2009 Budget Act and Related Legislation

August 28, 2009

Dear County and District Superintendents, Charter School = Administrators, and=20 County Chief Business Officers:

On July 28, 2009, Governor Arnold Schwarzenegger signed a package of = bills=20 amending the 2008=9609 and 2009=9610 budgets. The budget amendments = address the=20 budget gap of $24 billion that had developed as a result of the = deepening=20 recession since the last budget actions in February 2009. This letter = provides:=20 (1) a chronology of events leading to the most recent budget actions and = (2) a=20 description of the budgets for 2008=9609 and 2009=9610 as they stand = currently.

OVERVIEW

The 2008=9609 and 2009=9610 budget years appear to be on a continual = cycle of=20 change. The Budget Act of 2008 was one of the latest-enacted budgets in = recent=20 history, signed in September 2008. It lasted less than six months before = amendments were enacted in February 2009. Along with amendments to the = 2008=9609=20 budget, the February budget package included the Budget Act of = 2009=97five months=20 in advance of the constitutional deadline. Due to continuing = deterioration of=20 the state economy, both the 2008=9609 and 2009=9610 budgets were amended = in July=20 2009. This two-year period has seen two sets of amendments to the = 2008=9609=20 budget, one set of amendments to the 2009=9610 budget, four special = sessions, and=20 numerous trailer bills. Together, the Budget Act amendments of July 2009 = and the=20 trailer bills made up a comprehensive package. A list of budget and = trailer=20 bills enacted in February 2009 and July 2009 is provided in Attachment = 1.

CHRONOLOGY

Governor=92s Budget and Special Sessions

Due to the precipitous downfall of the state=92s economy, on December = 1, 2008,=20 the beginning of the 2009=9610 legislative session, the Governor = declared a=20 =93fiscal emergency.=94 Pursuant to Proposition 58 (Article IV, Section = 10[f] of the=20 California Constitution), the Legislature is required to hold a special = session=20 and must act within 45 days to address the emergency. If the Legislature = does=20 not act within 45 days, it may not act on other bills or adjourn until = it has=20 done so.

In response to a 2008=9609 projected deficit of $11.2 billion and a = projected=20 deficit over a two-year period (2008=9609 and 2009=9610) of $28 billion, = the=20 Governor proposed in the first extraordinary session a set of actions to = address=20 the deficit, including a $2.5 billion reduction to Proposition 98. The=20 Legislature developed a majority-vote budget package; however, with the = threat=20 of a veto, the Legislature did not send the package to the Governor.

On December 19, 2008, the Governor called the Legislature into a = second=20 extraordinary session, citing a continued decline in revenues and a = 2008=9609=20 deficit of $14.8 billion with a projected deficit over the two-year = period of=20 $41.8 billion.

On December 31, 2008, ten days before the constitutional deadline, = the=20 Governor released his budget for 2009=9610. In addition to proposals for = 2009=9610,=20 the Governor=92s proposed budget included significant new proposals for = revising=20 the enacted 2008=9609 budget to address the state=92s fiscal crisis. The = package=20 included proposals for expenditure reductions across most programs, = additional=20 revenues, securitization of the lottery, and borrowing.

In early January, the Legislature responded to the Governor=92s = second=20 extraordinary session requests and January budget proposals with a = proposed=20 budget package. The Governor vetoed the package and called a third = extraordinary=20 session.

February Action

On February 20, 2009, the Legislature and the Governor reached = agreement on a=20 package that included the 2009 Budget Act, amendments to the 2008 Budget = Act and=20 various trailer bills that amended the California Education = Code=20 (EC) and other California codes to reflect technical changes = necessary=20 to implement the budget.

The package addressed a deficit then projected at $41.6 billion over = the=20 two-year period 2008=9609 and 2009=9610. The budget package provided an = overall=20 spending plan of $94.2 billion in 2008=9609 and $92.2 billion in = 2009=9610, and=20 addressed the deficit through a mixture of spending cuts ($14.9 = billion),=20 revenue increases ($12.5 billion), borrowing ($5.4 billion), and federal = dollars=20 ($7.9 billion). The budget package also included various ballot measures = that=20 were placed before voters in the May election.

The budget package provided $50.7 billion, a $7.4 billion reduction, = for=20 Proposition 98 programs in 2008=9609 and $54.9 billion, a $3.5 billion = reduction,=20 in 2009=9610 as compared to the 2008 Budget Act. It also included = significant=20 programmatic changes to kindergarten through grade twelve (K=9612) = programs. The=20 budget changes include: (1) funding reductions affecting general purpose = funding=20 (revenue limits) and most categorical programs in 2008=9609 and = 2009=9610 and (2)=20 unprecedented flexibility in spending funds from many categorical = programs=20 through 2012=9613. The California Department of Education (CDE) issued = two letters=20 regarding the February budget action. Please see these budget documents = on the=20 CDE Education Budget Web = page=20 [http://www.cde.ca.gov/fg/fr/eb/].

Governor=92s May Revision

On May 14, 2009, five days before the May election, the Governor = released his=20 May revision of the budget. The May revision reflected the continued = weakening=20 of California=92s fiscal condition. As a result of a decline in state = revenues,=20 the administration increased its estimate of the two-year budget gap and = projected that the Proposition 98 guarantee would drop considerably in = the=20 2008=9609 budget year.

The May revision included two scenarios: (1) if the proposed ballot = measures=20 were adopted and (2) if the proposed ballot measures failed. The ballot = measures=20 did fail and the Governor=92s second scenario, which projected a = two-year budget=20 gap of $63 billion, became operative. This plan reduced Proposition 98 = spending=20 in 2008=9609 by $1.6 billion, to $49.1 billion, and reduced 2009=9610 = spending by=20 $4.5 billion, to $50.4 billion, compared to the February budget = plan.

Some major proposed changes included: (1) additional reductions to = school=20 district apportionments in 2008=9609 and 2009=9610, (2) additional = deferrals of=20 school district apportionment payments from 2009=9610 to 2010=9611, (3) = child care=20 changes associated with eliminating the CalWORKS cash aid program, and = (4) a=20 provision that would allow school districts to reduce the instructional=20 day/instructional year by up to seven days, limited to no more than = three=20 years.

Final Amended Budget Act of 2009

With the worsening of the state=92s economic condition and the = February-enacted=20 budget already out of balance, the Governor called a fourth = extraordinary=20 session on July 1. Finally, in the same month, the Governor and the = Legislature=20 struck a budget deal to close the $24 billion budget gap that had = developed=20 since February. On July 28, 2009, the Governor signed bills to amend the = Budget=20 Acts of 2008 and 2009 and to make statutory changes necessary to = implement the=20 budget package.

The budget package reduced the February-enacted Proposition 98 = funding of=20 $50.7 billion by $1.6 billion for a revised 2008=9609 Proposition 98 = level of=20 $49.1 billion. This amount is $9 billion below the original 2008 Budget = Act=20 funding level. For 2009=9610, the Proposition 98 funding level is $50.4 = billion,=20 $4.5 billion less than the February-enacted funding level of $54.9 = billion. This=20 amount is a decrease of $8 billion compared to the original 2008 Budget = Act.

The Proposition 98 minimum funding level was certified in ABX4 3 = (Chapter 3,=20 Statutes of 2009, Fourth Extraordinary Session) for fiscal years = 2005=9606 through=20 2008=9609. The language specifies an outstanding maintenance factor of = $11.2=20 billion to be restored over time to the Proposition 98 base as the = state=92s=20 economy and revenues improve, as provided in the Constitution of the = State of=20 California.

2008=9609 KINDERGARTEN THROUGH GRADE TWELVE IN DETAIL

This section describes changes made in February 2009 and July 2009 to = the=20 2008=9609 budget as originally enacted in September 2008.

Budget Changes

The February budget package imposed the following reductions that = were=20 characterized as =93non-programmatic,=94 that is, they affected spending = counting=20 towards the Proposition 98 guarantee but did not represent reductions in = funds=20 provided to schools to support programs in the 2008=9609 year. The = budget=20 package:

Redesignates $1.1 billion in revenue limits as coming from = Proposition 98=20 settleup funds. (Settle-up funds are funds that are owed to schools = due to=20 underfunding of Proposition 98 in previous years.)=20
Defers $2.9 billion of payments for the principal apportionment = and=20 kindergarten through grade three (K=963) Class Size Reduction (CSR) = from=20 February to July 2009. (These funds had previously been deferred to = April=97this=20 action makes technical changes and extends the deferral to July.) =

The February budget package made the following programmatic = reductions:

$247.1 million to eliminate the 0.68 percent cost-of-living = adjustment=20 (COLA) provided in the 2008 Budget Act for revenue limits.=20
$944 million from revenue limits on top of the elimination of the = COLA.=20 The deficit factor applied to revenue limits is 7.844 percent for = school=20 districts and 7.839 percent for county offices of education.=20
$944 million in 15.4 percent across-the-board reductions affecting = most=20 categorical programs. Excluded programs are Nutrition, Economic Impact = Aid,=20 K=963 CSR, Special Education, Child Development, After School = Education and=20 Safety, and the Quality Education Investment Act (QEIA). The package=20 authorizes the CDE to recover funds that had already been distributed = through=20 an offset to principal apportionment and categorical program payments. =
$203 million to reflect anticipated savings and revised caseload = estimates=20 in a number of programs.

The July budget package reduced $1.6 billion in 2008=9609 Proposition = 98=20 funding through a reversion (=93sweep=94) of undistributed categorical = program=20 balances. Thepackage provided funding in 2009=9610 to backfill $1.5 = billion of=20 these cuts and provided for a per-average daily attendance reduction to = be=20 applied to apportionments for revenue limits, charter school general = purpose=20 entitlements, and, if necessary, categorical programs. These = transactions will=20 be for the most part =93transparent=94 at the local level; they will be = implemented=20 by accounting adjustments at the state level.

Categorical Flexibility

The February budget package authorizes local educational agencies = (LEAs) to=20 use funds from about 40 categorical programs =93for any educational = purpose=94 for a=20 five-year period ending June 30, 2013. Nineteen General Fund programs, = plus all=20 programs funded from the tobacco tax and other special funds, plus = federal=20 funds, are excluded from this flexibility provision. While the = underlying=20 statutes for programs affected by the flexibility provision remain in = place, the=20 language states that LEAs using the flexibility provision =93shall be = deemed to be=20 in compliance with the program and funding requirements contained in = statutory,=20 regulatory, and provisional language.=94 Attachment 2 provides a list of = programs=20 affected by the flexibility provisions.

The February legislation, as amended in July requires LEA governing = boards,=20 as a condition of receiving funds, at a regularly scheduled open = hearing, to=20 take testimony, discuss, approve or disapprove the proposed use of = funds, and=20 make explicit the use of funds from each of the items affected by the=20 flexibility provisions.

The February legislation provides that funding in the five-year = period for=20 affected programs shall be allocated based on 2008=9609 LEA funding = levels rather=20 than the factors used in the existing formulas (for example, funds for a = program=20 currently allocated based on enrollment will instead be allocated based = on=20 2008=9609 funding levels). The July amendments provide for a base year = of 2007=9608=20 instead of 2008=9609 for the following programs: Supplemental = Instruction,=20 Regional Occupational Centers and Programs, Adult Education, Community = Day=20 Schools, Reader Services for Blind Teachers, Cal-SAFE, Ninth Grade CSR, = and the=20 Advanced Placement Fee Waiver Program. The July amendments also prohibit = districts that receive funding on behalf of a charter school pursuant to = EC sections 47634.1 and 47651 from redirecting funds for = another=20 purpose unless otherwise authorized in law, or pursuant to an agreement = between=20 the charter school and the chartering authority.

LEAs are required to use the Standardized Account Code Structure to = report=20 expenditures of funds pursuant to categorical flexibility using the = appropriate=20 function codes to indicate the activities for which the funds are = expended and=20 the State Superintendent of Public Instruction is required to report = this=20 information to the Legislature (due February 2010).

Use of Year-end Balances

The February budget package also allows LEAs to use restricted = account=20 balances as of June 30, 2008, with certain exceptions, for any = educational=20 purpose in 2008=9609 and 2009=9610. It is important to note that: (1) = the July=20 amendments made some changes in the specific programs affected by this = provision=20 and (2) reserves committed for bond funds, sinking funds, and federal = funds are=20 not available for this flexibility. Attachment 2 identifies Budget Act = items=20 that are affected by this provision, as amended in July.

Changes to Maintenance Contributions

The February budget package reduces, for a five-year period, required = contributions into routine restricted maintenance accounts from 3 = percent to 1=20 percent of an LEA=92s general fund expenditures. The July legislation = exempts LEAs=20 with facilities maintained in good repair pursuant to the Williams = settlement=20 from the 1 percent requirement entirely. These changes are effective = through=20 2012=9613.

Changes to Kindergarten Through Grade Three Class Size Reduction=20 Penalties

The February budget package reduces penalties under the K=963 CSR = program for a=20 four-year period beginning in 2008=9609. Previously, steep reductions in = funding=20 were imposed for classes that received class-size reduction funding but = exceeded=20 20.44 students. The previous penalties had the effect of completely = eliminating=20 funding when a class was greater than or equal to 21.9. Under the new=20 provisions, the maximum penalty is 30 percent of funding, and it is = applied only=20 when class size is 25 or more. The budget package did not change the = existing=20 provision that limits reimbursement to 20 pupils in a class. The July = amendments=20 clarify that an LEA cannot receive funding for more classes than the LEA = applied=20 for by January 31, 2009.

Instructional Materials

The February budget package, as amended in July, provides that the = State=20 Board of Education (SBE) shall not adopt instructional materials or = develop=20 curriculum frameworks until 2013=9614.

Between 2008=9609 and 2012=9613, LEAs are required to provide = sufficient=20 instructional materials for all students. When purchasing instructional=20 materials LEAs must buy standards-aligned instructional materials, and = in the=20 case of kindergarten through grade eight, LEAs must purchase = instructional=20 materials that were state-adopted prior to July 1, 2008, unless the LEA=20 purchased materials adopted after July 1, 2008.

Child Development

The February budget package reduces child care funding by $97 million = and=20 delays implementation of regional market rate changes scheduled for = March 1,=20 2009. The budget also includes a $108 million reappropriation from = 2007=9608 child=20 care savings for CalWORKs Stage 2. This reappropriation will offset the=20 shortfall in one-time savings from the After School Education and Safety = program=20 that were anticipated to be available to fund part of the 2008=9609 = costs for=20 Stage 2.

2009=9610 KINDERGARTEN THROUGH GRADE TWELVE IN DETAIL

This section describes the budget for 2009=9610 as amended in July. =

Major Budget Changes

The budget package:

Reduces revenue limits, and makes commensurate categorical = reductions for=20 basic aid districts, for a savings of $2.2 billion. The deficit factor = to be=20 applied to revenue limits will be 18.355 percent for school districts = and=20 18.621 percent for county offices of education.=20
Appropriates $1.5 billion to repay the 2008=9609 reversion of = undistributed=20 categorical program balances. The budget also reduces apportionments = (or=20 categorical programs in basic aid districts) by an equivalent amount = on a=20 peraverage daily attendance basis. This repayment amount is only $1.5 = billion=20 rather than $1.6 billion because $90 million in High Priority Schools = Grant=20 funds did not need to be replaced due to the elimination of the = program. This=20 reduction is imposed in the July amendments.=20
Reduces $374 million for an across-the-board 19.8 percent = reduction to=20 certain categorical programs compared to the 2008=9609 budget as = originally=20 enacted.=20
Restores $14.4 million to maintain the existing family fee = schedule for=20 child care programs.=20
Revises the schedule for distributing cash to LEAs for most = programs. The=20 new schedule calls for 5 percent in July, 5 percent in August, and 9 = percent=20 each month thereafter. For 2009=9610 only, the budget package layers = additional=20 cash deferrals on top of this schedule in July, August, and November.=20
In addition to existing deferrals from February and June, starting = in=20 2010, defers $700 million of principal apportionment payments from = April and=20 $1 billion from May to August.

California High School Exit Examination and Pupil Assessment

The budget package exempts special education pupils from the = California High=20 School Exit Examination (CAHSEE) graduation requirement until the SBE = makes a=20 determination that alternative means of demonstrating academic = achievement are:=20 (1) not feasible or (2) have been implemented. The SBE action will be = based on=20 the recommendations of the panel convened pursuant to Assembly Bill 2040 = (Chapter 666, Statutes of 2008).

The state assessments budget was reduced by $17.1 million as part of = the=20 across-the-board categorical program cuts. The CDE is working with the=20 Department of Finance (DOF) to reduce testing program costs.

Home-to-School Transportation

The budget deletes $404 million in special funds for home-to-school=20 transportation, but backfills a portion of the cut with $282 million in=20 Proposition 98 funds, resulting in a net 19.8 percent cut in 2009=9610. = State=20 Special Schools transportation will be funded with federal funds.

Charter School Facilities Grant Program

The budget brings the Charter Schools Facilities Grant program = funding to a=20 current basis. Previously, these funds were provided one year in = arrears.

Program Improvement Schools and Districts

The budget package:

Prevents the CDE or the SBE from directing which funds districts = must use=20 to implement corrective actions or sanctions.=20
Appropriates $175 million in Title I set-aside funds and $426 = million in=20 School Improvement Grant (SIG) funds. These amounts include ARRA = funds. The=20 SIG amount assumes that the state can successfully compete for ARRA = SIG funds.=20 The federal guidelines for ARRA SIG funds have not yet been released. = Budget=20 language directs these funds to be used for LEA corrective action = pursuant to=20 the provisions of AB 519, enacted in September 2008, and the Quality = Education=20 Investment Act (QEIA) (see next section), with any remaining funds to = be=20 allocated pursuant to legislation. The CDE is reviewing this language = to=20 determine implications and implementation activities.

Quality Education Investment Act

The budget package:

Suspends the $450 million statutory appropriation (from settle-up = funds)=20 for QEIA for 2009=9610 and extends the program for one additional year = through=20 2014=9615.=20
Appropriates $402 million (the K=9612 portion of the QEIA funding) = in=20 Proposition 98 funding for QEIA.=20
Reduces 2009=9610 revenue limit funding, or charter school general = purpose=20 entitlements, for those entities choosing to continue to participate = in QEIA=20 by the amount they receive for QEIA.=20
Allows districts participating in QEIA to apply for federal Title = I=20 set-aside and SIG funds, and requires the CDE to fund these districts = if they=20 meet eligibility requirements for the funds. Some QEIA schools would = not be=20 eligible because they are not Title I schools in Program Improvement. = In=20 addition, there is not likely to be sufficient funding from currently=20 available funds to meet the existing award amounts for QEIA eligible = schools.=20 The CDE is working with the DOF to identify other funding sources to = fill this=20 gap.

Sale of Surplus Property

The budget allows proceeds from the sale of surplus real property and = any=20 personal property located on the site, which were purchased entirely = with local=20 funds to be placed into the general fund and used for any one-time = general fund=20 purpose. If the purchase of the property was made using proceeds of a = local=20 general obligation bond or developer fees, the amount of the proceeds = deposited=20 into the general fund may not exceed the percentage computed by the = difference=20 between the proceeds and the purchase price divided by the proceeds. = Prior to=20 exercising this authority, districts must certify specific information = to the=20 State Allocation Board and present a plan at a regularly scheduled = public=20 meeting. Any district exercising this authority will be ineligible for = hardship=20 funding from the State School Deferred Maintenance Fund for five years = after the=20 date that the proceeds are deposited into the general fund.

Reserve for Economic Uncertainties

The budget package reduces the reserve for economic uncertainties in = fiscal=20 year 2009=9610 to one-third of the percentage in the Criteria and = Standards=20 adopted by the SBE pursuant to EC Section 33128 as of May 2009. = School=20 districts are required to make progress in returning to compliance with = the=20 Criteria and Standards during the 2010=9611 fiscal year. Compliance with = the=20 requirements for a reserve for economic uncertainties must be fully = restored=20 during the 2011=9612 fiscal year.

Child Development

The budget package fully funds CalWORKs Stage 2 and Stage 3 child = care,=20 maintains the regional market rate ceiling at the 85th percentile of the = 2005=20 regional market rate survey, and rejects proposed increases in the = family fee=20 schedule. Funding for the Extended Day program is provided only through = the end=20 of August 2009, at which time the program is eliminated. In addition, = the=20 package requires the CDE to gather information and develop a profile of = the=20 families receiving subsidized child care services.

The budget continues the General Fund reductions imposed in = 2008=9609, and uses=20 ARRA funds to partially preserve center-based slots while increasing the = overall=20 number of voucher-based slots.

American Recovery and Reinvestment Act of 2009

The budget authorizes expenditure of the remaining American Recovery = and=20 Reinvestment Act (ARRA) funds, including Title I ($540 million), = Individuals=20 with Disabilities Education Act ($634 million), and State Fiscal = Stabilization=20 Funds ($600 million).

Flexibility

The budget package includes the following additional flexibility:

Allows school districts, county offices of education and charter = schools=20 to reduce five instructional days and/or the equivalent number of = minutes per=20 year without incurring a loss of the funding through 2012=9613.=20
Allows some new schools to apply for funds from programs affected = by the=20 flexibility provisions and capped at base year participation levels. =

WHAT=92S NEXT?

According to the DOF, the state budget situation is likely to remain = a=20 challenge. The DOF projects a substantial deficit in the coming fiscal = year.=20 While the July projected deficit has been closed, more actions may be = necessary.=20 We will continue to update you as changes occur.

You can find detailed information about individual programs on the CDE Funding Web page [http://www.cde.ca.gov/fg/fo/]. The information = available=20 includes a program description, the allocation methodology, eligibility=20 criteria, application process, and important dates. You can also = subscribe to=20 the Funding mailing list to receive e-mail notifications as requests for = applications are announced and posted on the CDE Available Funding Web = page [http://www.cde.ca.gov/fg/fo/af/].

If you have any program-specific questions regarding the impact of = the budget=20 package on a particular program, please utilize the CDE Search CDE Funding Web = page [http://www.cde.ca.gov/fg/fo/sf/] for CDE = funding and=20 contact information.

If you have any questions regarding the state education budget, = please=20 contact the Fiscal Policy Division at 916-324-4728. You may also contact = Carol=20 Bingham, Director, Fiscal Policy Division, by e-mail at cbingham@cde.ca.gov.

Sincerely,

JACK O=92CONNELL

JO:ap

Attachments

NOTICE: The guidance in this letter is not binding on local educational = agencies=20 or other entities. Except for the statutes, regulations, and court = decisions=20 that are referenced herein, this letter is exemplary, and compliance = with it is=20 not mandatory. (See California Education Code Section = 33308.5.)

Last Reviewed: Friday, September 11, 2009 =