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Legislative Analyst’s Office looks at how community colleges are managing cash in response to State payment deferrals

In June 2020, facing a large projected budget shortfall, the state decided to defer $12.5 billion in payments to schools and community colleges. Beginning in summer 2020, our office set out to discover how community colleges were responding to these payment deferrals. We learned that about two-thirds of college districts have sufficient local reserves and internal borrowing options to accommodate the deferrals, whereas about one-third are planning to borrow externally. In November 2020, our fiscal outlook reports showed a much-improved budget situation, with state revenues and K-14 funding requirements much higher than estimated back in June. In light of the improved fiscal situation, this post provides two options for eliminating some or all of the K-14 payment deferrals—through either immediate midyear action or as part of the 2021-22 budget process.

Districts Began Preparing for State Payment Deferrals Several Months Ago. To generate one‑time state savings, the 2020‑21 budget package deferred $1.5 billion in state payments to the California Community Colleges (CCC) until 2021‑22. (The budget package also deferred $11 billion in state payments to school districts until 2021‑22.) Specifically, the state is scheduled not to make certain payments to the community colleges from February 2021 through June 2021, with payments instead being provided over the July 2021 through November 2021 period. Districts are planning to handle these deferrals by using various cash management strategies, including tapping their local reserves and borrowing externally from investors. We estimate about one‑third of CCC districts are planning to borrow externally. Although districts indicate deferrals are a major challenge, they generally believe them to be manageable this year.

Given Improved State Revenue Situation, Legislature Could Eliminate Some or All Deferrals. In our November 2020 fiscal outlook reports, we show that the state’s budget situation has improved considerably compared with June 2020 estimates. State revenue estimates have been revised upward, as have estimates of school and community college funding requirements. Particularly due to upward revisions for 2019‑20 and 2020‑21, we estimate that the state has a significant amount of one‑time settle‑up funds to spend on schools and colleges, though the exact amount will not be known for several more months as additional budget data becomes available. We recommend the Legislature place a high priority on using these one‑time funds to eliminate the K‑14 deferrals. Even under our lower‑end Proposition 98 estimates, the state could retire some of the K‑14 deferrals. At roughly the midpoint of our Proposition 98 estimates, the state could eliminate all of the K‑14 deferrals.

Legislature Has Options Regarding Timing. Should the Legislature decide to rescind some or all of the K‑14 deferrals, it could (1) do so through immediate midyear action or (2) wait and rescind as part of the 2021‑22 budget package. Under the first option, we encourage the Legislature to first rescind the February through April 2021 deferrals (totaling $7.2 billion in additional Proposition 98 spending), then reassess state revenues in April to determine whether to retain or rescind the May and June deferrals. The second option represents a more cautious approach. The first option provides greatest benefit to those community college districts relying on their local reserves whereas the second option tends to provide greatest benefit to those districts relying on external borrowing from investors (as these districts would receive borrowed funds upfront that could be invested until needed). If the Legislature decides to keep any deferrals in place for 2020‑21, it could revisit the repayment schedule, potentially paying off all the deferrals in July 2021 rather than extending repayments through November 2021. The Legislature could make these repayment decisions as part of budget close‑out in spring 2021.

For the full report, visit California Community Colleges—Managing Cash in a Time of State Payment Deferrals.

The article above was released by the non-partisan California State Legislative Analyst’s Office.