Despite the state’s budget surplus and strong economy, several California school districts are in severe financial distress. Although the state legislature should have money to help prop up these school districts this year, emerging economic headwinds may limit extraordinary support in future budgets. Now is the time for school districts to address their legacy costs and right-size operations.
According to data compiled by the Financial Crisis Management and Advisory Team, 11 California school districts, including two in Southern California, are now operating under a “lack of going concern” designation. County superintendents apply this designation to a school district that “may be unable to meet its financial obligations for the current or two subsequent fiscal years.”
In some cases, sharp enrollment declines have pushed school districts into this category. The two Southern California school districts, Bellflower Unified and Montebello Unified, suffered enrollment drops of 18% and 21% respectively between 2014 and 2020. Since California school districts primarily rely on Local Control Funding Formula (LCFF) grants from the state that are based on average daily attendance numbers, having fewer students normally translates into less revenue.
Although the COVID-19 pandemic seriously reduced daily attendance, the state took steps to protect school districts from the financial impacts of lower attendance. First, it disregarded higher absences between March and June of 2020 from funding calculations, then it applied 2019-2020 attendance levels to funding for the 2020-2021 school year. In January, Gov. Gavin Newsom proposed giving some of California’s budget surplus to school districts to reduce the blow from reduced attendance. And a group of state legislators, via Senate Bill 830, is proposing to allow school districts to receive state funding for students who are absent from class, effectively basing LCFF grants on total enrollment rather than average daily attendance.
The state government is currently well-positioned to supplement education funding because of its very strong revenues. For the first eight months of the 2021-22 fiscal year, California’s general fund receipts were $20.8 billion, 16.3% above projections. But state revenue performance may moderate in the coming months and years. Personal income taxes, California’s largest revenue source, are heavily dependent on wages and capital gains from the state’s highest earners, many of whom are in the technology sector. And growth in the technology sector may be slowing. After nearly doubling between January 2020 and December 2021, the Dow Jones Technology Index declined 13% in January and February 2022. Lower stock prices would translate into lower capital gains receipts for the state. And, if recent stock price performance signals longer-term reduced earnings growth, tech companies may slow their hiring and wage increases, further limiting the growth of taxable income in the state.
While those outcomes are far from certain, rather than banking on good stock market returns or long-term support from state taxpayers continuing, school districts should begin to rein in their fixed costs and legacy costs that do not affect classroom results.
Although pension contribution rates are set at the state level, and thus not controllable by school districts, school boards do control other post-employment benefits (OPEBs), such as retiree health care insurance. Montebello Unified School District recently reported $152 million in unfunded liabilities for the other post-employment benefits it owes to its retirees. School districts can economize on these costs by replacing defined benefits with health savings accounts and possibly by asking retired employees to shift taxpayer costs by using the premium subsidies they’re eligible for through Covered California rather than through school district coverage.
School districts that have suffered significant decreases in student enrollment should consider reducing their costs by consolidating schools. Although closing neighborhood schools typically attract parental opposition, districts could reduce operating costs and generate revenue by selling properties they no longer require. In Bellflower Unified School District, for example, Alex Baxter Elementary School’s enrollment fell over 35 percent, from 515 to 323 students, in recent years. The school is within two miles of three other elementary schools that could accommodate students.
California’s public school districts have been dealing with enrollment declines since well before the COVID-19 pandemic. Instead of waiting for the next economic downturn to force them to make spending cuts, school districts should use this moment to right-size benefits and reduce non-instructional expenses.
A version of this column was first published by the Southern California News Group.