Photo by Akshay Chauhan on UnsplashPhoto by Akshay Chauhan on UnsplashBob Blattner, principal of Blattner & Associates, is a Sacramento-based education consultant who specializes in California school finance. This Week in California Education podcast co-hosts Louis Freedberg and John Fensterwald interviewed him about forecasts for an economic recession and the potential impact on school funding that the coronavirus will cause. You can listen to the podcast here. The interviews have been lightly edited.
EdSource: Bob, you’ve been looking at these numbers pretty closely. What’s your view? How bad is this going to be?
Bob BlattnerBlattner: It’s going to be really bad. It’s really bad already. One of the things that makes this so different from the Great Recession, which was awful, is we’re getting hammered from both sides as a result of COVID-19. Our revenues are tanking. Capital gains taxes are going to plummet and withholding taxes, corporate taxes, sales taxes are all going to plummet. Yet on the other hand, we’re facing huge added expenses, taking care of the homeless population, for all of our PPE — personal protective equipment — all of those things. And so as our revenues are plummeting, it’s not like we have the ability to use all of our savings.
EdSource: And by savings do you mean that rainy day fund that Gov. Jerry Brown was so insistent on trying to build up?
Blattner: Absolutely. Gov. Brown pushed the Budget Stabilization Account — the rainy day fund — in fact overfunded it. So we have $3 billion more in that account than even the Constitution required.
EdSource: So you’re saying that that rainy day fund is not going to be enough to mitigate a lot of the damage?
Blattner: Not by itself, certainly not. The total amount at this point is about $17.5 billion. Through next June 30, the best guess from the Legislative Analyst’s Office, using the Great Recession as a model, which is imperfect to be sure, is maybe $35 billion in revenue hits.
EdSource: Isn’t there a huge amount of uncertainty or can we predict regardless that the budget is going to take a big hit?
Blattner: Absolutely. There’s a huge level of uncertainty. Unfortunately, all of the uncertainty has been trending negative. So for instance, a month or so ago, there was still hope for what we call a “V-shaped” recession, so it’s a real sharp decline and then a very sharp rebound. Well, that’s off the tables now as we learn more about the epidemiology, so now we’re looking at a “U” as in underground or underwater recession or maybe even an “L- shaped” recession in which we don’t know when we’re going to climb out it. We don’t know when we will be able to crawl out of the shelter in place, we don’t know how this disease is going to act. We don’t know if there’s going to be a rebound, probably a year to 18 months before we have a vaccine maybe. After that we don’t know how longstanding the damage to the economy is going to be. Even if all of a sudden we don’t have to worry about COVID-19, we have 20% of our labor force out of work. We have huge supply chain issues. We don’t know how fast the rebound will be.
EdSource: Education is tied to a rough percentage of the General Fund. So if you’re talking about a cut of that magnitude, then money for schools through a formula called Proposition 98 would be cut severely, too, right?
Blattner: Absolutely. Proposition 98 is a little over-complicated and so sometimes it’s not tied to a percent of revenues through various machinations called tests. What you can say though is Prop. 98 does generally about as well as the economy. The economy is doing horribly and consequently, so will Prop. 98.
EdSource: Schools are facing additional expenses and are coming off of the school closures with a lot of needs. So will the Legislature and the governor actually give a huge cut to education? What’s your best reading of things?
Blattner: I think that the governor and the Legislature will do everything they can to avoid cuts to schools. Traditionally that’s been the case. It’s not just a good idea, it’s the right thing to do. It’s good politically, it’s good morally, it’s good for the state.
But we’re facing a huge challenge that the federal government does not. The constitution of California requires a balanced budget. We can’t just go, “Hey, you know what? We’re going to borrow $100 billion, $50 billion to get us through this and we’ll pay you back later.” And so we don’t have a lot of the capability that the federal government has, which is why everyone is looking with such hope and unease to Washington. That’s going to be the wild card that will really help us out. And there are other options in the interim that the very bright people in the Newsom administration have. This is different from the Great Recession, but some of the tools in the toolbox may be the same.
Ways to lessen the damage
EdSource: Name one.
Blattner: Maybe the most well-known during the Great Recession was called an apportionment deferral. Proposition 98 was in the tank because there wasn’t a lot of money. And so the state said, “We only have this much money. We can only send you this much money, but we’re going to allow you to book and spend money that you’re not going to get until next year.” So that really was kind of a J. Wellington Wimpy solution (the Popeye charter who borrowed to buy hamburgers). The state said go ahead and spend it like you really have it, although you don’t.
EdSource: Now you’ve reminded me. Didn’t school districts have to go out and get loans and so on to get through this period?
Blattner: They did. One of the things about the deferrals is that it’s only a one-year fix. If you take a $100 advance off your next paycheck, when you get to your next paycheck, it’s going to be $100 short. So you’re going to have to take $100 off the paycheck after that just to hold even. And so what would happen is we would have additional deferrals every year ranging from $2 billion to close to $3 billion every year. And by the time we were done with the recession and the deferrals, the total amount that school districts had to borrow every year was over $10 billion.
EdSource: That is probably something that most Californians were totally unaware of.
Blattner: Good, because the important thing was taking care of kids in schools, and we were able to do that.
EdSource: So that’s one strategy. Anything else that they could pull out of the hat?
Blattner: You alluded to the increased costs of schools we’re facing even before we got into this, the increased costs for employer contributions for the retirement programs. They have been increasing sharply in response to Gov. Brown’s call to make the whole program actuarially sound: Payments weren’t keeping up with the out-year obligations.
EdSource: So school districts have had to chip in more.
Blattner: More than double what they were paying and the increases are still going. So for instance, the state could say we’re going to forego the increases. We’re going to keep you where you’ve been paying for the next year or two. And that’s, you know, well over $1 billion. A Prop. 98 cut of $2 billion is $10,000 per classroom across the state every year. Some of these creative work-arounds would avoid that.
EdSource: Is there anything that kind of gives you some hope that we’ll kind of get out of this without a huge amount of damage? You’ve pointed to the fact that there’s a lot of smart people working on this. I guess that’s something to be grateful for, but anything else?
Blattner: If you compare this to the Great Recession and you may remember just how difficult it was to get the ARRA, the American Recovery and Reinvestment Act, more than a decade ago. That took forever and it was very, very contentious, and the total was less than $1 trillion, right? It seems as if for a number of reasons — and everyone can speculate and probably hit it pretty close — the federal government is acting more quickly this time and more aggressively to pick up the slack. And that’s a good thing.
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