Senate Budget and Fiscal Review Subcommittee No. 1 on Education

The Senate budget Subcommitee number one on education will come to order. Before we begin, let's establish a quorum. Consultant, please call the roll. [Roll Call] The consultant notes a quorum has been established.

This is our second hearing as the Senate Subcommitee number one, as well as our first hearing on TK12 education issues. Last summer, when we adopted the 2025 budget, we enacted $2 billion in Proposition 98 deferrals and fully deployed the Prop 98 reserves.

The volatility of our revenues is on full display with the Governor now projecting a $21.7 billion increase in Prop 98 in his January budget release. Since last summer, just six months after we adopted the 2025 budget, K12 education makes up roughly 40% of the California state budget. We are seeing the Prop 98 minimum guarantee at unprecedented levels.

And with a declining student population, the governor's K12 education budget proposes an incredible opportunity for sustaining transformative investments while at the same time having incredibly difficult conversations around social safety net programs, higher education, and other critical programs outside of Prop . 98. We look forward to these conversations in sub number one.

I would like to pause in case, Senator Archuleta, you would like to provide any additional remarks.

Thank you, Madam President. I'm so happy to see so many people are here concerned about our budget, concerned about our men and women in our community colleges and colleges, and of course, our children.

And I think it's all of us, our responsibility, under the leadership of our secretary, to make sure that each and every one of our children and. And college students get the best education they can.

And California continues to be the leader, not just as the economy, as the fourth largest economy in the world, but also to be extremely competitive when it comes to education. And we look to you to do that. Those in education, we acknowledge the teachers, professors, and we thank you for your service.

And we hope that as we move forward with the budget, we can see where it's necessary to make some adjustments. But again, I encourage you to be with us and stay strong, and we'll get this across as we move along. Thank you so much, Madam President.

Thank you, Senator Archuleta. Moving on to our hearing, we have six issues on today's agenda. We will begin issue one with the state Superintendent of Public instruction, Tony Thurmond, who will provide remarks on the state of education. And I see that our state superintendent is here. Welcome to the Subcommitee, Superintendent Thurman.

Good morning. Thank you, Madam Chair. Members of the Committee, thank you for the opportunity to share with you, our reflections on the state of education, California. Overall, I'd say that the state is rising. Last year we noted that student performance on state test scores was an improvement in every category in math, in science and in reading.

If you look at our dashboard, you'll see that every category, every indicator was positive. For the first time since the creation of the dashboard, our students are showing progress in graduation rates and preparedness for college and for their future. But there is still a long way for our students to go. They've come from a long way.

We still have achievement gaps. We still know that low income students and students of color and students from disadvantaged backgrounds and agricultural communities still have gaps to close in many ways.

And so I would say that the state of education is hopeful, but we still have a lot of work to do as this is my final opportunity to present to this Committee in this capacity to state Superintendent, I want to thank you for the investments that you all have helped to lead for education during the last seven years that I've had the honor to serve.

We have seen a tripling of our per pupil funding. We've seen incredible investments in programs like universal meals. Every student gets breakfast and lunch regardless of their background. We've seen the full funding of transitional kindergarten. Amazing that there would be a free preschool for every four year old. $4 billion for community schools.

A billion dollars every year for arts funding, $6 billion for broadband. Incredible things that we're seeing for California. This budget as proposed also has incredible investments. Another billion dollars for community schools, 500 plus million dollars for special education, which would take our per pupil spending number 21 that we've not seen before, the discretionary block grant.

Incredible opportunities that we've had this every year since 2020 for our school districts is significant, but the reality is that our districts still struggle. I don't have to tell you, I'm sure you're feeling it in your communities, in your districts, and reading about the dozens of districts that are either on strike or preparing to go on strike.

Districts continue to struggle with declining enrollment and with chronic absenteeism, which has a financial cost for our districts. Many great things in this budget. But I have to acknowledge that there is heartburn for our districts as it relates to Prop 98.

The $6 billion that is being held up as part of the settle up has created angst for many of our districts. And you will hear this as I've heard it from district leaders.

They will say that because of that it has contributed to their need to make layoffs because they have to make decisions about the dollars that they can count on. They're looking for a signal that that money might be restored and that they would have it to help them balance their budgets in a very tough time.

You know, I'll leave it at that, that that part of the proposal, it does threaten to undermine the goals of our districts. And as they are trying to counter strikes, it's a very tough time. Now, in spite of all these challenges and our revenue challenges, I'm still hopeful for California.

I believe that there are opportunities ahead for California to get new dollars for both K12 education and for higher education. And this budget also envisions continuing the work that has been started around supporting literacy.

This state has made deep investments in dyslexia screening, has made deep investments in professional development for educators to have the science of reading and other great techniques to prepare them for helping our young students to be great readers. But there is more that we can do at the Department.

We've convened a cohort of over 2 million students in what we call the move the needle cohort to help our students increase their trajectory of their proficiency in math and science. I'm sorry, math and reading. We give them regular.

We give those districts regular professional development and best practices to help them move the needle in the right direction. Many of these districts have the reading coaches grant and they've benefited from expanded learning and from other programs to accelerate learning. But they represent 2 million students whose proficiency in many cases can grow and needs to grow.

And we think we need to continue to build on that. For those reasons, we've crafted a five year plan to help California students learn to read by third grade. We want to deepen the focus on dyslexia screening, deepen the focus on professional development.

We want to deepen the efforts around high dose tutoring to make sure that students get access to that proven strategy that has shown incredible results. You're going to hear from folks in Oakland Unified School District later today.

That is one of the districts where high dose tutoring is making the difference for young readers and helping them to overcome learning gaps as it relates to literacy. The five year plan is expensive and it's not. It's not envisioned in this budget proposal.

And we think that the state needs to continue making investments in programs, as I've described, that will help our children learn to read by third grade. Because as you all know, reading by third grade is the difference between graduating and dropping out.

And the likelihood of someone who drops out is that they are at greater risk for ending up in the criminal justice system. And so for those reasons, we will be continuing to press in asking this Legislature and Governor to to invest in a five year literacy plan. Other states have done it.

California's never had a long term plan in this way. We've cobbled together great programs, but we need to have coherence and a long term strategy where we measure impact on a year by year basis until we see the levels of growth and accomplishment for our students.

The other things I would mention is that we are trying to counter some of the barriers that our students face.

And Madam Chair, I want to thank you for your sponsorship of SB98 and SB49 to help us keep Ayes out of our schools and the work that you've led to help protect our students in higher education from Ayes. We continue that work. As you know, our legislation has kept Ayes out of those locations.

We're working to keep Ayes out of hospitals and emergency rooms. But yet we know that our students are still fearful of coming to school because of Ayes. And in California, that has a financial price tag on top of the emotional price tag that it plays on our families.

And so for those reasons, we are sponsoring legislation that puts a tax on any company that operates an Ayes detention center. It's embarrassing to know that there are seven Ayes detention centers in our state. We don't think that this is the way for California, but we have to continue to protect our students.

And I would just say it has hit close to home for us. At the California Department of Education, we manage three special schools, state special schools, two schools that serve deaf students and one school that serves blind students.

And on last week, one of our students at the California School for the Deaf in Fremont was at a routine meeting with his family at an immigration office. And as a six year old who was deaf was abducted from with his mom and his five year old brother. They were abducted and in short order deported to Colombia.

No information provided to their attorneys, no opportunity for them to have redress. And to make matters worse, a young man who depends on hearing aids, sent off without his hearing aids, a young man whose only communication abilities is American Sign Language, has no access to any language where he is.

And so, needless to say, we're working with various levels of government and the legal community to try and reverse this. But we think that the impacts of Ayes continue to be a major threat to our students and to our school communities.

And then there are 10,000 homeless students, teenagers, who are unaccompanied minors who, if we don't help them now they will become homeless adults. And so for that reason, we are sponsoring legislation that would help those youth get subsidized housing with supports to help them get jobs and get into education.

And as we continue our conversation around building out literacy for California students, we are sponsoring legislation that would make kindergarten universal for every student so that students don't show up in first grade without some exposure to school and some preparation to school. And so we face challenges. We've had some successes.

I still think that the future is hopeful for California. I'm grateful for what this Legislature and Governor are doing in education, and we look forward to doing more to help each and every one of our nearly 6 million students. Thank you and happy to take any questions that you might have.

Thank you, Mr. Superintendent, for your presentation. And I just want to acknowledge and appreciate all the work that you've done, particularly for students and families across the state.

I know that these have been very challenging times, not just for them, but also for school districts who are now dealing with enrollment loss and drop in attendance as a result of these Ayes raids.

And you have been a true partner in stepping up to co author legislation with me, whether it is SB98, AB84, legislation that seeks to stop ICE's presence in our schools and prevent Ayes from being able to access our school districts and also creates clear notification requirements for all school districts across the state.

So I've appreciated your partnership and know that there is legislation you are leading this year as well in order to address some of these issues and have really just been grateful that you have been so vocal. I know as a Member of the Latino Caucus, you understand this issue on a personal level.

So have just been grateful for your leadership. Especially, as you know, we face uncertain times. So thank you for standing so strong for students, for parents, and for teachers all across the state. State of California.

Thank you, Madam Chair. Honored to work with you on that legislation. Thank you.

Thank you. Senator Archuleta, do you have comments or questions?

Yes, Superintendent, I really am excited to hear what you just said. It seems like you're right there. You know, I've personally invited you to come to my community and see exactly what was going on. That invitation still holds. Thank you. And I'd love to see you come into the district right outside Los Angeles, no doubt.

But I'm really impressed with what you've said. But the concern as well that 3.8 million students are low income and yet you're faced with this ongoing challenge of breakfast and lunch. And people don't realize that our teachers today seem to be counselors, babysitters, nurses. They seem to be that person in the family that's missing in some cases.

So your job is immense. No doubt. But I'm also concerned about basic reading and math and remedial reading.

When you talk about how important it is that tutoring, I'm hoping that before you leave office that you'll implement some tutoring program, that it can be implemented across the state, even if it's volunteers, because it's so vital getting these young men and women.

And I say that because we've got 12th graders that cannot read as well as some 8th graders because somehow they've gotten through the system and we've got to go back because as you mentioned earlier, that is the future is, if they're stable, to go on to college and so on.

But with the English learners and foster youth that are out there, there's 1 million in the K12 system. But the challenges are there. And obviously we're talking about special ed when we're talking about challenges. So I'd like you to take a good look at that.

The special ed, we can't forget those teachers that give their heart and soul to some of these students and they're not compensated. I don't know how we're going to be able to do that. But you know, they're special angels in my eyes that work with our disabled kids that seem to be sometimes forgotten.

So shout out to those teachers that actually do that. But again, I'm so proud of the work you're doing and please continue and let's stay in touch. Thank you, Madam Chair.

Thank you, Senator. If I could, I would just address your question about tutoring. There is a program called College Corps where college students are paid to tutor and mentor students in our K12 system.

And it is not the only program, but it is a great program that creates opportunities because there just aren't enough tutors and mentors to help our young people. And I echo and also would shout out our teachers and our classified staff who do an incredible job.

You'll probably hear from the educators from the Oakland Education association at Oakland Unified how difficult it is for them because many times the districts are not able to fill the one to one aid positions that work in special education.

They end up contracting out to these other companies and it costs more money and the quality is not the same as if it were district employees who are providing that support. And so we give a big shout out because what we know is that this job is difficult for educators.

It gets harder and harder, but yet they double down. And we do look forward to visiting in your district and talking about our educator housing idea and our ability to build 2 million housing units using the surplus property that school districts have in every single county. And so thank you for lifting that up.

You know, there are great things happening. You know. You know, there's a lot of debate about how California students read. And what's clear is that we have to help students enhance their proficiency. There's no question about that. There's also some discussion that California's state standardized tests are different than other states.

And our test places emphasis in addition to writing some critical thinking and writing certain components. Even for third graders, they're being asked to write certain essays and to demonstrate critical thinking, which they should.

But we, you know, so we have a slightly harder situation, but there's no question we have to make sure that our students are ready for the jobs of tomorrow. And I can tell you, our state board just implemented a new curriculum for something that was passed in this Legislature. Personal finance.

Every one of our students is going to learn personal finance. And that is something that is guaranteed to help students reduce debt, increases the chances of students going to college. We, we are doubling down on our apprenticeship training programs. We say college and career.

We want our students to have access to both, whether they choose to go to college or work in an apprenticeship training program. And I would just say this. Our dual enrollment programs, where students get a chance to take classes at the community college level and to pursue a degree, are growing.

This budget has about $100 million proposed in it, and we would like to see that make it through to the final budget, as well as maybe having some of that. You know, there's been a request to have 10 million of that available to provide technical assistance to districts on how to expand and strengthen their dual enrollment program.

So, as you point out, we have much work and we're. We're going to double down in this year and hopefully in years to come and continue doing that hard work. Thank you, Senator.

Thank you, Mr. Superintendent. If since there are no more questions or comments from the Committee, we will go ahead and move on to issue two. Appreciate you taking the time to be here.

Of course. Thank you, Madam Chair.

Thank you. So issue two is on Proposition 98. We have two speakers. Speaker one, Alex Schope from the Department of Finance and speaker two, Ken Kapahan from the Legislative Analyst Office.

Thank you Madam Chair. Senator Alex Shope with the Department of Finance. So as you noted at the top, within the three year window, the Governor's budget projects that the minimum guarantee will increase by approximately 21.7 billion relative to the 2025 Budget Act.

So the guarantee increases in each year within the budget window and I'll go year by year to describe some of those changes in more detail. So starting with 2425 the past year, the guarantee increases by 3.9 billion in 2425 for a total calculated guarantee level of 1:23.8 billion.

The governor's budget also fully repays the existing $1.9 billion settle up obligation in 24-25. So that means that the increase in the funded guarantee level is 5.8 billion. Contributing to that increase in 24-25 is a $7.8 billion maintenance factor payment.

That is an increase of about 2.3 billion over the payment that was projected at the 2025 Budget Act. The remaining maintenance factor balance now at the end of the three year window is approximately 584 million. Moving to 25-26, the guarantee increases by 6.8 billion in 25-26 for a calculated guarantee level of 121.4 billion.

However, due to the persistent uncertainty in revenue estimates, the Governor's budget creates a new $5.6 billion solo up obligation in the current year which puts the funded guarantee level at about 115.9.

So this is an estimate it will be reassessed at the May revision and updated if necessary based on the revised Prop 98 factors and then pursuant to existing law, any underappropriation would either be paid in full in certification in 2027 or pursuant to a repayment plan and then 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, help avoid the overappropriation of Prop 98 when 25-26 becomes the past year next year.

If you recall right, this was a situation in fiscal year 22-23 with an over appropriation that will now soon be accounted for on the Non 98 General Fund side of the budget for 13 years beginning in 27-28. So finally 26-27 the guarantee increases by 10.9 billion for a total guarantee level of 125.5 billion in that year.

All three years in the budget window are in test one. So moving quickly to the public school system stabilization account, the Governor's budget includes true ups to the state's rainy day Fund for schools, the deposits and the withdrawals that were included in the 25 Budget Act. So I'll provide those numbers that were in the 25 budget act.

Then the updated governor's budget amounts. So 24-25 there was a mandatory deposit of 455 million at the budget Act. At Governor's budget that mandatory deposit is revised up to about 3.8 billion. 25-26 There was a mandatory withdrawal of 455 million at the Budget act which at the time fully depleted the reserve.

The Governor's budget true up flips that withdrawal to a mandatory deposit of 424 million. It also includes a discretionary deposit of about 240 million. So bringing the total deposits for current year to about 664 million. Finally, 26-27 there's a mandatory withdrawal of 407 million. Of that amount, 363 million is proposed to backfill local control funding formula costs.

And then the remaining 44 million is proposed to backfill student centered funding formula costs. So with those revised transfer amounts, the ending balance in the Reserve is now 4.1 billion at the end of 26-27. The revised balance would be enough to trigger the 10% school district reserve caps in 26-27.

So just a few more things to wrap it up. The transitional kindergarten and LA FIRE property tax re benches are revised down in 24-25, 25-26. Those are based on revised estimates of TK average daily attendance and then just LA County property tax losses.

Moving on, in recognition of community college enrollment based costs growing at a relatively higher rate compared to TK to 12 and also having borne a proportionally larger share of 25-26 deferrals, community colleges are funded about $391 million above the historical TK to 12 community college split in 24-25.

And then finally as I mentioned, you know those deferrals, the 25 Budget act deferred approximately 1.9 billion in local control funding formula costs. 408 million in student centered funding formula costs from 25-26 to 26-27. Those were the only outstanding deferrals. And then the Governor's budget proposes fully repaying both of those. Thank you. Happy to take questions.

Thank you and good morning Chair and Senator. Ken Kapphahn with the Analyst's Office. Most of our comments are summarized on page 10 of your staff agenda. I think the Department of Finance gave you a good overview of the major inputs and assumptions here.

General Fund revenue Typically is the most important input affecting the calculation of the Proposition 98 minimum guarantee. And the revenue picture right now is deeply unsettled. The state had a very good turn of fortune in January with income tax collections coming in well above the Governor's budget estimate.

That mainly reflected strength in non wage income like business and investment earnings. And based on that, we now think that revenues in this fiscal year are likely to exceed the governor's budget estimate by just over $8 billion.

And that's significant for this Committee because Proposition 98 would direct almost half of that amount, 3.7 billion towards schools and community colleges. On the other hand, the state's revenue gains are building mainly on a very strong stock market and a big boom among a very small number of tech companies that are leading developments in artificial intelligence.

And those gains are stock market gains are appearing increasingly tenuous. We're starting to see several signs that the market is approaching a peak. We think revenues for the upcoming year for 26-27 are likely to be more than 3 billion below the estimates in the governor's budget.

And for schools, that would mean 1.4 billion less in Proposition 98 funding. If the market drops significantly, and that's certainly a possibility, those losses would quickly become much larger.

So the bottom line here is that we think the state is likely to have at least a few billion dollars in additional one time funds available over the next couple months based on the increases in 25-26. But it's not necessarily going to have more ongoing funding available in 26-27.

All of that uncertainty points to the importance of managing risk proactively. And the governor's budget does have some prudent features in that regard. The $4.1 billion deposited into the Proposition 98 Reserve and is the starting point for that. It's not a lot compared to the state's overall spending on schools, only about 3%.

But it is a critical layer of protection because it can be accessed very quickly and it's earmarked exclusively for schools and community colleges. The budget also takes care of some past commitments. The repayment of deferrals is the best example of that. And third, it doesn't commit all of the funding that's in the budget to new ongoing programs.

The budget sets aside about 4 billion in 26-27 funds for one time activities. And, and that gives the state a buffer because if Proposition 98 funding declines in the future, the state can absorb part of that drop by allowing those one time expenditures to expire.

And we think all of those Features are important to maintain in the final budget agreement. We're not recommending austerity for school spending. We think some ongoing increases are reasonable, including some of the increases you'll hear about in the next issue. But the revenue uncertainty does warrant some caution in creating new commitments.

Shifting gears to the settle up proposal. So, brief recap that 5.6 billion. That's really the difference between the revised estimate of the guarantee in 25-26 and the funding that's included in this budget. That's called settle up because the state eventually has to make that or provide that amount.

And when the guarantee rises, the state typically provides that funding immediately, but it hasn't always done so. Sometimes it makes exceptions. And that's the case with this proposal. That's before you a couple of fiscal considerations here. The governor's expressed a lot of concern about short term forecasting risk.

And that's associated with this very specific chain of events where the state makes an estimate of the minimum, it appropriates funding to meet the minimum, and then it turns out that actually it overestimated the requirement and provided more than what Proposition 98 required. And that's not intrinsically bad. The state can always provide more than the minimum. But.

But it does become a problem when the budget is barely holding together, as in this year, and spending more than the minimum could throw the budget out of balance. So the idea of the settle up payment is to wait. The state might actually owe more than 5.6 billion.

It might owe less, and the state won't make the payment until it knows the final amount. And we think that's building on a reasonable concern about risk. But the major downside is that it makes future state budget deficits worse. The state's looking at very large deficits the next couple years.

35 billion under our estimates, 20 to 25 billion under the administration's estimates. And this proposal is going to shift $5.6 billion in costs from this year to those future years, which does give you some temporary fiscal relief, but it makes those future deficits even worse. We're recommending an alternative that has four basic components.

The first would be to set aside enough funding to fully cover the guarantee, so an additional 5.6 billion. The second would be to use 2.9 billion of that amount to make an additional proposition 98 reserve deposit that would be reduced or scaled back if revenues fall short of expectations.

Third would be to use the other 2.7 billion to build protection for schools in other ways, possibly prepaying some cost in 2728 maybe some relief on state pension costs for districts. And fourth, it would be 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 budget deficit. That's almost certainly going to mean spending reductions could be combined with revenue increases, depending on your preferences.

Some of those decisions are not going to be easy, but the state is going to make them, need to make them eventually to get the budget back in balance. And starting on that process now makes them easier to implement. That concludes my comments.

Thank you for your presentation. A couple of things I think first and foremost, you know, I know lots of folks have had concerns and questions about the settle up amount in particular. And I've heard from several stakeholders that have met, you know, with my office about trying to ensure that we are getting rid of the settle up.

And I know it's a top priority for so many education stakeholders. So how did the Department of Finance determine the Prop 98 settlement settle up amount of 5.6 billion. And how might we go through the process of getting rid of that settle up amount?

So that settle up estimate that was based on our outlook for revenue volatility right. At the time that we finalized our forecast in November, that was something that was informed by our forecast of the economy, the stock market.

I think that sort of viewing those kind of large increases in the guarantee, you know, in the light of that uncertainty. Right.

Understanding some of the potential volatility that could create, you know, as we develop the budget, you know, I think we see this number, you know, as kind of reflecting the risk at the point in time it was developed.

I think that what we'd emphasize, you know, as part of the justification for this proposal really is the intent to avoid the over appropriation. You know, I think we have to budget sort of in the context of those statutory restrictions that exist, you know, on reducing Prop 98 appropriations in the past year. Right.

And understanding, you know, that given the uncertainty that there is, you know, any sort of drops in the guarantee, you know, based on any changes. Right. Those will have to end up being paid for on the General Fund side of the budget.

Okay, thank you. Senator Archuleta. Do you have any questions or comments, Senator?

Yes, I do. Thank you, Madam Chair. I think all of us need to understand the magnitude of what we're trying to do with this budget and the number of people and students it affects.

But if I may, Madam Chair, I'd just like to go down the list a little bit so we understand why we're talking in the millions and billions of dollars. K12, 5.8 million students. Think about that. 5.8 million students K12 community colleges 2.2 million students. 58 county offices of education.

1000 local K to 12 school districts here in California. Thousand local K to 12 school districts. 10,000 K to 12 schools. 1300 charter schools. And please note that 3.8 million students are low income. We just heard the superintendent talk about breakfast and lunch and caring for these young children, English learners and foster Youth

Students are 1 million of the K12 students serving the public. Special attention, special need. 73 community college districts, 116 community college campuses, 72 educational centers. Proposition 98 of course passed in the state constitution in 1998, revised in 1990 and of course Prop 111 designed to guarantee the minimum level of funding for public schools and community colleges.

So we're faced with that, that we have an obligation to meet those those obligations that that says that Prop 98 we need to Fund. But as you heard, we're short $5.6 billion. And the 26-27 proposed budget includes $125.5 billion in education funding through Prop 98.

So the governor's proposal of 123.8 on Prop 98, it shows that right now the proposed budget 121 if I'm correct, 121.4. That's that 5.6 billion that we're talking about.

And what I'd like you to do is walk us through the certification that's necessary between the Finance Department, Department of Education, the governor's office to certify this so we can open up those doors in the Future for that 5.6 billion that awaits these students. Would you go through that, please?

Sure. I'd happy to give you an overview of the certification process. The state will have its final estimates of revenue and the other Proposition 98 factors for this fiscal year in May of 2027. At that point, the certification process will start. It will begin with a preliminary publication of all the inputs and factors and calculations.

There's a public comment period that runs through June. The Department of Finance is required to review all of those public comments and provide a written response to all of those. That's followed by a period for legislative review in July. Finance will also respond to any comments if the Legislature decides to hold hearing at that point.

Once the public review period and the legislative review period ends, there'll be a 90 day legal challenge period that Period typically ends in the middle of November. Once the period ends, the guarantee and all of the calculations are considered final. If there is still an outstanding settle up obligation, when that process ends, that triggers some additional steps.

Typically, what happens is that the state, if it still owes 5.6 billion, it will include that appropriation in the budget. The Governor will have a proposal to spend it on some school program, the Legislature will approve it and it will be just taken care of through the normal budget process.

If that doesn't happen, that obligation gets converted essentially into a per student block grant. 89% goes to Schools 11% goes to the community colleges. Each segment gets their share of the funding based on just a straight number of how many students that they have.

And then that amount is paid out on a schedule that's developed by the Department of Finance. So it could be potentially paid very quickly or it could be paid out over a period of time.

That process has never been used before because the state, when the state created that process back in 201920 it's always handled any obligations through the budget process. And there's still an opportunity for that to happen as part of next year's budget.

But if it doesn't happen, then it would trigger this alternative process where it's converted into a block grant and paid out on this schedule developed by the Department of Finance.

Thank you. And I thank you for walking us through that because everyone's going to understand there is a process and we're going to work with the Governor and try to make sure that every school, every teacher, everyone is given the opportunity for this great opportunity, which is called education here in California.

And I know the Governor is thinking, like all of us, we've got to protect our students. We heard the superintendent. We have issues with Ayes, we have issues with immigration and obviously which brings down our enrollment. And we're concerned about that.

So we're going to keep working with the Governor and trying to do what we can to make sure those families are taken care of. So I thank you for your presentation. Thank you, Madam Chair.

I had one final question. You know, I know that revenues are looking better, I think, than we had anticipated. And so what's the impact that that's going to have on Prop 98 overall and on the overall budget as well?

Yes. Thank you. So we did our most recent revenue update in February. And based on that, we would expect the guarantee in this fiscal year in 25-26 to be 3.7 billion higher than the estimate in the governor's budget. And for 26-27.

We would expect the guarantee to be 1.4 billion lower, based on our revenue estimates that are slightly below the Department of Finance's estimates. So across the two years, that's a net increase in funding, but all of the increase is happening in this fiscal year and not in the budget year ahead.

Thank you. You know, I just want to follow up on Senator Archuleta's point just about the impacts overall to daily attendance as a result of the raids, particularly in school districts that have a high number of undocumented students and Latino students.

I know that that's been a concern in areas like the Los Angeles Unified School District and beyond. And so I know there was legislation, I believe, last year by Assemblymember Jasmeet Baines in order to, you know, address that and essentially hold those school districts harmless.

I know that there were a number of school districts in her area in the Central Valley that had been impacted by some of these raids as early as January of 2025. So what would the fiscal impacts of doing something like that look like? That's number one.

And then the other piece that I just want to mention is, you know, I appreciate that Wildfire Recovery is continuing to be included in this budget package. You know, I represent Altadena, which covers the Pasadena Unified School District, which lost five schools as a result of the fire.

While my constituents have been going through the fire recovery process, the district has also been going through that process as well.

It's meant Ada loss to a district that is already financially struggling, as well as, you know, the cost of rebuilding and then having to deal with increased enrollment at surrounding schools and surrounding school districts as families are being displaced. I know that there was money that was set aside. It was $4 million for Pasadena Unified School District.

I met with them just recently, and Pasadena Unified School District was wondering how that number was determined and what fact were used to drive that number. So, two different questions.

Thank you. I can take the first one and maybe the second one, too. As far as the fiscal impacts of attendance, we watch that very closely. We get reports periodically from the Department of Education on statewide attendance levels. How many students are showing up on a daily basis?

The Governor's budget had estimated that total daily attendance in this fiscal year would be 5.46, about a 0.6% increase over the 2425 level, most of that increase reflecting the expansion of transitional kindergarten.

The preliminary data for the first half of the 25-26 school year suggests that attendance did still increase, but not quite to the same extent as the budget had anticipated. So attendance coming in a little bit lower. We're still looking into why that might have occurred.

We're planning to do to publish an update with some more analysis on that. The fiscal effect of that, that lower attendance would not change the overall Proposition 98 guarantee. The state still needs to provide 40% of all state revenues to schools. So the overall pot of funding isn't going to shrink.

But if there are districts that were disproportionately affected by that, they had much lower attendance for any reason. Could be disaster related. Could be more students staying home for some of the reasons that you mentioned that could have an effect on them.

Likely not as much of an immediate effect because when districts lose attendance, they get ramped down slowly, but over time, if they're serving a smaller number of students for students living in their catchment area, for example, that will affect their budgets and they'll need to make some changes to adjust to that.

So again, overall pot of funding is not shrinking, but there are effects in individual districts if they're feeling it more than other districts in the state. On the fire related funding, that's the property tax losses. Those reflect calculations by the Los Angeles county assessor. Obviously they have an estimate of what each property is worth for taxing purposes.

When a property is destroyed or damaged in fire, it lowers that value. And so they are. They've calculated what these new values of these properties are and they've told the state, well, here's the difference between what it was before the fire and what it was after the fire.

And they have this methodology for figuring out how much that reduced the local property tax revenue and how much that affected each local government, school districts, cities, counties in their assessment area. We've looked through that methodology pretty closely. We think there, we think it's reasonable. The numbers for 2425 are largely final at this point.

2526 is still an estimate, so we would expect some changes there. But the intent of the adjustment is that all of the direct losses attributable to the fire would be addressed through the actions that were already approved in last year's budget.

And I understand it wouldn't change overall the Prop 98, you know, guarantee and that 40% of our state's budget is going to be set aside. But just for those local districts and the loss of that daily attendance as a result of those raids. That's more of what, you know, I'm concerned with.

Understood. No specific analysis. We haven't done any specific analysis of those individual districts yet. But that's something we might be able to look into as we start to take a closer look at this data for the first half of the year.

And I believe you also had a question about the 4 million that was included in the budget for Pasadena Unified. And I'll let my colleague Patrick Rochelle speak to that.

Thanks, Amber. Patrick Rochelle, Department of Finance Just wanted to point out that the $4 million appropriation aligns with Vicmat's report from November 2025 and the 4 million was one time to Pasadena Unified and special apportionments for 26-27 fiscal year which is actually consistent with the estimated LCFF funding losses resulting from the fires and to help address outstanding and ongoing recovery related costs.

Like everything with governor's budget, it's sort of a starting point for a conversation so open to future adjustments or conversation about that as needed.

I appreciate that and I'll report that back to Pasadena Unified as well. So I don't have enough information right now to tell you if that number is high enough or if there's more funding needed there. But I do know they were trying to understand how the governor's office had come up with that amount. So thank you. Senator Archuleta.

Yeah, Quick question on you know we're talking about the enrollment declined somewhat, the Ayes, the raids and whatever it might be when 98 was pass. Is there provisions in there that for adjustments when any tragedy would happen in school districts or storms, fires, was there any of that that it would fluctuate rather than maintain itself?

The types of attendance fluctuations that we are seeing, there's not a direct factor in there. I think part of the reason is that some of the scale of the fires just wasn't something that the state had to deal with in the 1980s when the Proposition 98 was passed.

But there are a couple provisions in there that try to insulate schools from the effects of some of these things. So part of it is the requirement that schools always need to receive at least about 40% of the state budget, regardless of what's happening with attendance.

In addition, there are some provisions that say when attendance declines, there's no downward adjustment to Proposition 98 unless that decline has happened for three consecutive years.

And so that was the way I think the authors of Proposition 98 were trying to address some of the fluctuations or the risk that you might have just one year that was had really poor attendance and then it would bounce back the following year.

But those are really focusing on the overall pot of funding and how much money the state as a whole needs to set aside. That doesn't say anything about what happens to the individual districts. The states tried to do more to help districts manage the declines.

The best example of that is that the state used to provide funding to schools based on how much attendance was in the current year or the previous year. They got credited, whichever was higher. A couple years ago, the state began saying, we'll give you a third option.

You can use the average of your attendance over the three previous years. And in fact, most districts today are being funded on that new three year prior average calculation.

And so for districts, that provides a basic level of certainty about their attendance, because they already know what their attendance was over the three previous years and they can figure out the average and they know that it will be at least their funding will be based on at least that much attendance.

But that doesn't change the fact that if their overall school population is shrinking, they're still going to have to make some adjustments. If their attendance is 10% lower because 10% fewer students live in their boundaries, they can't put off making decisions like changing staffing or changing programs indefinitely.

They get a little bit more time to make those decisions, but it's not a permanent insulation from the effects of declining attendance.

The reason I ask is I don't think that the school district should be damaged financially because of the adjustment. And hopefully it's temporary. But you know, it's important we understand that it's not their fault. This is a fault of particular idea. In the East Coast.

We'll call it ... that adjustments are happening in our state because we're not a very popular state in the East Coast. I understand. But in California, we're still a fighting state. We believe in our children, our students, our teachers, and we should protect them, as I keep saying.

So this adjustment shouldn't in any way be punitive towards the school districts and how they run and how they're operating. So we've got to make sure that we take a good look and we, we adjust with that school that especially that as the chair mentioned, LA Unified, Pasadena and some of the others, they need the help.

So we have to take a look at that, that we're not damaging them physically as well as economically. So, you know, we'll keep an eye on that. Thank you.

Thank you, Senator Archuleta. Seeing as we have no further questions or comments from the Committee, we'll move on to issue three on the local control funding formula, including the augmentation for the necessary small schools. I'll give you all a chance to settle in and you can begin whenever you're ready.

Good morning, Chair and Members. Patrick Rochelle with the Department of Finance. I'll be filling in for my colleague noted in the agenda.

Katie Lagomarcino to cover the Governor's budget, adjustments to the local control funding formula and the proposed necessary small schools augmentation, pages 12 through 13 of the agenda lay out the major components of the local control funding formula which provides the bulk of the unrestricted funding to local educational agencies in the state.

Funding allocations through the LCFF are distributed based on the number of students served and include additional funding based on the enrollment of low income students, English learners and foster youth. The state fully funded the LCFF in 2018-19 and has annually adjusted the grant amounts by cost of living adjustment. I'll turn specifically to the budget year 26-27.

For 26-27, the governor's budget includes an increase of roughly 2.2 billion in LCFF funding for school districts and charter schools when compared to the revised current year funding levels. This increase reflects the 2.41% cost of living adjustment or COLA as well as ADA Percent change adjustments.

The total LCFF amount for 26-27 is 85.3 billion for the county Offices of education. Governor's budget includes a decrease of 25.8 million for 26-27 when compared to the revised current year funding levels to reflect ADA changes the 2.41% cost of living adjustment as well as other expenditures including adjustments for differentiated assistance and home to school transportation.

This brings the total LCFF entitlement for counties to 1.4 billion in 26-27. As for the necessary small schools augmentation, the Governor's budget also includes an ongoing increase of 30.7 million.

Prop 98 General Fund to provide a 20% increase in the necessary small school allowance which provides funding in lieu of the LCFF base grant to school districts that serve a small population of students and are geographically isolated.

These school districts have the option of selecting NSS funding in lieu of the adjusted grade Spanish base grant funding for eligible schools.

The NSS allowance is based on the combination of average daily attendance and the number of full time teachers for elementary schools or the number of full time equivalent certified employees for high schools, whichever provides the lesser amount.

Trailer Bill accompanying the Governor's budget updates the NSS funding tiers that are called out in statute to implement the proposed increase, which is again intended to recognize that small schools tend to have high higher per student costs in districts serving these schools likely face greater cost pressures from operating them in geographically isolated parts of the state.

That concludes my overview, but I have with me my colleague Amber Alexander from the Department of Finance and together we're happy to answer any questions you may have.

Good morning Senator, Michael Alferes with the Legislative Analyst Office. I'll be covering our comments specific to the LCFF COLA and the NSS increase.

So regarding COLA, we recommend prioritizing the COLA over other ongoing spending and funding the final statutory rate unless revenue estimates decline significantly by May, funding the COLA would help districts address the various cost pressures that they face, balance their budgets and sustain local programs.

Based on recently updated federal data, the COLA appears to be tracking slightly higher than the 2.41% estimate included in the Governor's budget. But but the final data used to calculate the COLA will come out in April, so next month. Regarding necessary small schools, we do find that the Governor's proposal has some merit.

We looked at spending data that showed that school districts that smaller school districts tend to have higher fixed costs relative to larger districts, which can make declines in enrollment harder to absorb, particularly for small rural districts. So increasing funding for necessary small schools with target funding to schools that operate in various remote areas of the state.

However, we note that the proposed 20% increase isn't tied to any particular assessment of costs. So if the Legislature is interested in adopting the proposal, it could provide a different level of funding based on its priorities.

The Legislature may also wish to raise this proposal against its other education priorities, such as proposals that kind of promote fiscal stability or proposals that target or provide education increases more broadly.

For example, we note that only one fifth of the state school districts that have less than 2,500 ADA have a necessary small school and would receive funding under this proposal. If the Legislature is interested in providing funding in a way that benefits small school districts more broadly, it could consider exploring other options.

For example, the Legislature could explore adding an add on to LCFF that takes into account the kind of student debt, student population density of a school district. Though this will be kind of more complex to design relative to the governor's proposal and would likely result in higher costs as well.

Lastly, if the Legislature is interested in adopting the governor's proposal, we recommend addressing what we call a fiscal cliff issue in our report. Essentially, the governor's proposal results in a large difference in funding above or below the ADA thresholds for eligibility for necessary small school. We lay out kind of two potential options.

One is to kind of expand eligibility so schools that have larger ADA would kind of be eligible to receive funding. That would kind of phase out the higher increase or higher levels of funding per school and this would result in kind of higher cost.

Relative to the proposal though, we have another approach that kind of provides different levels of funding to necessary small schools based on their size and that would result in kind of similar costs to the government's proposal if it doesn't wish to provide kind of a larger if it's more conscious of the increase in funding. That concludes our comments. happy to answer any questions.

Sorry, we're talking about the small school districts and so on and of course the larger ones always get the attention and the notoriety. But the small kids in the middle of the state and up and down portions of our state, they've got to be taken care of as well.

I would think one of the concerns they would have is some of the grants. Can you comment on some of the supplemental grants and grants that the teachers are looking for the students, the parents? How do we look with our grants to aid these small schools? Any idea?

Edgar Cabral with the LAO in terms of the supplemental. So in terms of the. With lcff we have the base grant and then you have supplemental and concentration grants. So the base grant, that's where we have this adjustment for necessary small schools where they receive a higher level of funding per student.

When it comes to the supplemental and the concentration grants, they don't get any higher amounts per student. It is still it's calculated based on the number of their ADA and so they can be relatively smaller compared to Their base amount.

The base amount is really where we prioritize this additional adjustment with some of the other restricted categorical programs, like, for example, the expanded learning opportunities program.

There is a minimum grant amount, and that was recently increased from 50,000 to 100,000 to help some of the smaller districts who said that that minimum of 50,000 is too small for us to even start up a program. So there are other programs where we do have these increases to the minimums to try to address those.

Those issues of schools being really small and just having higher costs associated with that.

The reason I bring it up is because I'm concerned about the small schools, because they're always pushed aside, and it's so important we give them the support we need.

And when they're reaching for every dollar to be equal to the larger schools in metropolitan areas, we got to get them to understand we're trying to make everyone feel equal when we're distributing our dollars and trying to make sure their budget lines up with everyone else mathematically. So we can't turn away from that.

We have to make sure that they feel they're part of it all. Madam Chair.

Thank you, Senator Archuleta. You know, I know we have on our attendance recovery program, right. As we've seen a number of school districts, particularly large districts, that have watched their enrollment decline. Significant. But I recognize there are also school districts located in the Inland Empire and parts of the Central Valley that have seen enrollment increases.

Pretty drastic enrollment increases as well, as a result of, you know, new families moving into the area, those that are seeking maybe a more affordable cost of living. And so there are some schools that are also dealing with increasing enrollment.

So what are some of the preliminary indicators for how local education agencies are implementing or contemplating implementation for attendance recovery programs? And how are we making sure that those districts that are growing are not basically being penalized for that growth, are not receiving the full amount of funding that they should be receiving as a result of growth.

Dean Patterson, California Department of Education. I can give you some preliminary data regarding how many LEAs are participating in attendance recovery. So as far as the first reporting period for the school year, there's only been 130 LEAs that have reported attendance related to attendance recovery. That amounts to about a little over 2,200 ADA.

The reason why there might not be as much uptake in attendance recovery is because it's the first year implementation. There are several requirements with attendance recovery, supervision, staffing ratio, curriculum.

I think LEAs are cautious of the program and making sure they adhere to the requirements because if they don't, it results in an audit finding and a loss of the average daily attendance generated from attendance recovery. So they would end up losing the funding associated with that program.

Additionally, districts and county offices of education already have another program that they can utilize for ADA recovery purposes. That's the Saturday school program. So I think districts and counties are already familiar with that program and may be relying on that opposed to implementing this new program. This, again was the first reporting period for attendance recovery.

We do expect to see an uptick at the second reporting period and then the annual reporting period. We also found at the Department there's some confusion regarding how to report attendance for attendance recovery. So we at the Department are putting out more guidance to make it easier for LEAs.

Madam Chair, if I could just add. We just. Anecdotally, in our conversations with many districts over the fall, we've heard kind of widespread interest in implementing and planning for attendance recovery programs. And I think, just want to clarify, I think the school districts that are growing would still be able to benefit from attendance recovery as well.

That there's nothing that precludes a district that's growing or if it's declining from a generating attendance recovery ADA that would kind of benefit their students.

Great. Thank you. Senator Archuleta, did you have any more comments or questions? Alrighty. Thank you all so much. That concludes issue number three. We will now be moving on to issue number four, where we will welcome Mike Fine and Megan Riley from FCMAT to provide an update on the fiscal health of local school districts. Welcome to the Committee, Mr. Fine and Mr. Riley or Ms. Riley.

Thank you, Madam Chair and Senator, it's our pleasure to be with you. As I shared a couple weeks ago in this same format in the Assembly, this is my 11th time doing this overview of fiscal landscape of where our LEAs are across the state.

And it is my final one as I will transition from FCMAT sometime in the fall. And we are very grateful for the Administration and the legislature's support for that transition. It's allowed us to bring Megan Riley on last summer as our chief administrative officer and assures a good year of transition and leadership at the fiscal crisis team.

And so a welcome to Megan Riley, who has a long, distinguished career as the chief financial officer, deputy superintendent, interim superintendent at LA Unified time both in county government, county offices of education and in the Navy. And so Megan and I will share part of today's presentation with you. I've given you an outline.

I won't certainly touch on everything, but we'll hit some highlights of kind of the landscape. Before I do that, though, Senator, I will Chair, I will give you a little bit more on the analysis related to the fire, specifically your question about Pasadena Unified.

So FCMAT was tasked with that study in Assembly Bill 100 last spring or 101 last spring. And we did that, issued the report on November 1st. We looked at Pasadena, Los Angeles Unified and the eight impacted charter schools, the $4 million for Pasadena.

So first we need to understand that Pasadena as a school district has a soft landing in its attendance or enrollment drop. Right? It can choose well, the state actually chooses the better option for them.

But this year there's an essence, the longstanding statutory hold, harmless that if they can use the higher of last year or years for funding purposes, ada. And we have an additional provision as well, the average of the three prior years that was implemented a couple years ago.

So for this year, from a ADA standpoint, they are in essence fairly held harmless from year to year. The change will be next year in 26-27.

Despite that, we did make the recommendation and you see that reflected in the governor's budget for $4 million special appropriation to Pasadena Unified to begin to deal with that decline that they are suffering as a result of the fires and also extraordinary costs.

Another key provision in the governor's trailer Bill proposals from February 1st is that we would return to Pasadena this fall, do the study again for any updates. One of the we've done these studies before when communities have been heavily impacted by fire paradise after the campfire, for example.

In that case we went in two years later, a lot of Decisions, a lot of unknowns became knowns in that two years we did this study almost, I mean within nine months of the fire. Right.

And so Pasadena, for example, hadn't even made the decision when we were there whether they were going to rebuild certain schools, keep them closed, reopen them, all those things. So there's a lot of unknowns, which is why we picked a middle of the road number. The estimate.

We did extensive look at pre fire enrollment trends and attendance trends and post fire enrollment trends and we picked a kind of a middle of the road to give them some initial assistance. The district is well aware of how that calculation was done and that was our initial recommendation.

And then we'll follow on with next fall with an additional report based on more known information. With regard to the charter schools, they don't enjoy that same hold harmless provision. So that's why they were given some additional assistance.

And we will revisit them, not this coming fall in the trailer Bill proposal, but the fall after, after they've had a chance to settle as well. So it gives you a little bit more background with respect to the question. Senator, as you know, passing Unified LA Unified were both declining enrollment districts to start with.

So it's important we try to separate what is the natural trend and the state's backfill due to the fires. And I think our report made an attempt to do just that, kind of separate those two issues.

Thank you and it's a pleasure to be here. My name is Megan Riley. As Mike mentioned, I've just joined FCMAT and it's an honor to be here and present to you. We'd like to kind of talk about the status and kind of the landscape of what we're seeing at with the school districts.

And with that we've provided you several charts. I want to start off with the historical data that we see with the qualified and negatives.

As the Senator mentioned, with over 1000 LEAs districts out there, when they certify and look at their budgets, they have to either certify positive, qualified or negative as far as how they feel their health assessment is for both this year and the two subsequent years.

And the qualified certification is that, you know, it's a measure of assurance of how well you are able to meet your bills and meet your payroll. Positive means that you can meet it both for the first year and the two subsequent years.

A qualified says that I may be able to and a negative is that I will not be able to.

So again, degrees of assurance that you know, whether you're feeling that the fiscal threats are there and what we see in the trend analysis in the first slide that we've shown you, going all the way back to the Great Recession and to where we are in the first interim certification of those districts is an uptick in the number of qualifieds.

A number of districts that are actually saying the increasing pressures that the out years are looking a bit more uncertain. There are 45 qualified as of the first interim. There were eight negatives out of all of the districts that we're certifying. These numbers are an uptick from the past years.

We haven't seen numbers as high as this since, but they are nowhere near what we saw the Great Recession. So again, it is something that we are watching. FCMAT comes in and looks at this information.

There are automatic triggers that the Legislature has put in place that actually engages FCMAT to look at those districts that have certain red flags that are raising and it's a great intervention process, a multi tiered system of support that allows us to go in and do a fiscal health risk analysis for districts that either have three qualifieds in a row that are classified as negative, that their budget has been disapproved.

So again, different things that automatically will get FCMAT engaged. We go in, we look at the district and then we basically do an assessment. There are 12 districts that have actually been listed as automatic triggers for FCMAT to look at. Of those, we have 83 completed fiscal health risk analysis.

We are in the process of eight others after the first interim and the budget information that we're showing you. Additionally, of the 45 that we just mentioned at first interim that are qualified, there were at least one that had three consecutives and we're currently engaged in that as well as part of the eight that we're looking at.

And then with that I'd like to hand that over to Mike. Thank you.

Thank you, Megan.

Just to remind the Senators that the second interim reports are actually due next week and so we'll have another snapshot picture of district fiscal health beginning next week as those reports are all filed with their respective counties and FCMAC goes out and surveys all of that data to collect it very quickly so that we can get a good snapshot of what's going on.

We do expect the number of districts in qualified status to drop at second interim. The negatives may not change, but the number of qualified we do expect to drop.

You see that in daily headlines where districts are adopting fiscal stabilization plans, they're adopting budget cuts, in many cases, they're adopting resolutions to reduce staff because of the pending March 15 notice in statute deadline. All of that ultimately gets accounted for in these second interim reports.

And so if they were had deficits going into that period, their local school boards have taken action to deal with that. We'll see that action reflected in next week's reports. I want to address immediate concerns and some solvency trends which I think get in part to your staff report questions as well.

Generally speaking, small and tiny districts are unable to sufficiently mitigate declining enrollment impacts. Our midsize and larger districts can do that much better. And you see that reflected in the governor's proposal with regard to the small school, the 20% increase to small school.

While that represents of course only roughly 140 individual schools versus districts, it is nonetheless an acknowledgement that our small educational environments have a more difficult time making adjustments. Declining enrollment related to that then would be what we would describe probably as the greatest fiscal impact going on right now.

You've alluded to that in your questions and comments earlier this morning. We see declining enrollment across all regions of the state, not all districts, not all counties, but certainly all regions of the state.

We see those trends vary from roughly 20% declines in the next decade in both of your General areas of Los Angeles county and down to some growth areas in some outlining areas. So the range of enrollment forecast enrollment changes over the next 10 years are fairly significant.

The most significant though is a forecast of 20% decrease in Los Angeles county, which you both represent special education costs, and you heard some comments about that earlier today. But special education costs in our school districts are escalating faster than any other costs. I wouldn't even call it a normal escalation.

It's not related to consumer price index or costs. It is simply almost a straight up trend in costs. This is driven in part by the fact that we are struggling to attract special education educators and paraprofessionals and thus districts, to meet their commitment to individual students through their individual education plans must turn to other providers.

And as alluded to, those other providers are expensive. It's not district's desire to do that. They they absolutely want to hire the people to to serve their students. Quality is better, costs are more manageable. They just simply aren't there to do that.

Ongoing expenditures, as you're all familiar with, continue related to the pandemic, both from a behavior, student behavior perspective, from a tutoring perspective, both of which you've alluded to this morning and yet some of the one time, certainly at the federal level, it's all Gone.

The Governor's budget addresses this in part by proposing to allocate the next two, what would be the last two tranches, if you will, of the Learning Recovery Emergency Block Grant, which it its genesis was one time pandemic related mitigations for learning loss. We are in a period of low to normal cost of living adjustments.

Estimate right now in the Governor's budget is 2.41. I think most of us that look at that data on a regular basis believe it will be slightly higher, approaching 2.62.7, maybe even 2.8 by the time we get to that calorie calculation in May or April, late April, in early May.

But what I want to remind you of is that districts experience escalating costs at higher rates than that.

You go to bed on June 30th at the end of one fiscal year and you get up the next morning on July 1, and without making any program changes, any other changes, your costs are up an average of 5 to 6%.

And so COLAs that are below that 5 to 6% while fully funding the formula, they are nonetheless insufficient to cover all the increased costs. And so at the local level, those begin to feel more like local cuts. They feel like a pinch financially because the COLA is not growing at the same pace that the costs are growing.

There are a variety of other operational costs. Senator Perez, you're intimately familiar with this topic of childhood sexual assault and other costs that are driving up insurance rates, driving up a variety of other costs, including utilities and so on. Want to also give you an update on districts that are in state receivership.

So since I was last here last June, both Vallejo City Unified and Oakland Unified exited state receivership, both after almost 30 years. Vallejo City exited a year late and Oakland exited a year early by finally paying off their emergency apportionments.

One of the elements that I think surprises people in the receivership statutes is that fiscal stability is not one of the criteria to exit. They simply need to pay off the emergency apportionment and pass an internal control audit. And so both districts are still struggling.

Vallejo City is making noted marked improvements in adjusting their expenditures to be able to stabilize. Frankly, improvements that should have been made earlier during receivership they are now doing and acting on under the leadership of a new superintendent. Oakland unfortunately is not in that same situation. They are continuing to struggle on a day to day basis.

South Monterey County Joint Union High School District is nearing exiting just based on time. They're doing very well. Englewood continues to make progress and we Actually could see them exiting the first phase of receivership within the next 18 to 24 months. Since we were last together.

Plumas unified, though, became the first district to go into state receivership in the last 13 years. That was last June 27, with the adoption of the trailer Bill, approval of the trailer Bill authority for a $20 million emergency appropriation apportionment rather. We drew down eight and a half million to meet payroll in the summer.

And we believe we can stop there. We. The work that the district has done to stabilize has been outstanding, and we think we can stop it at the 8.5 million needing to draw down assistance for the state.

We have issued reports both on oversight of Plumas and on the first comprehensive review report on Plumas itself that gives them their roadmap to improvement was issued during the winter holidays. And then finally, we continue to be involved in extraordinary audits. And I've given those to you in our outline, the status of, of several of those.

And with that chair, we are happy to answer any questions you may have.

Certainly. I have a couple of questions. First, I want to see if my colleague, Senator Archuleta, if you have any comments or questions.

Yes, please. We had mentioned the Pasadena school district. Of course, my colleague is very, very concerned about that and Altadena and so on. But. But when this all happened soon thereafter, did we send someone from your office to help them?

I mean, you know, the old team, good cop, bad cop, you know, we need, I think, your agency, someone from your Department to be the angel that falls from the sky, to help some of these districts before they run into problems, before there's issues there that you can tap them on the shoulder and say, let us help a little bit.

Let's make some adjustments. Let's see what we can learn from someone else's mistakes so we don't start pulling funding or even closing doors. So did you send someone over and are you in that capacity when you go back in the fall to take a look at the new study?

So I guess there's several pieces to that answer. Figment did participate within days of the fire with other state agencies to begin conversations with every local district. We had regular meetings.

This would include the Office of Public School Construction, the Office of State Architect, the Department of Finance, the State Board of Education, representatives from both houses in the Legislature. We met on a regular basis in the weeks following the fire to assess and identify what needed, what help was needed. There were point people.

FCMAT was not one of those point people, but there was point people assigned by the State Board of Ed that actually spent time in Los Angeles County, I mean days and days at a time in Los Angeles county from various other agencies to ensure a lot of coordination.

Soon thereafter AB101 was passed which then charged us with going in doing this analysis and reporting back to the Administration legislation by November 1st, which we did. With respect to Pasadena's pre fire fiscal challenges, we had been engaged in conversations over the last number of years with them but had not done any formal studies there.

They did not ask for any assistance and neither did the LA County Office of Education. The LA County Office of Education is their actual oversight agency. They've certainly been engaged prior to the fires post fires in some of their dealing with some of their fiscal difficulties.

So our focus post fire with them was to do the analysis requested in AB101 and make a recommendation which the Administration has incorporated both in their budget proposal and in their trailer Bill.

In my follow up question is you mentioned special ed and the cost but and the lack of professionals that are needed and tell me about recruitment or reaching out with incentives to bring people into that category without outsourcing as you had mentioned, so we can go ahead and and keep the educators within the district motivated to be part of special ed.

So Senator, this has been a difficult topic for a number of years. This is not a new topic. Right. We've had educator shortages in hard to place courses, special ed programs, science, mathematics for a number of years. So that actual trend is not new. There are a couple additional trends though that impact us and impact districts.

The first is remember that Special Education AB 602 Master Plan money is allocated to LEAs based on average daily attendance. It's not average daily attendance of their students with disabilities. It's total average daily attendance. Declining enrollment drop being ADA as a result of that. Plus attendance issues from a number of factors.

Whether that be the pandemic or it be immigration enforcement. Those things all impact revenue for special ed programs at the local level. So revenue is going down. Why Costs are escalating There are several factors in the escalating costs. The first is what I've already mentioned, that is it's hard to attract and retain special educators and paraprofessionals.

The alternative then is to turn to the outside, which is lower quality in my judgment and higher costs.

The other factor that we have going on that districts are dealing with, and I'll just use one example is we have whole new classifications to serve students with disability in behavior interventionists, behavior specialists that we didn't even have on the books a couple years ago, the need for that type of intervention with regard to our students with disability and frankly our General ed students as well has exploded.

And so we have districts hiring professionals, training them and so on. With respect to recruitment. It's a long standing, difficult topic. I will share with you something I shared recently on a on a webinar.

I won't make everybody happy with this comment, but there are a lot of March 15 notices being given to educators right now to trim budgets. A lot hundreds and hundreds across the state.

I would actually challenge some of our LEAs to, if they issued a notice, a potential non of employment changes going forward to an experienced educator, that the district should consider investing in that educator to go back and get a special ed authorization or credential.

They may be an English teacher, they may be a multiple subject credential teacher, but we have experience with them. We've already invested in them in training, in beginning teacher assessment and support programs, all of those things. They're a known quantity to us already. And they're not being reduced in force because they've done anything wrong.

They're being reduced in force to balance budgets in alignment with declining enrollment very candidly in most cases. And so why don't we invest further in those folks by paying for them to return to get those additional authorizations and so on?

That would be a way to address it with folks we already know and that we've already made an investment in.

Those pink slips hit hard on morale.

They destroy morale. I know that.

Big, big item.

I'm married to a 40 year teacher and our our son is a 10 year high school teacher. So I understand that very well.

Good. Thank you, Madam Chair.

Thank you. Appreciate your presentation, Mr. Fine. And I just want to say I'm always just so impressed with your work. The reports that you produce analyzing the fiscal health of our school districts.

It's something that's incredibly important given what a significant portion of the state budget it is and that these dollars are, you know, intended for one of the most fundamental things that I think that we do as a government which is providing a quality education to our students. I have a couple of questions.

One, I would love for you to speak a bit more about the fiscal impacts of AB218 cases. I know this work that we've partnered together on quite a bit over the past year.

We work together on SB848 to close some of the or to really address some of the preventative measures to ensure that those that are committing sexual assault sexual misconduct on K12 campuses are not easily moving from district to district. And was very happy to be able to see that Bill signed into law.

But I recognize that there continues to be a significant, significant fiscal impact on school districts that are paying out lawsuits. In addition to that, these same school districts are seeing a drastic increase in insurance cost and and that is having overall implications budget implications on these school districts as well.

So would you mind speaking to this issue a little bit more? Some of the ballooning costs that we've seen and the need to, you know, also address some of the fiscal challenges.

Thank you, Senator. And thank you for your leadership and authorship. So as the Committee is aware, we were tasked in the 2425 trailer Bill. Right. Budget trailer Bill with doing a study on the fiscal impacts of childhood sexual assault on public agencies.

And while our experience is focused on schools, we did reach out to our county and city and municipality partners in all of this. And we issued that report a year ago January. There were 22 recommendations.

The first 11 dealt with either data collection so we could get a better handle on claims and their impacts and some financing, some smoothing out of some financing debt types of processes so that school districts could and public agencies more broadly had options other than just writing a check for x millions of dollars, they had options to in essence, finance that obligation over time.

The second 11 recommendations dealt with prevention and credit to Senator Perez, who picked up all 11 of those recommendations in last year's successful Senate Bill 848.

There are three General areas of cost impact to schools and I believe this would, this carries forward to our municipal partners as well. But let's focus on schools. The first is the claim itself and that comes in a variety of ways. School districts have what you and I would call a deductible on our insurance, personal insurance policies.

They, they have what's called a self insured retention and that varies generally based on the size of the district. 100,000, 50,000, a million dollars, they all vary.

And just as if we were to buy car insurance, if we set a higher deductible, our premium is a little lower because we're going to take on the initial dollar impact personally. Right.

So they have for a claim they have the self insured retention and then they have any portion of the claim that is over their coverage limits. Coverage limits in our school districts vary, but generally they're between 35 and 55 million.

So any value of claims greater than that, they would also be subject to paying that that their public entity risk pool that they're a Member of is not otherwise covering. So that's the first impact is the claim itself.

Those vary widely across the state because not every district has a claim, not every district has a substantiated or proven claim, if you will. And so, and these amounts again vary based on the terms that they've entered into with their risk partner in lieu of an insurance company, their joint powers authority, that's their partner on risk.

The our estimate of that impact a year ago January was $3 billion on schools. We believed then that that was likely a conservative estimate, but it was the number we could tally at the time.

We've seen some settlements, we've seen in just one school district hundreds of settlements that would cause us to believe that number to reaffirm that that low, that it's probably at least another billion higher than that would be our guess without actually going back out and doing a study again and trying to re tabulate that information again.

So that's the first cost impact. The second cost impact is the ongoing quote unquote insurance premium. Again, most public agencies don't deal directly with an insurance company. They buy their risk coverage through a joint powers authority that they're a Member of a public entity risk pool. We've had them around since the 1980s.

Those risk pools do deal with insurance companies at the higher levels. And so they're experiencing premium increases from what's called reinsurers. Those what to you and I are an insurance company. But in this case it's a more complicated relationship and higher value relationship on the international market.

Not very few reinsurers left in the United States just on the international markets. And so premiums bottom line is premiums per ADA is how liability is covered are up over 700% in the last decade from about $3.25 per ADA to last year over $25 per ADA for a year's coverage basically of liability coverage.

The third impact fiscal impact on school districts and again our partner agencies out there in the municipality world would be on retroactive premium increases. And you may say what the year's over. My policy year's over.

But when you are a Member of a joint powers authority which becomes a government agency, you're a Member of that JPA during the years of your membership, you have a joint and several liability forever to that joint powers authority.

So if you were a Member of a given public entity risk pool in let's pick a year, 1995 and you were there for five years till 2000 and then you left and moved to a different pool.

If that first pool experiences claims that they have not reserved for and many pools have not reserved for the level of claims because we didn't know about them right then they are they Bill back their Members on a per ADA basis back to 1995 through whatever year may be.

And this is done on a year by year basis. We've seen roughly a billion dollars is our best calculation of those retroactive premiums over the last roughly three years. So our current estimate would be about claims are right around 4 billion. Retroactive premiums are a billion.

And then ongoing insurance premium increases have risen roughly 700% over the last decade. Those are the three primary points of impact. Fiscal impacts. Right. Without regard to the impact obviously personally on the victims and their families and so on.

Thank you and appreciate you laying that out. I know that this is an ongoing issue that Members of the Legislature are seeking to address. The other issue that I would just like to talk about, and you spoke to it a little bit earlier, is just the financial challenges that Pasadena Unified School District is continuing to face.

I, you know, recognize that PUSD was facing fiscal constraints before the fires happened. And the Eaton fires have created even more of a disaster for them. And they have several staff that have lost their homes and been displaced. They also have several students and families that have been displaced as a result.

I know parents who have told me that, you know, they're driving from Anaheim to Pasadena, that's an hour and a half drive in traffic just to make sure. That their kids can continue going to the same school district and others have not been able to do that. And so their children are relocated elsewhere.

And so the financial implications that that's had for the school district has been quite significant. In addition to that, the number of schools that have been lost as a result of the fires. And so now they are going through that rebuild process.

So I was actually surprised to see that they are not listed as one of the state emergency loan recipients. I do know that, you know, LACO has been closely monitoring them and has also had discussions about the potential for LACO to actually take over the school district as well.

So I guess what can we as a state do to kind of better support and guide them through this? You know, I've, it's, it's been so awful to watch families and students of that school districts who are already facing a financial catastrophe then have to navigate these fires.

And I know so many of them are trying to figure out what to do. Superintendent Blanco is trying to figure out how to navigate this crisis as well as the school board. But it has been very unfortunate that they've been having to deal with these kinds of back to back events.

So what might me be able to do? Mr. Fine. And providing them with assistance and guidance as they navigate both of these events.

Thank you for the question, Senator. We certainly are available at any time to them. The superintendent has not hesitated to reach out when she wanted our advice. One of the first concerns we have is that they since last summer have had a vacancy in their chief business official role.

They do not have a qualified chief business official on board and they've made a local decision. We want to be respectful of that, to fill that in maybe a non traditional way. We obviously would disagree with that. We think that's a key player in their leadership.

And can you, can you just speak a little bit more to what a chief business official does and what that kind of role and responsibility is? Just I certainly don't know. And for those that are watching that

don't know either, it's the chief fiscal officer.

Often they have responsibility not only for the fiscal matters, the budget, the accounting, those types of matters, but they frequently have expertise in risk management, in procurement, in facilities management, which this district obviously has some significant facilities impacts, in maintenance and operations, in transportation, enrollment projections, kind of all critical areas for this district.

And we would and have encouraged them to fill that role with qualified, a qualified individual. Los Angeles County Office of Ed is their primary oversight authority and they go through the budget approval, the interim Report analysis and certification review of this district.

Just like all districts, the district has managed to be positive or qualified certifications that Megan described earlier. Positive being we can meet our obligations for the current +2 fiscal years and qualify that we may not be able to meet our obligations.

They've done that in part because as a result of the fires, they've had a fairly significant income source of insurance proceeds. And while those insurance proceeds may be paid on a facility loss, they may not be restricted to the facility issue and they can use them for General purposes. Right.

That would be different than if the state, through the State Allocation Board and the Office of Public School Construction, provided them of an appropriation for to rebuild a facility. Those funds would be restricted to be used on that facility per the state architect's approved plans. So they aren't showing up on a list.

And I have to tell you, every time I, and I typically don't do this, but every time I don't see them on a list, I call like I call the LA County Office of Ed and ask for an update because why aren't they on that list?

Why aren't we sending the message that they need, that they're, they're fiscally have some fiscal challenges. I'm not going to call them distressed at this point because they are stepping up and meeting some of those needs.

Some of the history in this district, and Senator, I think you're familiar with some of this, is that their local school board has not always taken timely action and in the past to deal with some of their fiscal challenges. Thus those fiscal challenges have grown over time. They've accumulated.

And so we had an accumulation of those leading up to just the month before the fire. Then we had the fire and some very difficult decisions. In the weeks following the fire, I was in their board meeting when people, teachers, walked to the podium and said, you're giving me a layoff notice and I just lost my home.

That's a very difficult spot to be in. And we understand that they have adopted additional measures with regard to what we call fiscal stabilization plan this winter and up through now. We see those in the at least reported in the headlines, right. Of additional layoff notices, but part of those for Pasadena.

One of the elements of the story here is that some of this is an accumulation over a lack of decisions in this regard in prior years that have accumulated and they're just at a spot where they've got to be able to move forward. They have to now make those very difficult decisions.

We just, Megan and I just debriefed with LACO a week ago, week ago tonight, actually, we spent some time with them talking about both Los Angeles Unified and Pasadena Unified in a lengthy conversation in the evening. So we know that they're paying close attention. We know that they're having regular dialogue with them.

Accessing FCMAT services is as simple as going to our webpage and pressing a button or picking up the phone or texting us, and we would be right there. They have not met the criteria, though, for our automatic engagement where we go knock on their door.

Although we, very candidly, the morning after the fire started, I reached out to them at the time, their chief business official, and said, just know we're here. Whatever you need, pick up the phone and call and we'll be right there. He's no longer at the district. That's why the vacancy exists. He's moved.

He's moved to LA Unified, actually. And so we're certainly ready and prepared to support them. More importantly, we are ready and on a regular basis supporting LACO in their work with the district, which is the primary interface there.

And so, and that was part of our conversation last Thursday, is the level of support that LACO may need from us to support both of those districts.

In addition, I want to just add, because I was on the wildfire report that went in and looked after the Eaton fire. The, the. We knew that we had gone in extremely early and things were still unsettled.

That's why in the report and what has been picked up in the language that you have in the trailer Bill is to go back and.

And after things have really finalized with the insurance and other things like that, we can go in and do a quick, clearer assessment of the impact of the fires and what that's causing and if any additional supports are necessary.

But it's the two elements of what's caused by the fire and what's caused by kind of like the local control and the fiscal kind of autonomy that kind of needed to be, I want to say separated, but also distinguished. But it has converged at a really tragic moment.

Right.

And I would also offer this to distinguish between, say, Los Angeles Unified in Pasadena.

So, Senator, the examples you gave of families that couldn't find housings in the Pasadena area and moved outside the area, into Orange County, further east, even into the inland area, and so on, that distinguishes from LA Unified, which, given its size, the families that were displaced there often went over the hill into San Fernando, but they were still in LA Unified and in LA Unified, schools and the district could keep the kids together in their, say, in Palisades elementary, they could keep all those kids together just physically at another site.

Pasadena didn't have some of those same opportunities. First, they're not as large. Right. And second, they're just the housing options for families to temporarily relocate weren't necessarily in that school district. That doesn't keep the child to your point of attending a Pasadena school, because we are certainly not.

There's nothing that's preventing that child from being in a Pasadena school. It's simply the logistics of a parent getting them there every day.

Thank you. I appreciate just your overview and some of the issues, too, that the local school district can do to better address this issue. I think that's also informative for me as I, you know, have conversations with them.

It's been incredibly challenging for not just the school board Members, the superintendent, but also parents who are sending their children to schools in that district because they are seeing these reports and seeing these discussions happen during Board Meetings, and they're very concerned about the future of their school district, as I think any parent would be.

So it's helpful to hear that. Also good to know that we are not at the point where you as an agency needs to approach them and intervene, but that there is more that they can be doing and potentially that we could be doing and providing some guidance, because my goal is to ultimately see them be successful.

So thank you. Thank you for that overview. Are there any other questions related to issue four? Senator Archuleta?

Yeah. You touched on the lawsuits that are out there, which cost in the millions upon millions of dollars in the districts. Do we need to add more money into our classes for the teachers and faculty and everyone else pertaining to code of conduct, ethics and so on? How is that?

Because obviously I think we can be taught and trained and guided into being a better individual when we're on the job.

So, Senator, thank you for the question. Actually, Senator Perez is SB 848 from last year does some of that. It sets some behavioral standards, it sets some classroom standards with regard to even while not providing specifics, it guides districts to look at furnishing in the classroom.

So we know from looking at claims data how some of these offenses happen. Right? No windows in the door, no direct supervision of somebody walking past a classroom, being able to see inside couches in classrooms, those kinds of things. And so it sets some of the expectations and requires districts to develop policies around those expectations.

So it doesn't from a legislative standpoint, from a statutory standpoint, it doesn't direct very specific things. It directs the district to adopt policies based on input, including from their risk partners who are experts at in these topics, to put policy elements in place.

It enhances training not only for staff, but also now includes training for students on what to appropriate by grade level, by age, if you will, to be sensitive to what grooming looks like, how to report adult misbehavior and those kinds of things.

In addition to, as the Senator alluded to a few moments ago, creating a database here at the state to look at employees that may be moving from a district that are under investigation and then they go to another district before the investigation is complete and to get out from under the investigation, if you will, where it requires that investigation, the first investigation to be finished, reported and activity to follow it, as opposed to the pass where if they separated employment, the topic just went away.

So we want to prevent that from happening. So it doesn't SB848 does not put a number of provisions like that in place with implementation dates. There are obviously various implementation dates so that districts have time to put all this in place.

And the reason I bring it up because we have the county of Los Angeles, that's an example, Orange County across the state, yes, where this is becoming pretty prevalent. The cost of these lawsuits and a lot of them have no merit, but they still have to be adjudicated and there's cost.

So I'm hoping that we can look into that. And if we have to find another line item for that sort of thing for the additional training and guidance, I'd like to, you know, propose something like that, even stronger language. But we need to spend a little to save a lot in this sense.

The cost issues related to that, enhanced training and other requirements and SB848 will come about in the future as districts do those and submit mandated cost, consider claims and probably you'll see some additions to the mandated I'm guessing out in the future mandated cost block grant for schools would have to add an item and a X amount per student type of requirement, assuming that those are once that analysis has been done by the Commission on state Mandates.

Thank you.

Great. Seeing as we have no further question and comment, that wraps for issue four. I'm also just going to recess for 60 seconds because I know the folks need to reset the cameras. So if we could go ahead and flag for them to do that and we'll go ahead and prep for issue five.

So if we can turn over staff, I'd really appreciate that. Thank you. So we're going to recess for 60 seconds so that we can reset the cameras.

Alrighty. We will reconvene the Senate Budget Subcommitee. And we are now moving on to the California State Library issue number five. So the first issue we have is increased building rental expenses for library in courts one and two.

So for this item. Mary Halterman, Department of Finance the California State Library is requesting 1.1 million General Fund in 26-27 and ongoing to address increased building rental expenses. The State Library's current year budget includes 7.7 million available for rent expenses from all programs and funds.

This includes 2.2 million ongoing General Fund from the 2022 Budget act that addressed increased costs and rent. However, rent obligations have continued to increase the federal award. Administrative costs are capped at 4% of the award and that is fully used to pay for salaries and benefits and other indirect costs to administer the program.

And there are no additional funds that remain for rent expenses. Based on the 25-26 price book rates from the Department of General Services, total rent expenses are currently estimated at 8.8 million. This leaves a gap of 1.1 million that would require the State Library to redirect resources from other operations and programs.

If this request is not approved, I'm available for any questions. Thank you.

Good afternoon, Madam Chair. Senator, Florence Bouvet with the Legislative Analyst Office. So as context, the State Library occupies those two building owned by the Department of General Services, and as was noted earlier, the associated rental costs have been been increasing each year.

The state generally does not augment Department budgets for routine rental rate increases, though as was just noted, it occasionally provided augmentations for smaller agencies such as the State Library. And More recently, in 25-26, the California Student Aid Commission received an additional 1.4 million to cover higher OEM costs, which included higher rents.

So regarding the current proposal to provide a 1.1 million ongoing General Fund increase, we have two main concerns. First is that the proposed augmentation is much higher than the estimated rental cost increase.

If we consider Table c on page 20 of the Agenda and we add up the rental invoice for 2022-23 and then 26-27 the 2 totals difference would amount roughly to $420,000.

Second, the rest of the request seems to be related to the library's federal funding, and we're still working with the Administration and the State Library to gain a better understanding of all the related moving pieces and what it means for the library's budget.

So at this stage, we recommend the legislator withhold action on this proposal until it received additional information from the library and the Administration on these federal Fund issues.

Specifically, we recommend that the Administration and the state library provide additional information on four different areas for first, the amount of federal funding that's designated for state operations versus local assistance in the budget year and how that compares to the past few years.

Second, how the state library has addressed for the past two years a rule change that was alluded to that caps the administrative services to no more than the 4% of the annual federal grant funding.

So third, what spending the state library currently classifies as state operations and whether any of that spending could be covered by federal funding that is redirected from the rental payments and finally, what specific activities the state library would undertake with additional federal funding. That concludes our comments and I'm happy to answer any question. Thank you.

Thank you for your presentation. Do we have any questions or comments, particularly about the increased building rental expenses? Mr. Lucas, I recognize you're here on behalf of the California State Library. Did you want to comment on anything related to this item?

Greg Lucas, California State Library thank you, Senator. Someone has to explain to me at some point why we pay $9 million in rent to another state agency on two buildings that are owned by the state of California.

But we're grateful for the Department of Finance to cover this increase in our operating costs generated by the Department of General Services and hope the Legislature can agree with them.

Alrighty. I don't know if DOF or Legislative Analyst Office, if you want to respond to his comment just in regards to the cost. Okay, alrighty. And that's certainly a discussion that I think that we could have at a later point. Mr. Lucas, is there anything else? I don't have any questions or comments for this item. Alrighty.

We will go ahead and move on now to issue number six, the Imagination Library. And Ms. Halterman, you may get started whenever you'd like.

So the statewide Imagination Library Program was established under the State Librarian through Senate Bill 1183 and 2022. The purpose was to develop, implement, promote and foster a comprehensive statewide initiative for encouraging preschool children to develop a love of reading and learning.

The Bill was to create the Imagination Library of California Fund, which was to be used to deliver age appropriate books on a monthly basis to children registered in the program from birth to age 5, at no cost to families through Dahle Parton's Imagination Library.

Dahle Parton's Imagination Library is a book gifting program operated by the Dollywood foundation, which partners with local nonprofits or local governmental entities to deliver books. Local affiliates are responsible to raise funds in order to promote programs, enroll children and work with Dahle Parton's Imagination Library to coordinate monthly book orders and fulfillment.

The Dollywood Foundation Imagination Library covers the overhead and administrative costs through SB 1183. The Imagination Library of California Fund was also to support qualified local entities that agreed to a dollar for dollar match for the program.

The Bill also required the state librarian to administer a California iteration of Dahle Parton's Imagination Library and coordinate with a nonprofit entity that was organized solely to promote and encourage reading by the children of the state.

Along with SB 1183, the Legislature included 68.2 million in the 2022 budget for the California State Library to establish the statewide Imagination Library and further support local California partners by covering half the cost of books with the dollar for dollar match unless it was waived. These funds were to be available until June 302028.

Originally, of the 68.2 million appropriated, 57.2 million was for the Dollywood Foundation, 4.8 million was for the Strong Reader Partnership, and 6.2 million was for the state library administrative costs. In the current year, 3.8 million of the 4.8 million for the Strong Reader Partnership was returned and redirected to the Dollywood Foundation.

Additionally, 2.8 million of the 6.2 million for state library administrative cost was also redirected to the Dollywood Foundation. So to date, 63.8 million has been redirected to the Dollywood Foundation. I'm available for any questions. Thank you.

Great. Thank you. Ms. Holterman. Mr. Lucas, before we begin, I just wanted to see if you had any comments that you wanted to make.

That's a summary, a great summary of the program.

Thank you. Mr. Lucas. I'm going to go ahead and go over a timeline of events that happened and just have a couple of questions for you as I go over that timeline. Is that okay?

Terrific. Okay.

So my understanding is that articles of incorporation for a nonprofit organization called Imagination Library of California, Strong Reader Partnership, were filed with the Secretary of State on April 182023.

Now, this nonprofit was created in order to administer the funding that was allocated through SB 1183, a legislative effort that was led by both Senator Grove, who has joined us, as well as at the time, Senate Pro Tem Tony Atkins.

And the initiative and the goal of this, it was really a bipartisan effort to improve reading outcomes for young children and improve literacy rates amongst children. Is that correct? Do you recall this?

So the contract that was established required the Strong Reader Partnership to administer a dollar for dollar match and provide quarterly financial and activity reports every three months. Is it your opinion that the nonprofit met its contract requirements?

Yes.

And I know that there is a board as well as an Executive Director of this nonprofit. Do you happen to know how that board and that Executive Director were selected?

There were Members of the partnership that were selected by the Administration. The chair, Jackie Wong, who's the who runs First Five in California. Kim Belshay, who is the former Director of the Department of Health and Human Services. Mona Pascal Rogers, who was Governor Brown's appointment secretary, previously Lieutenant Governor, now works with meta.

There was a Senate representative and an Assembly representative. The Senate representative was selected by Pro Tem Tony Atkins.

Now, it's my understanding that in SB 1183 that the funding was allocated to the California State Library. It did not state within that Bill that you were to establish a nonprofit organization in order to administer that funding.

So why did the California State Library establish its own nonprofit if the legislation did not provide you the authority to do so?

Well, I would disagree with you, Senator.

I mean, I'm quoting now from SB 1183, which says the State Librarian shall coordinate with a non profit entity qualified under section 501C3 of the Internal Revenue Code and organized solely to promote and encourage reading by the children of the state for the purpose of implementing this article, which is what Finance just read to you.

So it wasn't an independent action on our part. We followed what was in the enabling legislation.

And would you agree that in establishing that nonprofit, that it is then the California State Library's responsibility to do oversight and to ensure that this organization, this nonprofit entity, is being accountable to what's been laid out to the goals of the ultimate funding?

Yes, of course.

Thank you.

I mean, they were designed to be the entity that received the $68 million and then would work in coordination with the Imagination Library. So any grantee of the State Library. Right. Is required to provide us with reporting on how they spend the money, usually on a quarterly basis.

Now, I'm glad that you bring that up, Mr. Lucas, because, you know, part of my concern here is about those quarterly. Now, In September of 2025, Senate Budget Committee staff requested the quarterly reports by the Strong Reader Partnership that were required in August 6, 2024.

Now, at this point, we had already been so behind on that quarterly reporting that there were already four reports that were due. And this reporting included bank statements, receipts and invoices to corroborate expenses of the Imagination Library. Do you remember this request coming in from Budget Committee staff?

Yes, I remember subsequent requests more clearly.

Yes. Actually, Committee staff sent you six Requests. So I believe they sent you a request on November 5th of 2025, November 13th of 2025, December 3rd of 2025, January 5th of 2026, January 22nd of 2026, and most recently, February 17th of 2026. So why have you been able to produce the documents that were requested?

Well, we. You mentioned we had multiple requests. We've responded multiple times to your requests. So, on October 8th of 2025, we received the check detail from the Strong Reader Partnership, which we forwarded to this Committee, the Subcommitee. You ask for itemized receipts of all these checks, whether for reimbursements or services.

We sent that request to the Strong Reader Partnership. We received an expanded list of payees on October 9, 2025 with descriptions, which we forwarded to this Subcommitee. On October 10, we received additional questions about the Strong Reader Partnership from this Subcommitee, which we answered with which. Well, questions.

We answered questions for which there was readily available information and pass the remainder on to the Strong Reader Partnership.

Now, I want to be clear, Mr. Lucas, I have all those documents here with me, both the deposit documents and the transfer to the money market account, as well as some of these other bank statements.

Now, as far as I know, and I've spoken to my Committee staff extensively about this, we have not received any receipts or any invoices. So are there invoices and receipts that you've received that you've not provided to Committee staff?

Not to my knowledge.

Because at this point, it looks as though we've received bank statements totaling about $555,000. Is that right?

I believe so, yes.

But the Strong Reader Partnership reported that it ultimately spent about $1.2 million. So there is currently about $650,000 that the California State Library is unable to account for. Is that correct?

I don't believe that's correct.

I mean, we received a final report on the disposition of the money by the Strong Reader Partnership, which has expressed, and we passed this on to you as well, the difficulty in obtaining some of this information because they no longer have any money or Members of the partnership since the money was transferred to the Imagination Library.

So I believe what you're speaking to is a letter that was sent on behalf of their legal counsel, Delfino Madden, on October 20, 2025. Is that the letter that you're speaking to?

No, I'm not familiar with that letter.

Okay. Well, on October 202025 there was a letter sent on behalf of a Mr. Chris Delfino, and in that letter, to Rebecca,

To Rebecca L. Went, the deputy state librarian. Mr. Delfino states that an arbitrary deadline of approximately three weeks to do all this work is not reasonable.

I do know who he is

I'm not aware of any legal authority. The state library has to demand the reports by Friday, October 17, and then makes a recommendation for representatives of Strong Reader Partnership and the State library to get on a call as soon as possible to agree on deadlines for the reports and the return of funds that work for both parties.

Do you happen to know if that meeting was organized to discuss. Discuss the request of this information and setting deadlines and a timeline?

I don't know whether there was a meeting with the partnership and their lawyer. Mr. Delfino, I know that whatever you. Your Subcommitee has requested, we have asked the Strong Reader Partnership to provide and continue to do that.

Well, those documents are still missing, Mr. Lucas, and that is my concern. In fact, you know, there's several documents that I have concerns about in terms of just detailing the bank statements, and this isn't even speaking to the $650,000 that cannot be accounted for.

So, for example, we have, in one case, $208,000 in payments to a consulting firm that is also headed by the Executive Director of the Strong Reader partnership.

Now, despite $208,000 being provided to this consulting firm for work, there was only one $5,000 grant that was provided to a partner in Yolo County for increased access to books for children. Are you aware of any other grants that were provided on behalf of the nonprofit?

No. Nor am I aware of what you just read to me. So.

So for $208,000, there was only one grant administered of $5,000.

That's what you just read? Yes.

Yes. And that is the documentation we have. We still do not have details, receipts, or invoices detailing what work was covered within that $208,000. Now, in addition to that, we also have checks totaling $75,000 for bookkeeping and accounting services that were paid out of the nonprofit's bank accounts.

But when budget staff asked why the cost of services were so high for just 20 transactions, the state library told us that these costs were justified. Is it still your opinion that these costs are justified?

Yes.

For 20 transactions, $75,000 for bookkeeping and accounting?

Yes.

I would disagree, Mr. Lucas. In addition to that, we also have a public affairs firm that was lobbying on behalf of First 5 California and the strong reader partners against the 2024 budget action that received a check for $14,500.

If you remember, the 2024 budget action reappropriated at least 90% of the $68.2 million to the Dollywood foundation no later than 45 days after enactment of the budget Bill as a result of this funding not being spent and not being implemented. So money was moved away from this nonprofit and directed directly to the Dollywood foundation.

Now, when budget staff asked the state library if these funds were in service of lobbying in opposition to the budget and to these changes, we were told that the funds were used to engage stakeholders for the imagination library. But when we requested invoices to verify these services, we've still not received them.

We've requested the invoices per your request.

Mr. Lucas. I want to make very clear that I find this to be incredibly concerning. There's $650,000 that's been unaccounted for in a program, a bipartisan effort that was intended to increase literacy amongst children. This is incredibly serious, and we've gone now since we've received the letter from the attorneys on October 20th.

We're now five months, and they've not responded to your request or to the request of this budget Committee staff. So, Mr. Lucas, what do you recommend that we do in order to get these documents?

I recommend that we continue to seek the information that you desire, which every time we get a request from you, we request it from the folks who remain of the strong reader partnership.

Mr. Lucas, I, I, I want to be even more clear than that. And for I, I'm not sure if the Executive Director or their board Members are watching this meeting. I know that we certainly reached out to your office to let you know that I would really like for somebody to be here.

I recognize that it is the nonprofit that was administering these funds and that you are the overseer of that nonprofit. And so having them present in this room today to be able to answer these questions was critical, but they are not here.

And so what I want to make clear is in the next seven days, I expect for us to have these documents. So that means seven days, that is next Thursday, for us to have an update from these folks.

This is a request coming on my behalf as the chair of this budget Subcommitee, and for us to get answers and invoices on how these dollars were spent, for us to go months at a time and not have answers, and to only have one single $5,000 grant be administered in Yolo County is unacceptable, and it raises huge concerns about financial transparency.

Do you understand the request I'm making, Mr. Lucas?

Clearly.

Is there anything that you need from us and my staff in order to make this a reality.

I'll talk to my staff and let your staff know.

Thank you. I'm going to turn it over to Senator Grove, who I recognize was a co author on this budget Bill and you know, has chosen to be here today.

Thank you, Madam Chair. First off, I deeply respect your questions and applaud you for your tenacity on trying to get the information for the misappropriated, what I feel is really, truly misappropriated funds on this incredible program that has fostered a love for region across the state. So I do want to correct you on one thing.

Section 19352 says a state librarian shall coordinate with a nonprofit entity qualified under a section 501C3 of the Internal Revenue Code and organized solely to promote, to encourage reading for the state. For implementing this program, it didn't direct you to start your own nonprofit. It directed you to work with nonprofit and partner with them.

But you went out and started your own nonprofit and you allocated 1.0 a little over $1.2 million, which the chair has already mentioned, to your own nonprofit.

And then subsequently, after we started asking questions about where this money was going and only having a $5,000 grant repeating again what the chair was saying, administered with no accountability, Even over the $5,000, there's 650, roughly $649,351.36 missing that we have no accountability for on the nonprofit that you started.

And you, I don't want to say blatantly, but almost puntly would just you were like, madam Chair, I'll get it to you. It's, it's, that was disrespectful, number one. And number two, you're the librarian, the state librarian. Why don't you have the answers that you knew you were going to have to answer from the chair or myself?

And my questions are similar and I'm not even going to repeat all of them. But that's completely unacceptable that you're here to answer these questions and you have nothing to offer. You don't have receipts requested six times. You don't have bank statements requested six times from this Committee.

You don't have documents to show where that money was spent. You can't show that even the money that was allocated for $5,000 in a non profit right here in Sacramento where any resources were used to reach the kids that want to foster a love for reading.

And you have no answers on $650,000 when a partner that you guys partnered with, that's in the Executive board of the nonprofit that you found as a vendor. That makes no sense and that reeks of horrific. No transparency and potential fraud. What's your explanation?

State library followed to the best of our understanding, provided. Both. Provided primarily by the Senate on implementing this program. So I can't. I can't speak to the information that we don't have that hasn't been provided by this partnership that's been dissolved. By sending the money now. Right. Whatever it is. $64 million to the.

To the Dollywood foundation in Tennessee. As I've said before, and I'll say it again, we've pledged to get you the answers that we. We. That you want. And we've requested them over and over again. And so now we have a deadline of a week and we'll get them to you by then.

So we have your assurance you're going to get us the documents that the chair requested?

We will request them again and get the documents. I mean, I don't know what to tell you other than we continue to do what you ask us to do.

You appear to be a highly educated individual, Mr. Lucas. Did you go to college or university?

Yes.

Okay. I barely graduated from high school and I'm 1 of 40 in the state of California and I can read this language and see that you were not allowed to set up a non profit. That you were supposed to use existing non profits and you set up a non profit.

Again, reiterating what I said, that can account for six requests of $649,361 or $51.36. That money is missing from this state library program that you were supposed to administer. What was the reason for setting up your own nonprofit in the first place?

It was our understanding that a nonprofit specific to the purpose that was identified in 1183 needed to be created to administer the program.

It's called the Dahle Parton Imagination Library.

The Dahle Parton Imagination Library.

Think that their non profit was sufficient to work with.

That's not what the. That's not. As we. That's not. What we were given to understand was that there would needed to be a state entity that worked with them to administer the program.

Do you not think the state librarian is a state entity? You just were in a situation where the state, your state agency is paying another state agency $9 million for rent. You considered your state agents. You consider yourself a state agency on item 5, but not a state agency on item 6.

I don't understand your question.

Do you consider yourself a state agency,

State library is a agency of the state of California.

Okay. And the law required you to set up a. Your state agency with a nonprofit. And we were thinking it was abundantly clear that it should have been the Dahle Parton Imagination Library. But you set up your own nonprofit and you spit or you allocated $1.2 million to that. And there are 659.

Or 600, let's just call it $650,000 in receipts that are not accountable on the nonprofit that you set up.

But on the other side, we have to provide all the receipts and everything where dollars are spent in every county where allocations are being made so that this can be a statewide reading program for those to foster a love of reading in every county. I know Kern's doing it. I know Los Angeles is doing it.

I know it's thriving because it's being done right by a nonprofit that had a 42 other state success story across the country. And yet we can't get answers for you and the chair of this Committee can't get answers from you on this $650,000 of missing money with a nonprofit that you set up. No comment.

You're just looking at me. Got you off guard.

Were you asking me a question?

Yes. Where's the money?

We've requested the information. We continue to request the information. We'll get you the answers. I can't improve on. On what I've said.

I support the chair 1000% that she has requested that those documents be here by Thursday of next week. Thank you, madam.

I will say. I will say, if you don't mind, that as we administered this program right back in 2022 and took the actions which you say we took independently, we apprised the Senate of what we were doing and sought. Is this what you want to do? We spoke routinely regularly with the pro tems office.

Like, here's what we plan on doing. Is this what you want to have happen? So, I mean, it's, it's, it's not like we went out and independently did this. But I appreciate your comments.

The former pro tem is like one of my best friends still. After she's gone, and I assure you, and I will stand here and defend her, that she did not allocate you to use $650,000. That is unaccountable, that she's not going to. If she was here and sitting in that chair right there where Ms.

Senator Perez is, then she would ask you those questions, too. There's no way that she authorized you or you had a conversation with her or her staff about misappropriating or not having receipts for $650,000, that would have never happened.

I don't believe that's what I said. I think she would be eager to get the answers to these questions, just as you are, Senator.

Thank you. Thank you, Madam Chair, for letting me participate. Of course. Grateful to have you here, Senator Grove. Mr. Lucas, I'm going to be honest with you. My budget staff, I was not here in 2022. I was elected last year, so I cannot speak to actions that happened before I was here.

But my budget staff do not recall you reaching out to express to the Senate that you would be setting up a nonprofit. Now, if you had questions about legislative intent listed in SB 1183, then you should have made an inquiry into what the intent was in that language.

If you were unclear about whether or not you had the ability to establish your own nonprofit to administer these funds. Now, did you do that? Did you ask any questions?

I recall us. Yes. I just. As I just said to Senator Grove, I don't know. I know for sure that we didn't act in isolation without consultation of the Senate. What do you want to see happen on this program? Just like we asked for.

Who do you want to have be the representative for the Senate on the partnership?

Now, Mr. Lucas, you are the head of the California State Library, and so you all established this nonprofit. So it is your responsibility, it is you as a state agency, that is supposed to provide that oversight and accountability.

That is part of the reason why, when you signed these documents to establish this nonprofit, that you stated that there needed to be quarterly reporting, including bank statements, receipts and invoices to corroborate expenses, and that did not happen.

This is one of the very fundamental things that the nonprofit was supposed to do and that wasn't delivered on, which meant that funding that was intended to increase literacy among students, to increase readership and book access among students, that those funds were not delivered and administered. Do you share in my concern?

Yes. As the timeline I was reading from demonstrates, we've repeatedly sought the information that you are seeking and continue to do so and will meet the deadline you established earlier.

Yes. And I want to make very clear, Mr. Lucas, that the reason why I'm asking you these questions is because you are the individual that is supposed to be accountable for the decisions of this nonprofit.

Now, I recognize and I'm very concerned by the fact that the last communication you received from them was not actually from any Member of the board or from the Executive Director that instead they had an attorney respond to you rather than responding directly to you.

That raises huge red flags for myself as well as the rest of the Senate.

Well, we. We reached out just the other day after we received your request to have someone from the partnership here and spoke to Jackie Wong, who said, as of today, I still do on March 9th. Right. As of today, I still do not have any new receipts, redacted or otherwise, from the contractors.

As you know, there are no funds that we have to continue this work. And I will continue to ask the former Strong Reader partnership contractors for the information being sought and let you know as soon as I receive the receipts. So that is the most recent contact I have. It's not this letter from Chris Delfino.

Well, I appreciate Ms. Wong's communication and she is not here, so I don't want to hold her accountable when she is not able to defend herself and ask her questions. I do want to point out out that I have a list of all of the checking account statements. And these are. Are.

These are bank statements dating back to 2024. So we are now two years almost away from these dollars being spent. And so asking for invoices and receipts. And for them to continue to argue that they are not able to produce these documents almost two years after the money has been extended expended is inappropriate.

For them to not have any bank statements for $650,000 of expenditures for this program is inappropriate. And so I want to make very clear to you and to whoever is watching, including those that served on the board, as well as the former Executive Director, that we need to have these documents by next Thursday.

So I look forward to receiving that update from you. If there is any way that I or my staff can be of assistance with delivering those documents, please let me know. This is of top priority for myself and my staff. Is that understood?

Yes. Thank you. I appreciate your offer.

Thank you. That includes issue number six. So, having heard all discussion items and if there are no further questions, we will now move on to public comment. If there is anyone in room 2100 who wants to provide public comment on items that were on today's agenda, then please line up.

We ask that you limit your testimony to one minute. Now let us begin.

Hi. Tiffany Mock, chair and Members. Tiffany Mok with cft, a union of educators and classified professionals, would just like to thank you for this hearing and also to note our opposition to the $5.6 billion settlement creation. Thank you so much.

Good afternoon. Sara Bachez, with children Now. Thank you so much for your leadership in grounding today's discussion and making sure that it's focused on current realities that our children and youth face. We just urge you to make sure that we continue to avoid any maneuvers that hamper school district's ability to make sure that they meet the needs of