Economic Forecast:

The Outlook for K-Adult Education Funding and What to Do Next

By Tahir Ahad and Brett McFadden - December 11, 2009

On Wednesday, the UCLA Anderson School of Management released its quarterly economic forecast.  The Anderson Forecast, in combination with several other forecasts, has become a closely-watched barometer for the overall health of our national and state economies.  It is widely used by policymakers to formulate budget and revenue projections at the state level.

We keep a close eye on international, national, and state economic trends because they directly impact the flow and characteristics of state revenues.  State revenues, in turn, are a key determinant of the Proposition 98 minimum guarantee for public education funding.  Besides this direct linkage to state revenues, California education funding is directly and indirectly impacted by worldwide economic conditions as well.

We are, however, careful to weigh such forecasts against that of other factors that impact Proposition 98 funding.  Many economic forecasts misread the severity of the current recession, catching state policymakers and pundits off guard.  Other factors that inevitably influence education funding are the fiscal condition of the state’s General Fund, Sacramento politics, and competing demands placed on the state budget by the non-education interest groups, programs and needs.  More often than not, development of the state’s education budget is more of a political exercise than it is a fiscal one.

The national outlook

The UCLA Forecast made note of the severity of this recession.  Most industries and states have been hit by record declines in home values, stock prices, and employment.  The forecast noted that there are a half million fewer non-farm jobs than there were a decade ago.  In more direct terms, the U.S. has lost revenues and economic growth has been stalled for over ten years, making this one of the most dismal decades for economic activity since the Great Depression.

The forecast did indicate that the worst was likely behind us.  UCLA economists foresee slow growth for the U.S. economy over the next two years, stating that the nation will likely start coming out of the recession this quarter.  The economy is predicted to grow at a rate of 2.8 percent in the second half of this year with the growth in the nation’s gross domestic product settling at 2 percent for 2010.  The GDP is predicted to rise to 3 percent in 2011. 

Nationwide unemployment is predicted to peak at 10.5 percent in the first quarter of 2010, and then remain at 10 percent or slightly higher for the rest of the year.  Because of this, as well as salary reductions and furloughs, consumer spending will remain weaker compared to earlier in this decade.  Consumer spending and investment speculation will, most likely, not be primary contributors to out-year economic growth.  Instead, overall economic growth will likely be fueled by the growth in exports associated with a weaker U.S. dollar.

Finally, the UCLA report noted that the government is “highly medicating” the economy with a policy of record deficit spending and zero interest rates.  While these actions have been necessary to avoid a complete economic meltdown, they cannot be sustained in the long run.

Economic outlook for California

As usual, California continues to lag behind most of the nation.  The forecast is that the state will experience little or no growth through 2010.  Economic activity will increase slightly in the first part of 2011 returning to normal levels at the end of 2011 and into 2012.

UCLA and other economic analysts believe that California’s unemployment rate will peak somewhere between 12 percent and 13 percent in 2010.  This is down from the estimates as high as 14.4 percent earlier this year.  Total employment in the state will have actually contracted by 4.3 percent in 2009 and state’s economy will not generate significant number of new jobs in 2010.  State unemployment rates will, most likely, not begin to fall below double digits until 2012 or thereafter.

Finally, record-level reductions in government jobs (including Local Educational Agencies, or LEAs) will create an additional drag on the overall economic activity and consumer spending throughout the state.

The bottom line continues to be that California will lag at least one year behind the rest of the nation in terms of recovery with continued risk to overall economic health associated with the state’s ongoing fiscal crisis and structural budget deficit.

What this means for school districts and county offices

We got out of the prediction business some time ago, but we can assume the following:

1. State revenues likely will not return to pre-recession levels until sometime after 2011-12.  Proposition 98 will be directly impacted, with education funding growth remaining sluggish through the next three years.  The pubic sector typically lags behind the private sector by upward of a year, so Proposition 98 funding may not begin to stabilize until after 2010-11.
2. It should not come as a surprise that 2010-11 will be another year of no Cost of Living Adjustment (COLA) funding and a revenue limit deficit factor likely above 21 percent.  Generally, it may turn out to be the hardest year for LEAs during this recession.  Mandate reimbursement funding will also most likely be deferred another year.
3. It is too early to tell what state lawmakers will do when it comes to reducing Proposition 98.  It will largely depend on the size of the overall state deficit.  Given the dynamics of when that could be determined, the education community may not have a clear picture until the May Revision.
4. A majority of LEAs have expended most, if not all, of their federal stimulus dollars.  The number of districts in fiscal peril will certainly increase with qualified and negative budget certifications possibly increasing to record levels.

What can we do with this information

Although it is hard to find a silver-lining in this dark cloud, being aware of the situation one is about to encounter is of some value, nonetheless. Knowing the bleak forecast, we recommend:

1. Since each district and COE has already gone through a few rounds of budget reductions, the new reductions will be even harder to identify and more difficult to implement.  Discretely, begin the process of evaluating all options, no matter how far fetched, to start developing concepts for later discussion and consideration.
2. It easier said and harder to do, but refrain from sending a message of doom and gloom and panic.  Additional reductions may be inevitable but it may not be helpful to demoralize the staff and have them spend the next several crucial pre-STAR months fretting about their employment status.
3. Engage your employee associations and unions in the discussion about the possibilities of further reductions including concessions involving employee compensation.
4. Inform and educate your board promptly and frequently to prepare them for the tough decisions they may have to make in the coming months and possibly years. Keep the school community appropriately informed.
5. Watch out for overtime and use of temporary and substitute employees that may have started to sneak in after the prior reduction in personnel.  Clearly communicate to the middle managers that they must obtain authorization from the superintendent and/or CBO prior to engaging any extra help.
6. Evaluate which services can be abandoned or suspended.  Start educating the users of those services about that possibility and devise methods and processes to address those needs minimally by other means.

As the information unfolds, we will keep you informed and share best practices to guide you through these challenging times.

Editor's Note: Tahir Ahad is President of educational consulting firm Total School Solutions (TSS) and Brett McFadden is Management Services Executive at Association of California School Administrators (ACSA).