Assembly Budget Subcommittee No. 3 on Education Finance

Good morning, everybody. Thank you so much for being here. We're going to call to order our Assembly budget Subcommitee number three on education finance for today. I am Chairman David Alvarez. We have Assembly Member Mike Fong and Assembly Member Muratsuchi with us. We are going to get started today. We have a pretty thorough agenda. We will have a hearing that I anticipate will take us at least a couple of hours. So sit back, relax, and enjoy.

Looking forward to the conversations today, but really particularly glad and appreciative that our State Superintendent of Public Instruction, Tony Thurman, is here, and I'd ask him if he could please come forward and share some remarks. Mr. Thurmond, thank you so much for the work that you do on behalf of all of our students. Very pleased to have you here and thank you for sharing an update on the work that you're doing. Welcome.

Thank you, Chairman Alvarez, and good morning to Members of the Committee and staff. Thank you again, staff, for the staff report. It was very helpful in setting the terms. I think you all know we're facing a tough financial period with revenue being less. This is not the time for a lot of expenditure and education. However, we appreciate that this budget creates a way to continue to provide consistent funding to our schools and that it doesn't balance cuts on the backs of educators.

I want to acknowledge our great educators, our teachers, our classified staff, our administrators, our parents and volunteers and students for all the great work that they do. In spite of the financial challenges, there is good news. This is the first year that funds will be flowing to our schools for Prop 28, arts and music funding that is intended to supplement, not supplant, what happens in our schools, and that this is funding that can be used to bring staffing into our schools.

Additionally, because of the investments that this institution has made to our schools, I think that there are great resources to help our schools address issues around learning gaps, not the least of which is $4 billion in expanded learning that our school districts have the almost $8 billion that was funded for the Learning Recovery block grant and $4 billion for community schools.

As we're in a tighter period, we're asking school districts to focus on those dollars and how they maximize the use of those dollars, to not think of them as individual grants, but instead as a framework that they can use together to support student achievement. And in that way, we'd like to work with this Committee and the staff and the Committee and staff and the other houses to create a stronger way of measuring impact and outcomes from these grants. Simple questions we want to ask.

Do you see an improvement in test scores? Do you see a decrease in chronic absenteeism? Do you see an increase in graduation rates? How did you use these funds, and do they help you to get to those places? And so we think that this is the important work for our school districts to do this year. We're in communication with many of them.

At the same time, we think that it is important for us to put a heavy emphasis on providing robust professional development and training for those who teach math and those who teach our kids to read. And you will see that this year we have a Bill that focuses on how we may be able to provide training for up to 160,000 math teachers and up to 160,000 staff who teach our children to read.

We know that learning to read by third grade is a critical benchmark, and those who don't learn to read by third grade often experience difficulties later in life. And so we're continuing on our focus in this area. Our schools have access to $50 million for reading coaches and specialists that we believe is a key investment to help our students. Of course, there's universal transitional kindergarten and universal meals that round out great programs that we think will help our schools. Of course.

And naturally, none of this works if we don't have teachers to be in the classroom. Last year, we sponsored a Bill that was signed into law that allows retired teachers to spend a little bit more time in the classroom without having an impact on their pensions. Thank you all for the support of that legislation. We also signed, authored, sponsored legislation that increases the stipend for those who might become a teacher from $25,000 a year to $40,000 a year.

And as you all know, we've secured money essentially for a scholarship for anyone who wants to become a teacher or a mental health clinician. We have $20,000 for those candidates. And while the Department of Education doesn't lead recruitment, we've developed a campaign to support school districts in their recruitment efforts and to make sure that the word gets out about these important grants.

And anyone who wants to avail themselves to these scholarships can reach out to us at Teachins.CA@CDE.CA.Gov. Finally, I would just mention that we're very concerned and interested about what we can do to support our students in the space of career technical education. We've done some private fundraising to support paid internships for students to learn about STEAM careers, and we can report more on that.

And I would like to invite the Members of the Committee to a summit that we'll be having in April. On the subject of apprenticeship training programs, we're inviting those who lead apprenticeship training programs in various fields, including the construction and building trades sector. Firefighters, educators, and others who have apprenticeship training programs will be putting on a training for all thousand of our school districts to make sure that they're talking to our students about the opportunities that exist in apprenticeship training programs and working in this field.

We are deep believers in promoting college and career, and we want to make sure that our students know about all opportunities, including the opportunity to work in the construction sector or as a firefighter or in another sector where there's an apprenticeship training program where they can earn a great living and have a great life. You'll hear about some other legislation that we have that this year calls for establishing a computer science graduation requirement for our students.

You'll hear us talking about AI and how that can be a tool for promoting what happens in education. And so despite some of the financial challenges that we are working through, we believe that there are many ways that we can continue to engage students in rigorous education that prepares them for a bright future here in the great State of California. With that, I will conclude my remarks, and happy to answer any questions from the Members of the Committee.

Thank you, Superintendent. Appreciate again you being here, sharing your update of how things are going. I want to particularly thank you for your efforts over the last year on the initiatives that you've taken the lead on, certainly on the legislation that you sponsored, focused on teacher pipeline, focused on student success, and also on options for students into the future with the career technical focus that you had.

I wanted to also appreciate the work that you're doing with the districts to ensure that, as you said, that they're utilizing the funds that have been allocated. And you use the word as a framework of what can happen and what they're doing, and that you are hearing stories and feedback on what those programs are doing in terms of making a difference for students.

I think one of the things we'd appreciate hearing from you as we go through this process this year is helping us identify particularly anything that has demonstrable research or data sets that underscore the significance of some of those investments as we obviously make decisions on which investments are really continue to be paying dividends for us and that we need to continue to be focused on.

So I'd look forward to hearing from you and your Department and your team on some of those examples of what's working well so that we can be informed, better informed, to make those decisions. So again, I thank you. I'll turn it over to any of my colleagues. Mr. Muratsuchi,

thank you very much. Welcome back, Mr. Superintendent. Always great to see you back in the Capitol and want to thank you also for being our leader for K 12 education. Really, I was jotting down all of the major accomplishments that we working together have been able to make, whether it's the community schools, whether it's focusing on learning recovery, whether it's focusing on the investments in expanded learning opportunities, whether it's Proposition 28, whether it's CTE. We have made tremendous strides forward in recent years.

I think as you started off talking about, our big challenge this year is to protect that progress and protect those investments. And I very much look forward to working with you to do that.

Thank you. Thank you, Mr. Fong.

Thank you so much, Mr. Chairman. And thank you, Mr. Superintendent, for your leadership and efforts. Really appreciate all the updates. And thank you for your leadership and efforts around apprenticeship training programs as well. Look forward to those additional meetings going forward, and then the work around paid internships and steam careers is so critical for next generation leaders here in California and our state. And thanks for the updates on Prop 28 and everything you're doing as well.

I really appreciate your leadership and I look forward to future conversations. Thank you.

Thank you, Mr. Chair. Thank you. Yes, I would just say that there are some best practices that we will be highlighting with our focus on professional development, especially around reading. We're very focused on training that builds on what this Legislature has done to support dyslexia screening, for example, and a deep focus on the science of reading and the professional development funding that we seek for educators really calls for looking at trainings that are, as you say, best practices proven to help drive student achievement.

And so you'll hear us talk about the science of reading. You'll hear us talk about a Bill that we're working on right now that would provide personal finance training to our students so they can learn to avoid debt, so they can learn how money works, so they can learn how to engage in this economy, and that they have opportunities to be successful going forward. I will leave you with just one thing.

In anticipation of today's hearing, we reached out to about a dozen districts all across the state, and we've heard the same thing from all of them. Many of them are in your district areas. They're all grateful that this budget shields education from the kinds of cuts that normally come when there's a revenue shortfall.

They have said if there's any way when revenue was better or if there are opportunities in the future to enlarge the COLA that they would welcome help there as they try to tackle healthcare costs and just the costs of ongoing implementation and managing programs. They continue to feel some pain there, and they ask that I articulate their desire to see no cuts in education and if and when possible, an increase in the cost of living adjustment for them.

Thank you. I would say that I'm very interested on your personal finance priority that you have and would love to hear more about that in a subsequent conversation with you and be supportive of those efforts. I think that's really critical for future student success beyond their academic career. I would also say that I've also met with at this point, a good dozen superintendents, all of the ones in my district and some beyond that, and we're hearing some feedback. Definitely appreciate you continuing to provide that feedback.

Certainly heard the same around COLA. I'll ask you, what I do when I talk to our superintendents in our districts is help us also identify where there needs to be maybe more flexibility with what we are doing today and how can we ensure that there are no impacts in the classroom and on students in a year like this, where there is certainly probably going to be some difficult decisions about some of the programming that we have.

So I'd ask you to also provide that feedback for us because you're just one, a great communicator to them, but also are in a position of receiving really important information for the work that this Committee does. So once again, thank you very much.

Thank you. We're happy to work with the Committee on your statement, Mr. Chairman, and to continue to facilitate communication between districts and the Members of the Legislature so that we're working together to address their needs. I would submit also that you have access probably to the entire California Department of Education today for your hearing. We're all interested in what you're doing, and our team is available to answer any questions throughout the day.

You have our budget chief, Mr. Merwin here, and several of our division directors and deputies who are here available to help throughout the hearing.

Great. Thank you very much.

Thank you.

Thanks again and appreciate you coming. We're going to now begin with the hearing on issues as listed on the agenda. But prior to that, I just wanted to make some personal comments. I think I had the opportunity last week with our first hearing in the Subcommitee on Higher Education to share some personal experiences of mine in our public education system at the higher ed level.

I'd like to today start with sharing some of my personal experiences in the k to 12, particularly as the focus today is on Proposition 98. And I just wanted to remind those who don't know about my journey, my educational journey, that I am a really proud product of our public school system. I am the youngest of six. I was a monolingual Spanish speaker when I first started.

I come from a household of two parents who were immigrants to this country, who never spoke English, very, very poor, went to one of the certainly poorest schools in San Diego, in the barrio Logan community, had some amazing educators, was involved in variety of programs from my k through 12 experience, including things like avid programs and gate programs and bilingual programs that I think for me really were important to laying a foundation for me to be able to be successful and graduate from high school, which I was the only one in my family out of six to do that and go on to college.

I would not have had those opportunities if it weren't for our education system. I now have two children in our public education system, one at a middle school and one in elementary school. During my time before coming here and when I was just a Member of the public, I served on my local PTA in various roles and capacities, spent a lot of time working with our schools and with our administrators on a very local volunteer basis.

And I am just a big believer that the opportunities that I've had in my life only have come because a result of the investments in higher education and the investments that were made in me. This role now allows me to really reflect on that, but also come with that lived experience to this conversation. I'm not an educator.

I've never been a teacher, have aspired to be one, at 1.0 mathematics teacher, but have not had the honor to do that, but really value the work that all of our educators do, our staff, classified staff, our teachers, our administrators, the folks who serve on boards of school districts, our superintendents. It is going to be a more challenging year. We have to acknowledge that we're going to have some conversations that are more challenging than certainly anytime in the near recent memory.

And I just wanted to ensure that everybody knows that, at least for myself, that the focus always will be on more student access opportunities in our k 12 system. Ensuring that, especially those who have challenges that are similar to mine, whether you're an English learner, whether you're lower income, whether you were from a home, a foster child, those are all indicative of the investments that we need to make in order to ensure that every student has the opportunities that we all believe our education system has.

So that will always be the end goal along the way, we will have some difficult conversations about some amazing investments that have happened over the last several years. But we want to make sure that those investments are actually paying the dividends that we all expect. And so we will be talking a lot about what has been demonstrated success. What are some areas, perhaps, where we need to make sure that we identify if the programs are being as successful as we'd like them to be.

And so those are the conversations that we'll be having again, always focused on ensuring that our schools have what they need to be successful and making sure that our students aren't impacted as a result of this difficult year. So I wanted to share that as a personal statement as we begin this. And if either of my colleagues like to share something at this moment, I'd open it up or could always jump in anytime. Okay, Mr. Mesuchi, thank you.

I just wanted to add that I like to say that I've learned the most important budget decisions when I was on my local school board during the Great Recession and I ran for the state Legislature to fight for education, for state funding, for public education, because I am also a true believer that nothing changes lives more than public education.

And so now that I've had a pretty good run since my first arriving the Legislature in 2012, in terms of budget years, this is the first other than the exceptional year of COVID But even then, we're able to largely protect our investments in k 12 funding. And so I look forward to working with this community, working with the Legislature to fight to protect classroom funding and to fight to avoid layoffs at our school districts. Thank you.

Thank you, Mr. Fong.

Thank you so much, Mr. Chairman. And thank you product of public education as well with the schools in the La Unified School District and Castle Elementary School in the community of Chinatown. It's the power and promise of public education that has really brought all of us here today and really appreciate the comments made earlier by our Chairman about the power and promise of public education and the power and promise of higher education.

My parents met at a community college at Los Angeles City College in the summer of 66. They wouldn't be here today, they hadn't met there. And they're both the first in their families to attend college here in the US. And it was a community college that brought them together as a power and promise of higher education or public k 12 education. That's what we're all fighting for each and every day here in California, for our students, for better California, and to really lead from that standpoint.

And as we heard from my colleagues. It's going to be a challenging budget year, first challenging budget year of my time here and really appreciate the work and efforts of all our team and all our CDE and everyone here. And so look forward to the conversations we're going to have going forward. Thank you, Mr. Chapter.

Thank you. So again, thank you all for being here. We're going to get started with our first panel. If you could please come forward. We're going to be reviewing during this conversation the Proposition 98 guarantee overview and the proposals that are before us by the Administration.

Thank you, Mr. Chair Members Alex Schope with the Department of Finance. So I'm going to provide an overview of the Prop . 98 guarantee, including proposed Reserve withdrawals, an accounting proposal related to the 2023 guarantee, and then other solutions and investments in the Governor's Budget for tk 212 and community colleges. So the Governor's Budget forecast that the Prop . 98 amount for 2425 will be 109.1 billion, so 800 million more than forecast at the 2023 Budget act. All budget years do remain in test one.

In the three year budget window, the Governor's Budget shows a decline of 11 billion compared to the Budget Act, with about 8 billion of that attributed to 2223. The budget also proposes statutory changes to address the roughly 8 billion decrease in 2223 to avoid impacting existing school budgets in the past year and subsequent years. We'll provide more details on this proposal in panel three to fully Fund the Local Control Funding Formula LCFF and the student centered funding formula SCFF.

The Governor's Budget also includes withdrawals from the rainy day Fund for schools of roughly 3 billion in 2324 and 2.7 billion in 2425 resulting in a revised account balance of more than 3.8 billion in 2425 and then again for this one. I'll provide more detail on this in the next panel. So, despite the drop in the Prop 98 guarantee level, per pupil funding is at one of its highest ever annual amounts, with about 17,600 Prop.

98 per student and over 23500 per student when accounting for all funding sources. So, touching briefly on attendance, the percentage change in average daily attendance from 2324 to 2425 is expected to be negative 3%, so indicating a slight decline. Ada continues to be a lower share of enrollment than before Covid-19 however, a reduction in Covid-19 related absences is assumed starting with 2223 and is anticipated to continue.

So, moving on to the rebench, the guarantee was rebenched to reflect the continued implementation of universal transitional kindergarten and Proposition 28. Specifically, the guarantee was rebenched in 2425 to include an increase of 938,000,000 for Prop 28 and about 1.8 billion to reflect continued universal transitional kindergarten implementation. The Rebench guarantee increased as a share of General Fund revenues from 38.6% to about 39.5%. So the Governor's Budget proposes several budgetary actions, including solutions to avoid negatively impacting school funding due to the revised guarantee amounts.

Given the current fiscal outlook, these solutions were carefully considered and are intended to mitigate disruption to education programs based on available resources.

So, on the k to 12 side, this includes an ongoing reduction of 1.4 billion for LCFF to reflect downward growth adjustments due to declining enrollment in prior years and the 0.0% cost of living adjustment, an ongoing increase of roughly 796,000,000 for the LCFF to support transitional kindergarten expansion and adult to student ratio reduction an ongoing increase of 122.2 million to support the universal School meals program and then an ongoing increase of roughly 65 million to Fund a 0.0% cost of living adjustment and caseload adjustments for various categorical programs.

For solutions on the k 12 side, this includes savings of 445.71,000,001 time Prop 98 General Fund for the California State Preschool program, a rainy day Fund withdrawal of approximately 5 billion and a roughly $7 billion past year accounting solution that we will discuss in the following two panels, and then reappropriation and reversion funding totaling 36.6 million to support ongoing LCFF costs in 2425.

So on the community colleges side, I think many of the investments for community colleges were outlined in the higher education overview hearing. So I'll skip those for now and just talk briefly about these solutions. Similar to k to 12, these include a rainy day Fund withdrawal of approximately 722,000,000 and then roughly 910,000,000 in the past year. Accounting solution that again we'll discuss in the next two panels.

So I guess I've said a couple of times we'll go into more details about the Reserve withdrawal, the accounting mechanism in the next two panels. Otherwise, this concludes my remarks for the Prop 98 overview and then happy to take any questions at the appropriate time.

Thank you LAO's Office thank you chair and.

Members Ken Kapphahn with the analyst office. We have a handout that covers our key points. I think the Department of Finance gave you a good overview of the Proposition 98 guarantee and the changes and the key inputs and factors. For a little bit of historical perspective, this reduction that we're talking about in the prior year is unprecedented. The state has never really seen changes in a year that's already over of more than a couple of $100.0 million.

So a $9.1 billion drop in 2223 is really new territory for the state. The Governor's Budget recognizes that shortfall, but we think revenues are likely to come in even lower than anticipated in 2324 and 2425. If you turn to page three of our handout the Governor's Budget had anticipated a strong rebound in tax collections this year, but we aren't seeing those increases materialize. Personal income tax collections in January, for example, came in 5 billion, or 25% below the level in the Governor's Budget.

Two weeks ago, we released our latest revenue estimates, and they are 15.3 billion below the Governor's Budget level in 2324 and 8.4 billion lower in 2425. Our lower estimates that we think are consistent not only with the recent tax collection data, but also with weakness in some key indicators that are important for state revenue. For example, the state is seeing lower levels of private investment in startup and technology companies and fewer California companies going public.

And these revenue estimates are important because in a situation where Proposition 98 is controlled by this test, one formula that you heard about, those revenue estimates directly affect the Proposition 98 funding level. Turning to page four of our handout, we estimate the Proposition 98 guarantee is 5.2 billion lower than the Governor's Budget level in 2324 and two and a half billion lower in 2425.

Those reductions account for our lower estimates of General Fund revenue, as well as a small offsetting increase in local property tax estimates. The figure at the bottom of that page shows how the guarantee has been changing. So over the three years that are relevant to this budget, the Governor's Budget reduces the estimates of the guarantee by 14.3 billion compared to the estimates for each of those years from back in June. And under our revenue estimates, the guarantee is down by an additional 7.7 billion.

On top of that reduction in the Governor's Budget. Our lower revenue estimates also mean the state overall is facing much larger deficit, which we peg at 73 billion. So what we have here is a serious shortfall, and what you'll hear from us in the rest of this hearing and in the hearings to come is that the state is going to need significantly more reductions and solutions to balance the budget by the time it passes the final budget agreement in June.

I'll save my comments on some of the other proposals for the next issue.

Thank you. Do we have any initial questions by either my colleagues, if I can start, as you maybe gather your questions, just sort of to set the stage for the specifics on the next couple of panels.

I'm looking at page number four for reference in the Lao's report that was provided to us this morning, but it's also in the report that was published a couple of weeks ago, I believe, and again, just to set the conversation, the estimates in the revenue are identified here in 2223.

Maybe I'll ask this to clarify from both finance and Lao, we are now in agreement that as we have all the information, that the figure for Prop 98, the appropriate figure given the revenue, is $98.3 billion. Is that correct from both of you?

That's correct. There could be still some final corrections and true ups and some small changes by May, but by and large, this is very close to a final number.

Okay, good. Thanks for sharing that. Do you anticipate the same minor in may potential true ups and changes as.

Far as any changes to 2223 moving forward? Yeah, I guess the Governor's Budget reflects our latest forecast, so anything will continue to consider revenue moving forward towards May. But I think it's probably too early for us to comment or speculate on that at this point.

Yeah, but would you agree with the comment from the Lao's office that it would be probably small, not fairly significant changes for the 2223 projected number? I'm trying to make sure we operate with the same facts here.

I think it's too early for us to be able to necessarily provide a comment as far as what the numbers look like at the May revision.

Okay, so are you giving us a warning that perhaps these numbers might be lower or higher?

We'll have an opportunity to update that moving forward? At this point, I think we're still collecting revenue data for everything, but I think too early for us to comment.

Okay.

I think maybe just to add some context, one of the challenges with revenue forecasting is the state has an accrual process where sometimes the tax payments that come in at a particular point are attributed back to a different fiscal year. And so the Department of Finance is really the lead agency that's responsible for making those final calculations. And so that's something they'll be doing for 2223. They'll lock it down in May.

So I think the Department of Finance is just acknowledging they'll still need to make some of those adjustments before we get to the final budget. But in the past, based on historical experience, those are typically fairly minor changes.

Okay. Just want to let you know, we'll probably follow up with a question on whether you agree with the assessment that in the past, at least, so that we can get a sense these have been minor in nature, or if we should perhaps expect something different. Because then as we move on to 2324 again, referencing the same chart here, this is where the differences start to really be much larger.

Governor's Budget in January is projecting 105,000,000,000, which is for current year, which our adopted budget was 108. So that's already $3 billion short from the governor's proposal. But now the Lao's estimate is 100 billion, which is now about $8 billion lower than was budgeted. So is that factually what I just stated from both? Can I get an answer from both of you on that?

I think you have correctly summarized both of our estimates of the guarantee, given our current best estimates of revenues and the other factors.

I'm not asking that you agree with each other because clearly there's a difference of opinion on that. But am I accurately reflecting what the Governor's Budget proposes?

Yeah, the Governor's Budget for 2324 reflects our latest forecast of the guarantee for that year.

Okay. And just to make it easy, then you're going to likely respond that for 2425. Also, it's based on the latest forecast, which is the January numbers from the finance. Okay. And that just to clarify again for everybody, Department of Finance and the Administration will not have any updated numbers whatsoever until the May revision for projections.

Correct. That will be our next opportunity to update our revenues and projections.

And from the Lao's perspective, are you going to continue to follow the trends and identify what's happening for us, at least in the Legislature, to have a better sense of at least trends, of what's happening on a more regular basis before May, or are you going to wait until May to provide us with more information?

Yes. So we'll continue to monitor the trends. If there is some kind of dramatic turnaround in revenues, you'll be the first to know. We've been watching the February collections, for example. We don't have final numbers yet, but we haven't seen anything in the data so far that's made us change our assessment from what we have. Like the Department of Finance, we'll also have updated revenue estimates. One of the next major milestones will be to see how things come in in April.

That's really the next big revenue month. And so we and the Department of Finance will both have an updated estimate based on how those payments come in.

Well, if you deliver us good news, you'll be the most liked individual in California, because we'd like to hear some good news at some point. I think I just wanted to state that because, one, there's differences in opinion of where we're at. I believe from the legislative's perspective, the Legislative Analyst is providing us more immediate and on the ground realities of where things are trending.

And I think we need to operate understanding that what those trends are to make decisions sooner rather than later to avoid more difficult decisions for our schools. And so I just wanted to state that we'll get more into that in a second as it relates to test one, test 2 and 3 on Prop 98. Again, trying to set some sort of groundwork here for this conversation.

You both agree that the 202223 budget still is under test one as our 2324 and our budget year as well. All three years that are being discussed here are under test one. You want to go first, correct?

Yes.

Okay. And you agree with that?

Yeah. So looking at the chart, like the one at the bottom of the page four with our estimates or that table, both of those calculations reflect test one being operative in the calculation of those numbers.

Okay. What would change the test scenario? I guess, at this point be a revenue decline. What is the amount of a revenue decline for? Let's just talk about 2324 because I think I can operate under the assumption that 2223 will be very similar. But for 2324 if we saw revenue, at what number would we be talking about a different test? Have you calculated that at Department of Finance?

So for 2324 I don't know that we have a specific number. However, under our model, I think it's highly unlikely that test one would flip to test two or test three. In 2324 I think we put some numbers into the model. Even something like a $25 billion decline would not flip the test. So again, I think as of right now, we see that as highly unlikely in 2324.

Thank you. You gave me a ballpark figure, which I acknowledge is a ballpark figure. 25 billion. Just to clarify, though, is that below what we budgeted, below where you are anticipating it now? What is a $25 billion change in revenue? Which revenue?

That would be based on Governor's Budget, what we projected the minimum guarantee being for 2324 that would be a $25 billion decline in SAL, General Fund revenues.

Okay. Elio?

Yeah. So some of this is. It's hard to give a simple answer to that because it depends on both. All of the inputs, General Fund revenue, attendance, property tax revenue, as well as how you deal with the situation in 2223 where the funding you approve or the funding the state approved in June is higher than the new estimate of the guarantee.

But I think we would concur with what the Department of Finance said, that in 2324 seems very unlikely that the state would switch tests regardless of what's happening with General Fund revenue. Again, that's assuming you're sort of addressing the 8 billion issue in 2223 either with the funding maneuver or with our alternative of using reserves that year, it's more of a possibility that it could change in 2425. The state's actually fairly close to that threshold.

You could see a different test become operative that year. It's more likely that you would see a different test become operative, not so much based on kind of the specific revenue estimates. But if you sort of didn't change anything in 2223 for example, in our December outlook, we had modeled that scenario and a different test became operative in 2324 and 2425.

But again, that's under a different set of economic assumptions and a different set of assumptions about how you deal with the drop in 2223.

Okay. We'll get into that. Those are it for me on this panel. Mr. Muratsuchi, thank you.

Mr. Kapon, your handout first talks about the unprecedented reduction in the 20222023 guarantee, where you talk about revenues for 2223 came in nearly $26 billion below the June 2023 estimates. And that previous drops to the guarantee in a priority have been only a couple of $100.0 million. And so going from a couple of $100.0 million to $26 billion seems kind of jumps out to me. Is that primarily attributable to the delay in tax payment deadlines?

Yes. And just to clarify, so we've seen drops in the prior year in revenue of a couple of a few $1.0 billion. The corresponding drops in the guarantee have been in the range of a few 100.0 million. But yes, this is really a story about the delay in the tax payment deadlines because ordinarily we watch tax payments coming into the state treasury and we are constantly adjusting and recalibrating our estimates based on whether those are tracking ahead or behind of where we think they'll be.

We didn't have that information when the budget was passed back in June. And so at that point, the state wasn't aware of how weak the picture really was with revenue. I think what we kind of concluded from that experience is that we always knew the state budget and state revenues were pretty sensitive to federal decisions about interest rates and monetary policy. But until those payments came in, we didn't understand exactly how sensitive they were. And so that's something we'll obviously take into account moving forward.

But again, as you said, because we didn't have that data at the time the budget was passed, it wasn't something the state could account for in its revenue estimates. All right.

Thank you.

I wanted to go into the re bench split.

I don't know if it's appropriate for this.

Ok. So according to the Department of Finance, the Governor's Budget January budget proposal is to maintain the Proposition 98 split between k 12 and community colleges at roughly 89% for k 12 and around 11% for community colleges. How is, how does this make sense when we're looking at two primary changes in the Proposition 9098 Rebench? One being driven by transitional kindergarten enrollment growth, like focusing on transitional kindergarten enrollment growth.

Why is the funding that is being generated by the TK through 12 going to be split with essentially the community colleges are going to be benefiting from the enrollment generated by TK? I guess that would be a question for finance.

Sure. So for universal transitional kindergarten, I think the state's approach to this split is consistent with prior reventions. That includes, I think it was roughly 1.2 billion in 20112012 to remove childcare programs from the guarantee. As far as Prop.28 goes, this actually is not subject to the split. This would be taken off the top before computing that, I think, to remain consistent with the intent of the voters for this to go for direct program costs for that program.

So in other words, new enrollment funding is going to go to the TK through 12. It's not going to go to the.

Community colleges for Proposition 28?

Correct.

What about for transitional kindergarten?

For transitional kindergarten? That we're still maintaining the split consistent with prior year revenue?

And why does it make sense that if TK is driving the enrollment growth and the enrollment increase in enrollment funding, why should the community colleges get that money? Why shouldn't it go to the TK schools that are incurring the costs of the increased enrollment?

I think as far as that goes, I would just reiterate that the Administration is trying to remain consistent with how various rebeccions have happened in the.

I mean, it doesn't make sense to me. I would urge the Department of Finance to consider that, that if TK is going to drive the enrollment, we're expecting many large leas to accelerate their new TK enrollment, including Los Angeles, Long Beach, San Diego and Fresno, our biggest school districts in the state.

They're going to be incurring the new costs of ramping up the TK enrollment, and I think the funding should go to where the costs are being incurred, namely our tk through 12 leas, if they're generating the enrollment similar to what you're proposing with Proposition 28. I just want to clarify, I think I heard you say that you're treating the Proposition $28 differently. You're not going to split the Proposition 28 arts funding growth with the community colleges, correct?

Yeah. That amount would be taken off the top before computing the split.

Okay. All right.

Thank you very much.

Of course. Thank you. All right. Thank you all. We are going to move on and dive a little bit deeper with the next panel on public school system stabilization account overview and proposals. We have the same panelists, so we'll start with Department of Finance Alex Schope, Department of Finance.

So I will cover the proposal in the Governor's Budget related to the public school system stabilization account, the state's Proposition 98 rainy day Fund for schools. So deposits into the rainy day Fund are required when capital gains revenues are equal to 8% or more of General Fund revenue. The 2023 Budget act projected a total balance of 10.8 billion in the rainy day Fund. The Governor's Budget reflects revised deposits based on updated lower capital gains revenues.

So revised deposits into the rainy day Fund of 339,000,000 in 2223 and 288,000,000 in 2324. Additionally, the Governor's Budget includes a mandatory deposit of 751,000,000 into the rainy day Fund in 2425. So the Governor's Budget also includes discretionary withdrawals from the rainy day Fund of roughly 3 billion in 2324 and 2.7 billion in 2425 which would result in a balance of over 3.8 billion in 2425.

So these discretionary withdrawals would be used to Fund Local Control Funding Formula and student centered funding formula costs in the fiscal years in which they are made. And finally, the revised Reserve balance of 5.7 billion in 2324 continues to Trigger School District Reserve cap requirements in 2425. So these requirements limit the amount of funds that districts may maintain as discretionary reserves from one year to the next. We do not, however, anticipate this restriction creating a significant hardship for most districts.

And finally, just to conclude, the Administration does note that the proposed discretionary withdrawals would require the declaration of a fiscal emergency by the Governor. That concludes my remarks and happy to take questions at the appropriate time.

Thank you.

Go ahead again, Ken Capon with the analyst office. We share the administration's assessment that this year is an appropriate time to make a withdrawal from the Proposition 98 Reserve. As you heard, those withdrawals are contingent upon agreement between the Governor and the Legislature, the declaration of a budget emergency, followed by the Legislature passing a statute authorizing the withdrawal, and we think it's a positive step that Governor is indicating he's open to making that declaration.

We do have some concerns about the way the withdrawal would be used. We see the core purpose of the Reserve as stabilizing existing programs and maintaining spending at existing levels. And the Governor's Budget effectively uses the Reserve withdrawal to free up 1.4 billion for new spending, and we're concerned that that approach sets up larger shortfalls next year and leaves less on the Reserve to maintain existing programs.

We really think the most compelling use of a Reserve is to address a large, unexpected shortfall that would be very disruptive to address in any other way. And this is the very situation the state is facing. With the drop in the guarantee in 2223 we'd recommend putting the Reserve withdrawal toward that year instead of using it to support programs in 2324 and 2425. And that's our main alternative to the cost shift proposal you'll hear about in the next issue.

Our approach, admittedly does mean the state would need more solutions in 2324 but you have more options for addressing the shortfall that year than you have in 2223. One final note here. The Governor's Budget makes a discretionary withdrawal of 5.7 billion leaves 3.9 billion in the Reserve. We understand the intent here, which is to maintain some funding in the Reserve for future use in case the revenue picture is even worse in the future.

But it is possible, depending on the final revenue estimates, that the constitutional formulas might require the state to withdraw some or all of that remaining balance. So that's something we'll also be keeping you apprised of as we update our revenue estimates.

Thank you both. Questions? Mr. Muratsuchi, thank you.

So, for the Lao.

It. I want to make sure I heard you right. So you're saying that the Governor is proposing to use the Prop. 98 reserves not to stabilize the cuts going forward or to mitigate the cuts going forward, but to support new expenditures?

That is one of our concerns, yes. Making new spending. I mean, there's a mix of ongoing and one time new spending in this budget. The Reserve withdrawal essentially frees up funding to make that possible. Ordinarily, in tight times, the state tries to contain spending, recognizing that when it faces a serious shortfall, it's hard to maintain existing programs, and adding new spending makes that even more difficult.

Okay. And I should have asked this first, and one of you may have said this already, but the governor's January budget proposal, what percentage of the current Proposition 98 Reserve Fund is being proposed to be expended?

As far as percentage, I don't know. If I give you. It's about 5.7 billion out of what was projected at the 2023 Budget act of 10.8 billion. So as far as the discretionary withdrawals go, I guess that would be a little less than half percent more.

5.7 billion out of 10.8 billion. Okay.

If I may, I think the two numbers to keep in mind on the Reserve are the 5.7 billion. That's what's proposed for withdrawal under the Governor's Budget, and the 3.9 billion, that's what's remaining potentially available for future use.

5.7 billion youth this year will leave 3.9 billion at the end of 2425-2425. Okay. And could you summarize what new expenditures are being proposed for using the $5.7 billion in Proposition 98? Rainy day reserves.

Yeah. So if you look at page seven of our handout, this is a list of all of the solutions as well as the ongoing and one time increases. If you're looking just at the increases, there's 784,000,000 in ongoing increases, 599,000,000 in one time. So 1.4 billion in new spending. And I think the way the reserves are used is that they are freeing up the 1.4 billion that's needed to cover the cost of those increases.

Okay, so the big one is the COLA.

That's the largest ongoing.

All right. Well, I would think that most people would agree with that. The basic intent of a rainy day Fund is to try to stabilize, to try to avoid any new cuts going forward. But you're highlighting that one of the big expenditures is the COLA, which we know is critical for all of our school districts to meet all the challenges of inflation and wage increases from their collective bargaining agreements.

I see another big ticket item on page seven, which is the $500,000,000 one time for the green school bus grants.

Yes, that's the largest one time proposal.

Okay. Yeah, I think I'm as green as I get in the Legislature, but I'm concerned that I would think that there are more core education priorities than the green school bus grants. And so I would urge the Department of Finance to consider that. And last for now, in terms of going back to the rebenching with TK and with Proposition 28, just so that I make sure that I understand and the public understands.

When we're talking about rebenching, we're talking about ratcheting up the Prop 98 guaranteed TK through 12 funding. Is that correct?

Yes, that's correct. I think for both of those issues, there's really two things that are happening which make it a little bit complicated. With both the TK expansion and Proposition 28, the state is essentially creating a new cost because it's funding a new program that's paid out of Proposition 98. So if that's all those two proposals or those two actions did, that would crowd out funding for existing k 12 programs.

So to avoid that from happening in both Proposition 28 and with the TK expansion, there is a requirement that the state increase the Proposition 98 guarantee on a permanent basis by the amount of those costs. And that increase is intended to support existing programs so that there isn't that crowding out effect.

What the issue is that's before you and I think was in your staff agenda and that you raised is whether all of those increases in the guarantee should go towards k 12 education, because that's what the programs where the costs are, or whether the state should split that 89% to schools and 11% to colleges, which is what it's done historically with the available Proposition 98 funding.

Okay, but I just want to clarify my understanding that if we're going to be ratcheting up the Proposition 98 guaranteed funding for k 12, then assuming that you are correct that our budget deficit is only getting worse rather than better, that's just going to mean we're going to have to find other areas of the budget to cut in order to Fund the guaranteed ratcheting up of the Proposition 98 funding.

Yes, that's correct. The way these revenging adjustments are administered is that the state is increasing the guarantee by a certain dollar amount and then grow it, and then that grows with General Fund revenue. Over time. So the fact that the revenue is lower doesn't mean that the state has a smaller cost to adjust the guarantee. That's still the same cost, and it's based on the cost of those programs.

But the increased funding that would come from the increased enrollment in TK and through Proposition 28 are those what we've traditionally historically referred to as categorical spending? In other words, are school districts going to be restricted in spending the New Dollars generated by transitional kindergarten on transitional kindergarten?

They aren't specifically subject to a very specific requirement, but they do have to meet some student teacher ratio requirements as a condition of receiving that funding. In addition, to the extent that those students are eligible for supplemental and concentration funding, they have to use that portion of their funding to increase or improve services for those students. So it's not a very specific spending requirement.

With Proposition 28, there is more of a specific requirement that it used, be used specifically for arts education and most of that for staffing. But the LCFF is more flexible as long as they meet the basic eligibility requirements to generate that funding.

Okay, thank you very much.

Thank you for your questions, given the amount of reserves being used in both of your approaches. Actually, let me get clarity on the Lao. Are you suggesting that for the 2223 shortfall that we utilize, how much of the reserves? All of it.

Or if you adopted no other solutions, you would need to use 8 billion in the Reserve to address that year? We also think there are some other actions you could take that could generate savings that could shrink that gap in 2223. There are some unallocated grants, for example, that are attributed to 2223. If you reduced those, that would be another way of addressing the 8 billion shortfall. So you might need up to 8 billion.

But again, that's only assuming you don't do any other solutions. We think with some of the other solutions that we'll get to a little bit later in the panel, you might not need to find the whole 8 Billion from the Reserve.

Just to make sure we're talking the same numbers, because you had some questions earlier about how much is the governor's proposed budget using? You said 5.7 billion. That's correct. From finance. And then finance estimates leaving 3.9 billion in the account.

Yeah, a little over 3.8 billion.

So we have a total of. What is this 9.8 billion currently in the account.

As projected at the 2023 Budget act? It's 10.8 billion in the rainy day Fund.

Okay, well, my math is help me add up the 5.7, the 3.9 and how does that get to 10?

Sure, sorry. Yeah, so I could clarify. So in addition to the discretionary withdrawals, as we do every year, the deposits for every year within the budget window are revised based on updated data. So the revised deposits for 22-23 and 23-24 I think those are respectively, 339,000,288. While there's still technically deposits money going in, those have been revised down a good amount. So I think 23-24 at the 23 Budget act was roughly 1.8 billion. 2223 and then 2324 this was 903,000,000,000.

So those, I think, effectively bridged that to get to the 3.8.

We have a lot of word phrases we use. True up, bench rebenching. This is essentially the similar exercise we're doing with.

Yes. So after all of the, I guess, baseline, true ups, adjustments, whatever you want to call them, what the state really has to work with is 9.6 billion. The Governor is withdrawing 5.7 billion under his discretionary Reserve withdrawal proposal, leaving close to 3.9 billion for a future use.

Okay, thank you. That clarifies the number. So under both scenarios, then, does that then trigger the cap for the districts on the reserves, or is it different in either one of your scenarios.

Including the revised deposits and the discretionary withdrawals? Those are all included, and that still triggers the Reserve caps. And that's based on the 23-24 number for 24-25 the same is true.

Yes, that's correct. Because the Reserve cap is triggered based on the balance in the previous year. So because the state is in 2324 right now, it's above that threshold. The cap would be operative in 2425 even if we did withdraw the entire balance that year.

The year after that, though, it would not. Yes, got it. And maybe for primary education, you're at the table, too. So I think you'd like to maybe get a chance to say a few words. What are you hearing from the district Superintendent? Share that you're communicating with districts on a regular basis on their response to the cap, and let me have you answer that one. Then. They have a follow up for that.

Good morning. Dan Merwin, on behalf of the Superintendent, largely anecdotal acknowledge that, but that since the implementation of the cap in fiscal year 2223 that LEAs have been able to adapt. They have either committed reserves for specific purposes and therefore not going to follow it, or they have been small enough because there's a 2500 lea kind of ADA threshold, that it hasn't applied to them.

Okay. My follow up actually fits well with what your response was then, this is anec.al. Who is actually tracking the data? Is there a portal that's available publicly? Are they submitting information? How are we knowing for sure that districts are adhering to this?

We have accounting data available through the sac system, and it would be something that I would want to put in a more user friendly format for you, but certainly something we could get for you.

Okay. I appreciate that. Okay. I think we are ready to move on to the one more question. Mr. Muratsuchi.

Thank you. I was just looking at the LAO's list of new spending increases. Well, ongoing expenditures, but Department of Finance. I see $122,000,000 being spent for universal school meals. And while I am 100% in support of making sure that no needy child goes hungry, no needy child can learn when they're hungry, when they didn't have a meal the night before or during the day. I'm hearing from my suburban school districts, kids that don't need free meals, getting free meals.

And I understand the argument that we want to eliminate any stigma of the previous system was for students and families to register to be identified as title one students, and to be eligible for the free or reduced lunches. I understand the desire to eliminate the stigma, but it seems to me like, especially given that next to the COLA increase of $564,000,000, the next highest ongoing expenditure is universal school meals. Has the Department of Finance. I love to hear anything the Department of Education might have on this considered. Why do we need to subsidize free school meals for kids that don't need it?

So Melissa Ing with the Department of Finance. So the 122,000,000 is not an. It is an increase, but it's based on actual meal counts. So schools aren't providing meals to students that aren't requesting them. They're not providing extra meals that are going into the trash. They are for meals for students that request a meal. So students have access to two meals if they would like a meal. It's not that schools are providing two meals for every student, if that helps clarify.

It's providing meals for every student that requests a meal, correct? Yes. But I know that, for example, my daughter gets free meals at her school. She doesn't need a free meal at her school. We haven't filled out any forms to request free meals. She's getting access to free meals. And I'm hearing this with many of my schools, and so my anecdotal experience of my family doesn't seem consistent with your statement.

Mr. Muratsuchi, we have a full hearing on this on March 20 because it is of interest.

Oh, we do. Okay.

And to several Members of the Legislature, very good. And we have a similar experience in my household. We do leftovers for meals on the next day, but our kids also get free meals. So we are going to have a full hearing on this. So I would expect Department of Education, certainly Department of Finance and others to be ready for a whole hearing on this. Okay, thank you. And actually, good point, though.

It's not just going to be on school meals, it will be on all of the ongoing increases that are being sought off after in this budget that the Lao has identified, and the one time increases which we will be looking at very thoroughly. And also, I think, already echoed the sentiments of my colleague that there are some really good things that we would love to do in a year when there's resources. This is not the year that appears to do that.

And we got to protect core funding for the classroom, but we will have really in depth conversations about these. So thank you all. We will move on to the next item on the agenda. You guys are the all Stars today. You get to go again for panel number three, Proposition 98 accruals and accounting proposal. And we will start with Department of Finance Alex Schope.

Again, Department of Finance. So, due to the winter storms in 2023, the Internal Revenue Service extended the tax filing deadlines for the 2022 tax year from April 15, 2023 to November 16, 2023. Because of these extensions, actual 2022 tax data was not available at the time that the 2023 Budget act was enacted. So due to the lack of actual data, the estimated minimum funding obligation for 2223 appropriated in the 2023 budget was roughly 8 billion above the actual minimum funding obligation.

So the Governor's Budget proposes an accounting solution for the 8 billion Prop 98 problem in 2223. The intent of this solution is to avoid negatively impacting existing school budgets, and it would not require leas to return any funding that was already allocated in 2223. So I think this proposal can be understood as having three main components.

First right, accounting for 22-23 at the state level, second, accounting for 22-23 at the local level, and then third, finally solving this problem, should taxes be delayed in a future year. So for the first component, the budget proposes to recognize the reduced 22-23 funding at the state level, beginning in 25-26 in equal amounts. Non Proposition 98 General Fund for five consecutive years.

So this would come out to about 1.4 billion each year for five years for k 12, and about 182,000,000 each year for five years for community colleges. Because all three years in the budget window are in test one, the reduction in 22-23 does not impact the guarantee calculation for 23-24 or 24-25.

Under this proposal, no additional cash allocations will go to local educational agencies or community college districts in any of these years, and LEAs also will not have to return any cash to the state. So for the second component, this is the language to allow LEAs and community colleges to continue recognizing the excess cash received in 22-23 as received in that fiscal year, so as not to require them to reopen their books to make additional prior year accounting changes.

Then third, finally, should this specific situation arise in the future, the proposed language also provides a General methodology to account for funding appropriated above the minimum guarantee in a similar manner as I just described, provided that certain requirements are met. So, just to conclude this solution, it is intended to mitigate harm to school districts and community colleges.

By using accounting mechanisms at the state and local levels, this proposal avoids significant cuts to education programs, allows school districts community colleges to keep their prior year budgets intact, and then provides a framework to solve this issue if tax filing extensions are delayed in future years. That concludes my remarks and happy to take any questions at the appropriate time.

Again, Ken Kapphahan with the analyst office to put this proposal in context, the Governor's Budget has 13.7 billion in reductions in solutions affecting schools, and this is the largest one. So we're talking about 7.1 billion in previous payments to schools and another 910,000,000 in community college payments. What this proposal involves, I think at a practical level, is the state using its cash resources to finance payments to schools in the prior year, but not recognizing the full budgetary cost of those payments for many years.

And we have some significant concerns with this proposal, which are outlined on page nine of your handout. One very notable concern is that this would worsen future state budget deficits. The state, under both our multi year estimates and the Department of Finance's estimates, is looking at deficits of around $30 billion per year over the next couple of years. This proposal is contributing and worsening those amounts. We think this proposal is bad fiscal policy. The state here is effectively creating a new type of obligation upon itself.

This proposal is different from traditional borrowing because the state is not paying an external creditor, but eventually the Bill does come due and the state will have to repay itself with its future revenues. We're also very concerned about the precedent. If you adopt this proposal, we think it would add even more pressure to the budget by creating an expectation that the state might adopt similar maneuvers for schools or potentially other programs in the future.

And lastly, we're concerned about the transparency here because the state is committing resources to schools. It's making these payments, but it's delaying the recognition of that underlying budgetary cost for a very long time. So we'd recommend rejecting this proposal and instead using Reserve withdrawls to address the shortfall in the prior year.

Also, because this proposal is part of a larger conversation about how to address the funding shortfall, we were hoping to share some of the other tools in the toolbox a little bit as a lead into the next issue. With your permission, I'll just go through those briefly at this point before I turn things over to my colleague.

Yes, please proceed.

So, as a starting point for addressing the budget shortfall, we'd recommend rejecting all of the new spending in the Governor's Budget. As we've already talked about, there's 1.4 billion in one time and ongoing increases, all on page seven of your handout. If you were to reject those, the state would have a smaller budget problem. We think a few of those might have merit in future years, but they seem unaffordable under our current revenue projections.

Second, the state could rescind the four and a half billion in unallocated grants. Page 12 of our handout has a chart with our estimates of those funds that the state hasn't yet dispersed. In many of those cases, the state has not even received applications or finished scoring them. We'd suggest going through that list and rescinding any grants that aren't the state's very highest priority or that could be pushed to a future year.

Third, the state has a few programs where it could make temporary reductions with the idea that districts could continue to operate the underlying activities with unspent carryover funding. We will have more information on this in the next couple of weeks, but two programs we think those unspent funds are likely to exist are the expanded learning Opportunities program and the special education Early Intervention grant. Fourth, the state has provided some significant increases to five major program areas over the past couple of years.

These are listed on page 13 of your handout. They include, again, the expanded learning Opportunities program, state preschool, school nutrition, school transportation, and transitional kindergarten staffing. And in all of those areas, we have some suggestions for ways the state could still achieve most of its core objectives, but at a somewhat lower cost. And then lastly, the state provides about 1.3 billion annually to Fund three add ons to the Local Control Funding Formula.

These are add ons that are based on the size of programs districts operated decades ago, rather than the programs and services and students that districts have today. Ending or scaling back those add ons would reduce some disparities in the LCFF and provide ongoing savings. So that, I think, concludes our comments on both the accounting shift as well as some of the other ways the state could obtain savings. Happy to take questions on those, as well as when you get to this in more detail in the next issue.

Thank you. We will start with questions. And just to get us going, I guess I'll go first. And then, certainly looking to my colleagues, maybe again, I'm trying to just set some foundation for our conversations. I think you both agree.

I think there's probably agreements just across the board that the 2223 situation, those funds have been given to the schools, to the districts they've been expended or they've been allocated in ways that at this point, asking them to pull those spent funds back is really not one practical, really fair or justifiable in any way. And so both of your perspectives on moving forward acknowledge that as a matter of fact, at this point, is that correct? See? Nodding heads from both of you. Okay, so then what we're left with is how do we account for, determine what that money counts towards what it really is?

And the Governor is proposing an approach that is looking to account that that money was given to schools, and yet that a total of about 5 billion over the course of four years, I believe, or over 6 billion, I guess, over four years would be accounted for in future years as funding that the schools receive, but that would be reduced from other General Fund expenditures. Am I understanding that correctly to our LAO's office?

Yes, that's how we understand the proposal. The state, starting on 25-26 would gradually begin to recognize the true budgetary cost of the payments that already provided in 22-23 and those costs would be paid out of future state revenues in the non Proposition 98 side of the budget.

So all the other funding that the state allocates would have that as an ongoing impact for a couple of years, four years to the Department of Finance. Is that accurate as well? I just want to make sure I'm accurate about understanding the proposal.

Yes. Beginning 25-26. Right. Those amounts would start to be recognized as non Proposition 98 General Fund.

And I think what I understand from hearing primarily your testimony today, because I haven't seen anything really too specific beyond that, is that you would be asking the Legislature to create a new type of accounting method for Proposition 98. Is that what we're being asked to.

I think that we would characterize it as just accounting for this funding differently? Right. Maybe like a cost shift, which I think is something that the state is permitted to do or has done. So recognizing that the cash has gone out, has left the state, gone to school districts, community colleges, just shifting the recognition to 2526 and moving forward.

Okay, so a cost shift, but you're asking us to take some sort of legislative action to allow us to do that? Because that's not permitted currently.

No, I believe that's permitted.

Okay. Sure. Do you want to provide comments or response?

Sure. Just clarifying that, yes. This is a new type of, I guess, maneuver or shift or proposal. So there isn't existing statute to authorize it. So two weeks ago, I think the Department of Finance did release trailer legislation that the Legislature would need to adopt in order to make this proposal operative.

Okay. So we are being asked to take legislative action to authorize this to happen?

Yes. This isn't something that could be done administratively. It needs statute to authorize it.

So maybe the way I asked you the question was differently than what I'm trying to get a response to. Do you have a different response to my question?

I just reiterate what my colleague familiar would say. Right. So just this proposed trailer Bill.

And has Department of Finance received. Any Legal counsel on this and potentially its impact to the constitutional requirement of Proposition 98?

This language has been reviewed by our legal team within the Department.

Okay. I do want to get to the issue of some of the proposals that the LAO has put forward in terms of ideas to help solve this problem. We will be getting into those also more detailed as we go along. I will ask them today, but I want to see if my colleagues want to jump in now and ask some of their questions. Mr. Muratsuchi.

Thank you. So, first of all, I want to commend the Department of Finance for his creative thinking in trying to minimize the cuts, the classroom cuts that we know are so critical. I just want to make sure I understand your proposal. So the, the LAO characterizes as essentially a loan from future budgets to backfill the Proposition 98 guarantees for 22-23 as well as the next two budget years. As I understand it, the backfilling would be done. Is the governor's proposal to backfill it with Non Proposition 98 funding.

Correct.

The amounts being recognized in the out years will be non Proposition 98.

And so that would have the effect of not rebenching the Proposition 98 guarantee going backwards.

So going backwards, the 22-23 amount would be Proposition 98 would be reduced to the actual minimum funding level. I think we would also note, I think as we're talking about at previous panels, because all years in the budget window remain in test one and specifically 23-24 the reduction in the 22-23 minimum guarantee would then not affect the funding level for 23-24 and moving forward.

So because of the recognized decline in revenues, the Prop 98 guarantee is going to be reduced in 22-23. Correct. But school districts are not going to have to make any cuts because we're going to account for the dollars that have already been budgeted for by transferring the expense of 22-23 to 25-26 and going forward, correct?

And we also include language for school districts and community colleges so they don't have to make any accounting changes on their end.

So the essentially, the loan from 25-26 to 22-23 is not going to have any effect on the guarantee. On the Prop 98 guarantee in 22-23.

Correct. The cash has already gone out. So from that perspective, we're not making any additional cash payments in the out years. We're just recognizing that reduction in 22-23 over five years in equal amounts beginning 25-26.

Okay. And the loan from 2526 is not going to impact the calculation of the Proposition 98 guarantee in 2526.

Correct. So I think I would first also say that from the Administration perspective, don't view this as a loan just for accounting for this funding in the out years. But yes, for 2526 for all the years in which payments are made, these will all be considered on top of the guarantee. So that will not affect the Prop 98 calculation. It won't go towards the minimum funding obligation.

And so regardless of whatever test any of those out years are in, these amounts being recognized will not have any effect. Yes. On the Prop 98 guarantee.

And because the Governor is proposing to use Non Proposition 98 funding to account for the cash shortfall in 2223 it's essentially more education dollars. Because the accounting maneuver is going to have to be made up with like, if we have to make cuts in 2526 it's going to have to come from the non K 12 portion of the budget.

The amounts in 2526 will be non Proposition 98. And I think I would also just clarify this is not going to be like any additional payments from the state. This is just how we're accounting for it. Additionally, I think I'd say from the administration's perspective, short of clawing back funding from schools, without this solution, this is something that we would have to account for the entirety of the problem, nonproposition 98 General Fund within the three year budget window.

I understand that, but I also want to make sure I understand that since we have to pass a balanced budget, the Legislature has to pass a balanced budget every year, that if we're taking dollars from 2526 to account for the shortfall in 2223 that's going to be dollars that we're going to have to cut from the nonprop 98 portion of the General Fund budget.

Yes. So it'll come from the non Proposition 98 side of the budget.

All right. Thank you.

So again, the intent here is pretty clear. It's not to claw back any prior funding, especially serving students in classrooms directly. I think there are potentially other one time programs and others that perhaps haven't been deployed or encumbered or really haven't been spent. And so we want to look at those, but to try and at least sort of bring this full circle on the Prop 98 guarantee.

So the cost shift is the phrase that you use, the cost shift that occurs in the future years and those payments of that cost shift that occurs. What happens and how do you handle if in potentially the future years we are not in test one and we are at a guarantee that's less, because I heard you say that the guarantee will not be touched or changed.

And so when we're not in test one, this would then mean that it could be a lower amount for Prop 98. So with regards to the out years amounts, the operative test for any of those years will not be affected at all by the amounts being recognized. These will be on top of the guarantee. So even if any of those years were saying, like a test two or a test three, this would not affect the calculation from the previous year going into that year.

I have a follow up to that, but sure.

So just to clarify, the way we understand the proposal is that the 8 billion would be reclassified forever more as a non Proposition 98 expenditure. So it would be something like, for example, you provide funding for school facilities. The amount you provide for facilities has no effect on the Proposition 98 guarantee because it's outside of it. This proposal would kind of interact with Proposition 98 similarly, in the sense that it would be completely separate.

It would be like an expenditure you make for any other non education program in the state budget. No effect on Proposition 98. Regardless of which Proposition 98 test applies, schools in the future would receive whatever the Proposition 98 guarantee is that year, regardless of these specific payments. And again, as the Department of Finance said, these aren't additional cash disbursements to any schools or any other entity. It is the state truing up and recognizing the underlying budgetary cost of payments that already provided in 2223.

They're not additional, but they did go to schools. And under Proposition 88, funding to schools sets your minimum guarantee. Yes. And so going forward, there could be an issue that that was actually the minimum and that we shouldn't be going below that minimum. And that's the concern that I would have, because then that would mean future cuts to schools. So I'd like to hear both of your response to that.

Yeah. So if the state were to be legally challenged over this shift, that would probably be the grounds for the challenge. I think it's hard for us to sort of handicap the state's legal position here because there isn't a situation that has a direct precedent to this. In the past, the state hasn't done a shift directly like this previously. The state has been sued about half a dozen times since 1988 over various Proposition 98 adjustments where we've tried to redefine certain terms or change the calculation.

The states won about half of those and lost the other half. And a lot of it comes down to really how much. When the court looks at those specific provisions of the constitution. It's assessment of how much room for their interpretation there is in what those terms mean and how much deference they should give to the Legislature in implementing the formula.

So I do want to give you a chance to respond to that as well. One thing that I think needs to be acknowledged is I don't think anybody, not the Governor, not the Legislature, is in any way trying to do something that in the future reduces funding to schools. So let's just be really clear about that. I don't want that to be misinterpreted, but I'd like you to give a response to what I just said earlier and to what the LaO just mentioned.

Brittany Thompson, Department of Finance can you.

Get that closer, please?

Brittany Thompson, Department of Finance we would just note that one component of this proposal is that the fiscal year following the tax delay has to be a test one year. So that means that 2324 has to be a test one in order for this proposal to be operative. So the test in the following years really wouldn't affect this proposal as long as 202324 or any year following the tax delay is in a test one.

Get that? Thank you for the clarification, but if there is a challenge to that, what certainty can you provide to us that utilizing this would prevent us from, unfortunately being in a situation where 98 guarantee is lowered?

I wouldn't be able to speculate on any future legal challenges. But what I can tell you is that our legal team did review this proposal and didn't express any concerns with his legality.

Will you be sharing some of that information with the Legislature?

You mean the actual trailer Bill Language.

The legal opinion provided?

I would have to take that back to my leadership to see if you.

Could share that that's fair.

Did you consider instead of to Department of Finance and also really to the LAO, because there's two alternatives of how to handle this 2223 rather than utilizing reserves, in your case, to do that, in your case, doing the cost shift. I'm glad we have a name for it.

Now I can refer to it as something the cost shift that you're proposing rather than doing those two, doing what is allowed in Proposition 98 and is very clear in the Proposition, which is a suspension of 98, that essentially accomplishes, I think, what you're still trying to accomplish. I guess I just reiterate, this proposal is meant to provide that predictability and stability to school districts as we deal with the budget problem.

But the suspension of the Prop 98 guarantee is not part of the Governor's Budget proposal, and it's not something that you've considered that is not a part of the Governor's Budget proposal. So I don't know. That could comment further on it. Okay.

Yeah, I think so. The reason that even if the state did suspend the Proposition 98 guarantee, suspending the guarantee doesn't automatically provide any sort of state savings. If we, for example, the issue in 2223 isn't that the Proposition 98 guarantee is too high. The Proposition 98 guarantee has already dropped on its own. The issue is that the funding the state approved in June is now 8 billion above that lower level. And just suspending the guarantee doesn't do anything to address that $8 billion difference.

So even if there was a vote to suspend and even if it was retroactive to 2223 if that's all the state did, it would have an $8 billion larger problem in the budget window. What both of our, I guess, approaches have in common is they both try to deal with the 8 billion by identifying another's Fund source to pay for those under the Department of Finances proposal. That Fund source is future non Proposition 98 General Fund revenues.

Under our alternative, the Fund source is funds in the Proposition 98 Reserve and potentially other savings you identify. But it's really those sorts of things that get you real budget savings. Suspending the Proposition 98 guarantee by itself wouldn't provide that.

Okay, so let's talk about some of those proposals that the LAO has put before us. They are in the Shorter report page. Sorry, the Committee report page 15. I'm sure they're on all the documents, but that's the one I'm referencing to at this point. I've seen these in other documents, so I'm sure that's consistent. You've got about almost $4.5 billion worth of one time grants that you believe can help with that $8 billion problem. Is that correct? Yes.

That's our estimate as of January of how much grant funding there is that's already been paid for through Proposition 98 but has not yet been allocated or awarded to schools.

So these are all non awarded to schools. Schools are not relying on this funding at this moment to accomplish these programs.

The one, I think, exception to that, some of the community schools grant funding, is part of the multi year awards. And so we have a specific amount in this report where we suggest you could decide not to continue awarding new grants into the proposal but still leave enough in there to sustain multi year award.

I'll ask you about that in a second. I just want to make sure we're again operating on similar facts here. So outside of community schools, which we'll get into in a second, all the other programs are unexpected, unencumbered. Some of them haven't even been, as you stated, out for schools to apply for. That is your assessment. Does the Department of Finance have a different assessment on those?

I don't think we've had an opportunity to do like an in depth analysis on any of the proposals from the Leo. Okay. I'd ask you that you do that for when we have future hearings on these items, be able to provide us some information. So then let's talk about community schools, because that's the one that you identified as partially, perhaps, is already moving forward in your report.

I recall, and I don't know where that is exactly, but roughly, of this $2.5 billion figure, about half of it is already out in some way and planned for. And schools, again, we don't want to interrupt what they've got planned. About half of it is what you think really is out there and we should definitely be very mindful about.

Yeah. So one option that we put on the table, you can see we've got around two and a half billion in, more than two and a half billion in unallocated funds for that grant program. One option you could think about would be rescinding 1 billion of that amount.

If you rescind 1 billion, that would leave about 1.1 billion for providing implementation grants to about 400 grantees that are currently in the planning process and eligible for implementation grants, as well as maintain 280,000,000 for providing two year extension grants to current grantees. Okay. Thank you. I think address that concern.

One last question. Well, I'll remember it in a second. I saw Mr. Fong leaning forward. I want to give him a chance to ask some questions. Thank you so much, Mr. Chairman. And just to follow up on the chair's point on the unallocated one time grants on the dual Enrollment access programs notice is $122,000,000. We know that in our community colleges, this is one of the very few growth areas in Enrollment.

So what we're saying here is that we're estimating that there's $122,000,000 in implementation grants that have not gone out or have not been sought after.

Yes, that's our estimate. And I think one of my colleagues, the next panel, I think, will be able to confirm some of the details about that specific program as well.

Okay. This is one of the very few growth areas in our community colleges, and it's something that I think I don't know. The information is out there in terms of the access to these types of grants, but we definitely wanted to highlight that. So thank you. Thank you for pointing that out. I remembered what I was going to ask.

So given that there appears to be lots of money that hasn't been gunned out, just for lack of a better term, has the Administration, Department of Finance, and I don't really know how this works, provide me some input requested that departments freeze spending on programs that haven't been already allocated, that is not included in the Governor's Budget proposal. I understand that. I guess my question is, what is the process in order for that to be effectuated?

It would be a decision that gets made, and that decision has not been made, I guess is my question. I'm not sure I know enough to be able to speak to that, but I could circle back to management. Does sure Lao or even the Department of Education know the status of that?

Sure. So in some previous downturns, there's been more of a, I guess, handshake agreement kind of appear in the Committee or between the Legislature and the Governor, usually involving the Department of Education in tight times. But if there's not consensus on that, that's also something. If you were to adopt early action, for example, you could put a moratorium on disbursements from those programs until you've had a chance to determine the specific amounts.

CDe, do you have any information on what you're being asked to do with some of these programs that you implement? Not so much. Information on has finances your direction, not expanding programs, not continuing programs, but more so. A comment, particularly community schools. But many of these programs, when they were implemented, it was with the intent of multi year awards. And that does provide a certain level of stability to program applicants. For example, national board certification grants.

If that is going to take time for a teacher to get their national board certification, that may not be in a one fiscal year scenario, it may require a year or two. And so while these are noted as unencumbered, unallocated amounts, that does not necessarily indicate that they are unplanned for sure. I think to the extent that your Department is planning, we'd like to hear where you are in the planning stages, because again, there is no intent in trying to stymie or block progress that's happening.

These were all important investments. There's a reason the Legislature supported them. But in a year like this, if those investments aren't actually being invested, we need to look at what is happening. So that's what we're going to really look to hear from you all on that front. It looks like you want to ask a question. Mr. Murphy, go ahead.

Following on your line of questioning, Mr. Chair, and following on the comments from the Department of Education, I think we all know that more so than the Department of Education, it's the school districts that rely on multi year funding commitments to be able to plan for know, even though the dollars may not have gone out, I know that there are many school districts that have been planning for, especially for the community schools as a core pillar of this whole child approach that we've been trying to take.

And so while I appreciate, Mr. Chair, you're holding all of our districts, all of our leas, feet to the fire in terms of making sure that the dollars are being well spent, I also would remind this Committee that, you know, the, the importance of the multi year commitments is to allow predictability for districts to be able to plan for these important programs.

Point we'll take in. I think the questions are more around the unplanned programs and definitely don't want to interfere with progress that's happening. But there seems to be some funding that just hasn't even really been planned. And so I doubt that districts were projecting future revenue on something that the state hasn't actually delivered because I think districts have learned over the years not to really rely on those assumptions.

So we will talk about again more about these, but for now, we will move on to issue number four, which is the Local Control Funding Formula and COLA and going to get a new team at the table. And thank you all for being here. We will be following up on our questions, so you'll hear from us very soon and look forward to hearing from you.

The panel will provide an overview this next panel will provide an overview of the Local Control Funding Formula, the LCFF for public schools and the Governor's Budget, proposals for cost of living adjustments and the formula for categorical programs. We have the Department of Finance, we have the Legislative Analyst Office, and I'll turn it over to Department of Finance to kick us off. Welcome.

Katie Lago Marcino, Department of Finance. I'll be covering the Local Control Funding Formula and I'll keep my comments pretty brief.

Can I ask you to get a little closer to the microphone so we can all really capture your audio? Thank you.

I'll start over. Katie Lagomarsino, Department of Finance I'll be covering the Local Control Funding Formula. My comments will be pretty brief for apportionments on districts and counties. So in the budget year we see a decrease of roughly 1.4 billion, a result of the 0.0% COLA, along with the population growth adjustments, and this compares the budget year to the revised current year.

Moving on to the county offices of education, in the budget year we see a decrease of 5 million, which reflects population growth changes applicable to the county offices of education, LCFF, as well as the 0.0% cost of living adjustment and I know that this hearing isn't focused on transitional kindergarten, but I'll briefly cover our transitional kindergarten numbers for LCFF.

So the Governor's Budget adjusts transitional kindergarten expansion costs up by roughly 635,000,000 in the budget year, reflecting revised program uptake to support the program to serve all children turning five between September 2 and June 2, and an increase of 161,000,000 to support the addition of a certificated or classified staff person in the TK classrooms serving these students. That concludes my remarks. I'm happy to take questions at the appropriate time.

Thank you very much.

Lao's office good morning, Mr. Chair Members. Michael Alvarez with the Legislative Analyst Office. While we are recommending rejecting the statutory cost of living adjustment for the upcoming school year or fiscal year, rather, rejecting e COLA would reduce the ongoing shortfall by about 628,000,000 and help the state avoid committing ongoing spending to a spending level that would have difficulty maintaining in future years.

An additional consideration is that zeroing out the COLA for the 2425 school year would follow several years of very large increases for the LCFF. Between 201920 and 2324 the state increased LCFF funding rates by about 30% per student.

In addition, the state could explore changes to other ongoing LCFF add ons to generate additional savings to address the ongoing shortfall and ease future budget pressures, such as the TK staffing ratios add on, as well as the add ons that my colleague Ken Kampan mentioned in the previous panel that are funded on historical funding factors rather than current student demographics. And my comments? They're happy to answer any questions at the appropriate time.

Thank you. We'll turn to Committee Members for questions or comments. I can start if you all want to jump in. I want to focus at least my first set of questions here on what the LAO calls the antiquated factors programs. There's three in particular that you outline that certainly caught my attention in our Committee report. Those are on page 20, and these are programs that existed prior to the reform to school funding when LCFF occurred a little over 10 years ago.

And I'm becoming more familiar with these specific funding funds, I should say, and I want to just get clarity on the first one, the targeted instructional improvement block grants. These are add ons above and beyond what LCFF calls for at the different districts for their funding. This provides them an additional grant.

And can you tell me briefly, I know this goes back to, as you stated in the report, desegregation programs in the some other just equalizing funding during the 90s, but am I understanding correctly that, or maybe give me a better picture of this. Are we seeing that school districts under LCFF now?

All of those school districts have already seen growth, but in addition to the growth they've seen since implementation, are seeing an additional growth because of this targeted instructional block grant, and then they're also seeing COLAs for this grant. Can you make sure that I'm understanding that correctly?

Yes, Mr. Chair, as you may be aware, there was over 50 categorical programs that existed before LCFF. Most of them are consolidated within the LCFF rates now, and there's only a few that kind of were left over, and this is one of those. And it really is just kind of a locked in time. How much did a school district or county office spend in the 1980s or 1990s? And they just received that amount every single year moving forward ever since the adoption of LCFF.

And so it does not increase Bicola. But regardless of whatever school district or county office or school district's LCFF is, or rather, I guess charter schools did not receive this grants just for school districts, I believe this particular one. And they just would receive this in addition to their LCFF entitlement. We refer to it as a fixed add on. So they just receive whatever funding every single year. That's the same amount.

Thank you. That gives some more clarity. So no COLA for this particular program, a fixed amount, you said. Has it been growing or has it been this amount since then? It's been the same amount for decades, yes.

Okay. To the Department of Education, are you tracking the use of these funds, and how is that being tracked? And then I'll give the Lao and finance, if you'd like to jump in on sort of giving me a sense of what districts are doing with this.

Funding that I am aware of. We are not tracking the funds. I'm not an expert in that particular area, so I would defer. I'm not sure that we have someone in the audience today that could speak with more authority, and I apologize, Department of Education, on behalf of the state Superintendent, Public Instruction. So, yeah, I believe that those funds, along with other funds within the LCFF are largely tracked, if you will, as part of the LCAP accountability process. And perhaps Leo has more information to.

Add there as well. Yeah. Do you know anything more about how these are being utilized and the effectiveness of these funds and what they were intended to do, and are they still doing that today?

Edgar Cabral with the Legislative Analyst Office. As Mr. Edelia said from CD, we don't have any specific tracking on these funds. I can only share my understanding of what some of the programs were when LCFF was created and when there were conversations around it. There were hearings that were specifically discussing various programs, including this one. And in some of those hearings, I do remember some districts talking about using these funds for they were initially for desegregation.

Nobody's doing desegregation anymore, but they were, for example, for sometimes school transportation or for example, to cover costs, maybe with transportation or other things related to their magnet programs, which some school districts thought of as sort of a similar or related to kind of ways to desegregate their school districts. But again, that may be some of the activities. How they're exactly spent right now, we don't know.

These are conversations from a decade ago when LCFF was implemented, and the language gives them flexibility to use the funds however they want.

Interesting. Department of Finance. I'll give you a chance to just give a response or a comment on why you think the $855,000,000 for this program continues to be important enough to continue to keep funding at this level.

Sure. Lena grant with the Department of Finance. I would just note that when the LCFF was agreed upon, some of these different grants, like the minimum state aid and the economic recovery targets that are listed here on page 20, along with the home to school transportation, which has that one specifically gotten an increase? I believe it was last year, including the reimbursement mechanism for up to 60% of those costs.

But some of these were part of the agreement for school districts to kind of agree to the LCFF, to that transition. And so, like Michael had noted, these are fixed amounts. They don't change year to year, but they are lumped in as part of the rest of the LCFF through the principal apportionments that they receive.

So accountability for those, maybe some lcaps might account for how those might be used, but I can't speak to the specifics of we haven't done an evaluation ourselves or anything like that on how those funds have been used.

Thank you. Very helpful. Your historical perspective, given that I think we're all here post those conversations, is really useful. I'll have to go and look into that. But what I do know about the history is that LCFF was, and the funding associated with it was intended to grow over time because it was a smaller figure to begin with and then certainly grew. And so I think when this first occurred, it kind of really sort of makes sense because the number was lower.

So having these add ons probably substantially helped. But now we've sort of made LCFF whole. Again, those are my terms in what I've read about the. So would you sort of agree or have comments about that assessment to the Lao and certainly to finance? Start with the Lao, whether you have thoughts about that for the.

I would say for the TiG specifically, I think we recommended putting it in LCFF and not keeping it as add on from the initial when it was initially proposed. But I think to your point, I think even more so. Some of these were included, particularly the economic recovery target, for example, was intended to give assurances to some school districts that the funding that they would receive once LCFF was implemented was going to be essentially 20078 levels with COLA.

Again, given, as Michael mentioned, LCFF rates have now increased very substantially. We are far beyond, we think, the 20078 plus COLA. And so we do think that this is another reason, another reason to come and revisit these and see if we necessarily need to have these.

And again, as we think about the state needing to identify solutions because we have a shortfall, we think taking some of these and reducing or eliminating these when we don't think necessarily the need is there, again, would be a better way to address it than, say, having to go into effect more core based LCFF funding.

Right. And this is also an ongoing solution, not just the one time solution.

Yes, that's right. And the minimum state aid, that one does grow, so the other two are fixed. The minimum state aid does grow. So, for example, if you have a school district, their property taxes grow a lot, the state starts spending Less General Fund in some cases, then the minimum state aid means the minimum state aid is calculating only looking at state aid General Fund.

And so it could be that a school district or a county office is not getting less funding overall, but they're getting less General Fund because they have a lot of property tax. And then the minimum state amount goes up. So that one does have increased costs over time.

Yeah, I think in my mind, with that exception, they're very similar, and we need to approach them in a similar fashion given the change that's happened over the last 10 years. So I'll just put that on the table for us to further discuss in the future. And I want to turn it over to my colleagues to ask, set a question.

One of the things that I think we'll be checking in on as we go through this process is on the evaluation of all programs, and LCFF is a large scale program. So I think maybe to the Department of Finance, what kind of ongoing assessment or evaluation is happening on changes in lLCFF as it relates to different programs? Is there anything that you'd like to share with us about what you're doing to evaluate and analyze just the formula itself on an ongoing, continuous improvement type of basis?

Lena with the Department of Finance there are numerous changes, and I think they're enumerated on page 18, or some of them are, that have recently been enacted on the local control funding formulas.

For example, accounting for the LCAP for the supplemental and concentration grant carryover funds in the LCAP specifically to increase or improve services for those ELLI students, the concentration grant increase and the base grant increase, the declining enrollment protections, those are all very recent changes, and so it may take several years for us to see whether the intended impact of those changes can be felt and seen at the district level.

Some of these are as recent as the last budget act, the home to school transportation number five on that list. We see that schools are, of course, submitting for reimbursement, so we account for it as part of the LCFF in terms of assessing how effective these programs know.

The Department of Finance hasn't been tracking it in that way, but there are, for example, like the county court and community schools funding that was part of the LCFF as well for counties that there's an evaluation of the LCAP that the LEO is, I think, providing a report on to the Legislature soon. So there are different, depending on what changes in the LCFF you're referring to. There are different kind of tracks of tracking the effectiveness of those happening for the funding changes.

I think those impacts will take time, like I said, to really assess whether or not they're effective.

Appreciate that feedback. I know the LAO has done a lot of reports on a lot of things and certainly appreciate all the work. Are you tracking some of this? And I know with some, like JCCs, you're definitely involved in providing some follow up and reports to the Legislature. But chair of our Education Committee last week held a hearing where we had some researchers come and really talk to us and stress on us the importance of evaluating our investments and whether they're being successful or not.

And it certainly left a big mark for me in that conversation, Chair Marutuchi, that we really should try to incorporate that a lot more in what we're doing. And so is there a way, don't want to add more work to all the work we already put on you, but to sort of identify specifically at least the ones that are listed here, that are the more recent ones, what are we tracking? Are we evaluating it? Who's doing that?

Don't expect to have an answer for all of them now. But can you help us understand what's been required in terms of some of these program changes over the last few years?

Yeah, so some of those specifically, I think there has not been as much formal requirements sort of in statute that says there are certain agencies that need to report back. So that's definitely something that the Legislature can explore of trying to add additional requirements to get a better of. As Ms. Grant said, there's a lot of external researchers who are looking at this issue a lot. There have been numerous reports related to LCFF. So it's not like nobody is specifically looking at it.

But in terms of a state driven, these are the specific questions that we want to answer. These are the things that we want to monitor on an ongoing basis. That has not happened as much. I think where the state has in recent years done a little bit more is in a few of the grant programs. The community schools is the one that comes to mind. To me more where there is a more specific, there was funding attached to interim reporting reports and a final report.

And so that one is the one I think of as maybe the most robust evaluation component. It's still early. We haven't gotten to sort of looking at all of those reports, but that is one that there is, there, there could be an opportunity to get a little bit more information with something like LCFF because it's so big and complex.

I think one of the key questions is just what data are you using and being thoughtful about what are the kinds of things we want to measure and then setting some clear parameters around ensuring that we're collecting the right data to answer those questions. Because a lot of times when the state does issue require reports or evaluations, oftentimes the exact information that somebody would need to do an analysis and answer those key questions can be quite challenging.

Well, I think, again, I was very much impressed by the research that we had at the Chairman's hearing last week, and I think on a going forward basis and understanding that LCFF is large and there's a lot of components to it. But if we're making intentional decisions on LCFF changes, I think we should be focused on how we're evaluating whether those changes are being effective or maybe not.

And I would put on the table also going forward that we should think about doing that even with not new programs, but with existing programs. And certainly the robust nature of community schools would be sort of, in my opinion, perhaps a standard bearer of perhaps what we should be comparing other assessments on other programs to, and certainly would be interested in Department of Education's capacity to participate in that.

In addition to, as we continue to Fund programs, whether it's new or existing programs that we look at, what are we doing to support the assessments of those programs as part of that funding? So that's something I hope this Committee embraces as we go forward, because while we not get the information for this budget year, we know that the future budget years are also challenging with the structural deficit, and we want to make sure we're making good decisions over the course of the next few years.

So I'm going to bring that up probably a few times. All right, Mr.Muratsuchi.

Thank you. First of all, I'm looking at our staff analysis here, and there is a factoid that's highlighted that I wanted to highlight, to commend and thank the Governor. It shows that in the last two budgets, we have increased the base grants of the LCFF by a total of 21.8%. And I know that that's a cause that I've fought ever since LCFF was passed. And so I want to thank the Governor for lifting all boats, rising tide. Lifting all boats with the increase in the base grants.

Clearly, we're not talking about rising tides anymore, or at least this year. But I think any district that says that education is not a budget priority, I think that's one clear fact that we can throw right back at them in the analysis. Also is the issue of the transitional kindergarten staffing, and apparently this is referring to a LAP. Is it an LAO recommendation?

It's an issue that has been brought to my attention that beginning in 2025, 2026 school districts must maintain an average of one adult for every 10 students in order to receive the TK funding. I'm hearing, number one, I'm a big supporter, big champion of universal Pre K, and this universal TK is clearly our first step in that direction, being the biggest game changer in terms of closing the achievement gap.

But we're hearing districts saying that they're having trouble not just with the overall teacher shortage, but specifically in finding enough teachers qualified to staff the transitional kindergarten programs. Want to ask the Department of Finance if there are any discussions, any consideration. I know that this was a hot topic in previous budgets. But given our current budget situation, as well as the reality of districts having a hard time finding enough transitional kindergarten teachers to meet the staffing ratio, has the Department of Finance had any considerations?

Are they seeing the data in terms of this teacher staffing shortage, and is there any discussion about even a temporary accommodation of this classroom ratio?

Lena Grant with the Department of Finance, I can't speak exactly to the data that's been collected on teacher staffing ratios. I think maybe someone, one of my colleagues could opine on that. But in terms of our commitment to the staffing ratios, that is reflected in the budget, and we're obviously aware of the staffing shortage. We're, however, maintaining our commitment to that one to ten student ratio. And so that is what the budget currently proposes. Currently it's one to 12, correct. Okay. But starting next year, the goal is one to ten. All right.

Thank you,

Mr. Muratsuchi, too. You don't want to miss March 20 because we're also having a TK. No, you're ahead of us. March 20 is TK, and we'll get your comments spot on. We have that planned as a conversation. So with that, I think, on this panel. Thank you all. Appreciate it. And we are moving on to our final State of School Fiscal Health panel. There's an informational item, and it's our final item of the day, the fiscal crisis and management assistance team.

FC Mat is California's public resource to monitor and guide the local education agency's fiscal health. This hearing will provide FC Mat's annual address to update the Assembly on the State of school fiscal Health. And we have Mr. Fine here to provide us the update. Welcome and thank you very much for being here.

Thank you, Mr. Chair and Members, glad to be with you this morning. I'm Michael Fine, Chief Executive Officer of the state's fiscal crisis and management assistance team. Before I start my comments, just a follow up, Mr. Chair, to one of your earlier questions that I don't think was thoroughly answered. And it has to do with the reserve cap that's in place and the monitoring of it that is part of the budget approval process.

So in statute requires the county Superintendent to do that calculation as part of their approval. And if they are over the cap, if you will, a district's budget was adopted over the cap, then they have the opportunity to revise it before the county would either conditionally approve or reject, disapprove their budget. So there is monitoring of it and some oversight to it as well. I've given you two handouts, one, an outline that I'm just going to work through. And then one a set of charts.

I'm going to start with the charts because I think it gives you a visual look at where we're at as a state where our leas or specifically our school districts and county offices are at. This does not include charter schools. They don't go through the same evaluation and reporting and process that our school districts and our county superintendents go through. The first chart is a historical look at certifications at first and second interim.

So just to remind you, the cycle is that a school district adopts its budget by the 1 July County Superintendent reviews that and by September 15 either approves conditionally or disapproves their budget. And I'll talk about those in just a second. And then twice during the year the school district is required to update their budget. We call that first interim report and second interim report. My data is through first interim report, which was December. The last update would have been December, just past December of 23.

This chart gives you a historical look at the number of qualified and negatives. And so as part of the interim report process, the local school board certifies their budget at the interim as either positive, meaning they can meet their obligations in the current year plus two subsequent years qualified, meaning they may not meet their obligations in that period of time, or negative, meaning they will not meet their obligations in the current or one subsequent year.

And so this chart summarizes, there's two entries for each year except the current year on the far right because we're only halfway through the year. Notably, the last couple of years have been our lowest points of qualified and negative certifications since before the great recession.

Almost 15 years, 16 years that began to change in December as things begin to tighten up and the planning as districts look out over the next few years from a number of factors, and I'll describe those to you later, but you can see that last spring we had three negative districts and 10 qualified districts where in December we doubled the number of negative to six and we tripled the number of qualified to 31.

When we get to second interim, which we are just a couple of weeks away from, I expect to see at least the qualified numbers increase. One of the characteristics of these 31 qualifieds, well, not necessarily of these, but of many districts at first interim, was that they used a much higher COLA than what is currently forecasted. And so they will reset that as they approach their second interim reporting.

And that will, as you have already asked some questions around and made some statements around, and I'm happy to explore those further. The lower COLA is certainly a contributing factor here. There were no disapproved budgets this fall by county superintendents. Whatever conditional approvals were issued in September were all resolved by the statutory deadline of November eigth. When we look at qualified and negative certifications, we also take a little deeper look at what their consecutive certifications have been. Are they on the list?

The tangerine line that's there is just an indicator that we automatically engage with the district at three consecutive qualified FICMat does. We don't wait for the county, we don't wait for the district to reach out to us for assistance. But since 2018, we have been automatically engaging with them under that criteria. Slide five gives you a sense. These are spread out all over the state, but noteworthy, as I will describe later, as many of these are smaller districts.

One time they correct their situation and turn around, or is there a consecutive status? The next chart on page four, slide four, gives you a sense for that. Most of the 31, this is their first consecutive. Their first time on the report recently, 27 of those two. This is for two districts. This is their second consecutive, for three, their first consecutive. And then we have one district where this is their 13th consecutive qualified status.

And we'll talk about the trend that we see with our smalls and tinies. When it comes to negative, the story is much the same for the six. This is their first negative certification. One, this is their second consecutive negative and one, this is their third consecutive negative. I would remind the Committee that it is unusual to have a district in negative status more than one time consecutively. They do a pretty good job of turning things around rapidly.

Their county Superintendent's intervention, our intervention, and so we don't historically see 2 and 3 consecutive. This is a trend. Well, I may be bold here in calling it a trend. It's an indication that we've got some folks struggling and noteworthy on slide seven would be the list of those districts, with one exception. Well, actually, there are no exceptions here. These are small and tiny districts. Noteworthy is that five of the six are small. Three of the five have six ADA, 13 ADA, 40 ADA.

And so you appreciate that when you have declining enrollment in that environment or other fiscal constraints in that environment, they have almost no place to turn. They already only have one teacher teaching K 1, 2, and 3 in a combo class. Where do you trim costs? Right. The principal Superintendent is also the bus driver and the custodian and so on. It is a very difficult environment for them.

And so you see them on here in this case, we do have some unique circumstances here that I think are important. One of these districts, Oak Run union in Shasta County, is a district of 40 Ada. We've determined that they are not following the immunization statutes, and I mean even to the point of seeking waivers from the parent. Seeking waivers or simply ignoring it, that makes their ADA ineligible for apportionment in December. They've dropped from 40 to about 11. As far as funding apportionment purposes.

Public health is working with them, County Superintendent is working with them. We are trying to work with them and engage with them. That's an unusual circumstance, very much an anomaly. But worth noting, we have one of these districts, Greenpoint in Humboldt, which is approaching potentially lapsation. And I think it's just taken the district a little bit of time to work through that mentally, that that's probably where they need to go and partner with one of their neighbors.

The others we're fully engaged with working with slide eight is any downgrade. So in those certifications, a positive qualified. If the County Superintendent disagrees, they can downgrade them. A positive to qualify to qualify to negative. And slide eight describes that. We only have one of those so far this year. At first interim that would be Live Oak Elementary School District in Santa Cruz County, where they certified qualified, the county Superintendent downgraded them to negative.

The last slide would be lack of going concern, very similar to a negative certification, except this is initiated not by the school district, but by the county Superintendent. It can be done at any time during the year, not just at first interim or second interim.

So if there are leading indicators in a district of fiscal distress that the county Superintendent does not believe the district is adequately addressing, then we have a designation, a basis of that determination, and then a progressive intervention process that is followed by the county Superintendent. And most districts respond very well to that. Some obviously struggle a little bit more with that. You can see in the current year, we already have six of those, and we're engaged in each of those districts.

Moving to my outline, then, with regard to near term trends impacting solvency, and I've mentioned a couple of these. First, is declining enrollment not new to us? We've been at this since '04-05, certainly accelerated a great deal during the prime pandemic years, but we are continuing.

You heard earlier today from Department of Finance some of their assumptions about enrollment growth. Nonetheless, it is a decline. It is back to our more normal, forecasted decline as opposed to what we saw during the pandemic.

And so from that standpoint, we're stabilizing a bit. As I've already indicated, though, our small and tiny districts that experience declines have more difficulty responding to those fiscal impacts from the decline simply because they're already small, already very tight budgets.

And the loss of one family of three can actually have a fiscal impact on the district. Attendance yield is beginning to recover, finally, from the pandemic. It has been moving the last 18 months, 24 months, actually in the opposite direction from declining enrollment.

So enrollment is going down, but attendance yield coming out of the pandemic was starting to inch up. We're seeing that now get back to a little bit more normal, still a little light.

And so as we work through that, the declining ADA mitigation strategies that the Legislature and the Administration put in place during the pandemic, while they remain in place, they will have less and less of an impact because we're moving further and further away from the anomalies of the pandemic itself.

The other factor, and you are well aware of this, we had large investments of one time money from the Federal Government and the state government, but predominantly from the Federal Government. During the pandemic years, those expire. The last of the three buckets of funds, if you will, from ESSER 1, 2 and 3 all expire this September.

We still have districts that have staff tied to those funds, and you see that reflected in, as you look at the headlines across the state in the last several weeks of layoff notices going out to both certificated and classified staff. A big piece of that is a result of declining enrollment and school districts catching up to their declines over the last several years. They were using some of those pandemic funds to soften the fiscal impact from those declines.

But the second thing is the actual expiration of those funds and the exhaustion of those funds come September. It's the federal fiscal year, but it is the first quarter of a school year. And so we have to deal with staff that are tied to those funds ending in September. We have to deal with them now by March 15.

And so that is putting some pressure on districts, their exit plans, if you will, from moving from one use of one time funds to support staff and other ongoing programs. They're working through that exit plan and implementing it at this point in time. You've asked questions about and made statements about what you're hearing from your member districts or districts in your school districts, in your home districts, if you will, about the COLA.

Yes, it's a low COLA that has been forecasted, and I think we will see some slight improvement here when we get to the final COLA. But it will not be what districts anticipate or hope. I certainly expect it to be less than 1%. What's notable here, that I'm sure you've heard from your constituents, is that a COLA of anything less than four and a half or 5% feels like a local cut, right?

It's not a cut, it's actually an increase in funding, but it feels like a local cut because in the school district, the fixed costs, if I can use that term, do go up each year. And they go up, on average, 4.5-5% with doing nothing else, just staying in bed on a given day, on the first day of school, just staying in bed, those costs are still going to be up. We have staff that move across the columns, move down in the steps.

We have health and welfare increases, and we have numerous other indices triggered kinds of increases. And so lower COLA feels like a local pinch fiscally. We still have inflationary pressures. While inflation has been tapped down significantly by the actions of the feds, the reality is the cost of the pencil is still at $3, not at its old $2. It's just not going up to $3.50. And so districts still feel the inflationary pressures on the cost side from the last several years.

While I've raised the impact of AB 218 regarding sexual assaults of minor, the fiscal impact the last several years, I've not gone into a lot of detail. It's just always been on the radar screen to look ahead to. When this legislation was passed in 2018, there was a lot of conversation about what the impact would be, but we didn't have numbers. We've now well through a good half of this process, and we are starting to see the fiscal implications to districts, and they are significant.

They come in three ways, and I want to break those down for you. The first is obtaining liability insurance coverage to start with. And if you're able to obtain it, then what is the cost of that premium. Those premium costs for next year being priced right now, we know from the industry, and there are only a few insurers that insure California school districts to start with. Let me back up. Most California school districts, their primary risk partner is a risk pool that they, in essence, own.

A group of school districts own or control that risk pool. The risk pool, though, provides a tiered set of coverages, what we call a tower of coverages. Think about a high rise building or five floor office building, such as the Capitol here. And each floor is either self insured or we buy commercial insurance, obtaining insurance for each of those floors. There are few providers to start with, and the price tag is going up significantly.

We do expect double digit increases in the premiums this spring going into next year. The second thing when we deal with risk pools is that they have to be made whole. And as the member district, that puts the burden on the member district. And so as the risk pools for insured SAM claims, sexual assault of a minor claims, the risk pool may be at risk if it has to draw down its reserves to pay a claim from a prior year.

And some of these go back 30 and 40 years, these claims. Then they do a special assessment against their member districts back at that point in time. And that special assessment is generally based on what their enrollment was back at that point in time.

So a couple of factors here. Number one is enrollments declined since then, so their assessment is on a per student basis is actually pretty hefty. And number two is they need to stay whole. As a risk pool, they need to stay whole.

And so we're starting to see special assessments in the $35 to $80 per Ada range. Put this in perspective. The premium increases in the special assessments will eat up the entire per Ada COLA for next year. Just let that set with you. Nothing else goes.

COLA doesn't cover anything else except just the liability coverage increases between this year and next year. The third way school districts are impacted is in this emerging area of uninsured and underinsured claims.

When we have claims from 30 and 40 years ago that may predate risk pools, and thus they may have had commercial insurance with companies that are no longer in business or that they can't even determine 30 years later who their insurance company was. We are seeing judgments from courts here in California in the 30 to a recent judgment of $137 million.

In the case of the 137 million is for two victims. There are four more victims from the same teacher that date back to the early 90s.

There are four more victims pending trial in this one incident. 137 million. The jury reached its verdict and judgment in 2 hours of deliberation. Their insurance is roughly 15 million. And so that 120, roughly million falls directly on the school district.

And so we need to begin a conversation about what we can do locally for our local districts, about how they can best handle these without backing up, because I don't think there's anybody that doesn't believe the victims should be compensated.

So without backing up on that aspect of it, how do local districts manage underinsured and uninsured claims? How do the risk pools that local districts basically own and control, how do they manage the impacts to them? So, different than my prior year's comments about AB 218 is, we now have some data to look at that is very impactful. The last two comments I have are both upbeat, positive comments.

And that is, generally speaking, our districts have quite a bit of General Fund Reserve, certainly more so than entering the last economic downturn that we felt going into the Great Recession, roughly 8% at that point. Today they're averaging around 22%. And cash holdings in our local districts are also very strong. Thank you, Mr. Chair.

Thank you. Let me try to quickly go through your presentation, ask a few questions. On slide two of the presentation. I know the goal probably is to be at zero with negative or qualified. Right. But is there like when this was, did this begin in the Great Recession? In '08?

No, this dates back all the way to the beginning of AB 1200, so back in 1992.

'92 and so was there ever discussion about how much is manageable in terms of the work that the districts have, the county has to do to make sure that they're able to. There's been instances when the numbers are really large. Even with the uncertainty this year, they look like they're going to be at the lower end of the quartile, if you will. So is there anything you look for to make sure that it's all manageable, if you will?

I think, generally speaking, certainly since the Great Recession, there's been no trouble managing the ups and downs that you see here, both at the county level. Remember, these are distributed over 58 counties, and so the impact is more probably not the qualifieds, but more the negatives.

Those require much more intense work. And we do have some concentrations. Again, the negatives are in smaller, tiny districts, so smaller and tinier counties. The larger impact probably ultimately boils down to our agency. And right now, I believe we can handle what we see in the foreseeable future.

Okay. On slide three, you have identified an exclusion of disapproval solely due to the unapproved LCAPS?

Yes.

What does that then mean to your overall numbers? How many disapproved as a result of LCAP?

It has no impact. The statute provides for a county superintendent to conditionally disapprove a budget. If the LCAP is not approvable at the September 15 point. They then are given till November 8th to correct the LCAP, get it approved, and then their budget can be approved. So this data is, in essence, as of November 8th, which is the statutory deadline for the approval or disapproval.

So the process is, the LCAP has to be approved before the budget, both at the local level and at the county superintendents, or CDE, if they're providing the oversight of the district. If the LCAP is unapproved, then the county superintendent or CDE is not allowed to approve the budget. One has to come before the other.

And so the district then engages in what needs to be corrected on the LCAP, goes through the process to do that, and then, generally speaking, there's few changes have to be made to the budget at that point, but it allows them then to proceed with the approval of that.

Moving on to slide seven on these negative districts that you talked about, I heard you say numbers and that I was surprised. We have school districts with 40 students.

We have school districts with six students. Despite statute that says at six or below, you would lapse or you would move through the district organization process, reorganization process.

This is a policy decision, so I don't want to, not intend to put you on the spot, but that just seems like an unsustainable situation from your perspective, are you comfortable with sharing about that opinion of mine?

Well, in very remote areas, I understand why that's the case. We have a very small community out in the mountains someplace and no school district neighbors around them. That starts to make sense. Right. In counties like, let's pick on Sonoma, which has a number of very small districts, not all of them are remote. They are fairly close by.

But for those of you, certainly Member Muratsuchi, who's a former school board member, giving up your district through a unification or a lapsation or a reorganization to a neighboring district is difficult. Part of your community identity is around your schools, your district.

Right. And so that's difficult for a community to do. And so they certainly struggle with that. There is, generally speaking, not a financial incentive to do it other than efficiency.

Right. But these school districts have a superintendent and administrative offices.

Generally, uperintendent, principal, often custodian, bus driver. They do teacher, certainly superintendent, principal, teacher maybe all wrapped up in one.

Okay. Interesting.

But they do have a board. They would have to have a governing board, of course.

Now to your outline that you provided to us, you talked about, and I've certainly heard it from every one of the superintendents I've spoken to, expiration of one time pandemic related funds, whether it was state or federal.

And I keep hearing people say that that's going to have some impact. But these were all very clearly temporary in nature. And I hear you say things like layoffs, notices going out for positions that were funded through these programs.

What kind of oversight was done either through, you call it FCM and you don't call it FCMAT. What do you call figmat? Figmat, thank you, or otherwise, to ensure that that wasn't the use of the funds, because that sets up a scenario that should not have been an expectation.

So we don't provide the direct oversight ourselves, but the county superintendents do. So this is a topic that's been though something we've spoken about with districts on a very routine basis. And when I say districts, in this case, the broad group of LEAs, both superintendents, chief business officials, board members in every setting.

And that is, first our normal mantra would be you don't use one time funds for, we often say for things that eat, meaning staff, staff likes to eat. Right. And so it's a recurring kind of thing. You don't use one time funds for recurring programs or recurring needs.

During the pandemic, we didn't say that. We changed our language a little bit, and that was driven by the specific purpose of those one time funds, and that was to support students during a very difficult time. And the way we support students is through staff. We support them through teachers. We support them through aides.

We support them through mental health and behavior intervention specialists and counselors and other services. Right. That's how we deliver those services. And so our mantra changed a little bit to say, for every staff member you use these one time funds for, you need to have an exit plan.

What is your plan as those funds begin to be exhausted or expire? We've talked through that, through ESSER 1. We talked through that with ESSER 2. Wasn't a lot of pressure there, right. Because you had follow on programs.

You had ESSER 2 that could cover part of ESSER 1, ongoing expenses. We've had ESSER 3. That would cover some of the ESSER 2 investments. Right.

But now at the end of ESSER 3, come September, it's done with regard to the federal some state programs continue on. So the learning recovery emergency block grant continues on till I believe it's '27 or '28 and so on. So they've known about it for a long time.

Many districts have been looking at their attrition, and they've been taking some of these one time funded positions and moving them into regularly funded positions.

Attrition of staff.

Attrition of staff, yes.

We also have an enrollment decline in.

We have an enrollment decline.

You mentioned two things that I'm sure you have nuances for because you said attendance is not back, but please clarify the statement. Then also we have decline in enrollment. So where do we actually land on where we stand on this?

Well, eventually. So, historically, enrollment and average daily attendance tend to move together up, down. During the pandemic and more specifically, following the pandemic, they crossed each other. Enrollment continued to decrease in the early days of the pandemic.

And in the year and a half following the prime pandemic years, attendance yields were also decreasing. We've started to see attendance yields now begin to increase. We're still below our historical levels, but we are getting closer.

And so right now we have this issue where the two are almost crossing each other. What we care about, well, we care about both, but from a funding perspective, what we care about is the attendance. That's what drives the revenue for the school district. And so as attendance yields go up, we may see some districts that benefit by going back to the greater of current year or prior year and not use the three year average that we put in place.

Right now, 80% of our LEAs use the three year average come July 1 with the new fiscal year. That three year average is a moving average. Right. In this year, we still have a pre pandemic year. In the three years when we get to July 1, it will all be pandemic or post pandemic ADA, and they will most likely not benefit from the three year average. It'll be current or greater. Eventually the two will begin to move together again.

Thank you. Similar to the question on the one time funds, the COLAs are pretty substantial in the last couple of years. And so I understand and totally agree. Cost of everything goes up. But there was a double in the 20s.

If you combine the last couple of years, what kind of direction did superintendents give to how you would treat that COLA in terms of it's not going to be 13% every year? I think that's a very obvious assumption to make. But those were very unique numbers.

They were very unique numbers. And I think from a caution standpoint, everybody reminded districts that those were not the norms. And we had forecasts. Even using last June's forecast for next year would have been below 4%, half of what this year's COLA was.

So I think everybody has been very clear about where we were headed. Caution about how to use those funds. They are COLA on the LCFF, predominantly, and special ed, and a few categorical programs. Right. So they are, in theory, recurring, ongoing.

So to bargain with them, I think was appropriate to consider them for recurring types of things, such as added staff was appropriate. Each district, though, is left, and each governing board is left to make that decision based on the needs of their school district and where they're at with regard to things such as collective bargaining, comparison of their peer groups, with regard to competitive salaries, those types of things.

The issue would be any one time components of that funding obviously shouldn't have been on the table to be bargained. Those kinds of things.

Thank you. You're welcome, Mr. Muratsuchi.

Thank you. Mr. Vine, good to see you.

Good to see you, sir.

Back.

Thank you.

Your chart here, it kind of summarizes my life experience with school districts. I was first elected to my school board in 2005, and so I experienced that spike there, and this has been my legislative, my experience in the legislature. And so, looking at this big picture trend of how the school districts struggled the most during the Great Recession, do you see any trend in terms of increases on these graphs?

Thank you for that question, sir. I see certainly a trend of increases, but nothing like the Great Recession. I think we have to pause and remind ourselves both the architecture and the conditions around the state budget are very different today than they were in '07-08 school districts. Reserve levels, cash holdings, and practices are also different today than they were in '07-08 going into the last significant downturn.

We have to acknowledge that a lot of work has been done by the Department of Finance, by the legislature, by the LAO, by lots of other folks to acknowledge those difficult periods of time, put some safety gaps in place to avoid that. I don't see us repeating that.

And as things do get a little tighter at the local level, I certainly see the numbers going up a little bit, but nothing that's unmanageable. Most districts are entering this in a completely different position than they were in '07-08.

Which is great to hear. I remember when the Torrance Unified School District had saved up a 22% local reserve. Our collective bargaining units were saying that we were sitting on money. We should be spending it on kids here and now, but these times are the reason why these rainy day funds are so critical.

But I thought that with the passage of the state rainy day reserves that we were talking earlier about, the caps on local school district reserves. I don't want to rehash what was discussed earlier, but how is it that districts are able to still get up to like 22% in the local reserves?

So, first off, remind you, that's an average. So we have some that are well below that, some that are well above it. But there are a number of provisions in the reserve cap that provide for exceptions to a hard cap. The cap itself, from a practical standpoint, has very little impact on the district unless the district wants it to have an impact. First off, more than half our districts aren't subject to the cap.

So any district with an ADA of 2500 or below, which is more than half our districts, are not subject. Our community funded or basic aid districts, which today, I don't know the number, but somewhere around 50, are also not subject to it. So we're really left with probably about 48% of our districts that may be subject to it. They have several options and they can spend their reserves down. Most of them have not elected that option.

They can seek an exemption from their county superintendent on a temporary basis, some in the early years of the cap. Well, just the last couple of years, because, remember, we've had the cap in place for a number of years, but it wasn't triggered until, was it 21, I think two years ago.

But the main way they do that, the cap applies to their unassigned and assigned reserves, which are categories in their ending fund balance. There are five categories.

There are only two, then that are subject to the cap. So district boards are to look at analysis and need, and both statute and the governmental Accounting Standards board statements, which is what governs accounting in school districts, provide for a component of the Indy Fund balance called committed funds.

They are exempt from the cap. And so district boards, through resolution, in most cases through some action, commit funds to a particular purpose. Those commitments are to be reviewed by their independent auditor.

So they need to have justification for it, they need to have a clear plan for it. And that would be what I would describe as the number one reason why a district would have total reserve greater than the 10%.

Okay. And so the committed funds, can you like, for example, commit a pool of funds to address your foreseeable pension obligations?

Yes, very specific items. There's also a general category that you could commit to called, that would be referred to as a stabilization fund or stabilization account. Just to help you deal with the changes from year to year.

But technology refresh, deferred maintenance, both of which are significant investments school districts make out in the future other forms of capital expenditures, an offset for documented declining enrollment. So an added soft landing done locally in addition to what the state provides. Those would all be some examples.

Okay.

And they can change just through board action. Both the amount and the reason can change from year to year.

All right. So I remember when we passed the local reserve caps and districts were screaming to me that we were taking away local control but sounds like they were able to figure out ways around it.

There are ways to manage it.

Okay. Thank you. And on your list of near term trends impacting solvency, I don't see pension costs, which I thought was going to, I mean, districts again in past years were screaming at me saying that you're going to bankrupt our districts by not reforming pensions.

So I kind of include pension costs in those year over year changes that are part of the fixed cost change environment. Right. We do have out year forecasts for contribution rates going up. Stirs rate. Right now the forecast is static, but certainly could change. But that's part of my comment about the lower COLA, that fixed costs of 4.5 to 5% every year.

And so when we have a COLA at 1% or below, it feels like a local cut because there's a disparity there in that 4.5 to 5% is where I would have put that purse increase or is where I put it.

All right. But it sounds like in terms of issues to be addressed, this liability insurance issue appears to be breaking through. I'm hearing about it more than I have in the past about pension costs.

I highlight it today different than I've highlighted it last couple of years, because again, we have more data today. But it is very much an emerging issue. I'm dealing with districts facing these judgments and what do they do? I've dealt with one at first interim who began to set aside 10 million a year to pay their judgment. That's a significant draw from their LCFF.

I want to remind us that when we're in an uninsured or insured, uninsured or underinsured environment with these judgments and settlements, those monies, along with the premium increases in the special assessments come out of current year LCFF.

So they impact program, they impact ability to hire teachers, pay them a competitive wage and so on. That's where the rubber meets the road with regard to the impact of the school district.

All right, thank you very much.

You're welcome.

Thank you. Appreciate that. The insurance issue keeps coming up around a lot of things in the state, so thank you very much. That is the end of our panels. We will now begin public comment and we'll give you a chance to speak.

Line up here at this microphone. We'll give you about a minute noting that Committee Members have a 12:00 commitment, but we are definitely going to stick around and listen to your testimony. So please state your name and your comments. Give you each a minute. Welcome.

Thank you, and thank you so much, chair and members. My name is Sedalia King with Catalyst California and a member of the California Partnership for the Future of Learning. The partnership is the statewide alliance of community organizing and advocacy groups that center black, indigenous and brown students, families and communities of color to advance a shared vision for schools.

Yesterday we submitted a letter to you, signed by 11 of our core organizations, urging you to protect funding for the California Community Schools Partnership program that students and families rely on.

We celebrate the historic investments made over the last few years across the birth to twelveth grade California public education system, including the historic 4.1 billion in the California Community Schools Partnership program.

The school's approach is essential to transforming public education, in particular for historically and presently undersourced and marginalized black, indigenous, low income students and students of colors like those represented in our coalition. The evidence is clear.

This approach changes the outcomes for students who have historically been denied equal opportunities, and the schools reduce racial and economic equity gaps such as those seen in Lost Hills Union elementary School in rural Kern County, which have seen double digit growth in English language arts and math proficiencies.

Thank you. If you can wrap up your comments.

Oh yes. We look forward to partnering with you and champion effectively implement community schools across California. Thank you again.

Thank you.

Hi, good afternoon. Katie Hardeman with the California Teachers Association. I did want to speak to issue three on the $8 billion payment maneuver, whatever you want to call it. CTA does have concerns around that proposal. We believe that the proposal is not following the constitution and existing statute, so we encourage you to think of alternatives.

I think essentially what it does is brings down the prior year guarantee, which either through this $8 billion off the books payment or through the LEO's proposal of using the reserves. It essentially brings down that prior year guarantee which has a significant long term impact on the guarantee going forward. So look forward to working with you on that important issue.

Thank you for the testimony.

Good afternoon Anna Loakimedes with Los Angeles Unified School District. We appreciate the conversation today around the COLA and would really like to emphasize that the COLA proposed in the Governor's Budget is what was necessary to maintain our staffing levels and what we have promised in our previous bargaining agreements.

We also appreciate the conversation around flexibilities for many programs given the expected budget deficits. In particular, we'd like to emphasize the need for flexibilities in expanding learning opportunities program.

Finally, we'd like to touch on the penalties for districts that have expanded transitional kindergarten in advance of the state mandate. We think that we are serving children who would not otherwise have access to free, high quality early learning, and we believe that districts should not be penalized while TK implementation is still ongoing for expanding those opportunities. Thank you.

Thank you.

Good morning. Elizabeth Esquivel with the California Association of School of Business Officials while we appreciate the LEO's recommendation of being cautious on using for the ongoing dollars, we really do support the fully funding the statutory COLA for the LCFF and for the programs outside of the LCFF. We also appreciate the additional funding being proposed of $122 million for universal meals as it provides sustainability to that program.

We appreciate your comments, Assemblymember Muratsuchi, in regards to revisiting the roughly $1 billion in the zero emission buses out of the Proposition 98. So we really appreciate and would recommend the legislature reconsidering the use of those dollars for other purposes.

Mike Find did a wonderful job with explaining the concerns around the liability insurance and adding to the budget considerations. We also want to consider special education, the increased cost to special education and the increase of students being identified.

As you mentioned, Assemblymember Muratsuchi, the pension increases for CalPERS jumping from 28.1% in 24-25 to 28.8% in 25-26 as well as the increase in utility costs, especially for those schools that are providing the extended learning opportunity program. Thank you.

Thank you.

Tiffany Mock on behalf of CFT, a union of educators and classified professionals, I wanted to thank you for this important discussion and also to Assemblymember Muratsuchi for mentioning the staffing crisis district faces, which is indicative of what we're hearing across the state as well.

I wanted to echo my colleague's comment, Katie Hardeman from CTA regarding the budget deficit on item number three and the maneuver, and also know this discussion that will be ongoing, that we can also, instead of talking about all of these cuts, we can also, and we would recommend increase revenue sources from other sources, including, but not limited to of course, the wealth tax, which the FDA has been a supporter of. Thank you.

Thank you.

Good afternoon. Carlos Rojas with the Kern County Superintendent School's office. I want to extend our sincere appreciation to the legislature for their recent investments in education. Namely, community school funding has resulted in notable student improvements in our small rural school districts that have pulled their resources together to what they call the Westside Consortium.

These handful of small districts have utilized community school funding to help identify and address student barriers and through this specific work have seen chronic absenteeism rates decline and student achievement scores improve in both reading and math, and I'm happy to provide that specific data if the committee is interested in seeing those outcomes.

At the same time, districts across the state have unspent funds in other investments such as expanded learning opportunities program, zero emission buses, reading coaches and specialists, and other programs.

Due to varying needs and implementation challenges. We respectfully ask the legislature to consider providing districts added flexibility in these existing categorical programs while maintaining strict accountability in how to best allocate those dollars to meet the unique student and staffing needs in their districts and to help the state navigate the likely revenue shortfalls. Thank you for your time.

Good afternoon. Chair and members Brianna Browns on behalf of the California County Superintendents, we want to express our gratitude for the Assembly's dedication to the well being of our students both this year and in previous years.

The leadership of this committee specifically has shown has been integral to the development of all of the whole child programs, such as the universal pre kindergarten as well as school based mental health programs and others. We understand the difficult budget picture the state currently faces. However, we urge you to continue to protect the well being of our students by avoiding cuts, deferrals, and retroactive callbacks for TK through 12 schools. Thank you.

Thank you.

Good afternoon, Chairman Alvarez and Committee Members. My name is Laurie Firstenfeld with the Childcare Law Center and I'm director of legal advocacy. I am here to speak about issue three. The state budget is the most important legislation for creating an equitable society, one where black and brown families have the childcare they need and childcare providers are fairly compensated for their hard work and dedication to our children.

We urge the committee to carefully consider other options to solve the $8 billion shortfall that protects the General Fund now and the vital life giving General Fund programs such as childcare in future years. And solve the Prop 98 over appropriation within Prop 98 to the extent possible while protecting individuals and communities of color. Thank you.

Thank you.

Hi, good afternoon. Paige Clark with the National Center for Youth Law. Thank you for the opportunity to share comments this afternoon as our state grapples with an increasingly challenging budget picture. We ask the legislature to maintain critical supports and services for some of our most underserved students, those experiencing homelessness.

Data shows that students experiencing homelessness graduate high school at rates about 15 percentage points below their peers, and we know that two leading risk factors for adult homelessness are not having a high school diploma and experiencing homelessness as a child.

For these reasons, we strongly support the $1.5 million allocation to the homeless education technical assistance centers included in the governor's proposed budget and urge the legislature to maintain this allocation. Thank you.

Thank you.

Good afternoon, chair members Sam Nashville with the Los Angeles County Office of Education. We are grateful for the funding provided in the 2023-24 state budget for community schools. These schools are vital for enhancing academic achievements and well being, particularly in underserved communities.

Safeguarding these funds is essential to sustain investment in student and community development, aligning with the state's commitment in equity and education. We submitted our full budget letter yesterday and we look forward to working with the budget, communities and administration this coming year. Thank you.

Thank you.

Thank you, Mr. Chairman. Assemblymember Muratsuchi and staff Jeff Baca, representing the Riverside County Superintendent of Schools and the 23 school district superintendents in Riverside County, like to express gratitude for the administration's efforts to protect K-12 education and the budget proposal this year.

Also express appreciation for many of your comments and questions this morning, which I believe reflect a commitment to not necessarily agreeing with the way to get there, a commitment to protecting the progress and programs that are taking place in our schools today.

We will be providing more specific feedback on various proposals in the hearings to come, and I think that we can also be helpful as a resource for your staff in providing information to help you find that perfect mix of solutions that will get us through the next few school years. Thank you very much.

Thank you. Thank you all for your public testimony. Very much. Appreciate it. Appreciate also the letters ahead of time just to help us further understand your comments. And with that, we will adjourn to our next committee hearing, which will be next week. We're adjourned.