Much of the current education discussion in California today is focused on the upcoming tax increase initiative, Prop 30, and what may happen to funding for California charter schools if the initiative doesn’t pass.
However, the issue that isn’t being discussed – and has an immediate impact on charter schools’ cash flow – is a 21.2% reduction in what schools typically receive during the school year. This will severely impact California charter schools this year, regardless of November ballot results. Schools need to be aware of this general purpose entitlement payment delay and the impact it will have on their budgets.
If Prop 30 passes, this 21.2% reduction is not a cut in funding, but a delay in payment that’s referenced in state law as an “offset.” If Prop 30 passes, it operates like an additional deferral of payments on top of current deferrals already in place. Schools should understand that the 21.2% amount is not taken all at once. Instead, it’s a 21.2% reduction in amounts that otherwise would be paid to schools on a monthly basis. This reduction will come first from money that normally would be transferred to schools by the state. The impact on the amount and timing of the local in-lieu funding may vary by school district or county.
With schools now having to account for an additional 21.2% cash flow reduction of their general purpose entitlement funding, many will be scrambling to rethink their budgets. This delay is roughly one-fifth of a school’s budget that will not be delivered when school administrators are expecting it—and it would be received in late June of 2013 at the earliest.
This cash flow reduction did not seem to be part of the public discussion about the budget during the initial negotiations. As is typical, the detail first appeared in the budget trailer bill that came together very quickly at the end of the session and assumes that the Prop 30 tax increase initiative will pass in November.
While the reduced funding is taking place now, there are several potential scenarios (given these is no mid-year legislation) that can take place contingent upon whether certain initiatives pass or don’t:
- If only Prop 30 passes: There should be no additional funding or cash flow reductions or deferrals. The new tax revenues would accumulate in the “Education Protection Account” instead of the State’s General Fund. Funding for California charter schools in the “Educational Protection Account” will be paid next June.
- If Prop 30 and Prop 38 don’t pass: There will be a substantial cut in general purpose entitlement funding (the so-called trigger cuts) and more substantial deferrals during the P-1 (first principal apportionment) payment periods. Many are suggesting that the state’s legislature will likely enact mid-year budget amendments to avoid these cuts and deferrals.
- If only Prop 38 passes: If this initiative passes, it’s not clear what may happen with funding timing and amounts. There isn’t enough detail in the ballot language currently, so some sort of implementing legislation seems likely.
- If both Prop 30 and Prop 38 pass: What happens will depend on how the differences in the two initiatives are reconciled. It’s our understanding that the initiative that receives the most votes will be implemented and the other initiative will not be effective. Anything other than simply implementing Prop 30 would seem to require some legislation and could cause further delays or deferrals, impacting school’s cash flow.
It’s difficult-to-impossible to completely map out all implications of these two tax initiatives, in large part because mid-year budget legislation seems likely under many of the possible scenarios.
The impact of this additional reduction in funding for California charter schools is very real and will undoubtedly be painful. Charter School Capital is moving quickly to inform charter schools so they can begin to plan contingencies and budget for the cash flow shortfalls. School administrators need to be aware, understand the impacts and plan accordingly.
To help educate our clients, we are holding a series of informational webinars specifically to discuss the impact of the state funding reductions on charter schools. This will provide timely and actionable information regarding the impacts of this reduction in funding for California charter schools. Our first webinar is scheduled for Friday, August 24 for Charter School clients. We will hold additional webinars for in the coming weeks. If you would like to receive information, please register here.
UPDATE: To access the presentation from our August 24th webinar, please go
here:https://www.slideshare.net/CharterSchoolCapital/charter-school-capital-california-budget-impact-on-charter-schools or check out the slides below.