more funding through LCFF would help all districts contains a total of $3.3 billion in new Proposition 98 address some of their key cost pressures, including funding for school districts. Of this amount, the their salary, health care, and pension costs. The Governor proposes using $1.4 billion for ongoing lower the statutory COLA for LCFF, the more purposes and $1.9 billion for one-time initiatives. The difficulty districts will have covering these pressures. Governor uses most of the ongoing funding increase Pension costs alone, for example, are estimated to provide a COLA for LCFF. The Governor has to increase by at least $800 million in 2020-21. If many one-time initiatives but the largest are focused the statutory COLA were low and Legislature were on addressing longstanding workforce shortages, to provide no other ongoing increase in general student poverty, and student achievement gaps. purpose funding, most school districts likely would Under the Governor’s budget plan, per-student need to dedicate nearly all of their additional LCFF funding reaches $12,619—increasing about $500 funding to covering higher pension costs. Providing (4.1 percent) from the previous year. Over the additional funding for LCFF would ease some of coming months, the Legislature will hear from this pressure. Providing funding through LCFF also many school groups in response to the Governor’s gives districts some flexibility to use funding in ways proposals. The information provided in this report is that best fit their local budget-balancing strategies, intended to help legislators have a better foundation whether that be, for example, increasing salaries, of knowledge that they can draw upon in responding renegotiating health premiums, or beginning to both to the Governor’s and school groups’ funding prefund retiree health liabilities. It also would be requests. This report also is intended to help the simple to administer—avoiding the extra layer of Legislature be proactive in considering its highest start-up costs associated with creating new ongoing budget priorities for school districts. programs. A Few Options the Legislature Could Begin Increasing Special Education Funding Rates Considering. We dedicate the rest of this report Helps Address Cost Pressures Too. In addition to identifying a few options the Legislature could to rising pension costs, many school districts have begin considering for using new Proposition 98 expressed concern with increases in their special funding in ways that help address school districts’ education identification rates and associated cost pressures in 2020-21. Consistent with the costs. The first step in addressing this issue would guidance we offered in our November report, The be targeting a portion of new ongoing funding 2020-21 Budget: The Fiscal Outlook for Schools for special education equalization. To address and Community Colleges, we think the Governor’s historical inequities, the Legislature typically “levels proposed overall split of new ongoing and one-time up” funding rates to a certain percentile of district Proposition 98 spending is reasonable. Below, we rates. We estimate that funding all districts at the discuss options for new ongoing spending, as well 90th percentile of existing per-pupil rates would cost as new one-time spending. Though the options about $150 million. The advantage of equalization are not exhaustive, they link to many of the core is that most districts in the state would benefit, cost pressures we discussed earlier in this report. but those with the lowest per-pupil rates would In the weeks to come, our office will provide more benefit the most. Such an approach builds upon detailed analysis to help the Legislature in making actions the state took in 2019-20. (The Governor its specific 2020-21 budget decisions. has a 2020-21 proposal to create a new special Allocating New Funding Through LCFF education funding formula that would increase rates Would Help All Districts Address Compensation for most SELPAs. We are in the midst of evaluating Pressures. Given that additional ongoing this proposal and plan to release an assessment www.lao.ca.gov 13 analysis full gutter 2020-21 BUDGET of it in our forthcoming February report, the rate increases over the near term. CalSTRS rates, “Proposition 98 Education Analysis.”) for example, are projected to rise from 17.1 percent Supplemental Pension Payments Also Would in 2019-20 to 18.4 percent in 2020-21, before Help All Districts Address Compensation dropping to 18.1 percent in 2021-22. Though Pressures. Many school districts regard higher we believe these secondary options are inferior pension costs as their most significant fiscal to using one-time Proposition 98 funding for challenge. To further address this issue, the supplemental pension payments, they still would Legislature could set aside a portion of new help districts address existing liabilities and, in one-time Proposition 98 funding for paying down some cases, could improve district fiscal health. districts’ unfunded pension liabilities more quickly. By comparison, most of the one-time proposals To accomplish such acceleration, the payments in the Governor’s budget would require districts would need to supplement the previously scheduled to implement new programs or expand existing increases in district and state contributions for services. 2020-21. Supplemental payments would both State Efforts to Address Cost Pressures improve the funding status of the pension systems Should Reinforce Good Fiscal Practices. In and tend to lower district pension contributions making its allocation decisions, we advise the over the next few decades—making district budgets Legislature to maintain strong incentives for easier to balance on a sustained basis. Moreover, local governing boards to remain responsible for supplemental payments would build upon state district fiscal health. School funding has grown at actions taken in 2019-20. Of all the Legislature’s historically high rates since 2013-14, and growth one-time district spending options, we believe is projected to remain above average in 2020-21. supplemental pension payments would provide the The vast majority of districts continue to have greatest sustained fiscal benefit to districts. positive budget ratings. As this report has shown, Other Options for Helping Districts With all districts face cost pressures. The key tends to Unfunded Liabilities. The Legislature, however, be in how districts respond to and manage those has secondary options it could consider. One of pressures. Whereas most districts are making the these options is to provide districts with one-time decisions necessary to maintain balanced budgets, grants conditioned on them using the funds for any a few districts are in poor fiscal condition. These unfunded retiree liabilities or future pension rate districts tend to have poor budgeting practices, increases (potentially resulting from a temporary typically linked with governance and management economic downturn that has lowered investment problems. Rather than providing state funding returns). Under this option, the Legislature does targeted to these districts, we believe a more not provide relief directly but creates a structure effective strategy would be for the state and COEs for districts to achieve such relief locally. Another to continue working with these districts to improve option the Legislature could consider is using their budget practices. one-time funding directly to smooth out pension LAO PUBLICATIONS This report was prepared by Kenneth Kapphahn, Amy Li, and Ned Resnikoff, and reviewed by Jennifer Kuhn Pacella and Anthony Simbol. 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. 14 LEGISLATIVE ANALYST’S OFFICE