Schools Get First Dibs on Extra Cash

An improving economy could bring $1 billion to $3 billion in extra tax receipts into California’s state government this fiscal year, economists believe. But the additional revenue is not likely to be enough to seriously improve the state’s budget outlook, Democratic and Republican lawmakers agree.

Schools have first claim on any additional state revenue. Over the last two years, the state put off making legally required payments to schools as the economy faltered. California’s Constitution permitted it -- so long as the money was paid back after the economy picked up.

The state now owes school districts $3.4 billion and, according to California’s complicated education funding formulas, the improving revenue picture means it is payback time.

The way the payback plan works, at least half of the new money automatically goes to pay the debt to schools. The money is not earmarked for any specific purpose. The Legislature can use it to fund almost any K-12 or community college programs. But the funds must be used for education.

That requirement rules out an idea that some Republican officials had been discussing -- using the increased revenue to offset a reduction in vehicle licensing fees that Gov.-elect Arnold Schwarzenegger has promised.

Schwarzenegger has promised to issue an order cutting the car levy on his first day in office. That would put in doubt $4 billion that currently flows to local governments, which use the car-tax receipts to pay for services including police and fire protection. The governor-elect has promised to preserve the $4 billion for local government, but has not said how he would do so. Legislative leaders have said they would not approve cuts in other services to fill the gap.

Local government officials are increasingly concerned that cutting the car tax will end up costing them money.

They have reason to be concerned, said Steven Frates, a senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College.

“The political calculus will always be for the people in Sacramento to look for the path of least resistance,” he said. “Local governments are at the end of the food chain.”

How big the surge in state revenue might be remains unclear. For the first three months of the fiscal year, July through September, revenue was $500 million above projections. If that trend continues, the state would end the budget year with $2 billion more than anticipated.

Stephen Levy, director of the Center for the Continuing Study of the Economy in Palo Alto, said it could be dangerous to assume that the revenue growth will continue at its current pace.

“You don’t know whether those three months could have been aberrant,” he said. “That may have been a very funny period in terms of tax liabilities, or refunds, or anything else.”

The new administration is most likely to rely on projections from the nonpartisan legislative analyst’s office due later this month. But even if that report has good news about tax receipts, many of the savings projected in this year’s budget have not been reached.

The state’s prison system, for example, has already spent $544 million more than budgeted three months into the fiscal year. The state so far has also not been able to generate anything close to the $680 million in revenue projected by renegotiating gambling compacts with Indian tribes. And plans to save $1.1 billion through payroll reductions have stalled.

Add those problems into the IOUs the state must pay down, and a revenue surge could be pretty much wiped out.

The need to repay money owed to schools “doesn’t make it any easier” to balance this year’s budget, said Assemblyman John Campbell (R-Irvine). “But it never was easy. This is going to take some bold and dramatic action, with or without that revenue.”