Cash Flow & Debt Concerns of California School Districts in 2012-13 Prepared and Presented by: Alameda County Office of Education Jeff Potter, Executive Director, District Business & Advisory Services Spencer Mead, Director, District Advisory Services September 25, 2012 Today’s Discussion The Cash Crisis for California School Districts Current school district funding model Impact of state budget crisis on school districts Elimination of RDAs in 2011-12 The Debt Crisis for California Schools, the State, and Beyond The global debt crisis The debt tipping point School district borrowing - and the emergence of extreme borrowing techniques Education in California California served 6.3 million K-12 students in 2010-11 with 261K teachers Total K-12 schools statewide - 10,340 Pupil/teacher ratio of 24.12 (national average = 15.97) Source: National Center for Education Statistics (nces.ed.gov), 2011 Ranked 35th nationwide in per pupil spending in 2010 Ranked 23rd before recession Education spending grew just 2% from 2007 to 2010, compared to national average of 10% California spent $9,375 per pupil in 2010 – 12% below the national average Source: U.S. Census Bureau Fourth highest average teacher salary in U.S. ($67,871) Source: National Center for Education Statistics Student achievement ranked below the national average in 2011 on all standard assessment exams (reading, writing, math, & science) Source: National Center for Education Statistics Cash Concerns California School District Funding • Primary funding model known as the “revenue limit”. A mix of property taxes and state aid for most districts. The revenue limit is typically two-thirds of a district’s General Fund revenue. Each district has a different revenue limit calculation, based on the district type (elementary, high or unified), size, historical spending patterns, and a multitude of other variables, which together make for a complicated and lengthy formula. A district’s individual base revenue limit is multiplied by the district’s average daily attendance (ADA) to determine it’s total revenue limit funding each year. • Other “regular” funding will typically come from the following sources: Other state revenue used to fund various programs within the district (known as “categoricals”). Federal revenue Local revenue (interest income, donations, etc.). Does not include property taxes, which are part of the revenue limit calculation. Revenue Limit Funding • Imagine a bucket Revenues raised through local property taxes are first dumped into the district’s bucket. If the bucket is not filled, the state tops it off with state tax revenues (state aid). Reported on J-29 Basic Aid Funding • If the bucket is completely filled by local property tax revenues, the state has no need to "top off" the bucket. If the bucket overflows with local property taxes, the district gets to keep the overage. • Districts whose buckets are completely filled by local property taxes are called “excess tax districts” (or "basic aid districts"). • There are typically less than 100 districts categorized as “basic aid” each year (out of a total of 1,131 districts). Because property tax revenues fluctuate each year, some districts are basic aid one year but not the next. Reported on J-29 Basic Aid Funding Additional Information • In the past, the state also gave districts with high property tax revenues an additional $120 per ADA (or $2,400 per district-whichever was greater). The California Constitution says that the state should contribute this additional money to fulfill its constitutional guarantee to provide all public schools with "basic aid." However, because of budget constraints in 2002-03, lawmakers decided to eliminate the $120, saying that the state met its constitutional obligation to these districts with other state funding from categorical programs. • At the time of the second principal apportionment (which is made in June), the California Department of Education officially certifies which districts are basic aid for the school year that is ending. Revenue Limit Deficit • • The California state budget crisis has resulted in a revenue limit funding reduction to schools of over 20%. Additional cuts (“triggers”) may occur if Governor Brown’s tax initiative fails in November (Prop 30). “Basic aid” districts don’t receive revenue limit state aid; they are cut through other state revenue sources (known as “categoricals”). K-12 Revenue Limit – Oakland USD Base revenue limit per ADA Source: School Services of California, Inc. State Apportionment Deferrals • State aid is received by schools throughout the year. Amount of state aid varies depending on each district’s revenue limit calculation. Total state aid is “apportioned” to districts on a “5-5-9” schedule (5% in July & August, 9% in September through June). • First state aid deferral to schools occurred in June 2003. Deferred from June 30th to the first week in July. Purpose was to assist state budget by reflecting one less payment to schools in 2002-03 fiscal year. • Nearly 10 years later, there are now numerous deferrals. Eight inter-year deferrals from 2012-13 to 2013-14, totaling $7.2 billion. (Ed Code 14041.5, 14041.6) Five intra-year deferrals within 2012-13, totaling $3.5 billion (AB 103). Monthly deferrals in 2012-13 in accordance with the Education Protection Account (EPA), per the Governor’s November tax initiative, totaling nearly $7 billion. Deferral Impact on District Cash Flow • Impact to each district varies depending on the amount of state aid in their revenue limit calculation. • Intra-year and cross-year borrowing has become far more prevalent, and the loans are a much larger percentage of total district revenue. • Borrowing options include: TRANs for property taxes paid in December & April for intra-year and cross-year state deferrals Borrowing from County Treasurer Interfund borrowing by the district (self-funded borrowing) Cash vs. Ending Fund Balance $60,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 $0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Oakland Unified - Cash in County Treasury Oakland Unified - Ending Fund Balance ACOE District Business & Advisory Services Summary of Alameda County School District Actuals for 2011/12 General Fund information only District Alameda USD Ending Fund Bal. - 6/30/12 2011/12 Revenue * 2011/12 Expenditures * Actual Ending Cash Surplus / (Deficit) Bal. - 6/30/12 *** Borrowing at 6/30/12 Borrowing Type at 6/30/12 16,200,087 88,034,638 86,783,002 1,251,637 1,640,024 2,200,000 Interfund 7,355,818 35,696,027 34,747,404 948,623 1,456,951 940,000 Interfund Berkeley USD 17,464,066 117,174,767 115,001,199 2,173,569 10,201,875 Castro Valley USD 16,822,954 69,130,604 69,587,893 (457,289) 2,286,724 4,000,000 Interfund Dublin USD 3,748,813 55,247,670 56,462,051 (1,214,381) 2,318,418 6,000,000 Interfund Emery USD 2,972,812 10,471,492 10,826,708 (355,216) 1,454,588 Fremont USD 36,061,588 251,408,244 254,741,021 (3,332,777) 3,086,382 11,000,000 Interfund Hayward USD 22,362,330 183,467,997 184,666,081 (1,198,084) 3,154,990 5,775,000 Interfund Livermore USD 11,361,854 99,978,779 103,426,564 (3,447,785) 1,852,400 5,500,000 Interfund 201,895 413,305 427,582 (14,277) 127,868 New Haven USD 5,591,554 100,053,108 99,607,613 445,495 5,848,152 Newark USD 7,586,124 53,264,319 50,627,000 2,637,319 1,395,087 Oakland USD 45,253,260 420,100,334 410,893,009 9,207,325 9,251,111 Piedmont USD 4,858,736 30,510,668 30,079,373 431,296 1,981,308 15,435,669 123,080,561 120,236,722 2,843,839 San Leandro USD 8,234,341 67,550,105 68,001,644 San Lorenzo USD 16,541,832 88,439,662 86,400,926 891,541 2,229,551 1,984,197 Albany USD Mountain House ESD Pleasanton USD Sunol Glen USD Notes: * Revenues include Other Transfers In; Expenditures include Other Transfers Out. ** Includes any available reserves in Fund 17. *** Cash balances inclusive of all borrowing at 6/30/12. (451,539) (7,075,474) None None None 23,400,000 Interfund; TRAN 3,000,000 Interfund 45,000,000 TRAN 1,200,000 Interfund None 2,999,369 8,000,000 TRAN 2,038,737 1,594,748 8,800,000 Interfund 245,353 587,471 None ACOE District Business & Advisory Services Summary of Alameda County School District Adopted Budgets for 2012/13 General Fund information only. District Alameda USD Ending Fund Bal. - 6/30/12 2012/13 Revenue * 2012/13 Projected Ending Cash Expenditures * Surplus / (Deficit) Bal. - 6/30/12 *** Borrowing at 6/30/12 Borrowing Type Borrowing at 6/30/12 in 2012/13? Anticipated Borrowing Type in 2012/13 16,200,087 79,054,383 86,794,577 (7,740,194) 1,640,024 2,200,000 Interfund Yes 7,355,818 32,830,848 34,421,674 (1,590,826) 1,456,951 940,000 Interfund No Berkeley USD 17,464,066 113,339,637 117,126,633 (3,786,996) 10,201,875 Castro Valley USD 16,822,954 64,065,420 68,811,975 (4,746,555) 2,286,724 4,000,000 Interfund No Dublin USD 3,748,813 59,321,908 59,304,659 17,249 2,318,418 6,000,000 Interfund No Emery USD 2,972,812 9,210,717 10,016,419 (805,702) 1,454,588 Fremont USD 36,061,588 218,921,618 238,701,521 (19,779,903) 3,086,382 11,000,000 Interfund Yes Hayward USD 22,362,330 178,312,917 184,969,236 (6,656,319) 3,154,990 5,775,000 Interfund No Livermore USD 11,361,854 95,169,156 100,047,347 (4,878,191) 1,852,400 5,500,000 Interfund Yes 201,895 339,564 416,811 (77,247) 127,868 New Haven USD 5,591,554 95,262,571 95,941,833 (679,262) 5,848,152 Newark USD 7,586,124 51,716,245 53,750,762 (2,034,517) 1,395,087 Oakland USD 45,253,260 401,620,373 398,077,912 3,542,461 9,251,111 Piedmont USD 4,858,736 28,796,950 30,454,130 (1,657,180) 1,981,308 15,435,669 111,757,290 113,495,687 (1,738,397) (7,075,474) None Yes TRAN San Leandro USD 8,234,341 65,541,268 67,854,244 (2,312,976) 2,999,369 None Yes Interfund; TRAN San Lorenzo USD 16,541,832 84,707,599 86,080,300 (1,372,701) 1,594,748 Yes Interfund 891,541 2,024,250 2,057,269 (33,019) 587,471 Albany USD Mountain House ESD Pleasanton USD Sunol Glen USD Notes: * Revenues include Other Transfers In; Expenditures include Other Transfers Out. ** Includes any available reserves in Fund 17. *** Cash balances inclusive of all borrowing at 6/30/12. None None None 23,400,000 Interfund; TRAN 3,000,000 Interfund 45,000,000 TRAN 1,200,000 Interfund 8,800,000 Interfund None Interfund No No TRAN Interfund; TRAN No Yes Interfund; TRAN; Treasurer Yes Interfund Yes TRAN No No Impact of Prop 30 on Deferrals • Prop 30 is the Governor’s tax initiative – the Schools and Local Public Safety Protection Act. Increase in state sales tax from 7.25% to 7.50% Resulting increase in revenue - estimates vary from $9 billion (Governor) to $6.8 billion (LAO) If approved by the voters in November 2012, $2.24 billion in cross-year deferrals will be paid down. If the initiative fails, cross-year deferrals will remain unchanged from 2011-12 fiscal year levels. In addition, mid-year trigger cut reductions of $2.6 billion will be implemented (approx. $441 per ADA statewide). • Competing initiative Prop 38 – The “Molly Munger Initiative” Increase in income tax for most Californians Results in increased revenue to schools of $10 billion No impact on state deferrals Impact on Schools of ABX1 26 – The Elimination of Redevelopment Agencies (RDAs) • LEAs (Local Educational Agencies) and other affected taxing entities previously received only one type of identified revenue from RDAs— pass-throughs. In most counties, generally paid via warrant from RDAs. • Under ABX1 26, LEAs and non-LEAs now receive THREE types of identified revenues from (former) RDAs: 1. Pass-throughs 2. Additional property taxes from Residual Distributions 3. Additional distributions of Other Revenues Typically by electronic funds transfer from the County Auditor-Controller. • All distributions are supposed to be based on post-ERAF percentage shares of property taxes within each RDA Project Impact on Schools of ABX1 26 – The Elimination of Redevelopment Agencies (RDAs) The California Department of Finance previously estimated LEA share of residual distributions and other revenues for FY 2011-12 at $1.037 billion statewide, including: • $887 million for K-12 Districts • $ 3 million for County Offices of Education • $147 million for Community College Districts Impact on Schools of ABX1 26 – The Elimination of Redevelopment Agencies (RDAs) Actual LEA shares of residual distributions and other revenues in FY 2011-12 were much lower than DOF estimates, due in part to the following: • First distribution from RPTTF on May 16, 2012 was zero, since over 50% of tax increment was already allocated to RDAs before they were dissolved on Feb. 1, 2012. • Former RDA debt service and enforceable obligations were much greater than DOF expected. • Other revenues were smaller than DOF expected, and will require additional time to be liquidated and distributed. Impact on Schools of ABX1 26 – The Elimination of Redevelopment Agencies (RDAs) For Alameda County schools, the impact is shown below: Local Educational Agency Alameda City Unified Albany City Unified Berkeley Unified Castro Valley Unified Dublin Unified Emery Unified Fremont Unified Hayward Unified Livermore Valley Joint Unified Mountain House Elementary New Haven Unified Newark Unified Oakland Unified Piedmont City Unified Pleasanton Unified San Leandro Unified San Lorenzo Unified Sunol Glen Unified ALAMEDA COUNTY TOTAL Department of Finance Amount Actually February 2012 Received Per the Estimate of RDA Net 2011-12 J-29B Tax Tax Increment LEAs Report (Cash (i.e., Cash Projected) Received) 3,171,863 199,961 12,361 503,259 79,370 169,807 161,992 272,172 7,723,249 513,072 4,362,387 4,094,245 2,680,350 845,996 1,035,106 285,902 1,426 4,779,612 216,612 178,305 5,199 21,387,652 5,379,401 90,785 576,016 4,815,228 318,182 171,692 906,652 12,212 52,131,082 12,818,985 Difference (3,171,863) (187,600) (423,889) (7,815) (272,172) (7,210,177) (268,142) (1,834,354) (749,204) (1,426) (4,563,000) (173,106) (16,008,251) (90,785) (576,016) (4,497,046) 734,960 (12,212) (39,312,097) Percent Received vs. Projected 0% 6% 16% 95% 0% 7% 94% 32% 28% 0% 5% 3% 25% 0% 0% 7% 528% 0% 25% Debt Concerns Why discuss debt? • Debt affects us in many ways and at many levels. • As individuals, we are familiar with debt on a personal level. Whether it’s a mortgage, car note, credit cards or a payday loan, we understand that borrowing allows us to afford things we otherwise couldn’t. • However, we know that too much debt can be harmful. It could lead to annoying or threatening creditor phone calls, poor credit ratings, increased interest rates on future borrowing, default, lawsuits, bankruptcy, depression, and fraudulent behavior. Why discuss debt? • At the local government level, state level, national level and international level debt can also be helpful because it allows us the same borrowing power. But, too much debt at these levels has the same kind of devastating effects. • For instance, there has been a lot of talk about the European debt crisis. The primary countries involved (Portugal, Italy, Ireland, Greece, and Spain) have had to undergo strict scrutiny from their lenders and had to take measures to reduce their expenditures or restructure their obligations in order to avoid defaulting on their debt. • This overwhelming debt threatens to ruin the European Union and harm the Euro. American banks fear that a collapse of the European banks could negatively affect them and the U.S., which could in turn affect California and local governments. Why discuss debt? • Closer to home, the U.S. government has seen its National Debt increase to over $16 trillion. Many believe that this level of debt is unsustainable. • At the state level we are familiar with the deficit issues that California is facing. We understand how the state has manipulated the cash flowing to local governments. • However, to understand the magnitude of the debt, refer to the State Treasurer’s Debt Affordability Report (issued October 2011). www.treasurer.ca.gov/publications/2011dar.pdf Why do we care about too much debt at the international level, national level, or state level? International and National Levels • At the international and national levels, countries might choose to liquidate debt in ways that could have negative fiscal impacts on its citizens and local governments. • The working paper called Liquidation of Government Debt (Issued in April 2011, http://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf) discusses ways that sovereign nations have historically liquidated overwhelming debt. • Three ways that have negative impacts to individuals and local governments are: Financial repression, Austerity measures, and Default/Restructuring of debt. Why do we care about too much debt at the international level, national level, or state level? • Financial repression can cause hidden or stealth inflation. This could lead to reduced purchasing power. As organizations have to spend more on goods and services, it may also lead to layoffs and higher unemployment. • Austerity measures can have a ripple effect to citizens and local governments also. Reduced expenditures could result in loss of jobs not only at the central government level, but also at the local level. This could result in higher unemployment, and less money spent on social programs and infrastructure projects. • Default/Restructuring of debt, may lead to devaluation of the currency, which drastically reduces purchasing power. This could result in inflation, higher unemployment, and less money spent on social programs and infrastructure projects. Why do we care about too much debt at the international level, national level, or state level? State Level At the state level, too much debt can lead to default/restructuring of debt or austerity measures. This could result in job loss, higher unemployment, and less money spent on social programs and infrastructure projects. Local Level At the local level, we see bankruptcy, default/restructuring of debt or austerity measures. This could also lead to job loss, higher unemployment, and less money spent on social programs and infrastructure projects. When is there too much debt? Economists look at states' and nations' debt-to-GDP ratios to determine the level at which debt starts to cause growing problems. A debt-to-GDP ratio of 90% is where many economists agree the negative consequences of debt become serious. At this level, residents will see more and more of their tax dollars used for interest payments rather than the state services they rely on, and economic growth is likely to slow down. See the article “State’s Finances Threaten Whole Country” By Emily Washington, Updated 7/30/2012 Emily Washington is associate director of state outreach at George Mason University's Mercatus Center. When is there too much debt? Ranking of Deepest in Debt 1 2 3 4 5 6 7 8 9 10 Country Japan Greece United States Italy Portugal Ireland Belgium France United Kingdom Germany 2010-11 Estimate of Gross Domestic Product (GDP) 5,880,000,000,000 303,000,000,000 12,800,000,000,000 2,200,000,000,000 239,000,000,000 217,000,000,000 514,000,000,000 2,760,000,000,000 2,400,000,000,000 3,560,000,000,000 Ratio of Debt to GDP Total Debt 13,700,000,000,000 232.99% 489,000,000,000 161.39% 15,130,000,000,000 118.20% 2,540,000,000,000 115.45% 257,000,000,000 107.53% 225,000,000,000 103.69% 479,000,000,000 93.19% 2,260,000,000,000 81.88% 1,900,000,000,000 2,790,000,000,000 79.17% 78.37% See the article – “10 Countries Deepest in Debt,” by 24/7 Wall St. - Michael Sauter, Charles Stockdale, Ashley Allen - February 14, 2012 When is there too much debt? When is there too much debt? Buffett’s Exit From Muni-Bonds Signals Trouble Ahead for Local Govts By Morgan Korn, Daily Ticker – 8/21/2012 Warren Buffett's Berkshire Hathaway ended its five-year bullish bet on the municipal bond market. Buffett's move may very well signal his fear that more cash-strapped cities, states and municipalities will default on their debt. Local authorities have been making severe budget cuts (affecting both personnel and services) over the past two years to stave off bankruptcy but many are still short on funds. There have been six Chapter 9 municipal bankruptcy filings this year, compared to 13 in 2011. Muni bankruptcies have totaled 268 since 1980, according to Reuters, with cities, villages and counties accounting for 49 of the filings. Nebraska, California and Texas have the highest number of bankruptcy filings. Stockton, Calif., became the largest U.S. city to ever declare bankruptcy when city officials were unable to reach a deal with creditors, and San Bernardino, Calif., filed its bankruptcy paperwork on Aug. 1, making it the third California city, after Mammoth Lakes, to seek bankruptcy protection. How Should We Measure Whether There Is Too Much Debt? The Deceptive Debt Ratio By Erik Voohrees - June 8, 2010 The statistic normally used to measure debt is the "Debt to GDP" ratio, referring to the amount of debt versus the nation's sum total of transactions. However, debt is not serviced from a portion of the economy's activity as a whole; it is serviced from tax revenues. As such, the ability to repay debt should be measured based on tax revenues, not on the GDP. "Debt to Tax Revenue" is a much better statistic for examining government debt. Estimates of Debt to Tax Revenue Ratios for Various Government Entities Outstanding Debt (Includes GOS, COPS, Ratio of Debt to 2012-13 Budget Tax Revenue BANS, Leases & Other)1 Revenue District New Haven Unified 19,349,902 251,830,665 1301.46% Emery Unified 6,065,956 56,918,990 938.34% San Leandro Unified 26,303,914 171,838,080 653.28% Dublin Unified 36,528,045 204,657,507 560.28% Hayward Unified 39,323,374 215,293,485 547.49% Oakland Unified 151,262,668 782,131,384 517.07% San Lorenzo Unified 21,322,811 92,185,000 432.33% Castro Valley Unified 20,496,700 84,273,297 411.16% Piedmont City Unified 21,397,290 85,293,229 398.62% Newark Unified 19,542,386 71,279,635 364.74% Berkeley Unified 79,027,885 238,409,222 301.68% Albany City Unified 16,366,765 43,067,979 263.14% Alameda City Unified 39,162,231 98,031,382 250.32% Fremont Unified 93,611,481 204,716,061 218.69% Livermore Valley Joint Unified 49,170,637 106,528,613 216.65% Pleasanton Unified 63,319,604 110,479,273 174.48% Sunol Glen Unified 1,201,626 2,087,363 173.71% Mountain House Elementary 107,265 0.00% California United States 95,900,000,000 141,450,000,000 147.50% 2,902,000,000,000 15,974,157,349,782 550.45% 13,700,000,000,000 489,000,000,000 2,540,000,000,000 225,000,000,000 257,000,000,000 479,000,000,000 2,790,000,000,000 1,900,000,000,000 2,260,000,000,000 761.11% 369.34% 264.56% 239.77% 236.65% 217.14% 199.57% 194.67% 183.89% Information for Countries Below Relates to 2011 Japan 1,800,000,000,000 Greece 132,400,000,000 Italy 960,100,000,000 Ireland 93,840,000,000 Portugal 108,600,000,000 Belgium 220,600,000,000 Germany 1,398,000,000,000 United Kingdom 976,000,000,000 France 1,229,000,000,000 Does not include short term debt (i.e., TRANS, county borrowing, or interfund borrowing). Questions? Contact Info: Jeff Potter (510) 670-4277, jpotter@acoe.org Spencer Mead (510) 670-4195, smead@acoe.org