Saddleback District Faces Financial Crisis In Wake Of Coronavirus

LAKE FOREST, CA —Unemployed Californians won’t be the only ones struggling to pay their bills in the coming months.

Most, if not all, of the states 1,037 K-12 school districts, which rely heavily on money from the state’s general fund, will likely have to rework their own spending plans for the new school year. The Saddleback Unified School District—with schools serving families in Lake Forest, Mission Viejo, Foothill Ranch, Rancho Santa Margarita, and Laguna Hills—is one of them.

Although an executive order signed by Gov. Gavin Newsom last month guarantees school districts will continue to receive revenues budgeted for the current school year, it’s the coming school year that concerns school administrators.

With state tax revenues and other sources of income expected to plunge, school boards will likely be forced to redraft their fiscal year 2020-21 spending plans that were already well along toward being finalized when the coronavirus forced classrooms to close in March.

“We don’t know anything; it’s as simple as that,” says Mike Fine, chief executive officer of the Financial Crisis & Management Assistance Team (FCMAT), a state-funded organization created in 1992 to provide school districts with financial and management advice on a voluntary basis. “This is looking a lot like 2008.”

Fine said school districts should be running different financial scenarios, if they haven’t begun already, because nobody knows what the new school year will bring. He believes school districts will be faced with extraordinary expenses required for distance learning and other services provided by districts such as feeding students and child care.

For Fine and his staff at FCMAT business may soon be booming.

On the Brink

Troy Flint, of the California School Boards Association which represents nearly every district in the state, said schools are in a worse financial position now than they were in the great recession of 2009.

“We’re on a financial precipice where many districts will be in a precarious position and others may end up in receivership if there’s a prolonged recession,” he told Patch. What’s uncertain is just how far the state will go in providing financial assistance beyond its broad assurances that school districts will be taken care of.

State and local sources provide most of the annual revenue for California schools, although federal funds contribute. In addition to a share of local property taxes – amounting to about 30% of each county’s one percent tax levy – schools rely most heavily on state funding derived from a portion of the state’s personal income tax, sales tax and corporate and insurance tax collections. State Lottery proceeds also provide school districts with additional revenue.

With millions of Californians out of work, businesses shuttered and tax deadlines extended, an accurate picture of revenues from income and sales taxes probably won’t emerge until mid-summer, after the June 30 deadline for approval of school budgets, although a hint of revenue shortfalls will come in May’s state budget revision and school districts will have a better picture of just how bad things might be.

Complex Process

An annual ritual almost incomprehensible to the average taxpayer, the process of constructing a school district budget is in large part dependent upon navigating a maze of calculations projecting how much state aid will be received under the Local Control Funding Formula, a K-12 financing system implemented in 2013 replacing an even more confusing school funding method utilized for nearly 40 years.

“If you’re asking how any revenue shortfall will affect state government in terms of the timing [when revenues are received] that will be an assessment made as we finalize our updated forecasts for the May Revision,” H.D. Palmer, deputy director of the state’s finance department, told Patch.

Palmer said it’s important to note that compared to the financial crisis of 2008-09, the state’s cash position is much better today than it was then.

The Governor’s January budget proposal for FY 2020-21 projected an extremely healthy financial condition,” Palmer said, “but the state’s cash position will be reassessed as part of the budget revision next month.”

Newsom’s proposed budget, submitted to the state legislature Jan. 10 increased state general fund spending for basic K-12 education to $61.6 billion which included $3.15 billion to help reduce school districts’ annual contributions to the state Teachers’ and Public Employees’ Retirement Funds and pay down the unfunded portion of those pension funds.

Billions Short

Yet a report issued by California’s Legislative Analyst’s Office on April 5, predicted that “revenues are likely to be at least several billions of dollars lower than anticipated in January, although compared to prior recessions the state enters this period of economic uncertainty with significant reserves.”

But the LAO warned that any “decline in state revenues, as the state is likely to experience in response to the coronavirus emergency, is likely to reduce school funding.”

According to the LAO, in February the state had about $17.5 billion in reserves -- $16.5 in the Budget Stabilization Account and $900 million in Special Fund for Economic Uncertainties. There was another $377 million in a special state reserve account specifically for schools.

In addition, the LAO estimated the state’s school districts themselves had a total of $12.8 billion in reserves that could be spent for any purpose, an amount that would cover expenses for about two months.

Whatever happens in May, the most pressing problem for school districts as they reconsider budgets in such uncertain times will be that of cash flow: How much they’ll actually receive from the state and, more importantly, when they’ll get it.

Until a better revenue picture emerges, it’s expected school districts will use at least part of what they’ve squirreled away to make ends meet.

Every district is required to set aside money for emergencies based on a percentage of their previous year’s expenditures. Many districts set aside only the minimum required while others budget more, with larger districts frequently reporting reserves substantially in excess of what’s required.

Over and above these required reserves, other sources of money may also be available to some districts. Funds budgeted in two other categories -- “committed” and “assigned” could be redirected by school boards or district administrators if necessary.

Where school boards have committed funds for specific purposes, such as equipment purchases, this money can be used for something else if a resolution is approved to change the purpose. Funds assigned by administrators for particular expenses can also be redirected if necessary.

Flint says that about half of the districts were already dipping into their reserves before the coronavirus shut down schools, forcing school officials to begin “operating in an uncommon environment.”

Reserves Required

School districts are required by state law to continue providing services in a time of crisis regardless of the costs, Flint said. It’s the unanticipated costs created by the health emergency that will make budgeting difficult for school officials because they still have employee payrolls and benefit expenses – which comprise 80% or more of district budgets.

Those expenses will continue, albeit at reduced levels, until classrooms reopen. Although most full-time teachers will continue to receive paychecks because of labor contract requirements, many districts have already furloughed scores of classified employees, such as teacher aides, custodians and food service workers.

Since benefit contributions are based upon percentages of payroll, most notably to the California State Teachers Retirement Fund (CalSTRS) and the California Public Employees Retirement System (CalPERS) which provides pensions to classified employees, these are expected to be temporarily reduced. Yet these giant creditors, who themselves have been taking a short-term bath on investments, expect to be paid regardless, although they recognize everybody’s hurting.

Spokespersons for both CalSTRS and CalPERS told Patch the pension funds will be working with school districts on a case-by-case basis if they experience financial hardships and this includes potential waivers of penalties for late payments.

However, retirees will continue receiving monthly pension checks on time.

While it’s uncertain what will happen with the state’s May budget revision, a hint of what’s in store may be the State Lottery, which last year contributed $1.5 billion to K-12 school districts. Lottery distributions are estimated to account for as much as 2% of many district’s revenue.

“We’ve concluded the current coronavirus public health emergency has negatively impacted sales by an estimated 25-30%,” Lottery spokesman Jorge DeLaCruz told Patch. As of April 9, DeLaCruz said some 900 Lottery dealers confirmed they were closed due to the coronavirus – about 4% of the state’s 22,154 retail outlets selling Lottery products.

According to the latest data available, during the first half of the current fiscal year Lottery payments to school districts totaled $617.1 million. Just how much those payments will drop won’t be known until distributions are calculated for the second half of the current fiscal year in September.

Whatever happens, Flint says the coronavirus pandemic presents an opportunity to “remake California public schools by encouraging a comprehensive approach to education rather and a piecemeal approach.”

If nothing else, Flint said, the public is getting a better idea of how much schools are a “hub of community” and what happens when classrooms are closed.

Patch Editor Ashley Ludwig contributed to this report.