School Districts Brace for New Budget Blow : Funding: A heavy impact would be felt in the county from the $1-billion statewide cut that legislative and educational sources say Gov. Pete Wilson will propose.

Gov. Pete Wilson’s expected proposal to slash funding to California public schools by $1 billion would have a deep impact on most districts in Orange County, but many district officials said that careful financial planning would temporarily soften the blow to their schools.

In a survey conducted this week, district business managers said that previous cuts in state funding, coupled with decreases in lottery revenues, increases in fees and the deepening recession, led them to prepare conservative budgets.

But while miserly budgeting would avert program cuts and layoffs this year, the state funding cut would mean that districts would have to dip deeper into already dwindling reserves, and that could spell trouble for next year.

“We can make it through this year, but when 85% of your budget is in salaries and benefits, that’s where you (eventually) have to cut,” said Joan Upton, director of fiscal services for the Cypress School District. “I shudder to think what will have to happen in the years to come.”

According to legislative and educational sources, Wilson in his budget message to be delivered Thursday will announce the elimination of the cost-of-living adjustment for public schools and community colleges, effectively amounting to a $1-billion cut in education funding statewide.

The Legislature would have to suspend Proposition 98, the voter-approved initiative that guarantees public schools and community colleges at least 40% of state general fund revenues, in order for the cost-of-living increase to be suspended.

Under Proposition 98, school districts were guaranteed a 4.76% annual cost-of-living adjustment, but former Gov. George Deukmejian slashed that adjustment to 3% last year. District business managers argued that even the 4.76% increase would not have been enough in the face of an anticipated 5.2% rise over the previous year’s operating expenses.

Many managers surveyed said they have already prepared budgets as if the anticipated 3% increase did not exist. This further increased reliance on reserves, which the districts hoped to use to keep salaries and services at current levels--no easy task in the current lean economic climate.

“We have basically been living off our reserves, and now the reserves are so depleted that we can’t do that any more,” said Richard Donoghue, associate superintendent for business services of the Orange Unified School District, which stands to lose about $1 million. “Our great concern is next year and the possibility of no COLA,” which would be “a major setback,” Donoghue said.

The only other option, district officials said, is to make tough choices on what services to cut.

“We’re talking about cutting instrumental music, media programs and nurses,” said David Brown, superintendent of the Irvine Unified School District. “We’re very concerned. It’s just a very lean time.”

The Irvine district had already been forced to cut $2.4 million from its budget last year because of financial constraints, Brown said. “We’ve had to cut down on maintenance dramatically--(we) don’t clean the classrooms as frequently. We’ve had to cut down on the vocal music program and (school) psychologists. We cut back on administrators in the district office, and we cut way back on transportation,” he said.

And if the cost-of-living increase is eliminated, Brown said, his district will be faced with another huge loss, to the tune of $3 million.

If approved, the suspension of Proposition 98 would come just months after the Legislature approved Senate Bill 2557, which allows counties to levy a fee against school districts for assessing and collecting property taxes. That fee, which is expected to cost some Orange County districts as much as $700,000, took effect Jan. 1.

Elizabeth Parker, a member of the county Department of Education’s board of trustees who serves on its budget committee, said the property-tax fee had already effectively eliminated money that would have been used for employees’ cost-of-living increases. While those increases are not in jeopardy because the Department of Education is contractually bound to them, the board is now faced with replacing state COLA funds that would have been used to back the pay hikes.

“The question is where are all of our priorities going to be . . . Parker said. “We’ve set (employees’) COLAs and salaries on monies that are no longer there.”

With more than 80% of expenditures earmarked in most districts for salaries or benefits, contractual obligations to employees are expected to eventually heighten financial pressures on all school districts if the state cost-of-living increase is cut, business managers said. In the long run, that could mean layoffs.

“This year we’re OK--we have a balanced budget and are in the black,” said James O. Fleming, superintendent of the Placentia Unified School District. “But next year, we have a 7% increase in salary and fringe benefits (as) part of a three-year contract. Next year, we got some real problems.”

Even before the proposed state COLA cut, the district was forced to freeze hiring, cut overtime and slash school overhead expenses, Fleming said. The district, already projecting a $323,000 loss from SB 2557 and another $60,000 in new county sewer fees, will face an additional loss of $1.1 million if the Legislature cuts the cost-of-living increase.

While he wouldn’t speculate on what might have to be cut next year, when the full impact of the state cut becomes clear, Fleming said with more than 80% of the district’s budget going to salaries and benefits, the cuts “will end up being bodies sooner or later.”

Times correspondents Rose Apodaca, Zion Banks, Mary Helen Berg and Mary Anne Perez contributed to this report.