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Downside of A23 about to kick in

The possibility that the Amendment 23 formula itself might drive cuts in state K-12 spending for 2010-11 was raised Monday during a legislative briefing on state revenues and budget prospects.

Members of the legislative Joint Budget Committee and other lawmakers convened to hear the September revenue forecasts from staff of the Legislative Council and the executive branch Office of State Planning and Budgeting.

The news is not good, but, as is often the case, the two forecasts varied significantly.

Natalie Mullis, chief economist for Legislative Council, said the council staff estimates a $560.7 million shortfall in the current, 2009-10 general fund budget. That’s $240.7 million higher than the $320 million in cuts already planned by Gov. Bill Ritter’s administration.

But Todd Saliman, director of the OSPB, said his agency estimates that state revenues will be sufficient to cover the 2009-10 general fund budget with the cuts already planned.

If the 2009-10 budget is balanced with permanent cuts and/or revenue increases, the 2010-11 budget still will need to be cut $188.7 million from the prior year levels, Mullis said.

But if 2009-10 cuts are only one-time, the cumulative amount that will need to be cut from 2010-11 spending is $1.3 billion, Mullis said. It’s likely the legislature will look on Ritter’s cuts as one-time only.

Saliman projects a shortfall, albeit smaller, for 2010-11.

Regardless of the numbers, Saliman said budgeting will be tough. “We’re going to have to cut deeply in ’10-11. … The choices are going to be harder.”

Some of the differences between the two estimates have to do with accounting interpretations about how revenue should be recorded by fiscal year.

Both forecasts also lack estimates for costs that won’t be known until later, like Medicaid caseloads, an issue that worries state policymakers. Saliman said his staff would meet with that of Legislature Council to reconcile their figures and that they would agree on the most conservative (i.e., worst case) estimate. That is expected to be done before Ritter submits his formal 2010-11 budget proposal to the JBC on Nov. 2.

Of most interest to the education community was the discussion about A23, the constitutional provision that governs the annual amount of state aid to school districts. The amendment requires support to increase each year by inflation and enrollment plus an additional 1 percent. For the 2010-11 budget, the regional inflation rate for calendar year 2009 will be used.

Both Legislative Council and OSPB are forecasting deflation for 2009, .4 percent to 1.6 percent, respectively.

Sen. Chris Romer, D-Denver, raised the question of how deflation would work in the A23 formula, asking if the 1 percent bonus would remain in effect, even if there were a negative inflation rate greater than 1 percent.

Mullis said that was a legal question for other officials to decide, but Saliman said his interpretation is that the two would be added together, possibly yielding a negative number. “We’re assuming that you end up with a negative .6 percent” for the A23 multiplier, he said.

“For the first time since Amendment 23 was passed we’ll have negative inflation,” Romer said. “There’s a new ball game in town as it relates to school funding.”

Romer supports the idea of increasing state revenues by ending some business tax exemptions but hasn’t yet proposed a detailed plan for doing that.

Another part of the 2010 legislative debate over K-12 spending will be whether A23 covers all state aid to schools. In addition to base per-pupil funding, districts also receive additional (and varying) amounts of money based on such factors as the cost of living for staff, district size and numbers of at-risk students – the so-called factors.

In the past, that money has been part of the overall annual A23 calculation. But now Ritter and many legislators believe the factors aren’t included in the formula. So, it’s possible the factors will be cut as lawmakers search for cash for other programs, further reducing the amount of aid districts receive in 2010-11.

(Another complication to school finance is the practice of the state backfilling projected declines in local property tax values. Department of Education officials say local tax valuations may be holding up better than expected. But, even if backfilling is needed, lawmakers may be tempted to cut back on those amounts as well. The state does not compensate districts for declines in property tax collections, as can happen with taxpayers are delinquent. That may be an increasing concern because of foreclosures.)

The K-12 funding formula for 2009-10 is firm, meaning overall budget cutting done by the 2010 legislature probably won’t affect aid to school districts. The exception to that is $110 million in school aid that the legislature set aside until January. Given the revenue situation, it seems unlikely that lawmakers will release that money for local school use. What’s not yet decided is if the $110 million will be taken off the top, or deducted from the factors. That decision could have an impact on school aid for 2010-11.

Higher education funding didn’t come up at Monday’s briefing. College budgets are basically being held at 2008-09 levels with the help of federal stimulus funds. Ritter has proposed reducing direct state aid to colleges and universities in the current year and making up the shortfall with additional stimulus money. (That plan requires federal approval.) The trouble with that plan is that federal rules require the state to restore in 2010-11 the direct aid it cut in 2009-10, about $80 million. That will put additional pressure on the 2010-11 budget process.

The forecasts focused just on the general fund, which is supported by state taxes. Total state spending, including federal, cash and other revenue, is about $18 billion a year.

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