Preliminary September Revenues Up Sharply

Although the Department of Finance (DOF) has not yet released its monthly Finance Bulletin for October, Brad Williams, the Legislative Analyst’s chief economist, has acknowledged that revenues from two of the three major taxes are up significantly. The corporation tax came in $525 million above the May Revision estimate and the personal income tax (PIT) exceeded the estimate by $380 million, for a total gain of $905 million. No information is available at this time for the sales tax and the other minor taxes.While some have speculated that the corporation tax gain is related to rebuilding contracts tied to the hurricane-damaged Gulf Coast region, Williams rejects this theory because taxable profits from such activity would not materialize this soon. Instead, he believes that the gain could be a result of corporations taking advantage of a reduced federal tax rate on earnings generated in foreign countries. Federal law allows foreign earnings to be “repatriated” to the United States and thus subject to domestic tax rates, which in turn would generate greater tax revenues for California and other states. In addition, Williams believes that the high profits enjoyed by oil companies could be contributing to the corporation tax gain.

While the official DOF’s account of revenues will not be available until later in the month, this news is certainly welcome. Even if the other taxes just meet expectations, the collections from the corporation tax and the PIT will place the monthly take about 10% above estimate. Combined with collections from prior months, the September revenues would place the state almost $1.8 billion ahead of projections, which would ease the types of cuts and program reductions many Capitol observers anticipate will be part of the January Governor’s Budget.

Final Recap of 2005 Legislative Session�Chaptered and Vetoed Legislation

The curtain finally came down on the 2005 legislative session, with the Governor meeting the October 9th deadline for signing or vetoing legislation. During the 2005 legislative session, more than 2,400 bills were introduced by members of the Senate and Assembly. By the time the Legislature adjourned on September 9th, 961 bills had been sent to the Governor�s desk for his consideration. The tally for this year shows that the Governor signed 729 bills into law and vetoed 232.

Since this is the first year of the two-year legislative cycle, bills that failed to reach the Governor�s desk become two-year bills (meaning they will be heard during the 2006 legislative session). A couple of bills that fit into this category that have a significant impact on community colleges are:

SB 361 (Scott, D-Altadena)�new community college funding formula�and AB 476 (Liu, D-La Canada Flintridge)�community college fees.

Both of these bills will likely be acted upon shortly after the Legislature reconvenes in January 2006. SB 361 will be amended to include an urgency clause so that, if signed into law, it will become effective upon the signature of the Governor (it is the intent of the Chancellor�s Office that SB 361 be in place for the 2006-07 budget). Assembly Member Liu has convened a task group to look at options and make recommendations regarding community college fees. It is her intent to amend AB 476 to reflect the consensus recommendations of the task group.

Chaptered Legislation

AB 967 (Canciamilla, D-Pittsburg), Chapter 399/2005: Concurrent Enrollment of Pupils in High School and Community Colleges

This bill exempts from an enrollment cap on concurrent enrollment at community colleges a student recommended by his or her principal for enrollment in a college level advanced scholastic summer session course, or in a vocational community college summer session course.

AB 982 (Laird, D-Santa Cruz), Chapter 320/2005: Community Colleges: Fees

This bill deletes the exemption of low-income students from paying a health service fee.

AB 1280 (Maze, R-Visalia), Chapter 515/2005: Public Postsecondary Education: California Community College Baccalaureate Partnership Program

This bill establishes the California Community College Baccalaureate Partnership Act Program. Under the program, the Chancellor�s Office is authorized to annually award two grants, not to exceed $50,000 each, to a collaborative, composed of at least one community college and at least one baccalaureate degree-granting institution, formed for the purpose of offering baccalaureate degree programs on the participating community college campus.

AB 1366 (Lieber, D-Mountain View), Chapter 360/2005: Community Colleges: Fiscal Accountability: County Office Fiscal Crisis and Management Assistance Team

This bill adds the Chancellor of the California Community College system or his or her designee and a member of a community college district governing board chosen by the chancellor to the Fiscal Crisis and Management Assistance Team (FCMAT) governing board, thus making community college districts eligible to request assistance from FCMAT.

AB 1492 (Evans, D-Santa Rosa), Chapter 363/2005: Community College Districts: Property: Sale or Lease

This bill excludes from provisions governing the construction of community college facilities and governing the disposal of property owned by community college districts certain transactions involving the sale or lease of property owned by a community college district if the proceeds of these transactions are expended for capital outlay purposes relating to qualified community college facilities, as defined, and if the district complies with other specified conditions.

AB 1646 (Higher Education Committee), Chapter 654/2005: Public Postsecondary Education: Community Colleges: Technical Revisions

This bill authorizes a community college district to exempt a student who, as of August 29, 2005, was enrolled, or admitted with an intention to enroll, in the fall term of the 2005-06 academic year in a regionally accredited institution of higher education in Alabama, Louisiana, or Mississippi, and who could not continue his or her attendance at that institution as a direct consequence of damage sustained by that institution as a result of Hurricane Katrina, from paying a nonresident tuition fee in the 2005-06 academic year. The bill also exempts these students from the enrollment fee if they would otherwise qualify for a waiver under the standards in existing law.

SB 70 (Scott, D-Altadena), Chapter 352/2005: Vocational Education

This bill requires the Board of Governors of the California Community Colleges to assist economic and workforce regional development centers and consortia, including middle and junior high schools or high schools and regional occupational centers and programs, to improve linkages and career-technical education pathways between high schools and community colleges for the benefit of pupils and students in both education systems, as described. The bill requires the Board of Governors to ensure that elementary and secondary school educators strongly collaborate with college faculty in implementing this provision.

SB 724 (Scott, D-Altadena), Chapter 269/2005: Public Postsecondary Education: California State University: Doctor of Education Degrees

This bill authorizes the California State University to award the Doctor of Education (Ed.D.) degree, focused on preparing administrative leaders for California K-12 public schools and California Community Colleges.

Vetoed Legislation

AB 1070 (Cogdill, R-Modesto): Community Colleges: Fees for Loss or Damage of District Instructional Equipment

This bill would have authorized a community college district to charge any enrolled student a fee to recover the costs of replacing or repairing instructional equipment that is owned or leased by the district and that has been lost or damaged by the student.

The Governor�s veto message stated:
I am returning AB 1070 without my signature. I respect the authors [sic] intent to address the reasonable issue of allowing local community colleges to charge students for the costs of replacing or repairing instructional equipment that has been lost or damaged. The ability to recoup such costs encourages personal responsibility and the exercise of care in using valuable equipment. However, this bill would allow community colleges to assess fees as a condition of enrollment in a course or courses, with no limit on the amount that could be charged. I am concerned that, depending on the level of fees and the number of courses in which they are charged, this bill could deter some promising students of limited means from choosing to pursue a course of study that requires the use of costly instructional equipment. As a result, this bill could have a negative impact on the number of students who choose to enter the important career fields such as science, medicine, or nursing. I encourage the Legislature to work with my Administration in crafting legislation that avoids these unintended consequences.

SB 672 (Cox, R-Fair Oaks): Community Colleges: Inmate Education Programs: Computation of Apportionments

This bill would have authorized any governing board of a community college district that provided classes for inmates, including inmates of state correctional facilities, to include the units of full time equivalent students generated in those classes for purposes of state apportionments.

The Governor�s veto message stated:

I am returning SB 672 without my signature. This bill would inappropriately authorize community college districts to receive reimbursement at the �full-credit� reimbursement rate rather than the lower �non-credit� rate, for hours generated teaching credit classes at state prisons. The higher rate results in an excessive reimbursement given that when providing instruction in a correctional setting, community colleges do not incur facility or other student services costs.

Community College Initiative

A joint advocacy effort of the Community College League of California (primarily the CEO organization), the Faculty Association of the California Community Colleges, and the Los Angeles Colleges Faculty Guild, is considering a ballot measure for November 2006. The three-pronged ballot measure would address Proposition 98, bilateral governance, and student fees.

While the draft community college ballot measure addresses several issues of longstanding frustration to community college leaders (many attempts have been made to reach a compromise with K-12 leaders and the Legislature on a community college �fair-share� of Proposition 98 funds), the primary reason for the consideration of a ballot measure is the challenge faced within Proposition 98 funds. The primary driver of the annual change in Proposition 98 funds is the rate of K-12 enrollment growth. K-12 enrollment growth is slowing, and, in many cases, K-12 school districts are actually declining in enrollment. The project pace of K-12 growth is not expected to keep pace with community college growth (estimated at 2% to 3% annually over the next 10 years) and this would threaten the ability of community colleges to serve all Californians seeking an educational opportunity.

If changes are not made to the growth calculation of Proposition 98, and the projections for Proposition 98 by the Legislative Analyst�s Office (LAO) are correct, funding for community colleges will be $300 million short by 2014-15, assuming that nothing more than cost-of-living adjustment and growth is funded over the next 10 years and community colleges are provided the statutory guarantee of 10.93%.

Proposed Solutions

1. Establish a separate Proposition 98 guarantee for community colleges that grows annually with the existing Proposition 98 inflation factor and community college enrollment growth.

2. Establish the California Community Colleges in the Constitution, securing bilateral governance and providing the System Office with autonomy similar to that of the California State University.

3. Reduce student enrollment fees to $20 per unit and limit future fee increases to the lesser of the annual change in per capita personal income or 10%.

What�s Needed to Qualify the Ballot Measure for a November 2006 Election?
A constitutional amendment initiative requires a simple majority (50%) for approval. Further, the number of valid signatures required for a constitutional amendment is 8% of the votes cast in the most recent gubernatorial election. Based on the 2002 election, 598,105 signatures would be needed; however, if the 2003 recall election is used as the base, the signature requirement will increase to 692,633.

It is estimated that $4 million will be necessary for a successful campaign (including paid signature gathers). Local districts will be asked to raise $2.5 million. District fundraising targets are set based on credit enrollment. Keep in mind that no district general funds�or staff time during regular business hours�may be used for this purpose.

California Community College Survey Results

To determine whether or not California voters would support a community college ballot measure, a community college funding survey was developed by Garin-Hart Research Group. In January 2005, the research group interviewed 606 likely voters. As a result of the initial survey, the community college ballot measure has been crafted to appeal to the voters and to avoid drawing opposition from organizations with significant resources that might otherwise campaign against it. Initial testing of the measure shows that 63% of the voters support the measure, and the level of support increases after voters hear the arguments for and against the measure. Thus, proponents of the measure believe that the voters are highly likely to approve the measure if there is little or no funded opposition.

How Would Proposition 76 Affect Community Colleges?

Governor Schwarzenegger�s California Recovery Team, a business-backed coalition, is supporting an initiative on the November special election ballot that would dramatically change the rules governing the State Budget process by placing a strict cap on spending. Proponents of Proposition 76 argue that the new cap is designed to �smooth� state spending. An examination of the provisions of Proposition 76 indicates that the proposed cap could lead to a significant reduction in state spending over time.

This finding is supported by the Legislative Analyst�s Office�s (LAO) analysis of Proposition 76, which concludes that, �Over time, we believe that the operation of this limit would likely reduce state expenditures relative to current law.�

The Capital Budget Project�s analysis finds that Proposition 76 could:
 Lead to a significant reduction in state spending. If Proposition 76 had been enacted in 1990, for example, allowable spending would be $12.6 billion below the level signed into law by Governor Schwarzenegger in the 2005-06 Budget. This exceeds the 2005-06 General Fund spending for higher education ($10.2 billion).

 Limit spending to less than the level of revenue collections over the course of the state�s typical boom-bust budget cycle.

 Result in the accumulation of large reserves in the state�s General Fund and special funds. The magnitude of these reserves could lead to pressure for tax reductions that, in turn, would further reduce the allowable spending, even if the state has sizeable reserves.

 Lead to large balances in funds supported by voter-approved taxes.

How would the proposed cap work?
 Proposition 76 would impose a new state spending limit, give the Governor broad authority to cut spending if revenues fall below forecast levels, and make changes to the Proposition 98 spending guarantee and to transportation funding authorized by Proposition 42.

 It would limit growth in spending to no more than the average revenue growth in the three prior years.

 The cap applies the cap �proportionately� to the General Fund and special funds in years when revenues exceed the cap.

In the search for some context as to how the Governor�s spending cap would really work, the LAO was asked the question: What would happen if it was in place during this past year�s budget debate?

The answer: It would apparently have prohibited $3 billion worth of spending agreed to by legislators and Governor Schwarzenegger. The LAO has not published the above number, in part to avoid wading into the heated political battle over the Governor�s initiatives. However, according to the LAO, the spending cap formula in Proposition 76 (which uses data from the previous three budget years) would have held spending in the 2005-06 fiscal year to $110 billion. The Budget Act of 2005-06, on the other hand, pegs at $113 billion.

So the question is: Where would the Governor and legislators find an additional $3 billion in cuts? A tax increase (even if agreed to by Republicans) would have not been an option, because Proposition 76 says that, if spending is already at the maximum level, then most tax revenues go into a reserve fund. So, how would spending have been reduced by $3 billion? Several sources who work for varying interest groups say that one easy fix would have been to simply cancel this year�s early payoff of car tax revenues to local governments. That alone would have downsized the $3 billion gap by $1.2 billion. But where would the rest come from? Social services programs? Higher education? K-12 schools?

Impact on Community Colleges
If you assume that Proposition 98 funds represent approximately 40% of the $3 billion, that would amount to a potential cut of $1.2 billion in K-14 funds. Based on the usual 10% share of Proposition 98 funds that community colleges have received in recent years, community colleges would have received approximately $100 million fewer funds for the 2005-06 fiscal year. That big of a cut would have likely translated into no funding for equalization, restoration of Partnership for Excellence funds, and a reduction in growth funds.

Proposition 76�s spending cap is, in the final analysis, an untested budget tool. Tom Campbell, Director of the Department of Finance, has taken a strong exception to using Proposition 76�s formula for this past year�s budget. He asserts that it is unfair to apply it to any previous budget, even one that was pending when Proposition 76 was actually written. If it is passed, all sides seem to agree that it would weaken or remove one budget balancing tool used in years past (tax increases) and force more usage of another budget balancing tool (spending cuts).

25 Days and Counting . . .New Polling Results Not in Line With Conventional Wisdom
It was recently reported that the California Recovery Team is supporting a new media poll by Survey USA that shows all of the Governor�s initiatives winning �handily,� all polling with a minimum of 55% support.

Specifically, the survey found:

� Proposition 74 (teacher tenure)�55% would vote Yes; 44% No; 2% Undecided
� Proposition 75 (public employee union dues)� 60% Yes; 37% No; 3% Undecided
� Proposition 76 (budget spending cap)�58% Yes; 36% No; 6% Undecided
� Proposition 77 (redistricting)�59% Yes’; 36% No; 5% Undecided

Survey USA�s numbers run counter to every other poll on these initiatives to date. One issue is the wording used by Survey USA in its poll. For example, Survey USA did not mention school funding as part of its question on Proposition 76, while the Secretary of State�s title and summary of the initiative do. The poll asked 507 likely voters: �Proposition 76 limits growth in state spending so that it does not exceed recent growth in state revenues. If the special election were today, would you vote Yes on Proposition 76? Or would you vote no?�

According to Jay Leve, representative for Survey USA, �We ask our questions in 35 words. [Other pollsters] ask their questions in 105 words,� adding that sometimes the actual ballot language is deliberately misleading.
Todd Harris of the Governor�s campaign team stated, �People won�t be using the ballot language to make their decision, they�ll be using what they hear in the television advertising.�

The Survey USA poll is in sharp contrast to the Public Policy Institute of California (PPIC) poll on �Californians and the Initiative Process,� released on September 29, 2005. According to the PPIC poll, Californians have been primarily focused on natural disasters and economic concerns and are showing little interest in the special election. �Voters see little on the ballot that connects to their current concerns,� says PPIC survey director Mark Baldassare. �It�s a major reason for the lackluster response to the election generally and to the specific measures on the ballot.�

A majority of likely voters (53%) say the special election is a bad idea, with only 40% calling it a good idea. When PPIC asked survey participants to name the initiative that interested them the most, 38% responded �don�t know� while 12% responded �none.�

It is important to note that the PPIC survey was conducted just prior to the kickoff to the Governor�s campaigning; however, the polling numbers continue to slip.

� Proposition 74 (teacher tenure), 43% Yes; 47% No
� Proposition 76 (budget spending cap), 26% Yes; 63% No
� Proposition 77 (redistricting), 33% Yes; 50% No

The PPIC survey did not include questions on the Proposition 75 (union dues initiative) as part of the September survey, but when they polled in August, the issue was favorable: 55% yes and 32% no.

Special Election Update: The Campaign Money Trail

It has shaped up to be an expensive campaign and a somewhat bloody initiative battle, with business backers supporting the Governor�s initiatives. Individual donors, including the Governor himself, have been donating generous sums to the California Recovery Team�s campaign. It was reported in the Los Angeles Times that Governor Schwarzenegger has amassed more than $76 million in contributions since running in the recall election.

This week, Senator John McCain (R-Arizona), a potential presidential candidate in 2008, is in California stumping for the Governor’s reform initiatives, but has reportedly expressed reservations about the estimated $200 million that will be poured into the upcoming special election. An avid proponent of campaign finance reform, Senator McCain stated, �I have talked [with Schwarzenegger] about money in politics and will continue to talk about it. After this, I hope he works on it.�

On the flip side, the California Teachers Association (CTA) recently contributed $2 million to the �No on Proposition 75� campaign (union dues initiative). As you will recall, CTA raised its membership dues earlier this year to help offset the cost of fighting certain special election initiatives. Now some want to put a stop to it.

On September 22, 2005, the National Right to Work Legal Defense Foundation filed a class-action lawsuit in the U.S. District Court in San Jose requesting a temporary restraining order, which would have precluded the union from collecting dues in the short term. The Foundation is representing three teachers and is seeking to curtail the collection of the dues increase until teachers can be notified of their right to opt out, believing that the increase violates the constitutional rights of CTA members, of which about 30,000 are considered �agency fee payers� and therefore not official CTA members.

However, last week, CTA won its first battle in the legal war over whether or not it could increase membership dues to fight the special election. On Thursday October 6, 2005, a U.S. District Court judge denied a temporary restraining order that essentially prohibited the CTA from collecting an annual dues increase in the short term.

This now means that a hearing will not likely occur early enough to have an impact on the special election. According to the San Francisco Chronicle, the increased membership fee was initiated to amass upwards of $50 million for CTA�s political action committee. Most of the funds will be used to fight the Governor�s propositions in the special election. According to the San Francisco Chronicle, documents presented during the time of the hearing by CTA Controller Carlos Moreno showed that the labor union has already spent the $50 million it anticipated raising with the dues increase and is currently in the process of securing a $40 million line of credit.

According to a Foundation representative, it plans to press forward with the lawsuit against the CTA even if it is not resolved before the election.

Ask Arnold…
Are Restricted COLA Dollars Available for Salary Increases?

Q. Our certificated budgeting unit is asking that we add the cost-of-living adjustment (COLA) on restricted programs to the dollars generated by the unrestricted COLA and give a bigger pay raise. Do other districts do this? Are these restricted dollars appropriate for salary increases?

A. Many of the new restricted dollars are going to find their way onto the salary schedule, but not in the way that has been suggested. When you calculate the unrestricted pay raise and reach settlement, the unrestricted dollars will be used to fund the unrestricted pay raise. Keep in mind, teachers who are paid from restricted funds are also on the salary schedule and, to the extent possible, their increase should come from the restricted COLA. However, in most cases, the restricted dollars available for the salary increase are not sufficient to cover all costs. In that case, programs will create or increase existing encroachments.

So the short answer is that you should never use restricted dollars to increase an across-the-board salary schedule adjustment.

By the Way . . .

Compton College Accreditation Update. As readers may recall, Compton Community College District is currently under the jurisdiction of a special trustee appointed by the state chancellor. Compton is also in jeopardy of losing its accreditation, so, the Chancellor�s Office has been working with the district to improve its compliance with standards for accreditation. A special review team from the Accrediting Commission for Community and Junior Colleges (ACCJC) visited Compton Community College on October 3rd to review the progress the district is making. The four-member review team spoke with selected representatives of the campus community, including Interim President Jamillah Moore; Special Trustee Charles Ratliff; and college leadership, including Academic Senate and faculty union representatives. District staff believes that they have prepared a strong case and are in substantial compliance, and firmly believe that Compton should remain accredited.

Currently, the college is fully accredited pending a final report by ACCJC. The special review team will review all of the information and triangulate the evidence with the Statement of Reasons and accompanying exhibits provided earlier to ACCJC by the college. At the end of two weeks, the team will share a draft of their findings and recommendations with the college. Compton will then be given a week to correct any inaccuracies or misstatements before the final report is forwarded to ACCJC for its review and action.