The State Fiscal Stabilization Fund Mess in California

It is no secret that California is in a heap of budget trouble for fiscal years 2009 and 2010, let alone the years after that. Thus far, California has taken its fiscal woes seriously with respect to federal education funding. It submitted and won approval for its State Fiscal Stabilization Fund (SFSF) application in the very first round to ensure a quick flow of federal economic stimulus dollars. But a $2.0 billion dollar accounting mistake has led the state to submit a revision to its application that could enable Governor Schwarzenegger to cut education funding further.

Essentially, the California Department of Finance claims that it overestimated the state’s maintenance of effort (MOE) baseline funding (based on the state’s fiscal year 2006 spending levels) by $2.0 billion due to complications with “settle up” funds owed to school districts. The MOE determines the minimum amount of funding a state must provide to both K-12 and higher education in 2009 and 2010, enabling states to use SFSF dollars to fill in resulting budget gaps. This oversight allows the state significant flexibility in its state contributions for education funding in 2009 and 2010.

At the same time, the state failed to include community college funding in its MOE numbers for higher education. As a result, the original SFSF application significantly understated how much money the state will spend on higher education each year. This oversight resulted from the unusual way California funds its community colleges. Community college funding is included with K-12 funding as determined by Proposition 98-a school spending law which sets an annual minimum funding level for K-14 in the state.

California’s revised SFSF application appeared on the Department of Education’s website last Friday even though the revision is dated May 17^th. The amendment only changes the MOE baseline numbers (Part 4, Section C) for K-12 and higher ed, not the section where the state commits to actual levels of spending (Part 5, Section A). As a result, it seems that California hopes to reach the original state contribution levels but is allowing for the possibility of lower spending in the case of real budget problems. The original and revised MOE numbers, as well as the state spending levels, can be found in the table below.

The only significant changes beyond the $2.0 billion drop in the K-12 MOE baseline number for fiscal year 2006 is the jump in the higher ed MOE numbers to account for community colleges. This is problematic because the state did not submit a revision for its actual spending levels for higher ed, creating a large gap between the MOE numbers and the actual spending levels. This may also have an impact on the distribution of SFSF dollars between K-12 and higher ed. If the community college inclusion shifts the proportion of the state deficit attributed to higher ed versus K-12, California will be obligated to spend additional SFSF dollars on higher education. It is possible that the governor will have to submit yet another revision to account for this change.

Because the $2.0 billion MOE revision affects K-12 spending and not higher ed spending, California’s public schools could face even greater budget cuts than previously expected. Documents from the California Department of Finance suggest that total cuts to spending legislated through the Proposition 98 funding law could be as high as $6.0 billion over two years compared to previously planned budget numbers. While these cuts will be somewhat offset by SFSF spending, California was not provided with sufficient SFSF dollars to account for its entire budget deficit.

California is not alone in its budget struggles. But as the state that educates more public education students than any other, these budget troubles are sure to have a widespread effect. We hope that spending cuts are made wisely to minimize their impact on the quality of education students receive.