Assembly Budget Subcommittee No. 3 on Education Finance

Good morning everybody. I apologize for the little late start here, but we want to get started. Thank you and welcome to the Assembly Budget Subcommitee number three on Education Finance. It is our first hearing of the year, one of many to come.

Today's focus will be on Proposition 98 and I want to thank the Members of the Committee who are here. I am Chair Alvarez for this Committee and again appreciate all who are here. We will have a couple of panels. We have some questions and then I do want to note our goal.

And now because of my delay, we might be a little bit late, but is to end this first meeting by 10 to begin our joint hearing by by 10 o', clock, maybe a little thereafter. So just to let you all know. So this is our annual hearing on the Proposition 98 guarantee.

We will hear from the Department of Finance with their estimates and proposals germane to the constitutional and statutory requirements. We will not be hearing any other specific education funding proposal today. We will have those hearings subsequently.

We will have public comment at the end of the three panels for the guarantee, the rainy day Fund and the deferral issues. Those are the three panels as I said earlier. We will then adjourn and then do our joint oversight hearing at 10am as close to as possible.

This is a crucial hearing to look at the full context of Proposition 98 guarantee resources over the three year budget window. We face revenue volatility. We've heard that from across the board and many future economic unknowns.

As we consider this budget in its totality with 98 included, what we have some certainty about is that it's become sort of a new normal for these one time surplus funds. And whether it's settle up or one time funding proposal we regularly have now in the billions of dollars annually to consider as one time investments.

What is at issue is not whether to spend the funds on these Proposition 98 purposes we must and we will. But when to do so and how to do so. The one time funds are an asset for addressing long term stability, investing in long term standing and ongoing priorities.

And all of sub 3 hearings after today I want to underscore this. Every sub 3 hearing will focus on this issue. How and when to spend our one time resources and assets to meet the highest priorities that we identify. So with that I don't know if any of our colleagues have any comments to say. Nothing.

Okay, then we will get started. I'll ask the first panel to please come forward. This is the proposition 98 guarantee as proposed in the Governor's budget for again, the three year budget window of 24-25, 25-26 and the budget year. This includes the Governor's budget proposal impacting the guarantee calculation, the maintenance factor payments balance re benching and settle up.

I've asked the Administration and the LAO to hold presentations on other specific budget proposals into the future. So we will begin with the Department of Finance and then we'll hear from the Legislative Analyst Office. Please proceed.

Department of Finance so within the three year budget window, the Governor's Budget projects that the minimum guarantee will increase by approximately $21.7 billion relative to the 2025 Budget Act. The guarantee increases in each year within the budget window, so I'll go year by year to describe some of those changes in more detail.

So starting with 24-25 the guarantee increases by $3.9 billion for a total guarantee level of 123.8 billion. The governor's budget also fully repays the existing 1.9 billion settle up obligation in 24-25 meaning that the increase in the funded guarantee level is about 5.8 billion.

So contributing to the increase in 24-25 is a $7.8 billion maintenance factor payment which is an increase of about 2.3 billion over the payment that was projected at the 25 budget act. The remaining maintenance factor balance at the end of the three year window is now approximately 584 million.

So 25-26 the guarantee increases by about 6.8 billion for a calculated guarantee level of 1:21.4 billion. However, due to the persistent uncertainty in revenue estimates, the Governor's budget creates a new $5.6 billion settle obligation in 25-26 which puts the funded guarantee at about 115.9 billion.

So this estimate will be reassessed at the May revision and updated if necessary based on revised Prop 98 factors. Pursuant to existing law, any underappropriation would either be paid in full AT certification in 2027 or according to a payment plan similar to the settle up amount that was included in last year's Budget Act.

This proposal is intended as a proactive measure to manage the budget to help avoid the over appropriation of Prop 98 when 25-26 becomes the past year next year. So finally moving to 26-27 the guarantee increases by about 10.9 billion for a total guarantee level of 125.5 billion.

So all three years in the budget window are in test one. Additionally, the transitional Kindergarten and LA Fire property tax re benches are Revised down in 2425 and 25-26 this is based on revised estimates of transitional kindergarten average daily attendance and LA County property tax losses.

Then finally, in recognition of their enrollment based costs growing at a relatively higher rate, community colleges are funded about $391 million above the split in 2425. And that concludes my remarks. Happy to take questions at the appropriate time.

Thank you. Thank you and good morning, Chair of Numbers Ken Kapphahn with the Analyst's Office. We have a report that covers our comments on this issue and most that analysis is on page 17 in the appendix.

My comments today are going to revolve around risk, where it comes from and what the state might do to manage it and protect the state budget and school programs. I think the Department of Finance gave you a good overview of the major moving pieces.

The most important number is the 21.7 billion increase in the guarantee relative to June. That's mainly reflecting much higher General Fund revenue estimates. And it's certainly true that state tax collections have been strong since June.

But most of those gains have been linked to a strong stock market and a big boom among tech companies with large investments in artificial intelligence. And those gains are starting to appear more and more tenuous. We're seeing several signs suggesting that the stock market might be approaching a peak.

If the stock market does drop significantly, revenue losses almost certainly would be measured in the tens of billions. And that's significant for schools because under this Test 1 formula, the drop in the Proposition 98 guarantee would be about 40 cents for each dollar of lower revenue.

The revenue estimates in the Governor's budget don't really account for that possibility. And the risk is that the school spending proposals that are before you build on estimates of the guarantee that could erode very quickly. One way to lessen that risk would be to adopt lower revenue estimates that account for some of those risks.

That approach would mean paring back some of the spending proposals in the Governor's budget, but it would give you a school spending level that is something that the state could more likely sustain over time. If you do adopt the governor's revenue estimates, it becomes all the more important to mitigate risk in other ways.

And the Governor's budget does have some prudent features that would help in that regard. One of those is the proposition 98 reserve deposits. You'll hear about that in the next panel. Another important feature is paying off some past commitments. That's reflected in the deferral paydowns and the learning recovery block grant proposal. Again, you'll hear about those later.

And then third, the governor's Budget doesn't commit all of the new funding in the budget to ongoing programs. It sets aside about 4 billion in 26-27 funds for one time activities. And that gives the state a buffer.

Because of the Proposition 98 guarantee declines in the future, the state can absorb that drop without having to touch ongoing programs.

If you do adopt the governor's revenue estimates, we'd recommend using these hearings to start thinking about, well, what proposals could be delayed or reduced or rejected if one of these more negative scenarios starts to materialize and the state needs to make reductions. Shifting gears to the settle up proposal. So just a brief review of the nomenclature here.

That 5.6 billion is really the gap between the revised estimate of the Proposition 98 guarantee in 25-26 and the level of funding that's proposed in the budget. We call that settle up because the state will eventually need to settle up and Fund that higher requirement.

Usually the state appropriates that funding as soon as it recognizes a higher estimate of the guarantee, although occasionally it delays that payment, including in the proposal that's before you. There are a couple different types of risk in play here. I think the governor's main concern is the short term forecasting risk.

And this is associated with a very specific chain of events. So the risk is that first the state increases school spending this year based on those higher estimates. But then after June, the state realizes that revenues came in lower than it thought and the Proposition 98 guarantee drops.

The state will naturally have its final calculation for this fiscal year until May of 2027. And the state also can't reduce spending to that lower level because of a law that prohibits reductions after the year ends. And you're probably wondering, well, how could the state even reduce spending in the first place if the year is over?

But prior to this law, the state would often make accounting adjustments. And so what that typically meant was taking some of that spending that was above the minimum in the previous year and counting it towards the following year's Proposition 98 obligations.

Those were spending reductions, but they didn't require districts to return any payments the state had made previously. Since those reductions aren't possible anymore, the state could end up with a spending level that's significantly above the guarantee when it does its final calculations in May of 2027.

Now that's not intrinsically bad, but it is a problem when the budget is only barely balanced right now, and spending much more than the minimum requirement could throw it out of balance. So I think the idea of the governor's proposal is the state would simply wait, make its final calculation in May of 2027.

The final amount owed might be more than 5.6 billion. It might be less. And the governor's the state won't make the payment until it knows the exact amount. And so there is a reasonable concern there. And the governor's proposal would address that concern. But I think the major downside is that this makes future state budget deficits worse.

The state looking at large deficits the next couple years, 35 billion annually under our estimates, 20 to 25 billion annually under the Department of Finance's estimates. This proposal shifts 5.6 billion in cost to those future years, giving the state temporary fiscal relief this year, but making those future deficits even worse. So we'd recommend an alternative.

This has four components. The first would be to fully set aside enough funding to fully cover the estimates of the guarantee this year. So that means an additional 5.6 billion relative to the governor's budget.

Of that 5.6 billion, we'd recommend depositing at least 2.9 billion into the Proposition 98 Reserve along with trailer language that reduces the deposit if revenues decline. That approach gives the state a buffer similar to the governor's proposal. It's a way to reduce costs if revenues fall short.

Third, we'd recommend using the other 2.7 billion to build additional protection for schools in other ways. That could be a larger reserve deposit. That could be an advance payment that preemptively covers some costs in 27-28 along the lines of what we recommended in November.

Or it could potentially involve setting aside some funding to help cover future pension costs. Any of those things would help build an additional layer of resiliency for school budgets. And then fourth and finally, our alternative means adopting more solutions. 5.6 billion more for the non proposition 98 side of the budget.

We'd recommend doing that as part of a broader plan to shrink the state structural deficit. That is going to mean spending reductions potentially could be combined with revenue increases. Depending on your preferences. Those decisions are likely to be difficult, but the state will need to make them eventually and starting now makes them easier to implement.

And then lastly, and stepping back from the very specifics of the settle up proposal, we'd recommend you consider appealing the law that prohibits prior year spending reductions. This law was originally adopted in 2019-20 to provide greater certainty around the calculation of the guarantee and the allocation of school funding.

But in practice it seems to have had the opposite effect. It was one of the motivations for the very complicated funding maneuver the state had to Adopt a couple years ago. It was one of the motivations for last year's settle up delay. The governor's budget alludes to it again as part of the rationale for the 5.6 billion.

And these are all examples of actions that create more uncertainty about when and how the state is going to allocate Proposition 98 funding.

One compromise approach you could explore would be to amend the law so it continues to prohibit any kind of prior year reductions that require districts to return previous payments while still allowing the state to make reductions through accounting adjustments that would help the state avoid inadvertently exceeding the guarantee, which is the governor's concern, without using the settle up delay as a way to do that.

With that. That concludes my comments. Until the next panel.

Thank you both. We'll take some questions from Committee Members. I think I'll just start by noting probably the word of the day is volatility and the uncertainty that it's created for everyone from budgets in Sacramento to the budgets that are decided by our local school districts. And so I think it's the theme of the day.

It'll probably be the theme of the hearings that I said at the very beginning because the last thing we want is to project one thing and then have different expectations either when may revise comes or later on in the, in the, in the actual budget year when the numbers come in and they show something different.

And so I appreciate the history on the 1920 law that came into place. I think we do want to hold harmless our districts as much as possible. So I think this is a, this is like a difficult challenge for us.

But I think it's a, we could, we could do this probably in a more sophisticated way to provide some of that certainty to our local districts. And that's what I hope this conversation becomes. So speaking of volatility, the current year setup amount is significantly larger than we did last year.

And is that from both of your standpoint because you anticipate more volatility than the previous year or why is that number larger from finance's perspective?

Yeah, I think. Right. I think obviously, you know, we were messaging the same thing, the same uncertainty last year that is kind of continuing into the year. I think also sort of just going back to my overview, you know, the large kind of increases in the guarantee, I think that, you know, sort of also sets up. Right.

Potential larger swings as we kind of move towards the spring, you know, and continue to update the Prop 98 calculations.

So just to, I think to be clear, it sounds like there's a concern of more volatility is present.

Yeah, I think you're right. I think there's, you know, we're looking at significant uncertainty that we want to, you know, continue tracking into spring.

Would it be fair to categorize the 5.6 billion given that it's $0.40 to the dollar under the current test of Prop 98, that the uncertainty that you are potentially anticipating, 5.6%, $0.40 the dollar is roughly around let's say $14 billion potentially of uncertainty as a total amount of revenue.

I guess I'm not sure. I don't know if I could do the calculation in my head right on the spot, but

I may be off. A few millions there too.

Yeah, I mean I think that would be I guess roughly, you know, if you're projecting as to 40%. But you know, I think this is, this is our measure of that uncertainty within the guarantee.

And the question to the LAO's point, and you could comment on that as well. But the question, this one's to the still Department of Finance, why not as suggested by the LAO, put the 5.6 billion in the PSSA and a way to have that available if need needed or distributed, as you have said, will be determined next year.

Yeah, so I mean I think, you know, I think anything with a settle up just come back to emphasizing the sort of main intent which is avoiding that over appropriation. Right. There's the, you know, the risk or if you are overappropriated when this becomes a past year. Right.

That will be funding that we do have to Fund find on, you know, the non 98 side of the budget. You know.

So just to clarify your opinion, your, your opinion is that if you put it in the pssa then you're appropriating it?

No, I think we, I think any alternative proposal we'd obviously always want to look at language. You know, I think it could be something that provides a flexibility within Prop 98 potentially. I think we see this proposal as sort of providing sort of, you know, more flexibility within Prop 98 and for the overall budget.

Got it. Appreciate that. So to the concern of if you put in the pssa, the flexibility will be retained, remain for us.

That's how we understand it. The state regularly makes adjustments to the required deposits or withdrawals from that account within the prior year. And so we think the state by the same logic could also adjust an optional deposit based on what happens with revenue.

I also wanted to come back to your question about how much, how much volatility are we really concerned about here?

And we had a similar question in our analysis and we looked at past deviations and forecasts and what we found is that for the current year, so 2526 in this case, it's rare for revenues to deviate by more than about 4% from the estimates that the state has when it from the estimates in May that form the final budget.

So a 4% swing in revenue is worth about 9 billion. So given that $0.4 ratio that you talked about, if the state wanted to mitigate that typical range of risk, it's actually more than typical range of risk. It would need a settle up buffer of about 3.5 billion.

The governor's budget already has 664 million in proposition 98 reserve deposits in 25-26. So it would need an additional 2.9 billion on top of that to mitigate the kind of likely range of down revenue drops or drops in the guarantee that it might experience.

Now, 3.5 billion is still far short of what the state would need to protect school programs during a significant downturn that, say, happens in a couple years. So it's not as though we're saying that the state puts 3.5 billion in the reserve and then doesn't have to worry about volatility.

But if you're specifically concerned about this forecasting issue and this prior year adjustment, then we think a buffer of around 3.5 billion, whether that's the settle up delay or the Proposition 98 reserve deposit that we're suggesting, that's the range, that's really the range of the buffer that you need.

Okay, we'll talk a little bit more about the reserve in the next panel. As far as finance perspective on the settle up funds for next year, is there any expectation on how those would get used if those were to become available?

I don't think that's something I'd be able to speak to at this point. I think, you know, obviously, given the uncertainty that's sort of inherent in the proposal and the reason we're proposing it, you know, we would want to see sort of, I think, what the Prop 98 package and the revenue picture looks like for.

Okay. And just to note, for the Committee last year in the budget, we approved prioritization of the utilization of the funds. So just so that you all know, for the funds that were settled up this year, let me ask one last question, which is on the split with community colleges.

Because it's 98, it's, it's kind of feels like it's off topic, but it's 98 related and, and wondering if. So the 2425 split gets once again, I guess readjusted and then going Forward2526 going forward, TK gets the now counted as part of the K12, part of the 98 guarantee.

Just help me understand on a going forward basis, given there's growth in enrollment in community colleges and that seems to be continuing and potentially we are seeing declining in the K12 population, Tk12 population, have their thoughts been given about like what is going to happen at some point, probably a few years from now when this trend continues to grow and you see the need in 98 per community college growing because of enrollment, the enrollment in TK12 not keeping up to pace.

Have you all thought about that at all?

So I think from our perspective would emphasize that this in the governor's budget is a one time proposal.

You know, I'm not an expert on the, you know, the community college enrollment, but I think that our team who works on that is confident that they provided, you know, kind of enough funding at least within the remaining years in the budget window for that enrollment growth.

You know, I think that, I think that's a conversation we'd be happy to, you know, continue with the Legislature, but I don't, you know, I don't know that we can.

We'll leave that specific. Thank you. We'll leave that open. Do you have any thoughts on that?

Yeah, Well, I mean, as you know, less than a year ago, the state approved a budget that had a new methodology for calculating the split. And now, less than a year later, reviewing a governor's proposal that effectively reverses part of that change, at least on a temporary basis.

We don't think that's a sign of bad faith by the Governor, but it's another reminder of the problems created by using the split as a budgeting tool. We've been concerned that it makes it more difficult for the Legislature to build a budget that meets its priorities. It turns out it also frustrates the governor's priorities as well.

The enrollment growth that you mentioned is a great example of that. If you continue to stick with 8911 as your split, given the enrollment trends, you're going to have a community college budget that's consistently tighter than your K12 education budget.

Now, if that aligns with your priorities and you want to spend more and expand school programs more than community college programs, that you might be comfortable with that. But we wouldn't recommend taking that budgeting approach just because of these percentages that we had in 199091.

So we would again, like last year, recommend discontinuing the split altogether as a budgeting tool. Build a budget that covers COLA enrollment growth and the community school and community college proposals you think are the highest priorities.

And just to clarify, for all, the 89-11 split was not part of the Proposition 98 ballot measure constitutionally required. It was put into practice when it was first utilized. Yes. All right. Do you have any questions from our colleagues? Dr. Patel, please.

I want to start by expressing gratitude for the report that you provided, Elio, and for your testimony today. Alex. With the Department of Finance. Budget, obviously, is a very complex process. And when we're seeing volatility like that, of course it raises a lot of questions.

Ken, I appreciate you benchmarking me to this 4% swing is worth 9 billion because I'm trying to do, you know, these kinds of calculations in my head and even on the back of the envelope, and I'm wondering where that 5.6 billion came from and how we justify that as a wild swing.

I understand that we may have some similar conditions to what it was in 2023, and yet the delta that we're withholding is substantially larger. Can you put a little finer point on that? For me, the justification for the wider delta?

So I don't know that there is like a specific formula we can point to for that 5.6 billion. But I think, Say again, just the continuing uncertainty, the increases that we're seeing in Prop 98, understanding $21.7 billion over the 2025 Budget act, and the potential with that uncertainty, I think kind of creating more volatility with the larger swings.

Yeah. And so with that caution in mind, I'm definitely intrigued by the proposal you've come up with, the four step kind of approach to addressing that gap. And I find it strategic as well as tactical, and I appreciate that.

Going to look at that a little bit more carefully. I have a couple specific questions also out of the report. Ken, I read in here and this kind of made me a little sad that the 26-27 per pupil funding level is actually $300 lower per pupil than 2425 if you take into account cost of inflation.

That's right.

So school districts will be seeing a need to cut even though we have possibly this withholding that we're also doing, which is one time funding.

Yeah, we have for the other Members. Dr. Patel is referring to a chart on page 12 that we have looking at the per pupil funding and I think there's. You look at the past three or four years, you can see that the story of the volatility the chair mentioned about how it's fluctuated up and down.

Pure pupil funding has grown. It grew quite a bit during the pandemic years and it's continued to grow upwards. But in this most recent year it hasn't been growing as quickly as inflation. And so some of that what you're probably hearing from your districts is that it's tough to manage these rising costs.

You're probably hearing a lot about personnel costs. Pressured increased salaries to keep up with inflation. Health care, pensions, some other non personnel costs too. Insurance and utilities have been growing quite a bit.

So districts aren't seeing reductions in their pre pupil rates of funding but they have expressed concerns about it not keeping growing as much as their cost increases.

Yeah. And then can I ask a follow up question again, a very detailed question. I apologize as I'm trying to understand these budgets better. We have the governor's total budget proposal page seven on the report. Prop 98 funding for schools is $20,427 per student with the commensurate increase. What is the range on that?

From a base funded Ada district to the highest concentration funded Ada district. What's the range? We talk about averages a lot but I would love to know what that range would look like.

I can talk a little bit about that. There will also be. I think there's the next hearing. We'll get into the very details of lcff. But that can be from the extremes.

There can be a gap of about 50% in a high funded district might have 50% more funding per pupil than a district with very, very few unduplicated, very few low income students and English learners.

Thank you for that. I think that's all for me.

Thank you. All right, any other questions? Okay, we'll move on to the next panel which is on the pssa, the Public School System Stabilization Account overview and the proposal. Department of Finance, please.

Alex Shoap, Department of Finance. So the Governor's budget includes true ups to the rainy day Fund deposits and withdrawals that were included in the 2025 Budget Act. Similar to the previous panel, I'll go year by year. First provide that budget act transfer and then the updated Governor's budget amount.

So starting in 24-25, there was a mandatory deposit of $455 million at the budget Act. At the Governor's Budget, that mandatory deposit is revised up to about 3.8 billion. 25-26, there was a mandatory withdrawal of that same 455 million at the Budget act that fully depleted the reserve at the time.

So the Governor's budget true up flips that withdrawal to a mandatory deposit of about 424 million. It also includes a discretionary deposit of 240 million. That brings it to a total deposit amount of about 664 million. Finally, 26-27, there is a mandatory withdrawal of 407 million.

So of this amount, 363 million will be used to backfill local control funding formula costs and then 44 million will be used to backfill students at their funding formula costs. So with those revised transfer amounts, the ending balance in the Reserve is about 4.1 billion at the end of 26-27.

And that revised balance would be enough to trigger the 10% school district reserve caps in 26-27.

Thank you again, Ken Kapphahn with the Analyst's Office. I think the Department of Finance gave you a good overview of the moving pieces. The the two main factors that drive reserve deposits are year over year growth in the proposition 98 guarantee and capital gains revenue.

So to the extent that revenues are higher in May, you'll likely see these deposit estimates revised up. And to the extent they're lower, you'll likely see them revised down. 4.1 billion balance wouldn't be enough to fully address a significant drop in the guarantee. 4.1 billion is only about 3.3% of the guarantee in 26-27.

But it is a very important building block for budget resiliency, and that's because the reserve is very flexible. You can use it for any school or community college program. It can be accessed relatively quickly. And unlike something like a payment deferral, it doesn't disrupt the cash flow for districts.

And so if you build a budget around the governor's revenue estimates, we'd recommend using this reserve as part of the broader strategy to mitigate risk, potentially considering even a much larger deposit as part of this alternative to the settle up proposal as well.

Thank you. I think what we'll do is we'll also do issue three here and then we'll do questions so we can try to line up our time. So Alex, you can present on this.

Alex Shoe, Department of Finance so the 2025 Budget act deferred approximately 1.9 billion in local control funding formula costs and 408 million in student centered funding formula costs from 2025-26 to 26-27. These amounts are the only outstanding deferrals as of the governor's budget. But the governor's budget proposes fully repaying both.

Thank you. Go ahead. Paying off the deferrals aligns the ongoing cost of school programs with the funding that's needed to pay for them. It improves district cash flow and a better positions the state to address future drops in the guarantee. We'd recommend approving the governor's proposal.

If the legislative analyst were here, he would tell you this is your basic good government fiscal hygiene type of action.

Thank you. Appreciate you both. We would agree. I'll start with comments on that. Certainly this Committee and the Assembly generally was not enthusiastic about the deferrals last year. So I'm glad to see this happen and hopefully we don't revisit this again. It does though for me at least beg a question for clarification maybe from either one.

Lao, probably from the report. Does the deferral payment in addition is that in addition to the roughly 10 billion in 24-25, 25-26 new payments that are going to be occurring as a result of the current revenue numbers.

So that 1.9 billion is part of how that 10.9 billion is used. So if you think about the way to think about deferrals is to think about monthly payments. Districts normally get 12 payments. Essentially this year they're only going to get 11 and a half.

So next year we need to give them an extra half of payment to true up the cash schedule and get back on track. So part of what we're doing with that 10.9 billion increase is giving them a one time extra payment of half of half a month's payment to eliminate the deferrals moving forward. Got it.

Okay. And then I think we just want to be clear about the priority of this repayment for finance. Is this in a prioritization waterfall, if you will, whatever process you all determine to how you use additional revenue is where does this fall In a priority of what gets funded.

I can't give, you know, a specific ranking to everything, but I think like two of our highest priorities, of course, are always making sure that ongoing costs are funded and that, you know, we're kind of able to. To retire any outstanding debt. Like, like a deferral.

Okay. That would be consistent, I think, with us as well. Any questions on. Well, let me just ask some. On the psa, we kind of. I know it's strange. We talked about a little bit in the first panel conversation, but it just. The vol.

Again theme, volatility, the fact that we put money in, take money out, like, it just seems like it makes it very difficult for stability for obviously our local school districts. Our schools, but also for us. Has there been any conversation.

I can ask a bunch of questions in terms of like why this versus that, but any conversation has to try to create some sort of definition formula for how to do this in a way that creates more stability outside of just the constitutional. The, the required amount that needs to be deposited into the account.

So I think. Right. You know, as you alluded to. Right. A lot of these, most of what occurred at the governor's budget, that's all constitutional. You know, that's just by the formulas that are there.

You know, I think, I think as with sort of any budget or Prop 98 package, it's sort of balancing the needs, you know, addressing district needs, you know, Administration priorities and also sort of building that budget resilience.

I think that, I think that this package, you know, with the deposits in there, including the supplemental discretionary deposit, sort of works to try and build some of the resilience that was lost at the 2025 Budget Act.

You know, I think, I think discretionary deposits are or can be a good tool, but as always, just kind of needs to be balanced against the other needs of the.

To the Lao. Again, appreciate the 4% comment that was made earlier. I think that was information for me that was useful. So that seems to be. I don't know if you said an average or.

But if we are concerned about potentially a very volatile situation occurring here, you know, we can probably only reference in recent history since 98, I mean maybe in 2000, 2001 but certainly the great recession in 08 through 10. What were, what was the volatility in those years?

Have you done an analysis of that and should we be looking more towards that as a guiding sort of principle of how much to be worried about, if you will?

Yeah, the volatility over the past Couple years has been extreme. One of the reasons people are often surprised that the state constitution itself doesn't say more about how the state trues up and adjusts its estimates of the Proposition 98 guarantee.

Part of that is because back in the 80s when it was drafted, state revenue was substantially less volatile and we didn't have the kinds of swings that we see today. 4% is really only the volatility within the current year, the budget year volatility is much that sort of range of potential outcomes is more than twice that range.

And we've seen some of the biggest swings that we've ever seen the last couple years. In 2021 we saw an increase. In 21-22, actually we saw the proposition 98 guarantee ended up more than 30% higher than the estimate in the budget.

And then a couple of years after that, in 22-23 it ended up dropping almost 20% compared to what was in the budget. We have seen some increases like that before in the.com bust and in the Great Recession. But we've seen large swings almost every year for the past several years.

And so this is becoming a new, even more of a challenge than it has been in the past. I think that maybe raises two issues for you. One is in the years where we have these large upswings, how can that money be put to good use?

Some of the best ways to do that are to build budget resiliency with reserve deposits and paying off debts like deferrals. Sometimes that can mean covering startup costs for programs. It can mean covering temporary or short term costs that districts are facing.

We have this idea, maybe it can be covering some, paying some costs in advance that you know are coming in a future year. Those are all productive ways to use one time funding. But for building the budget, it also means to be cautious about how much you commit to new ongoing programs.

Because you might have an estimate now that the Proposition 98 guarantee is going to be at a certain level, but we don't know for certain that it's going to keep growing each year from that point.

So it's both thinking about using those one time funds productively when they do happen, and then not over committing to ongoing increases based on one point in time projection.

I think I'm just going to ask, this is my last question that as we go through again I said every hearing and talk about the spending proposals is how much are we considering what you just said in terms of ensuring that they're true in one time nature, that the districts are utilizing them truly for one time, nature programs.

I don't know that we're doing that well enough as a state. I think we're going to have to figure out how to do that better.

But I also think given the volatility swings, we probably should be focusing on analyzing a little bit better what the right target should be and not just the mandated amount with some number just because we think it's the right number or we ran out of ideas of how to spend, you know, 98 money on which is I would argue perhaps maybe something happening. So that it for me questions, colleagues. Dr. Patel,

Just have follow up comment, agreeing with, needing to make sure when we do have these dollars that we have a very strategic plan for what kinds of programs we're going to put them into. A couple of questions about the stabilization accounts for Department of Finance.

Do you have a clear set of guidance around withdrawal parameters specifically for the discretionary deposits that might be proposed?

Right. So withdrawal, you know, withdrawals for all the constitutional deposits, again, that's sort of dictated by the constitutional formulas. The governor's budget proposal does not propose, I think, specific withdrawal parameters. I think that's something I probably have to go back and check with some other folks we have.

You know, I think it's my understanding that some past precedent, either with this or with the budget stabilization account, those are treated a little bit differently. But I'd probably have to circle back for more details.

Thank you. And as I'm learning this process and how it all works, this is helpful to know what those processes look like. Especially we're going to be in a transition year to a new Governor. So we're looking at how those commitments are made and want to make sure that those commitments get honored with our new leadership.

And for the LAO also, what metrics should we consider as a Legislature for possible voluntary contribution into the stabilization account?

Yeah, there are a lot of factors you could consider. One is the different kinds of risk that you're looking at. So there's again the short term forecasting risk. You need a certain amount in 25-26 to address that.

If you think about the Reserve has a 10% cap or target for mandatory deposits under this, under the most recent estimates of Proposition 98, that 10% target would be a little over $12 billion. A $12 billion balance probably would be enough to address the first year of a significant drop.

So if you set yourself up with that kind of reserve level, you've bought yourself some time to deal with the drop if it happens. But there isn't enough money in there to deal with the full sweep of an economic downturn that might last a couple years.

So then the question is, well, are there other ways you can build protection? If you're combining this with a large one time cushion and you're not committing all of your Proposition 98 funding to New ongoing programs, that helps. If you've paid off all of the deferrals, you're in a better position to deal with that.

So what we would suggest is thinking about this, not so much as there's one right number for the reserve, but we'd recommend building it from the level where it is today, which is zero, but also thinking about, well, what are all of the major tools that you have to address volatility.

Thank you.

Okay. I think we are. Okay. No other questions. Appreciate you all being here for these three issues. And again, we'll continue on the theme throughout the year. That brings us to public comment on this item.

If there are any Members of the public who wish to comment on this item, I ask you to please step forward cognizant of the time. And I'm just going to gauge how many people get up to either give you a minute or two minutes.

So if you are speaking on this, please help me out by standing up and giving me a visual assessment. Okay. We'll definitely give you one minute. If you need to speak more, we'll be a little lenient. So that means for our 10 o' clock panel, probably starting about 10:05, between 10:05 and 10:10.

So welcome, please come forward, introduce yourself and we'll give you a minute. I'll give you a notice that it's a minute, but if you need more time, we'll be flexible.

Thank you. Mr. Chair and Members. Sandra Barrero, on behalf of SEIU California, we oppose the withholding of 5.6 billion from the Prop 98 minimum guarantee. If fiscal uncertainties necessitate the withholding, then we hope the Legislature will consider proposals that generate more stable sources of revenue. Thank you.

Thank you. Good morning, Mr. Chair and Members of the Committee. I have Dan Merwin on behalf of the California School Boards Association. Probably a common refrain this morning, again. Opposed to the 5.6 billion withholding. We consider that a manipulation of Prop 98 not settle up. It's the third such manipulation in as many years.

As well, you noted that if we're. Facing revenue uncertainty, it's probably around the term the ballpark of $14-15 billion. We're not seeing proposals that mitigate that on the nonline side of the budget. And if there is that kind of. Uncertainty, there's existing processes to address it, including higher revenue estimates. When we get to May revised or.

At least more accurate revenue estimates. We'd encourage looking at those and following some of LAO's recommendations. In the meantime.

Thank you. Thank you. Good morning, Mr. Chair and Members. Barrett Snider. We have the Small School Districts Association, about 26 county offices of education, including San Diego, Nevada Placer, Fresno, the school number of school districts including Escondido, Sweetwater, San Bernardo Union High School District and La Mesa Spring Valley.

We were co signers on a letter that's being distributed to you by the sergeants reflecting comments made by the School Boards Association. We have deep concerns with the President around the proposal to withhold $5.6 billion.

In addition to the comments made by my colleague from csba, we're concerned it relies on a constitutionally suspect use of the Prop 98 certification settle up process.

That process was designed to be a process for the Legislature and the Governor to reconcile what is an estimate at budget adoption to and what we know the guarantee is later when we have all the data.

It was not designed to be a process by which the legislation, the Governor can knowingly withhold billions of dollars of Prop 98 Guarantee Dollars, particularly when the same budget revenue estimates are applied to the rest of the state budget. It stacks all the uncertainty on schools.

So for those reasons and others that are in our letter that you can read, we're opposed to that. Thank you. Thank you.

Good morning, Mr. Chair and Committee Members. Carlos Rojas representing the Kern County Superintendent Schools Office. First of all, I want to extend our appreciation to the state for their recent investments in education, particularly in those. Programs that extend beyond the traditional classroom and been able to knock down a lot of barriers for our students and our families.

And we've seen results of those student. Outcomes improving because of that money being available for those those those programs that. Extend beyond the classroom. It makes those programs possible. However, that funding being timely and predictable for our school districts makes those programs.

Makes it possible for those programs to be operating in an efficient and effective manner, ultimately resulting in improved student outcomes. For that reason, we are opposed and concerned with the proposal to withhold or. Create that settlement of $5.6 billion because. It impacts predictability and timeliness and receipts. Of those funds for schools to plan those programs effectively.

Good morning. Chairmember Sam Nash here On behalf of the Los Angeles County Office of Education, we want. To align ourselves with our colleagues in. Posing the proposal to withhold $5.6 billion. In Prop 98 funding. At Laco, we have the responsibility of approving the budgets of 80 school districts. And school solvency is critical to provide our students with a robust education. Thank you. Thank you.

Good morning. Chair and Members. Jessica Sacco on behalf of Children now, as Highlighted in the 2026 California Children' Card, California schools continue to face some of the largest achievement gaps in the nation and have among the worst educator staffing ratios in the country. These challenges are deeply connected and cannot be addressed without predictable funding.

Children now shares the concerns raised by our education partners that the Proposition 98 guarantee not being met in the 2025-26 budget. Based on the administration's own General Revenue Fund assumptions, the state owes schools at least 5.6 billion.

As discussed, January revenue estimates now appear to significantly exc Department of Finance projections, meaning the true obligation to schools is likely even higher. We urge this Subcommitee to plan now to fully meet the Proposition 98 requirements and reflect that commitment in the May revision meeting. The guarantee is not optional. It is essential to giving the students and educators the resources they need to succeed. Thank you.

Morning. Thank you, Mr. Chair. Members. Andrea Ball. I'm here on behalf of 33 organizations. The California Association of Suburban School Districts, the Central Valley Education Coalition, which is a coalition of six county superintendents and district superintendents across the Central Valley, and the Orange County Department of Education.

All these groups signed onto the coalition letter opposing the withholding of the Prop 985.6 billion. So we echo and align ourselves with the comments of the previous speakers.

In addition, we do want to thank the governor's proposal and hope the Legislature adopts the paying off of the deferrals from the prior years that also contributes to certainty, which is really important at the local level. Thank you.

Good morning. Paige Clark with the National Center for Youth Law. As the Legislature weighs options for Prop 98, we are increasingly concerned about the lack of dedicated education funding for K12 students experience experiencing homelessness.

Despite having almost 300,000 students identified as homeless during the 24-25 school year, California invests no state funding and relies entirely on the federal McKinney Vento grant of just $15 million annually. An annual state investment would ensure the majority of students attend schools where support is accessible should they experience homelessness. We appreciate the committee's attention. Thank you.

Hello, chair and Members of the Committee. My name is Jonah Colon and I'm a student at American River College. I also experienced homelessness during my K through 12 education during my sophomore year of high school.

I remember trying to focus in class while worrying about where I would sleep, how I'd get to school, and whether I had what I needed to keep up. Students facing homelessness today are facing with those same challenges and they need more than good intentions. They need consistent support. Investing 15 million of ongoing Proposition 98.

Funding is critical to support students with. Transportation, tutoring and counseling that help students show up, stay on track and graduate. Thank you.

Just give me a minute. I'm just going to remind folks to please we're going to have full discussions on all programs and projects funded by 98. And so your comments should be limited to the topic today, but appreciate you. Please come forward.

Hello everyone. My name is Jamari. I am a student activist at SAC State, a young Latino activist here in Sacramento. As someone who experienced homelessness as a youth in high school for about two and a half years, this proposal of giving $15 million a grant to programs that would help homeless youth is not something we want, but something that we need because it is necessary.

The high school I went to did not have a dedicated office or program for students dealing with homelessness. But if it did and it had the necessary funding like the one being proposed today to help those homeless students, then I wouldn't have had to work three jobs all at the same time.

I would have performed better in school, been much more involved in school than I was, and overall had the support of a homeless program. For these reasons and many more, a $15 million proposal to LEAs is not something we just want, but again, something we need because it is necessary.

As a former homeless youth who continues to sleep on the couch whenever I visit or are staying with the family for winter summer break, having support for homeless youth is important. Thank you.

Good morning chair and Committee Members Michelle Warshaw on behalf of the California Teachers Association and our over 300,000 Members across the state here in opposition to the $5.6 billion withholding from Prop 98. California voters passed Prop 98 Nearly four Decades Ago to enshrine public to enshrine funding for public schools in our constitution.

The governor's proposal violates this promise by failing to provide the full amount of funding that the Constitution demands. That is money that under the Constitution should be going to classrooms this year. The Constitution also does not permit unilaterally underfunding the minimum guarantee without suspension.

CTA also rejects the administration's characterization that the 5.6 billion is settle up funds if revenues materialize after the fiscal year closes at the higher calculated level. There is no statutory authority for preemptively creating settle up for the current or budget year before the close of those fiscal years. Thank you for your time. Thank you.

Good morning, everyone. I'm Christiana Quinones. I'm a child development major at SAC State. On behalf of the Guardian Scholars Program, I wanted to touch bases on this whole proposal. And as a student who experienced homelessness through the K through 12 system and also into higher education, I realized that. These funds would have actually. Excuse me, sorry.

Would have actually helped me get further into my academics. It is a very emotional thing for me. So I am working on trying to express that. I'm realizing also by being in my position, I'm seeing the things that are starting to affect children in education.

And as somebody who is going to be in education, I feel that this is something that we really need to think about in our populations. Thank you.

Thank you.

Good morning. Kathy Van Osten representing John Burton Advocates for Youth. Just want to echo some of the prior statements. We know investing in chronic youth homelessness, whether it's housing, we know that that pays off. It curbs that pipeline into chronic adult homelessness. We have about 300,000 students a year experiencing homelessness.

We have very limited funding going to making sure that they are getting identified and that they are getting supports to graduate. And it is absolutely essential to keep them off the streets long term. We need to invest in their graduating and getting on to hopefully higher education or other skilled work.

Okay, I'm just gonna let. If there's anybody else talking about this specific topic, we do have a hearing set for February 24 on funding of the local control funding formula.

If you're here and you're going to want to say something similar to what it was just said, can you keep it a lot shorter because it's actually not germane to today's topic. You will have an opportunity on the 24th of February to do so. Just say I also support and move on to the next person, please.

Hi, my name is Ashley Powers Clark and I am here to talk on that topic. So I'll keep it very brief. I've been a homeless liaison for about 14 years and am the homeless liaison for this district right here in Sacramento. I do have two high school students that very much prepared for today and they're in my program standing behind me. So I'll give the rest of my time to.

Thank you.

Hello, my name is Shatara Benjamin. I'm a high school intern in homeless education services at Sac City Unified School District. Secure funding for K through 12 students experiencing homelessness is not a request, but it is a necessity.

Through my experience, I have seen students arrive at school exhausted from unreliable transportation, unable to complete assignments due to the lack of basic supplies, and most of all, I have witnessed the anxiety and insecurities they carry every day because of their environment. Our children are students at the end of the day.

The same children that represent our future and our potential for change. We cannot take this for granted. The McKinney Vento program is a critical first step providing immediate school enrollment for students experiencing homelessness. However, enrollment is not enough. We need Proposition 98 to help us continue these efforts.

Is one thing to get students in the school, but it's another to ensure they have the resources and support needed to stay in school and graduate. Once again, Proposition 98 is not optional. It is essential to set these students up for long term success. Thank you. Thank you.

Next speaker will be our last speaker on this topic. If you are here for the same topic, just yeah, I'll let you raise your hand and let me know. You'll be the last speaker on this.

Hello, my name is Jania Norman. I am a high school student at Hiram Johnson. Actually I'm here today because I'm a large. I'm a part of a large number of students who have experienced homelessness or still are homeless. I've been experiencing homelessness since I was 7 years old from being homeless with my family and then being homeless by myself. I'm also a first generation where my parents did not go to college nor did finish high school.

And due to who my parents are, I have been in and out of youth shelters since I was 12 years old because I had no place to go. And due to that, my grades and my mental health suffered completely and honestly.

I thought I would go down the same road as my parents because I had no place to go. Luckily, because of my school I was able to get back up. And I'm actually a really large part of the Hiram Johnson community. I am senior vice President along with black Student union President.

I'm here today because not all students are as lucky as me to go to school for help. A lot of students fear they will be judged or mistreated because of how they are. Because they didn't know where they would go to shower today, nor would they have anything to eat.

This is a really big step in the right direction to help our homeless youth population. All students deserve a chance to have necessities that students who are blessed to have a home have.

Schools should have these funds to help students later on so they don't go down the same road as their parents or earlier generations and experience chronically homelessness.

Thanks to Hiram Johnson, I was also able to get health insurance due to the fact that I did not have any and a pair of glasses that I'm not wearing right now but I do have them.

Thank you. Thank you. Thank you. Appreciate you.

Tiffany Mok on behalf of CFT and we oppose the settle up creation. Thank you so much.

Thank you.

Anna Ioakimedes on behalf of Los Angeles Unified echoing others in our respectful opposition to the 5.6 billion deferral.

Thank you. Anyone else on any of the issues that were before us today. Okay. And again for those who spoke on the issue not before us today, 24th February would be an appropriate time for you to and we welcome you back with that. Thank you all.

We will adjourn this particular hearing and we will begin with the next one in just a couple minutes. Thank you.