Update on the State Budget

It looks like this week the House and Senate will finally have a detailed budget out for review, debate and negotiation. The last several weeks have been spent gathering information from state agencies and learning details and timelines for stimulus funding.

In addition, leadership is working with the reality that a large tax increase is probably not on the table. To pass a tax increase requires a 2/3 vote. Members of both the Republican and Democrat parties have voiced public opposition to a large tax hike, putting in doubt whether there are 20 Senators and 40 Representatives who would vote for it.

This means the only short-term solutions are cuts, sweeps, reform and borrowing. Longer-term solutions such as comprehensive tax reform and comprehensive education finance reform (as blogged about earlier) will be worked on over the summer to be voted on next session.

Once again, before talking specific details of the education budget, remember that the budget could morph greatly as negotiations take place to get 31 House, 16 Senate, and 1 Governor vote(s). The comments below are where the budget is today.

With regards to education funding, the House and Senate are fairly close to each other with regards to the size of the lump sum cut. There will most likely be a 3% - 4% cut from soft capital. This equates to approximately $150 - $200 million. The original idea was to reduce the base level by this amount but it ended up negatively impacting overrides so soft capital will be reduced instead.

There are other cuts proposed but they affect only certain districts. For example, there is still a proposal to phase out Career Ladder at 28 districts over 11 years. In addition, the funding for Arizona's virtual learning programs (called TAPBI) will be reduced by a certain %; however, the good news is that all districts can now have a TAPBI program and more virtual schools will be allowed statewide.

There is still elimination of the early learners program (the state paying for two years of kindergarten); however, what concerns me in this area is that certain Senators have proposed not funding this year's early learners for kindergarten next year. This means you are going to tell several dozen charter schools and a handful of districts that they have to allow these kids to take kindergarten, but they will receive no funding? And what about the child who transfers to a completely new district or charter school for kindergarten? Do they have to provide kindergarten at no cost?

Continuing on, small school districts (<600 students) will only have 1/2 of the cuts that larger districts receive and charter schools are looking at about a $75 per pupil reduction for 2010.

With regards to ending fund balances of school districts being swept, certain legislators are discovering there is no such thing as "free cash" available for the taking. Any cash swept this year would most likely be made up next year by a local levy. This means those folks pushing to take $300 - $400 million of school balances are actually pushing for a large property tax hike next year. There are a dozen reasons why this is a bad idea, but three of the biggest are these:
1) Those districts who planned for the future (i.e. the end of excess utilities funding, lower sales tax collections, etc.) are the very districts now being punished. Great way to reward competence.
2) Investment banking firms who place bonds for Arizona districts are able to negotiate lower interest rates when there is a positive cash balance, as opposed to a zero, or negative cash balance, as has been proposed.
3) Sweeping ending balances is the most inequitable way of solving a budget crisis. Lots of districts have no ending cash balance, or a negative balance. This will drive up property taxes for some and not for others.

Besides the numbers for education, the bigger debate will be around policy changes accompanying the budget (see the earlier blog on budget BRBs). Will districts be allowed to have 15% overrides? Will bonding be allowed for soft capital? One thing is for sure, both House and Senate leadership want to allow as much flexibility with remaining dollars as possible. For example, any remaining soft capital can be used for M & O expenses.

At the end of the day, there is still about a $400 million hole that cannot be filled easily. The majority of members will not allow any higher cuts to education, which is a relief to me, so other ideas will have to be put forth. Ideas being discussed are rollovers, securitization of the lottery, sale/leaseback of buildings, deeper cuts, etc. These ideas each come with their own set of negative consequences so the next few weeks should prove interesting as members stake out their "die-on-the-hill" issues. One thing is for sure, the chances of this negotiation process taking another month or two is very high.