Childhood Sexual Assault: Fiscal Implications for California Public Agencies

Childhood Sexual Assault: Fiscal Implications for California Public Agencies January 31, 2025 Michael H. Fine Chief Executive Officer Table of Contents Executive Summary ............................................................................................2 Introduction ........................................................................................................5 Background ........................................................................................................9 Data on Childhood Sexual Assault Claims ..............................................................9 District Impact Story .............................................................................................................10 Public Agency Insurance .......................................................................................14 Public Agency Insurance Basics .............................................................................17 District Impact Story .............................................................................................................17 Financing Considerations ................................................................................20 District Impact Story .............................................................................................................24 School and Community College District Emergency Apportionment ............31 Emergency Apportionment Requirements for Local Educational Agencies .......34 Victims’ Compensation Fund ...........................................................................36 Prevention Considerations ...............................................................................37 District Impact Story .............................................................................................................39 Summary of Recommendations ......................................................................41 FCMAT’s Role ...................................................................................................43 Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 1 ExEcutivE Summary Executive Summary Background Assembly Bill 218 (Chapter 861, Statutes of 2019) eliminated many claim prerequisites and increased or effectively eliminated the statute of limitation periods for claims of childhood sexual assault against public entities, including local educational agencies and municipal governments. Assembly Bill (AB) 218, The Child Victims Act, renamed childhood sexual abuse to childhood sexual assault and expanded its definition. Further, it increased public agencies’ liability exposure by doing the following: 1) Extending the statute of limitation periods for claims of childhood sexual assault. 2) Permanently eliminating the Government Tort Claims Act’s presentation requirements for claims involving childhood sexual assault. 3) Reviving certain claims for which the statute of limitations period had otherwise expired, if brought by December 31, 2022. The legislation retroactively increased the time limit for beginning an action to recover damages suffered as a result of childhood sexual assault to 22 years from the date the plaintiff attains the age of majority (i.e., 40 years of age) instead of the previous eight years (i.e., 26 years of age), or within five years of the date the plaintiff discovers or reasonably should have discovered that the psychological injury or illness occurring after the age of majority was caused by sexual assault, whichever is later. Assembly Bill 452 (Chapter 655, Statutes of 2023) further changed the statute of limita- tions on childhood sexual assault. This legislation eliminated the statute of limitations for the recovery of civil damages suffered because of childhood sexual assault for claims that arise on or after January 1, 2024. Some of the financing solutions recommended in this report for AB 218 claims will also be applicable for future claims under AB 452. Senate Bill 153 (Chapter 38, Statutes of 2024) authorizes this report. It requires the Fiscal Crisis and Management Assistance Team to provide recommendations to the appropriate fiscal and policy committees of the Legislature and the Department of Finance regarding new, existing, or strengthened funding and financing mechanisms to finance judgments or settlements arising from claims of childhood sexual assault against local agencies. Childhood sexual assault is a deeply sensitive and traumatic issue. The intent of the authors of this report is to respect and honor victims. Findings and Assessment A comprehensive analysis of claims is not available, but what can be concluded is that the impact is significant. The most recent statewide data was released in May 2023 and covered 80% of statewide average daily attendance. But even with claim data, the magnitude is not accurately known until each claim’s outcome is decided. Many claims are in various stages of litigation; thus, it is impossible to project the extent of total liability, whether claimants will prevail, or what the dollar value of any final award of damages or settlement agreement may be. Even with missing details, we can conclude that the fiscal impact is and will continue to be significant and will affect programs and services. The best estimate of the dollar value of claims brought to date because of AB 218 is $2-$3 billion for local educational agencies. Other local public agencies’ costs will exceed that value by a multiplier, with one county government alone estimating their claim value at $3 billion. The dollar estimate increases further for total childhood Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 2 ExEcutivE Summary sexual assault claims when considering claims outside of the time frame covered by AB 218. The fiscal impact is not limited to local educational and public agencies with claims but affects all public agencies, because it includes increased insurance premiums and special assessments based on the joint and several liability of current and past members of public entity risk pools. Most public agencies have liability coverage through risk pools, not commercial insurance, so insurance in the traditional sense is something of a misnomer. With few exceptions, most local public agencies access insurance protection through public entity risk pooling. These pools are a way to manage risk and are created when a group of public agencies join together to finance and administer various forms of insurance coverage. This is similar to the commercial market but with the cost shared among the pool’s member agencies. Each member agency funds the public entity risk pool through premiums and fees for the coverage obtained. The contributed funds and any investment earnings on reserves finance the risk pool’s obligations. Childhood sexual assault and misconduct cases have significantly altered the liability insurance marketplace (which includes public entity risk pools) in California. The insurance industry is built on a promise and operates under the current rule of law. No one expected the retroactive removal of the statute of limitations on childhood sexual assault. Changes in law disrupt the marketplace and create opportunities for reinsurance companies to reevaluate their products and pricing. Commercial insurers are less willing to accept the risk, given the ongoing uncertainty surrounding childhood sexual assault losses, which includes unknowns that could extend for decades. As a result, fewer insurance providers are available to offer reinsurance products, and the price has increased dramatically. The insurance market for public agencies is perilously unstable. In the worst case, the market could deteriorate to a point where there is not enough insurance available, and public agencies could end up competing with each other for the limited coverage still being offered. With some limitations, local agencies have the authority to borrow funds to amortize the cost of a settlement or claim. Local agencies have the power to authorize and issue refunding notes and bonds to satisfy their financial obligations under involuntary tort judgments. These notes or bonds are typically referred to as judgment obligation notes or bonds. Obligations arising from settlements may be nuanced. With some exceptions and various constraints, local agencies are also authorized to make lease financing arrangements. The state treasurer should be allowed and directed to help public agencies that face settlements and judgments from childhood sexual assault to access capital markets. There may be a variety of reasons to have an intermediary issue debt on behalf of public agencies. Intensive interventions associated with a large emergency apportionment may not be appropriate for school districts requiring state loans solely due to AB 218 obligations. California’s constitution and statutes protect school districts from insolvency through state emergency apportionments (also known as state emergency loans). These are commonly referred to as the receivership statutes. A less defined but similar receivership protection is extended to California’s community colleges. This protection is designed to ensure that school districts continue to educate students. An administrator does, however, have the power to file a Chapter 9 bankruptcy petition for a school district, and a community college district is apparently authorized to file for Chapter 9 bankruptcy. This receivership process is not available to charter schools or other public agencies. However, the current structure and intensity of the intervention that accompanies a large emergency apportionment may not be appropriate for a school district that requires a state loan solely due to AB 218 obligations. It is unlikely that the circumstances Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 3 ExEcutivE Summary surrounding a childhood sexual assault offense from years earlier are related to deficiencies in an agency’s current governance, policies, systems and practices. The exception may be personnel management practices. Victims deserve a more compassionate and timely remedy than litigation. A frequent discussion item among public agencies affected by childhood sexual assault claims is the creation of a statewide victims’ compensation fund. All victims alleging injury have a right to a trial, so this would be a voluntary alternative to the judicial process. The fund would work to resolve claims through a reasonable process that invites the victim to present their claim in an uncontested environment that focuses on care and compassion, and where remedies are offered, discussed and decided on. The goal should be to completely eliminate childhood sexual assault in local public agencies. One of the frequent criticisms of AB 218 and AB 452 is that neither bill promoted a state policy priority of eliminating childhood sexual assault offenses, and neither addressed the topic of prevention. Preventive measures and mandates must be increased to protect children. Recommendations This report makes 22 recommendations for the Legislature’s consideration. The recommenda- tions have the following themes: • Mandated childhood sexual assault claim reporting, statewide data repository and data classification. • Amended timelines for public agencies to pay a judgment to facilitate public financing of all or part of the judgment. • Enhanced provisions related to the public financing of obligations. • Alternative statutory provisions for emergency apportionments for school districts. • Study and establish a victims’ compensation fund option. • Consistent and expanded statutes focused on preventive measures. These recommendations are provided throughout the report with their respective topics and are summarized in the last section for ease of reference. Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 4 introduction Introduction Assembly Bill 218 (Chapter 861, Statutes or those with repressed memory of the of 2019) eliminated many claim prerequi- assault, may continue to commence claims sites and increased or effectively elimi- up to age 40 or within five years of discovery, nated the statute of limitation periods for as provided. This essentially provides a claims of childhood sexual assault against 14-year window for claims to continue to be public entities, including local educational filed until victims turn 40 years old and sets agencies and municipal governments. no age limit for those who discover psycho- AB 218, The Child Victims Act, renamed logical injury or illness later. childhood sexual abuse to childhood sexual Assembly Bill 218 amended three statutes. assault and expanded its definition. Further, it The main amendments were to the California increased public agencies’ liability exposure Code of Civil Procedure (CCP) Section 340.1. by doing the following: This section has a 40-year history of legis- 1) Extending the statute of limitation lative amendments, specifically to modify and periods for claims of childhood extend the statute of limitations for childhood sexual assault. sexual abuse (now assault) and molestation claims. Subsequent amendments culminated 2) Permanently eliminating the in the elimination of the statute of limitations Government Tort Claims Act’s altogether for offenses on or after January 1, presentation requirements for 2024 (AB 452, Chapter 655, Statutes of 2023). claims involving childhood sexual assault. Neither AB 218 nor AB 452 included any added prevention measures. And neither bill 3) Reviving certain claims for which gave local public agencies financial resources the statute of limitations period to address the effects of the change in state had otherwise expired, if brought policy. by December 31, 2022. Risks extend beyond traditional transi- The legislation retroactively increased the tional kindergarten to grade 12 programs. time limit for beginning an action to recover Charter schools, community colleges, and damages suffered as a result of childhood other local agencies all have risk exposure sexual assault to 22 years from the date the from childhood sexual assault and from plaintiff attains the age of majority (i.e., 40 the AB 218 revival statute. Charter schools years of age) instead of the previous eight began in California in 1992, so their historical years (i.e., 26 years of age), or within five risk exposure is more limited. In addition, years of the date the plaintiff discovers or a significant percentage of charter school reasonably should have discovered that the enrollment is in nonclassroom-based psychological injury or illness occurring after programs. However, the term nonclassroom the age of majority was caused by sexual is a misnomer: the reality is that many assault, whichever is later. charter school students are on a campus Commonly referred to as a revival statute, or interacting in person with charter school the legislation made it possible for victims personnel and other students, albeit less of childhood sexual assault to seek recovery frequently than in a traditional school setting. for damages after the previous statute of Community colleges have limited exposure limitations had expired. The revival provi- to AB 218 claims but do have increasing sions allowed claims for damages to be exposure to risks associated with childhood commenced up to December 31, 2022, for sexual assault in the future. Historically, victims over the age of 40. However, victims community colleges’ main risk exposure is younger than age 40 before January 1, 2023, Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 5 introduction in their campus childcare programs. But affected, whether they have claims or not. community college exposures are increasing The same is true of other local government with the introduction of on- and off-campus agencies such as cities, counties and certain early childhood programs that are part of an special districts. The cost and decreasing instructional program, and dual enrollment availability of liability insurance or other risk programs that bring high school students on sharing programs affects current educa- campus to attend classes. tional and public services, because more of today’s tax dollars are being used to pay Other local agencies, like cities and for yesterday’s offenses. The cost of claims counties, have significant risk to AB 218 diminishes programs and services for all claims because they operate and govern the community populations, including children following: and students, some of whom are those who • Recreational facilities and were victimized. programs. The diminished market for liability insurance, • Childcare facilities. especially inclusive of sexual assault • Juvenile probation and detention coverage, hits third-party private partners hard. Foster families and agencies, commu- facilities. nity-based organizations, and sole and • Foster children programs. corporate providers of nonpublic agencies • Short-term residential thera- and nonpublic schools serving students with peutic programs, residential disabilities are required to have adequate foster care, or congregate care insurance protection, sometimes equivalent (formerly group homes). to that of a public agency. When coverage isn’t available, these essential partners are These local agencies also have risk related unable to provide services. to law enforcement because of failure to investigate, failure of due diligence, and Fiscal implications can vary widely from one inadequate reporting; programs such as local educational or governmental agency police and fire explorers; or other involvement to another. Claims of the same nature and related to childhood sexual assault. Based on judgments or settlements with the same published reports, the County of Los Angeles value may have dramatically different impacts in 2023 projected costs of “between $1.6 depending on the size of the agency, its to $3 billion to resolve roughly 3,000 claims coverage status and its revenue sources. For of sexual abuse that allegedly took place in example, a childhood sexual assault claim the county’s foster homes, children shelters from 1995 for $2 million against a school and probation camps and halls dating to the district with 850 students and no insurance 1950s.”1 coverage for 1995 has a different impact than a claim with the same parameters against a The California Department of Education school district with 14,000 students. Court operates three state special schools — two judgments, and often settlements, do not for hearing impaired and one for visually consider insurance, ability to pay, or the impaired students. The exposure to childhood impact on local programs and services. sexual assault claims extends to these programs as well. California’s local governments, including school districts and community colleges, Understanding the fiscal implications have access to protection under United of childhood sexual assault claims for States Bankruptcy statutes. Today’s local educational and public agencies is Chapter 9 of the United States Bankruptcy essential. All local educational agencies are 1 “Decades of failures leave L.A. County facing up to $3 billion in sex abuse claims,” Los Angeles Times, May 1, 2023, by Rebecca Ellis Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 6 introduction Code is the successor to statutes dating temporary charge of a district’s operations. back to the Great Depression of the 1930s. The emergency apportionment process is Chapter 9 is designed exclusively for local described in more detail later in this report. governments to adjust or reduce their obliga- California’s charter schools are not protected tions when their resources are inadequate to by the constitutional protections reinforced cover those obligations. Filing for Chapter 9 in Butt v. State of California. As nonprofit is different from other forms of bankruptcy organizations, charter schools that find in two ways. First, the filing is fully at the themselves in dire financial condition because discretion of the locality; creditors are not of a large uninsured or underinsured liability permitted to force a local government to claim may find that their best or only option file for relief. Second, the bankruptcy court is to file for bankruptcy protection under may not directly compel a locality to sell its Chapter 7 or 11 of the federal bankruptcy assets or increase tax rates to raise revenues statutes. Under Chapter 7, the charter school to meet its obligations, nor may the court ceases to operate, and its assets are sold directly compel the locality to dissolve or to pay its creditors. Under Chapter 11, the reorganize its governance structure. However, charter school would attempt to reorganize if a municipality does not make appropriate its financial affairs. efforts (potentially including increasing revenue or disposing of assets) to pay its Aggregation of liability is the only way to debts through the bankruptcy process, the finance the overall burden and protect bankruptcy court can reject the municipality’s the stability of local public agencies. plan of adjustment or dismiss the munic- California’s system of elementary and ipality’s bankruptcy case. As a result, the secondary public education and basic bankruptcy court can indirectly affect the services through local public agencies will municipality’s actions. In the last 25 years, survive the challenge presented by the claims there have been only a small number of of childhood sexual assault. But individual Chapter 9 bankruptcies in California. school districts, charter schools and other agencies may not. Unlike other local public agencies, school districts and community colleges have a state Local agencies are responsible for paying receivership process designed to reduce the for the entire claim if they are uninsured, or need for bankruptcy protection. Nonetheless, a portion of the claim if they are insured or an administrator for a school district has the underinsured. In addition, liability coverage power to file a Chapter 9 bankruptcy petition premiums have risen by more than 700% in for a school district, and a community college the past decade, and coverage levels are district is apparently authorized to file for eroding. Because public entity risk pools Chapter 9 bankruptcy. Today’s receivership are owned by their member agencies, each process was born out of the legislative local public agency is obligated to ensure remedy to civil rights litigation designed to that the risk pool is stable and has sufficient protect all students and safeguard commu- resources to meet its obligations. Those nities from a school shutdown due to insuffi- added resources come from the risk pool’s cient funds. The California Supreme Court’s member agencies through special assess- opinion in Butt v. State of California ((1992) ments and other contributions. For local 4 Cal. 4th 668, 685 15 Cal. Rptr. 2d 480, 842 educational agencies, these costs place P.2d 1240) laid out an obligation for the state increasing pressure on their current local to protect the integrity and quality of our control funding formula dollars used to staff educational system for students. The process classrooms, pay for utilities and replace includes a provision for an emergency appor- textbooks. The same is true for other local tionment and for an administrator to take public agencies: these costs represent an increasing share of the funding sources used Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 7 introduction to provide law enforcement, fire suppression entitled to compensation for their loss and and medical aid, park and recreation suffering. The intent of the authors of this programs, and other municipal services. report is to respect and honor victims. Assembly Bill 452 (Chapter 655, Statutes of In preparing this report, the Fiscal Crisis and 2023) eliminates the statute of limitations Management Assistance Team consulted for childhood sexual assault claims. This with subject matter experts, including legislation eliminates the statute of limitations experts in risk management, public entity for the recovery of civil damages suffered risk pools, and public finance; labor organi- because of childhood sexual assault for zations; management organizations; and the offenses on or after January 1, 2024. Some of legal community. Interviews and research the financing solutions recommended in this were designed to help the authors more report for AB 218 claims will also be appli- thoroughly understand the magnitude of the cable for future claims under AB 452. fiscal impacts on schools and local govern- ments, the intricacies of different approaches Senate Bill 153 (Chapter 38, Statutes of to public entity risk pooling, the litigation 2024) authorizes this report. It requires the environment, and public financing structures Fiscal Crisis and Management Assistance and other financing mechanisms. Team to provide recommendations to the appropriate fiscal and policy committees This report responds to the statutory of the Legislature and the Department of requirement. The second section of the report Finance on new, existing, or strengthened looks at what we know about the claim data funding and financing mechanisms to finance and the potential magnitude of the fiscal judgments or settlements arising from claims impacts on local educational agencies and of childhood sexual assault against local other local public agencies, and provides agencies (counties, cities, county offices of a brief overview of how local educational education, school districts, charter schools, agencies and municipalities are insured, joint powers authorities, and special districts). including the current risk marketplace. The third section explores financing options Childhood sexual assault is a deeply available to amortize the fiscal impact of a sensitive and traumatic issue affecting the settlement or judgment. The fourth section youth that educational and government looks at the unique receivership protection programs are designed to serve and protect. available for school and community college The victims of assault are from all cultures districts. The fifth section discusses the and backgrounds. The profound physical, concept of a statewide victims’ compen- emotional and psychological impacts can last sation fund, and the sixth section explores a lifetime, often shaping a survivor’s sense preventive measures. The final section of self, their relationships, and their ability summarizes the recommendations. to trust others. No one interviewed for this report condones the crimes that are alleged and were committed; all expressed concern for victims. Everyone believes victims are Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 8 Background Background Data on Childhood Sexual of consistency among public entity risk pools, self-insured agencies and insurers; however, Assault Claims there are many variables when considering aggregating claim data. These include the Assembly Bill 218 claims continue to be following: filed. Many believe that the window to file claims under AB 218’s revival statute closed • Overall lack of coordination on December 31, 2022. However, the only and common definitions. One claims subject to that deadline were for example of a universal classi- victims who had reached the age of 40 (22 fication system is discussed years past the age of majority). Victims under in more depth below. Another 40 (estimated by some to be two-thirds of problem is the inconsistency of the claims activity) have part or all of 14 definitions, which leads to varia- years to file their claims (the previous age tions in attributing a claim to the limit of 26 was extended by AB 218 to age revival provisions of AB 218. 40, creating a 14-year window). Additionally, • Duplicate counts. As discussed victims may file claims within five years of the below in the insurance section, a date they discover or reasonably should have great majority of public agencies discovered that the psychological injury or obtain insurance-like coverage by illness occurring after the age of majority was becoming members of a public caused by sexual assault, whichever is later. entity risk pool. Some risk pools Understandably, there was a rapid increase serve as the primary coverage in claims activity after AB 218 was enacted (e.g., up to $5 million), and and before the three-year window for those other pools serve as the excess over age 40 closed. But new information and coverage (e.g., $5 million to $55 environmental conditions also contribute million). In some cases both risk to increases in both the number of claims pools report the same claim, and the estimated values assigned to those though the value of the claim is claims. Examples of these factors include likely different because each risk information about a particular perpetrator, pool’s policy limits vary. a specific set of circumstances, judicial • Claim counts vs. victim counts. verdicts, and media coverage of other Risk pools and self-insured childhood sexual assault offenses such as public agencies account for those in scouting or the Roman Catholic victims inconsistently. Some church. Between June 30, 2023 and June 30, equate one claim to one victim. 2024, one public entity risk pool reported that Others may associate one the number of claims increased by 23%. claim with multiple victims if the There are many variables when analyzing offenses have the same perpe- claim data to determine magnitude. Claim trator and similar circumstances data is essential to determine the potential and timing. For example, one risk magnitude of the fiscal impact on local pool reports 420 claims with 639 educational and public agencies. However, plaintiffs based on October 2024 a single source of unduplicated, reasonably data (counts are of new claims categorized claim data is not available. that did not exist when AB 218 Creating such a source seems like a simple was passed). concept, and there appears to be a great deal Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 9 Background • Point in time. Any report reflects District Impact Story a specific point in time. Claims under AB 218’s revival provisions Some school districts face catastrophic continue to be filed, and dollar fiscal consequences as a result of uninsured valuations will change over time AB 218 revival judgments. One elementary as more information is known school district on the central coast with 350 and actuaries update values. The students reports one uninsured AB 218 claim, most appropriate time period for with three victim allegations stemming from reporting dollar valuation of the late 1970s to early 1980s. The alleged claims is as of June 30 to corre- abuser and many potential witnesses are spond to annual financial deceased. At that time, the district had reporting, or when the public commercial liability insurance coverage with agency prepares disclosures adequate policy limits. However, at some related to offering public debt. point in the five decades since, the district’s insurance carrier went out of business. In addition to the above variables that may Consequently, the district faces full fiscal affect public entity risk pool claim counts and responsibility for all settlement and/or valuations, the actual impact on local educa- judgment costs, currently estimated at more tional and public agencies varies based on than $20 million. In 2023-24, the district’s the following: unrestricted general fund budget totaled • Self-insured retention. This is the $16.7 million. Even a state emergency loan amount of the claim for which funded over the maximum 20-year period the local agency is responsible, would not provide a realistic way to finance somewhat like an insurance such a large liability. The annual debt service deductible. Self-insured retention would be more than $1.5 million (including for local public agencies varies interest, costs of issuance, and expenses widely across the state based related to the conditions for state emergency on a public entity risk pool’s apportionments). That is equivalent to approx- memorandum of coverage and a imately 9% of the district’s current local local agency’s size and ability to control funding formula (LCFF) revenues. A bear risk. Common amounts are neighboring unified school district with 1,900 $25,000 – $250,000, with some students reports an almost identical story, at $1 million or more. with four uninsured AB 218 claims set to go to • Applicable memorandum of trial in the next year. coverage terms. This is the for coverage for sexual assault amount of coverage the local and molestation to be excluded agency has through its various from third-party coverages; public entity risk pools, taking thus, this one peril may be fully into consideration dates of self-insured. coverage and any limits, aggre- gates, or other restrictions or • Settlements and judgments exclusions. in excess of policy limits. If a • Programs of self-insurance. settlement or judgment exceeds the memorandum of coverage Larger public agencies may be limits, the local agency is respon- partially or fully self-insured. This sible for this excess amount. may be for certain types of perils Maximum policy limits vary. In or for all liability claims. It is the past 10 years, a common becoming increasingly common limit for local educational Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 10 Background agencies has been $55 million the release of this report but before legis- but can vary from the high $30 lative consideration of the report and its million range to newer limits in recommendations. the $70 million range. Previously, As noted above, not all risk pools classify the common limit was between claim data using the same definition. $10 million and $20 million. Additionally, it must be recognized that not all Given that AB 218 did not set any limits on childhood sexual assault claims are the result the timing of the offense for which a claim of the passage of AB 218. Claims for damage has been filed, a local public agency may find resulting from more recent childhood sexual that it had no third-party coverage when the assault continue to occur and are not attrib- offense occurred, whether from commercial utable to the revival statute. Many of these insurance or a public entity risk pool. There claims were filed within the applicable statute are also cases where the primary coverage of limitations. provider no longer exists, but the excess A statewide data repository of claims would coverage provider does exist. Therefore, be useful for developing policy and funding the impact on local educational and public options. agencies can vary widely based on avail- ability and terms of insurance, leading to a Even with claim data, the magnitude is mix of insured, uninsured and underinsured not accurately known until each claim’s claims. outcome is decided. The actual fiscal impact cannot be determined without the claim being One local educational agency has a claim for decided, because estimated values assigned childhood sexual assault that dates to the to claims for disclosure or actuarial purposes 1940s. More commonly, claims may be from may differ from actual values upon settlement the 1970s, 1980s and 1990s. As discussed or judgment. Many claims are in various below, public entity risk pools began in the stages of litigation; thus, it is impossible to 1970s, and most were established by the project the extent of total liability, whether mid-1980s. Before then, insurance coverage claimants will prevail and, if so, what the was obtained through commercial policies. dollar value of a final award of damages or Local agencies usually procured high-quality settlement agreement may be. The full nature insurance coverage at coverage limits of a remedy is unknown at this time. When suitable for the time. However, in many cases values are estimated, the basis is commonly the companies that provided such coverage determined by an independent actuary and no longer exist, leaving local agencies with may or may not align with a jury verdict. uninsured claims. Reasonable conclusions can be reached by A comprehensive analysis of claims is reviewing the 2023 statewide report and not available. The most recent statewide interviewing leaders familiar with claims data was released in May 2023 by insurance in their own risk pools. Despite limitations, industry leader Aon. That data covered available data is sufficient to make informed, 80% of statewide average daily attendance. reasonable conclusions about claims for Several efforts are underway to produce childhood sexual assault, and to inform policy complete data, and/or to extrapolate statisti- considerations. This data includes sexual cally significant subsets of data, to produce assault and molestation claims allowed an informed statewide value and magnitude. under AB 218’s revival provisions and claims However, these efforts are still underway allowed irrespective of AB 218. at the time of this report. Data from one of these new efforts may be available following Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 11 Background Interviews with public entity risk pool experts This data is derived from interviews with who are knowledgeable about their respective several local educational and public agencies, pools’ claim data, settlement negotiations several primary risk pools and two large and trials as a subset of the total statewide excess risk pools that serve local educational exposure indicate the following: agencies, and one large risk pool that serves both local educational and other public • Between one-third and half of agencies. the claims received for childhood sexual assault since AB 218 was Observations made from the 2023 Aon report enacted have been settled or regarding claims in schools, with data contri- decided; the remaining claims butions from 14 public entity risk pools or are in some stage of analysis, individual local educational agencies, include review, settlement discussion, or the following: litigation. • Claims originated in 48 of • Offenses in schools are California’s 58 counties. somewhat bimodal, with the • Geographically, the epicenter highest number by far at high of claims is in the five Southern schools and the next highest California counties (Los Angeles, occurrence at elementary Orange, San Diego, Riverside schools. However, data also and San Bernardino), which suggests that the value of claims have 65% of the 2,079 total from high schools is the lowest, claims reported (14 of the state’s and the highest value claims 25 largest school districts are originate from middle schools. located in these counties). The modus operandi of perpe- trators differs by grade span; this • Children ages 13 to 17 are informs prevention strategies, most at risk, with the highest which are discussed later in this frequency of victims being age report. 14. • Sources familiar with statistically • Offenses occur most often in significant subsets of claim data classrooms (50%). estimate that claimants over 40 • The data includes 250 claims represent one-third of the case involving students with disabil- load. These claims were a direct ities; in more than 60% of these result of AB 218. cases the perpetrator was • The nature of childhood sexual identified as another student. assault in schools varies and • Teachers are the most common includes adult vs. student and perpetrators, accounting for student vs. student. Overall 38%. In generally decreasing sexual assault claims also order of frequency, perpe- include adult vs. adult. trators also include the • The allegations vary and following: students, teacher’s include negligent supervision of aides, coaches, custodians/ employees or students, negligent maintenance workers, coaches’ supervision of a third-party’s assistants (including walk-on use of public facilities, failure coaches), and unauthorized to investigate or appropriately outsiders. report, and civil rights violations. Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 12 Background • Sixty-eight percent of the provide coverage. Local educational and offenses occurred during general governmental agencies have the underlying education, 14% during athletics, financial exposure to the claims. and 6% in before- or after-school There are also claims for other non-AB 218 programs. childhood sexual assault claims or more • The types of offenses reported recent offenses that are outside of the were touching on skin (30%), timeline for revival claims under AB 218. In its intercourse (19%), and touching 2023 report, Aon estimated these claims for through clothes (17%). local educational agencies to be more than 2,000 in count, with a value of $1.3 billion. Not all data points were reported for every Because of the lax definition described claim; therefore, the number of observa- above, some of these claims may be desig- tions (or N-value) in each dataset was not nated among the AB 218 revived claims and consistent. The percentages shown were be counted in the numbers cited above. rounded to the nearest whole number. The source was a published report by a recog- Because AB 218 claims were not anticipated nized industry leader. The data was not by local governmental agencies or their risk independently verified. partners, few reserved funds for this risk exposure. Consequently, whether paying The fiscal impact is not limited to local for the entire claim, a portion of the claim, educational and public agencies with coverage premiums, or special assessments, claims; it affects all public agencies. Fiscal the source of funds is unrestricted funding impact also includes premiums and special used to pay for programs and services. assessments that are based on the joint and For local educational agencies, this is their several liability of current and past members current local control funding formula money of public entity risk pools (this is explained in used to staff classrooms, pay for utilities the insurance section below). and replace textbooks. For other local Even with missing details, we can public agencies, it is one of several funding conclude that the magnitude of the sources used to provide law enforcement, fire fiscal impact is significant and will affect suppression and medical aid, park and recre- programs and services. The best estimate ation programs, and other municipal services. of the dollar value of claims brought to date A statewide data repository and a because of AB 218 is $2–$3 billion for local universal classification or coding system educational agencies. Other local public should be developed to track and report agencies exceed that value by a multiplier, liability claims. It is recommended that the with one county government alone estimating Legislature require the development and their claim value at $3 billion. These amounts maintenance of a statewide data repository, are the estimated aggregate claim value, not including mandating cooperation and infor- the amount that the local public agency may mation sharing by public agencies. Recent be responsible for after applicable insurance. efforts at data collection indicate that the However, several large agencies included responsiveness of risk pools and agencies in this amount are fully self-insured. Public may be declining from the level Aon was able agencies across the state have settled some to achieve in its 2023 report and is closer to claims pretrial, or have received adverse 60% of statewide average daily attendance. judgments following trial, and have yet to finalize most claims. To support a statewide repository, a set of common definitions, classifications and The magnitude of the financial burden now coding taxonomy is required. This is similar to equals or exceeds all of the other types of what was done in the past with the Workers’ liability for which public entity risk pools Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 13 Background Compensation Insurance Rating Bureau. in this report for more details about the Although the best approach may be for basic principles of public agency insurance the risk pooling and insurance industry to coverage. establish such a classification system, it is The Joint Exercise of Powers Act recommended that the Legislature mandate (Government Code 6500 and following) a classification system to provide objective, authorizes the creation of joint powers actuarially-based information on childhood authorities. Joint powers authorities can be sexual assault claims. used only by public agencies and exist when Public Agency Insurance two or more public agencies join together to exercise a common power or create a Most public agencies have liability separate legal agency. To participate in a joint coverage through risk pools, not powers authority, the public agencies must commercial insurance, so insurance in enter into an agreement that specifies both the traditional sense is something of the authority of the joint powers authority a misnomer. With few exceptions, most and how it will execute that authority. Joint local public agencies access insurance-like powers authorities may perform many protection through public entity risk pooling. functions, including risk pooling for coverages A lower percentage, but still a majority, of such as workers’ compensation, general charter schools participate in risk pools. liability, property, and employee health Starting in the 1970s, commercial insurance benefits. rate increases and limited availability forced Public entity risk pools are joint powers many local public agencies to leave the authorities and are structured in a variety of commercial insurance market and create ways depending on their type of coverage public entity risk pools to secure coverage and their members’ experience and direction. by pooling funds. Public entity risk pools are California has the largest number of public a way to manage risk and are created when entity risk pools in the country. Public entity a group of public agencies join together risk pools are slightly isolated from the to finance and administer various forms of insurance marketplace. The risk pools offer insurance coverage. This is similar to the public agencies a cost-effective alternative to commercial market but with the cost shared commercial insurance, can be nimble during among the pool’s member agencies. Each changing environments, bear risks that the member agency funds the public entity risk risk pool can afford, and insure (or reinsure) pool through premiums and fees for the others. coverage obtained. The contributed funds and any investment earnings on reserves Public agencies are using today’s dollars finance the risk pool’s obligations. to pay for decades-old offenses revived by AB 218. Before the enactment of AB One example of a risk pool is the Schools 218 in 2019, public entity risk pools (and Excess Liability Fund (SELF), which was the insurance industry in general) did not founded in 1986 to provide local educational contemplate retroactive changes to the agencies with coverage for catastrophic statute of limitations for childhood sexual liability claims, such as the death of a assault claims. Risk pools hold funds in student, traumatic brain injury, or cases of reserve based on actuarial forecasts of childhood sexual assault and molestation. member agencies’ liabilities under current At one point or another in SELF’s history, law. Therefore, the funds to settle AB 218 every school district in California except claims were never collected during the appli- two has been a member. See the box later cable coverage periods. In addition, AB 218 claims are settled or adjudicated at current Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 14 Background dollar values, not the value of the dollar at the Public entity risk pools have implemented time of the offense (i.e., 1970s-1990s). Public different approaches to mitigate unsus- agency insurance is not structured for this. tainable claim costs. Over the past decade, members of one large excess coverage The concept of public entity risk pools owned risk pool have seen premiums for liability and operated by their members was likely coverage increase from $3.50 per average not fully understood when AB 218 was being daily attendance to $25.50 per average daily considered. Membership can change, with attendance. A primary liability pool decreased public agencies making decisions about its policy limits in 2019-20 from $50 million which risk pool to join from time to time. But to $35 million, and in 2022-23 increased its once a member for a given year, a member self-insured retention amounts from $1 million agency assumes a lifetime obligation based to $2.5 million. On the other hand, another on the year of membership and any claim excess public entity risk pool for schools exposure associated with that year. This recently increased its policy limits from $50 concept of joint and several liability means million to $75 million. that public agencies are obligated to cover the cost of claims for their respective Public entity risk pools have used various membership term regardless of whether their strategies to stabilize and maintain coverages membership continues today. as the cost of claims has risen. Risk pools have flexibility to adjust to market conditions Consequently, risk pools have been forced to to control losses, expand coverage, and fund AB 218 settlement and judgment costs provide optimal pricing for member agencies through special assessments, retroactive while ensuring the risk pool’s financial premium adjustments, or other mecha- solvency. One example has been to reinsure nisms (e.g., increasing current premiums). certain layers of liability with insurance These collections are necessary to maintain companies (i.e., purchase insurance for the fiscal solvency and program stability. If a risk pool). By transferring risk, risk pools public entity risk pool becomes insolvent, can protect their balance sheet and stabilize the member agencies will be fully exposed member premiums. to all remaining and associated risk. In the last four years, an excess liability risk pool In another example, one risk pool serving serving local educational agencies has local educational agencies reports that it collected more than $300 million in special is also evaluating a complete restructuring assessments from current and prior member of how it calculates member premiums for agencies to account for claims attributed to liability coverage. Rather than its current rate years through 2016. It anticipates it may need per average daily attendance, the risk pool to collect another $300 to $400 million in the is considering differentiating premiums by coming years to address ongoing and new grade span to recognize the higher risk for AB 218 claims. Another primary insurance childhood sexual assault at the high school pool serving local educational agencies with grades, and/or setting the premium based approximately 800,000 students has collected on a count of adults to reflect the higher risk approximately $40 million in retroactive associated with having more adults on a premium adjustments to date. Public entity school campus. risk pools have advised member agencies to Childhood sexual assault and misconduct plan for these costs in their annual budget cases have significantly altered the liability development, in addition to continuing insurance marketplace in California. premium increases. Both of these factors Allegations covered widely in the media are increasing pressure on local operating involving the Boy Scouts of America, Roman budgets. Catholic Church, United States Gymnastics, and higher education institutions have Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 15 Background increased public awareness of the preva- whether to offer insurance, and its pricing, lence of and trauma caused by childhood are based on measurable elements and sexual assault. This awareness is contributing predictability. to what risk pool managers and insurers When reinsurance is available, it is often have described as “social inflation,” or obtained from foreign carriers at a higher rising costs of claims because of increased cost and with more restrictions and lower litigation, broader liability definitions, more limits. For example, in some cases, when a plaintiff-friendly legal decisions, and larger risk pool reinsures a portion of its risk, the jury awards. Social inflation is outpacing commercial insurer may provide an aggregate economic inflation. policy limit rather than a per-occurrence Even before the enactment of AB 218, public limit. One current reinsurance industry trend agencies reported increasing insurance is that the amount of risk each insurance premiums, more restrictive coverage, partner is willing to bear is becoming smaller changing policy limits, and increasing self-in- and smaller. As a result, one needs more sured retention levels. But the revival statute and more reinsurance partners to reinsure a further altered the insurance environment. given risk. For example, seven years ago a risk pool had nine reinsurers to cover all of its The insurance industry is built on a promise reinsurance needs; now it has 21 reinsurers. and operates under the current rule of law. Insurers and reinsurers did not expect the The revival statutes and these insurance retroactive removal of the statute of limita- industry changes have created an tions on childhood sexual assault. Changes environment that is both unmeasurable and in law disrupt the marketplace and create unpredictable. In interviews, public entity risk opportunities for reinsurance companies pool managers reported that these increases to reevaluate their products and pricing. in costs are not sustainable. Commercial insurers are less willing to accept The insurance market for public agencies in the risk because of the ongoing uncertainty California is perilously unstable, and experts surrounding childhood sexual assault losses, do not see this ending anytime soon. In the which includes unknowns that could extend worst case the market could deteriorate to for decades. As a result, fewer insurance a point where there is not enough insurance providers are available to offer reinsurance available, and public agencies could end up products, and the price has increased competing with each other for the limited dramatically. coverage still being offered, creating an Assembly Bill 218 has adversely affected unfortunate dynamic. public entity risk pooling reinsurance options. Standalone sexual assault and moles- More than 85% of the California market for tation policies are increasingly expensive reinsurance has disappeared. Companies are and difficult to obtain. Many risk pools and no longer willing to accept a risk that they reinsurance policies have begun to separate may not know for decades how to measure, general liability coverage from sexual assault predict or price. Insurance pricing is based and molestation coverage. When sexual in part on actuarial science, which does not assault and molestation coverage is available, contemplate a retroactive change to known it may have additional conditions such as claim experience. Actuarial science uses specific preventive actions by the public known trends to predict the future, but the agency employer (e.g., ongoing employee extent of childhood sexual assault offenses training to increase awareness of risk factors was not known leading up to the enactment associated with childhood sexual assault). of the change in statute. The evaluation of Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 16 Background One of the largest school districts in the state agencies and nonpublic schools serving is self-insured for sexual assault coverage. students with disabilities. All are required This district also does not participate in any to have adequate insurance protection, insurance pools; rather, it purchases excess sometimes equivalent to that of the public insurance from a commercial insurer for agency. When coverage isn’t available, these general liability up to a $35 million limit and essential partners are unable to provide maintains a $5 million self-insured retention. services. Charter schools approach insurance in both similar and different manners. For District Impact Story the purpose of the Joint Exercise of Powers Some school districts have already paid Act, charter schools are considered public very large jury award amounts. Late agencies. Most charter schools are members in 2023, a jury delivered a $135 million of insurance pools; approximately 25% judgment against one of the 25 largest purchase traditional commercial insurance school districts in the state. The jury found for liability coverage. Although AB 218 that the district failed to protect the two excludes childhood sexual assault from the plaintiffs, former students, from abuse in requirement of the Government Tort Claims the 1990s by a teacher employed with the Act that a claim be first presented to the local district for more than two decades. The agency to consider before litigating it, charter jury required the district to pay 90% of schools are neither subject to nor protected the judgment and the abuser (who is in by the Government Tort Claims Act. state prison for child molestation charges) Charter school representatives indicate that to pay 10%. To finance the judgment, the insurance limit requirements vary widely district initially planned to declare hardship depending on the charter school authorizer. under Government Code 970.6 to extend Some authorizers require minimum coverage the payment over 10 years, but the plain- of $1 million to $2 million, while others require tiffs agreed to a reduced judgment of $45 the charter school to match the authorizer’s million in exchange for immediate payment. own limits (e.g., $35 million, $55 million, $75 The district, which was a member of a million). Representatives said that although joint powers authority for excess liability the lower limits cost far less in premiums, insurance coverage, paid $31 million plus they leave the charter school with significant legal fees from its reserves, and the public underinsured exposure. However, charter entity risk pool paid $14 million. The district school governing boards are free to arrange has four more pending claims from victims for higher limits. of this abuser and is concerned about the financial burden that future settlements or Public agencies are not the only organi- judgments may impose on its general fund. zations facing difficulties in securing To date, the district has incurred more than affordable coverage. Increasing costs and $453,000 in legal expenses related to this shrinking availability of coverage is a crisis for case and has been billed more than $2 the community partners that provide services million in AB 218 special assessments by to or in conjunction with public agencies. its joint powers authority for excess liability These include foster families and agencies, insurance. community-based organizations, and sole and corporate providers of nonpublic Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 17 Background Public Agency Insurance Basics Although every public agency develops its own comprehensive risk management program to address its specific needs, certain principles apply to all public agency insurance programs. Public agencies have several types of coverage (e.g., general liability, property, workers’ compensation), and they also purchase different layers of coverage. Layering insurance coverage is a common strategy for organizations with larger risk exposure, like public agencies. Likewise, layering works well in a public entity risk pool. By layering policy limits, public agencies and their risk pools are often able to lower total premium costs compared to the cost of a single, high limit policy. The combined layers of insurance limits are often referred to as a public agency’s “tower” of insurance coverage. Layers further up the tower, and reinsurers that may insure those layers, have less exposure to overall risk. Some agencies may participate in a single public entity risk pool to obtain all levels of coverage. Others may participate in one public entity risk pool for primary coverage and a second risk pool for excess insurance. Some primary insurance risk pools may participate as members in another risk pool for excess coverage purposes. A small number of larger public agencies may be fully self-insured. And a small number of public agencies and charter schools may not participate in any risk pool, opting to purchase traditional policies in the commercial market. Layer 1 – Self-Insured Retention Public agencies maintain an initial layer of risk known as self-insured retention. Self-insured retention is the amount the local agency agrees to be responsible for. It is similar to a deductible in the commercial insurance industry. This amount may vary based on the public entity risk pool they are members of, the agency’s available unrestricted revenues and how it chooses to insure its overall risk in general. Layer 2 – Primary Policy The first amount of coverage after the agency’s own self-insured retention payment is known as primary coverage. For local educational agencies, the primary limit covers from the self-insured retention amount up to a range of $1 million to $5 million depending on the structure of the risk pool. The public entity risk pool providing the primary policy is responsible for a covered action until the policy limit has been reached. Layer 3 – Excess Policy After the primary coverage is exhausted, the excess coverage is triggered and covers the next level of claim costs up to the policy limits. Interviews with various public entity risk pools indicated that excess policy limits range from $35 million to $75 million. Some public agencies may choose to have more than one excess policy layer. An excess liability risk pool covers a peril once the primary insurance policy has been exhausted, up to policy limits. Per-Occurrence Versus Aggregate Claim Limits Whether primary or excess, liability policy limits are designed to address claims in two ways: per-occurrence and/or in aggregate. A per-occurrence claim limits the amount paid by an insurer for each individual claim in a policy period. When one event results in injuries to multiple people (e.g., when a single perpetrator assaults multiple students over a certain period of time), policies will classify the injuries as a single occurrence. In addition, aggregate claim limits establish a maximum amount a risk pool or its reinsurance will pay for all covered claims during a policy Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 18 Background period. Some risk pools may establish a per-occurrence and/or aggregate limit for their member agencies in a policy year, or even on an individual layer-by-layer basis. In the past five years, these tools have been used in tandem. Occurrence Versus Claims-Made Coverage Liability insurance is also available to cover claims in one of two ways: either on an occurrence basis or on a claims-made basis. An occurrence policy covers claims arising from events that occur during the contracted policy period, regardless of when the claim is made. A claims-made policy covers only claims made during the policy period, regardless of when the offense Figure 1: that caused the injury occurred. Historically, Example Tower of Insurance Coverage public entity risk pools have offered occur- for a Public Agency rence-based policies; however, AB 218’s revival provisions and subsequent statute of Typically, this includes multiple layers limitation changes have forced risk pools to of excess coverage as follows: 1) Pool’s self-insured retention evaluate the need to transition to claims-made Excess public (e.g., $5 million). policies. agency risk 2) Reinsurance with, for example, six pool insurers, each covering a propor- Sample Public Agency Tower of Insurance (e.g., $5 tionate share of the amount from $5 million to $55 million to $10 million. Coverage million) 3) Three more layers of reinsurance coverage, with each successive Figure 1 shows various levels of public agency layer covering from $5 million to insurance coverage that can create a tower $10 million using multiple reinsurers sharing each layer proportionately. of insurance. The first level is typically an Primary agency’s self-insured retention. The second public agency Typically, this includes multiple layers risk pool of coverage as follows: level is the primary coverage of the risk pool (e.g., $25,000 1) Pool’s self-insured retention to which an agency may belong, which itself to $5 million) (e.g., up to $2.5 million). includes several layers. The third level is 2) Reinsurance with, for example, four insurers, each covering a propor- excess coverage carried by the public entity tionate share of the amount from risk pool, which also typically includes several $2.5 million to $5 million. layers. Agency’s self-insured Few public agencies have all of the layers retention (e.g., $25,000) depicted, and increasing costs and decreasing availability make a comprehensive tower of insurance difficult to achieve. Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 19 Financing conSidErationS Financing Considerations The ability of local agencies to pay a amortizing the costs over time. settlement or judgment from current For claims that are insured or partially resources may be limited. Tort liabilities are insured, risk pools usually pay promptly. generally payable in full upon the conclusion However risk pools may also have cash flow of litigation. For local agencies, this may deficiencies depending on payout activity. An mean paying for the entire claim if they are example of this is a risk pool that provides uninsured, or a portion of the claim if they liability and property coverage and is faced are insured or underinsured. This may result with a childhood sexual assault judgment and in significant negative impacts on a local a wildfire that destroys multiple school facil- agency’s budget resources and thus their ities in the same time frame. ability to deliver services. It takes time for a public agency to The fiscal impact and ability to pay can vary issue debt. Public agencies are limited in widely from one local educational or public their ability to secure financing. Unlike for agency to another. Claims of the same nature consumers and businesses, borrowing funds and value may have dramatically different is an extensive process of approvals, disclo- impacts depending on the size of the agency, sures and offering notes or bonds for sale. At its coverage status, and its revenue sources. a minimum, it takes 120–160 days to do the For example, a childhood sexual assault claim following: from 1995 for $2 million against a school • Assemble a financing team of district with 850 students and no insurance attorneys, a municipal advisor, coverage for 1995 has a different impact than underwriters, and credit a claim with the same parameters against a enhancers. school district with 14,000 students. Court judgments, and often settlements, do not • Seek and obtain local governing take into consideration insurance, the amount board approval of a financing of discretionary annual revenue, reserves structure. available, ability to pay, or access to the • Seek and obtain judicial municipal finance market to finance the validation (described below). liability over time. • Obtain credit ratings. Existing judicial procedures allow little • Prepare, obtain approval for and flexibility in timing to pay a judgment. issue preliminary official state- Under current judicial timing constraints, ments and official statements. public agencies do not have enough time to arrange for borrowing under the complex • Offer notes or bonds for sale to and time-consuming public finance process. investors. Verdicts are not effective until a judgment is • Close the transaction and receive entered by the court. Absent a filing for a new the funds. trial, or to vacate or correct the judgment, or to appeal, the public agency defendant has Private placement financing can be accom- 30 days after the notice of entry of the award plished in less time. The judicial validation as a judgment to pay or request other consid- process alone can take more than 120 eration by the plaintiff and court. days and varies widely depending on each county’s court calendar. If uninsured, few local agencies have the ability to pay claims or settlements from existing resources or reserves without Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 20 Financing conSidErationS School districts and community colleges (a) The court which enters the have constitutional safeguards in the judgment shall order that the form of state loans, but those can take local public agency pay the almost a year to obtain. As described judgment, with interest thereon, earlier and in more detail below, the state in not exceeding 10 equal Legislature has certain responsibilities to annual installments if both of the ensure that school districts and community following conditions are satisfied: colleges continue to operate and provide (1) The governing body of constitutionally guaranteed services to their the local public entity has communities. Other local public agencies adopted an ordinance or and charter schools are not included in this resolution finding that an state obligation. Commonly referred to as unreasonable hardship will emergency appropriations or emergency result unless the judgment state loans, the obligation involves advancing is paid in installments. funds to local educational agencies, an obligation for repayment over time, and (2) The court, after hearing, associated outside intervention. Historically, has found that payment emergency state loans have been made at of the judgment in below market interest rates, or the interest installments as ordered rate has been subsidized by Proposition 98 by the court is necessary appropriations. to avoid an unreasonable hardship. The process for invoking an emergency appropriation is not quick. Several prerequi- (b) Each installment payment sites exist, and the Legislature must ultimately shall be of an equal amount, act to approve an emergency appropriations consisting of a portion of the bill. The Legislature is not in session every principal of the judgment and the month of the year, so advance planning is unpaid interest on the judgment essential. This is not possible when dealing to the date of the payment. with a judgment and the existing judicial The local public entity, in its timelines to pay that judgment. discretion, may prepay any one or more installments or any part of an installment. Payments of Judgments Against Local Public Agencies Government Code 984 allows a public agency to make periodic payments on a judgment California law sets forth conditions for under several conditions, including if the courts to consider that allow a local public parties agree to such installment payments agency to pay judgments over time, up or, under certain circumstances, if the public to ten years. In the case of judgments that agency elects to do so. Those circumstances would create an unreasonable financial include 1) a judgment in excess of approxi- hardship that would result in reduction or mately $3 million (increased annually), and 2) elimination of public services, the Legislature after the public agency’s immediate payment has acknowledged the need to provide relief of the first half of the judgment. Similar to GC for public agencies by allowing them to fund 970.6, the court may determine the length payment over time. Government Code (GC) of time for the periodic payments, not to 970.6 and 984 address this topic. exceed 10 years or the length of the plaintiff’s Government Code 970.6 states: remaining life expectancy at the time the judgment is entered, whichever is less. Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 21 Financing conSidErationS This provision excludes any commercial 1. Unreasonable hardship should be insurance coverage but includes the public determined by the local governing agency’s exposure through its self-in- body or tied to established sured retention or uninsured amount, standards. Public agencies are and judgments in excess of policy limits. presumed to act in the public’s best Government Code 984 also imposes a variety interest and in good faith. Allow the of conditions on any agency using this local governing body to pass by a provision. three-fourths majority a resolution declaring unreasonable hardship To meet the Legislature’s intent to recognize that would satisfy the standard in a balance between a public agency’s obliga- GC 970.6. Require the resolution to tions under a judgment and its responsibil- identify the nature of the hardship, ities to provide public services, section 984 specifically its 1) impact on public provides that the Judicial Council shall adopt services (e.g., instructional program, rules providing for a reasonable extension of law enforcement staffing, parks and the time for filing the notice of appeal from a recreation services), and, for local judgment on the verdict to permit an election educational agencies, 2) its impact pursuant to these provisions. on the agency’s ability to meet the The usefulness of Government Code 970.6 adopted state standards and criteria and 984 are severely limited. On the surface for fiscal solvency. both sections look like helpful provisions 2. The court should defer to the local to protect public agencies from financial governing body’s determination of insolvency. But as a practical matter, their unreasonable hardship as it would usefulness is limited. First, these provisions in any challenge to a legislative act, are limited to judgments. The law is not absent a clear abuse of discretion. helpful for pretrial good faith negotiations striving for a settlement. Second, the interest Government Code 970.6 should be further calculation in section 970.6 (capped at 7% amended to provide payment terms more – Civil Code 3287(c)) results in a rate that is consistent with judgment amounts. It is well above market and what public agencies recommended that the Legislature amend typically pay. GC 970.6 to provide a sliding scale of time for repayment based on the judgment amount, The “unreasonable hardship” provision in plus interest thereon. For example, for Government Code 970.6 is problematic. judgments up to $10 million, provide for the The adjective “unreasonable” is not defined existing 10 years (or 10 equal annual install- and has the potential to be applied inconsis- ments). For judgments that are $10 million tently. Currently, it is at the court’s discretion up to $20 million, provide for 15 years (or 15 whether to allow payment on judgments for equal annual installments). For judgments up to 10 years. Further, neither hardship nor a that are in excess of $20 million, provide for standard for proving it are defined in statute 20 years (or 20 equal installments). and so may be vague. Is drawing down unrestricted reserves a hardship? Is reducing Paying a judgment before exercising or eliminating certain programs and services certain public financing options could a hardship? preclude a local public agency from issuing specific forms of debt. The Local Government Code 970.6 would be more Agency Refunding Law allows any local practical if it provided a definition of these agency to issue bonds “for the purpose of terms. It is recommended that the Legislature refunding any revenue bonds of the local amend GC 970.6 to provide for the following: agency” (GC 53583). The term “revenue bonds” for these purposes means: Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 22 Financing conSidErationS bonds, warrants, notes, or other 30 days of the date the judgment is entered evidence of indebtedness of a by the court, the governing body of the local local agency payable from funds agency must declare its intention to finance other than the proceeds of ad the judgment by issuing public debt or other valorem taxes or the proceeds long-term financing option; and 2) within 90 of assessments levied without days of the date the judgment is entered by limitation as to rate or amount by the court, the governing body of the local the local agency upon property agency must notify the court and provide in the local agency. appropriate evidence of substantial progress toward issuing such public debt. (GC 53570(b)). In short, and as described below, a local Public Finance Considerations agency may issue refunding bonds to refund indebtedness. This would prohibit 1) Fiscal impacts on public agencies may reimbursement financing (i.e., prohibit a local be mitigated and managed by financing agency from issuing judgment obligation obligations over time. The policy decision notes or bonds to refinance a judgment the for a local agency’s governing board is local agency has previously paid, because no whether to finance any monetary settlement indebtedness exists to refund after it is paid), or judgment over a term of years or to pay it and 2) a local agency from issuing judgment from funds on hand in a single year, evalu- obligation notes or bonds before a judgment ating the impact that any sizable monetary is entered against the local agency. judgment or judgments would have on current programs and services. Extending the statutory timelines would give local agencies enough time to make Financing options are available to local financing and payment arrangements. agencies that want to refund and amortize Extending the statutory timelines for public monetary judgments over time. Although agencies to pay a judgment would provide financing options will help public agencies short-term relief while the agency makes deal with the magnitude of the fiscal impact, arrangements for longer-term financing. ultimately there will still be a significant Other short-term financing options are not impact on the local educational or public always practical and may eliminate a public agency’s programs and on the affordability of agency’s ability to finance the obligation (see servicing the obligation while both sustaining the discussion of the Local Agency Refunding programs and maintaining fiscal solvency. Law later in this report). The California Constitution restricts the Absent any judicial ruling to the contrary, a power of local government entities to incur plaintiff must generally be paid within 30 days certain debts without the approval of the of the date the judgment is entered by the electorate. Article XVI, section 18 of the court. It is recommended that the Legislature California Constitution provides, in pertinent extend this payment due date to 150 days part, the following: from the date the judgment is entered by the [n]o county, city, town, township, court for judgments that are greater than 50% board of education, or school of the local agency’s unrestricted reserves. district, shall incur any indebt- This longer duration for judgments would edness or liability in any manner allow the public agency to secure funding by or for any purpose exceeding in offering public debt. The Legislature could any year the income and revenue impose additional criteria on a local agency provided for such year, without in exchange for the extended initial judgment the assent of two-thirds of the payment date. These could include: 1) within Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 23 Financing conSidErationS District Impact Story Some school districts are responding to the uncertainty about AB 218 claim outcomes by building reserves and increasing insurance requirements for community-based education partners. An urban unified school district with more than 16,000 students in Southern California reports having 11 AB 218 claims, three of which are uninsured and date back to the mid-1960s and early 1970s. The oldest of these cases originated from an outside organization that had access to students using district facilities. Although the district paid close to $2 million in special assessments to its previous excess liability pool, it has yet to access any of the applicable excess policy coverage. To protect its ongoing fiscal solvency and limit effects on current educational programs, the district reports it has started to set aside certain one-time money (e.g., unrestricted funds unspent at year end) in a special reserve fund to finance increasing insurance premiums, special assessments and self-insured retention limits, as well as future AB 218 settlements and judgments. Districts often partner with and rely on third-party organizations to provide essential educational services to students (e.g., nonpublic schools and agencies). Further, in recent years, the state has invested heavily in educational programs that encourage partnerships with community-based organizations (e.g., Expanded Learning Opportunities Program). To reduce the risk of future sexual assault and molestation claims, the district has increased its insurance requirements for all community vendors and service partners with access to students, which has limited the organizations that are able to provide services. qualified electors thereof, voting edness is not the creation of a new indebt- at an election to be held for that edness within the meaning of the constitution. purpose. Accordingly, the issuance of bonds to refund an obligation imposed by law does not In other words, the California Constitution violate Article XVI, section 18 of the California prohibits these local agencies from incurring Constitution. long-term debt obligations without a vote of the electors (special districts, including parks Local agencies are authorized to issue and recreation districts, are not subject to refunding notes or bonds for the purpose this prohibition). of refunding any evidence of indebtedness of the local agency. Local agencies have the The courts, however, have recognized power to authorize and issue refunding notes several exceptions to the constitutional debt and bonds to satisfy their financial obligations limitation. One such exception, applicable under involuntary tort judgments. These notes here, is that debt incurred to satisfy an or bonds are typically referred to as judgment obligation imposed by law does not violate obligation notes or bonds. Obligations arising Article XVI, section 18 of the California from settlements are more nuanced. Such Constitution. In particular, the California obligations are likely eligible for refunding and Supreme Court has recognized that a local judicial validation but come with additional agency’s liability for involuntary tort claims legal consideration. are obligations of the government imposed by law. Furthermore, the California Supreme In certain circumstances, judicial Court has concluded that the issuance of validation is necessary to enable notes or bonds to refund obligations imposed by bonds to be sold with the level of certainty law does not create a liability that is new or the municipal finance market requires different from an already-existing obligation regarding their validity. CCP 860 and imposed by law. The bonds are only an following provides a procedure for estab- evidence of the indebtedness, and a mere lishing the validity of notes and bonds and change in the form of the evidence of indebt- related financing contracts. Use of the CCP Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 24 Financing conSidErationS 860 procedure must be authorized by other • Direct Leases. The direct lease statute, such as GC 53511, which authorizes a (or lease-purchase) method local agency to “bring an action to determine is most often used to finance the validity of its bonds, warrants, contracts, the acquisition of equipment obligations or evidences of indebtedness.” or relocatable buildings. In the A validation action is an in rem action, which usual transaction, the local conclusively determines the validity of the agency leases the property matter against all persons. If a local agency from the lender, which may be does not bring a validation action pursuant the vendor of the property, a to CCP 863, an interested person may bring leasing company or a bank. an action, otherwise known as a reverse Under this financing lease, title validation action, to determine the validity of to the property is transferred to such matter. In general, reverse validation the local agency at the end of actions are brought by opponents to the lease term. A portion of each challenge the validity of a matter authorized lease payment made by the local by a local agency. agency is designated as interest, which may qualify as tax-exempt Given the potential large monetary amount of income to the vendor, leasing judgment obligations to be entered against company or bank. The vendor, local agencies, and the likely impacts to local leasing company or bank may agencies’ programs and services if such subsequently transfer its interest judgment obligations were to be paid when in the lease to another party. entered against the local agency, many public agencies are likely to conclude it is desirable • Certificates of Participation. In and prudent to issue judgment obligation the certificates of participation notes or bonds to refund judgment obliga- method, the local agency, as tions related to AB 218 and amortize such lessee, leases the property from obligations over an extended period of time. a third-party lessor, usually a Obtaining a validation judgment provides nonprofit corporation created by stronger and more immediate defenses or on behalf of the local agency. against a subsequent legal challenge, and The lease payments made by may provide comfort to lenders and reduce the local agency to the third- interest rates for a local agency’s transaction. party lessor are assigned to a commercial bank trustee. The Local agencies are authorized to make trustee executes and delivers lease financing arrangements. Lease certificates of participation, financing is a mechanism whereby a local which are sold to investors. Each agency leases property and, in consideration certificate of participation owner of the use of the property, makes periodic is entitled to a proportionate lease payments during the term of the lease. amount of the lease payments Lease financing enables local agencies to made by the local agency under finance projects over a multiyear period. In the lease; the certificates of effect, lease financing is a borrowing that participation represent this is repaid over time from the local agency’s entitlement. In a typical certifi- general fund. Lease financing usually cates of participation financing, involves either a direct lease of property a portion of each lease payment from a vendor, leasing company or bank, or a is designated as interest and, financing lease, undivided interests in which consequently, the owners of are evidenced by certificates of participation. the certificates of participation may receive tax-exempt interest Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 25 Financing conSidErationS payments. Certificates of partici- to make lease payments is pation are sold to investors much abated, or reduced, during as bonds are; the proceeds from any period in which the local the sale of the certificates of agency does not have full participation provide the money beneficial use and occupancy used to complete the local of the leased property. These agency project. leases are often referred to as “Offner-Dean” leases, after two Unlike bonds, certificates leading California court cases of participation have no holding that such leases do not independent legal existence or constitute debt for California significance. They are simply constitutional purposes. receipts evidencing ownership of a share in the local agency lease; • Annual Appropriation Leases. the lease itself is a local agency The second type of lease that obligation, the payment of which avoids classification as debt is gives rise to tax-exempt interest. known as an “annual appropri- Moreover, because certificates ation lease.” Under such a lease, of participation are not created the local agency is obligated by statute, they are not subject only for payments due in the to certain statutory requirements then-current fiscal year. The local that may affect bonds, such as agency has the right, at least election restrictions and other once during each fiscal year, to statutory limitations. unilaterally terminate the lease by not appropriating the lease Lease financing is an exception to the payments for the following year. constitutional debt limit. As previously Upon any such termination, the discussed, Article XVI, Section 18 of the leased property is returned to the California Constitution provides that certain lessor. local agencies may not incur any indebt- edness payable beyond the fiscal year Either an abatement lease or an annual in which it is incurred without the voter appropriation lease may be used for lease approval. In a lease financing, however, the financing. Because an Offner-Dean lease local agency’s obligations under a lease are provides greater security, it is the type most structured to avoid classification as indebt- often used in California. The use of lease edness for purposes of this constitutional financing has been frequently recognized restriction. This is usually accomplished in by the courts as not implicating the consti- one of two ways. tutional debt limitation; therefore, the legal community and the municipal finance market • Abatement or Offner-Dean accept such financings without the need for a Leases. The first and most validation proceeding. common method uses a long-term lease containing a Lease financing may be an alternative to rental abatement provision. judgment obligation notes or bonds for Under such a lease, each lease some local agencies. Some local agencies payment is contingent upon may want to pursue lease financing to finance the local agency using and their childhood sexual assault obligations. occupying the leased property The structure avoids the delay of the CCP during the period for which 860 validation proceeding and potential legal such lease payment is due. challenges to the financing that may result The local agency’s obligation from such a proceeding. Moreover, the timing Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 26 Financing conSidErationS issues under the Local Agency Refunding proceeding relating to the refunding of all Law relating to refunding indebtedness do prospective judgments that could potentially not apply to a lease financing, which may add be entered against the local agency. flexibility to the financing. On the other hand, It is recommended that the Legislature clarify lease financing requires a lease asset. Using that a CCP 860 validation proceeding may be a lease option, therefore, ties up local agency brought by a public agency before tort action assets that could otherwise be available for judgments are entered against the public future capital financings. Or, in some cases, agency. This would help enable the public the only school site in a small school district agency to put in place a financing mechanism may already be the security for an existing or program for the timely refunding of a large lease financing. Thus, each local agency number of tort action judgments as and would need to compare the advantages when such judgments are entered. It would and disadvantages of lease financing when also facilitate public agencies in efficiently deciding to pursue financing for its childhood and effectively managing the unprecedented sexual assault obligations. number of actions stemming from the However, lease financing of childhood sexual enactment of AB 218. It is also important not assault obligations is currently not available to narrow legislative action to just AB 218 to some local agencies. Education Code (EC) obligations. Over time, AB 218 will cease to 17456 prohibits school districts from using be a consideration, but claims resulting from the proceeds of lease financing for general future childhood sexual assaults and other operating purposes, which would prohibit extraordinary tort liability will impact public school districts from lease financing their AB agencies in a similar fashion. As described 218 obligations. Moreover, some city charters above, AB 452 eliminated the statute of may similarly restrict use of lease financing. limitations for the recovery of civil damages suffered because of childhood sexual assault Given the unique challenges brought for claims that arise on or after January 1, about by AB 218, the Legislature should 2024. consider recommendations regarding common financing methods that would The Education Code prohibition against help local agencies more easily implement school districts using lease financing a financing option. Historically, judgment proceeds for general operating purposes obligation bond validation actions, as was put into place to prevent school districts described above, have involved underlying from financing working capital expenditures tort actions that have already reached and furthering a school district’s financial judgment. Thus, a local agency typically distress. However, in the present situation, it would issue bonds to refund a single is recommended that the Legislature consider judgment or a handful of judgments on an a limited exception to the prohibition in EC as-needed basis following the completion of 17456 for situations where an otherwise a CCP 860 validation proceeding. However, financially stable school district is faced the sheer number of lawsuits and the large with an extraordinary liability such as one potential total liability some local agencies brought about by AB 218. The Legislature will have from claims as a result of AB should provide such school districts with 218 make this approach impracticable. another financing option to amortize the Issuing bonds after judicial validation on a liability and lessen the financial effects on case-by-case, piecemeal basis would cost programs and services. Such an exception time and money, and significantly burden could be narrowly tailored to apply to school judicial resources. The solution is for a local districts only in extraordinary situations, only agency to bring one CCP 860 validation if they otherwise meet the state’s standards and criteria for fiscal solvency, and only with Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 27 Financing conSidErationS the approval of the county superintendent public agencies. Furthermore, the state of schools or state superintendent of public treasurer has the potential to enable local instruction, as applicable. agencies to access the state’s intercept payment mechanisms, has recognized The existing state and local payment experience as an intermediary issuer, and intercept provisions should be extended provides for the safety and security of an to local agencies to increase the security issuance by the State of California. These and credit of public financings. EC 17199.4 are all desirable features for small agency provides both a mandatory and voluntary financings. Currently, the state treasurer intercept mechanism for local educational administers intermediary issuer-like agencies participating in public financings programs for affordable housing, schools and handled by the California School Finance community colleges, earthquake insurance, Authority. The mechanism allows the state victim compensation, and excess liability controller to intercept appropriate funds and insurance, among others. amounts due to the local agency and redirect those funds to bondholders to pay debt The California School Finance Authority is service obligations. There is also an optional one example of the treasurer’s intermediary local process that county treasurers may financing programs. At the same time, the agree to perform to intercept local property authority has challenges meeting the timing taxes and make payments to bondholders constraints of a settlement or judgment. according to the terms established. These The authority has certain blackout periods mechanisms increase the security and credit because of disclosure requirements related to of the public debt. It is recommended that the the state budget. Legislature extend these intercept mecha- The Legislature should consider expanding nisms to apply to public financings for local other state agencies’ financing roles. agencies rather than limit the mechanism to The California Infrastructure and Economic the California School Finance Authority. Development Bank has broad authority to issue revenue bonds, provide financing to State Agencies’ Financing Role public agencies, provide credit improve- ments, and acquire or lease facilities. The state treasurer should help local Historically, the bank has focused on infra- agencies facing AB 218 settlements and structure and economic development, but judgments gain access to capital markets. it has also been the intermediary financing Although federal and state statutes regarding authority for state emergency apportion- public finance do not distinguish between ments to school districts and community local agencies that use the financial tools colleges under state receivership. The bank associated with public debt financings, does offer public agency revenue bonds the municipal finance market may be less for qualified purposes and, as stated on its receptive to certain financings by small website, has “unique programs of specific agencies. Small agencies may pursue state and local government agencies used for private placement arrangements for notes or the furtherance of governmental and qualified bonds whereby the agency sells its debt to purposes.” The Legislature should expand one or a small group of investors through a or direct an appropriate role for the bank in negotiated arrangement; however, there may financing childhood sexual assault settle- be instances when a small agency requires ments and judgments. an intermediary, such as the state treasurer, to issue debt on its behalf. The Legislature could appropriate funds, or allow payment of obligations from more The advantage of the State Treasurer’s restrictive funds, to help local educational Office is that its public finance services and agencies. The Legislature always has the products can be made available to all local Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 28 Financing conSidErationS option of appropriating specific funds to local of millions of dollars in part by issuing debt. agencies to support a change in state policy Examples include taxable revenue bonds such as the retroactive nature of AB 218. offered by the University of California. The Legislature may also consider allowing The municipal finance market is usually the expenditure of funds from existing, more indifferent to the reason for public debt. The restricted appropriations to pay tort liabil- market assumes that the reason for and ities or to establish committed reserves for decision to issue public debt was properly tort liabilities. Finally the Legislature may vetted by the local legislative body. However, appropriate unrestricted funds through an the investment market may react to certain augmented cost of living adjustment or types of debt structures (e.g., leases with other discretionary funds that local educa- abatements) by imposing higher yield require- tional agencies may use for this and other ments. In addition, some investors may have purposes. investment policies with socially-conscious The Legislature could also consider providing investing restrictions and thus avoid debt an appropriation that establishes a revolving associated with judgments or settlements. fund within the state treasury for public Like any new public debt trend, if judgment agencies to access to make timely payments obligation bonds or other forms of debt on settlements and judgments. The revolving issued by California public agencies due to fund would be replenished by reimbursement childhood sexual assault settlements and from a local agency using proceeds from judgments were to emerge as a frequent allowed public debt offerings. Such an offering, a specialized market may develop approach would need to be structured to among an informed investment community. comply with statutory provisions regarding Smaller agencies may find higher yield obligations imposed by law and not subject to penalties (higher interest) than larger issuers; the constitutional debt limit. There may also however, this is likely driven more by credit be complications to this approach that would analysis than by the purpose of the issuance. require CCP 860 validation. Rules related The availability and terms of credit are to a revolving fund need to be established based on affordability and structure of regarding eligible public agencies, ability to indebtedness. Interviews with analysts from repay, limits on the dollar amount or number one of the big three credit rating services of times one agency can access the fund, indicated that judgment obligation bonds are repayment terms, reporting, interest rate and, generally seen as credit positive because for school districts and community colleges, they provide an effective way to amortize a the interaction with emergency appor- judgment or settlement burden over time. tionment loans. When credit raters assess a public agency’s credit for existing or new debt, they do not Public Finance Market consider credit impacts from pending claims An investment market exists for judgment or judgments; only final resolutions are obligation bonds or other forms of public considered in the analysis. However, local debt used to finance a settlement or public agencies with financial trends and judgment. California public agencies have ratios above or below the median and facing issued only a handful of judgment obligation litigation may experience credit weakening. bonds in the last twenty years. No school or Investors focus on credit and assurance of community college districts are on record as being paid back. Among the predictors of risk issuing or placing judgment obligation bonds is affordability (i.e., the local agency’s ability until last year. Higher education institutions, to manage annual debt service) and debt both public and private, have financed sexual levels. assault settlements costing multiple hundreds Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 29 Financing conSidErationS Some of the settlement and judgment The most robust disclosure of pending amounts related to childhood sexual assault claims is found in the issuance of debt, claims exceed reasonable affordability tests. not in annual financial statements. For example, a $75 million debt issuance to Governmental agency financial statement cover a judgment against a school district disclosure of the liability associated with with $15 million in annual revenue would childhood sexual assault is generally require annual debt service of $5.4 million in viewed as weak. Governmental Accounting principal and interest for 20 years. This would Standards Board Statement No. 10, result in 36% of the district’s revenue being Accounting and Financial Reporting for pledged to this one debt obligation. Because Risk Financing and Related Insurance school districts spend 85% of their revenue Issues, requires public agencies to report on personnel, most of whom directly serve an estimated loss from a claim as an expen- students, only $2.3 million of the $15 million diture and as a liability if both of the following in annual revenue would be left for nonper- conditions are met: sonnel expenses, including debt service. 1. Information available before the Thus the annual amount available would pay financial statements are issued for only about half of the annual debt service. indicates that it is probable that As a result, the district in this example would an asset has been impaired or a have to substantially reduce personnel and liability had been incurred at the the associated programs and services for date of the financial statements. It is students. implicit in this condition that it must Creditors are looking for stability and be probable that one or more future security. Avoiding hidden risks is an events will also occur, confirming the important component of their investment fact of the loss. decisions. Therefore, a debt issuer’s demon- 2. The amount of the loss can be strated commitment to better prevention of reasonably estimated. risks, including the risk of childhood sexual assault, should be presented in the context In a sample of school district annual financial of credit (see the discussion of prevention statements, few included any disclosure or measures later in this report). valuation of liability for pending claims of childhood sexual assault. However, school California schools have long been considered districts and other public agencies making good investments—stable or positive. offerings of municipal securities have However, recently, and for the first time, increased their disclosures of such risks. Moody’s Investor Services assigned the This conforms to the intent of the disclosure kindergarten through grade 12 traditional regulations issued by the Securities and school sector a negative outlook for 2025. Exchange Commission and other federal This acknowledges the financial environment and state antifraud provisions. Material facts of greater constraint, driven in part by overall include risk factors that investors and the decline in enrollment and increasing fixed municipal finance market rely on. operating costs. Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 30 School and community collEgE diStrict EmErgEncy apportionmEnt School and Community College District Emergency Apportionment The state is constitutionally obligated to date, the loan amounts required to correct ensure that school districts continue to these deficiencies have triggered the more provide instructional services to students. intense intervention of an administrator. California’s constitution and statutes protect State loan conditions are designed to school districts from insolvency by using remedy fiscal insolvencies caused by state emergency apportionments (also systemic failures in governance and known as state emergency loans). These are management, not those caused by sudden commonly referred to as the receivership or unexpected events. School districts statutes (Articles 2 and 2.5 and 2.7 of Chapter encounter fiscal crises as a result of two 3 of Part 24 of the Education Code). A less things: governance and management failures defined but similar receivership protection is over time, or a sudden event. Underinsured extended to California’s community colleges. and uninsured settlements or judgments Since 1990, nine school districts and one related to past childhood sexual assault fall community college district have required into the latter category—a sudden event. It state loans. Upon accepting a state loan is anticipated that any emergency appor- and depending on the loan’s size, a district tionment needed due to an AB 218 settlement must comply with certain conditions until or judgment would exceed 200% of a the loan is repaid. Charter schools and district’s required reserve, and thus the more other local public agencies do not have the intense intervention with an administrator same protection. See the box below for would be required under current law. more details regarding the requirements for emergency apportionments. Intensive interventions associated with a large emergency apportionment may The receivership process includes a provision not be appropriate for school districts for an emergency apportionment and for requiring state loans solely due to AB 218 the local county superintendent of schools, obligations. The loss of local control, intense through an administrator, to take temporary intervention with an administrator, and annual control of a school district’s governance follow-up required in the case of a higher and operations, or for a trustee to provide emergency loan amount appear unwarranted added oversight to the district’s governing for districts that are otherwise governed well board. Whether the receivership process and meet the state standards and criteria for involves the more intense intervention of an fiscal solvency. administrator or the less intense oversight of a trustee is determined by the amount of the Normally, receivership intervention has emergency apportionment required to ensure two major purposes. The first is to help the the district will meet its financial obligations. district overcome and correct its gover- If the apportionment exceeds 200% of the nance, student academic performance, district’s required reserves, an administrator human resources management, facilities is required. management and fiscal challenges. The second is to ensure that the district can meet Until now, districts requiring state loans have its annual obligations to repay the state or the exhibited ongoing and unmitigated systemic bondholders that provided the emergency failures in all operational areas: fiscal apportionment funds. management, pupil achievement, personnel management, facilities management, and governance and community relations. To Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 31 School and community collEgE diStrict EmErgEncy apportionmEnt It is unlikely that the circumstances 6. Replicate current trustee surrounding a childhood sexual assault responsibilities, with modifications offense from years earlier are related to to focus on the district’s progress in deficiencies in an agency’s current gover- correcting any deficiencies identified nance, policies, systems and practices. The in the initial assessment. exception may be personnel management As an alternative to enacting the new practices. statutory provisions recommended above, the The two major purposes of receivership Legislature could consider including these intervention can be accomplished through provisions in each district-specific emergency an alternative statute. It is recommended apportionment legislation on a case-by-case that the Legislature adopt an alternative basis (similar to how the state authorized statute for school districts requesting the one community college emergency emergency apportionments solely due to appropriation). childhood sexual assault obligations. An State law provides two methods for the alternative receivership statute should include state to finance emergency apportion- the following provisions: ments. EC 41329.52 provides the more 1. Specify the Legislature’s intent common method, a two-part financing, that this statute be used only for which includes an initial interim loan from districts that require an emergency the state general fund to the school district. appropriation solely due to This is paid back in full, with interest, from settlements and judgments resulting the proceeds of a lease financing between from childhood sexual assault claims. the school district and the California Infrastructure and Economic Development 2. Continue to require the existing Bank. The lease financing is then paid back prerequisite conditions for receipt of by the school district over time. any loan funds (e.g., EC 41320). The second method is an alternative to lease 3. Create new professional and legal financing and subject to the availability of standards established by the State funds. EC 41329.53 allows a district to receive Board of Education, upon the an emergency apportionment from the state recommendation of the Fiscal Crisis general fund on a long-term basis. and Management Assistance Team, specific to preventing and eliminating To ensure the two methods are cost-neutral childhood sexual assault. These to the district, in the case of a state general include human resources policies, fund loan, the bank is responsible for deter- adherence to hiring standards, mining the interest rate based on an analysis employee supervision, campus safety of the interest rate, costs of issuance, and practices, employee and student any credit enhancement costs that would awareness training on grooming and have occurred with the alternative lease prevention measures, mandated financing. Both methods require repayment reporting policies and practices, and within 20 years. district culture. State loan terms may not be realistic for 4. Require the Fiscal Crisis and larger settlement or judgment values. Management Assistance Team to As childhood sexual assault claims are complete an initial assessment of the settled and adjudicated across the state, district’s compliance with the new an emergency apportionment may be the professional and legal standards. only financing alternative for some districts. School districts that are unable to reach 5. Follow the trustee model to help the reasonable settlements for uninsured and district as outlined in EC 41320.1. Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 32 School and community collEgE diStrict EmErgEncy apportionmEnt underinsured claims will have to seek balance between annual debt service and resolution in the courts. Some school districts educational program and service needs. The may encounter jury awards that cannot be decision about an appropriate repayment supported by their current resources or by term could be part of the prerequisite the reasonable public financing alternatives process when seeking a state emergency outlined in this report, leaving the district loan (EC 41320), including the required public with no option but to request an emergency meetings. The Legislature should extend apportionment. the maximum repayment term of 20 years for emergency apportionments when the Unlike the municipal finance market, state loan amount is significantly higher than the emergency loans do not consider the credit- school district’s ability to pay within that time worthiness of the district. But affordability is and based on an analysis performed and an important consideration, and the amount disclosed during the process leading to an of the settlement or judgment of childhood emergency apportionment. sexual assault claims will influence the afford- ability calculation. Balancing affordability It should be noted that the 20-year limit is in with the ability to maintain the integrity of statutes applicable to emergency appropria- instruction and student services poses a tions. The state’s Infrastructure and Economic significant concern. Development Bank has internal policies that support repayment terms up to 50 years for Education Code 41320(e) requires the county certain financing structures. superintendent of schools to certify that the action taken to correct the district’s financial The emergency apportionment option is problems is realistic. Current statute also not available to charter schools, county requires loan repayment within 20 years, offices of education, or other local regardless of which of the two methods agencies. Statute does not provide for the state uses to fund the emergency charter schools, county offices of education, loan. However, some districts’ unrestricted or other local agencies to access the resources, the main source for loan emergency apportionment process. The only repayment, may not realistically be able to option for these agencies will be to use other support the debt service payments needed financing options outlined in this report to for a 20-year loan. finance childhood sexual assault settlements and judgments. If unsuccessful at finding Extend the repayment terms when the financing, these entities may seek protection emergency apportionment amount is high. though Chapter 9 (governmental agencies) As noted above, both methods for funding an or Chapter 7 or 11 (charter schools) of the emergency apportionment (EC 41329.52 and United States Bankruptcy Code. 41329.53) require that repayment not exceed 20 years. It is recommended that the Legislature provide for a longer repayment period to enable districts to maintain an appropriate Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 33 School and community collEgE diStrict EmErgEncy apportionmEnt Emergency Apportionment Requirements for Local Educational Agencies School Districts Articles 2, 2.5, and 2.7 of Chapter 3 of Part 24 of the Education Code provide for emergency apportionments to school districts in fiscal crisis. Based on the apportionment amount, statute establishes two types of intervention upon receipt of an emergency apportionment. For simplicity, these two types of loans and their associated intervention methods are described as Type 1 and Type 2. Type 1 Loans Type 1 loans are emergency apportionment amounts up to and equal to 200% of a district’s recommended reserve for economic uncertainties under the state standards and criteria for fiscal solvency. For Type 1 loans, the county superintendent of schools, state superintendent of public instruction, and the president of the State Board of Education appoint, by majority vote, a trustee to monitor and review the district’s operations. The trustee may stay and rescind any action of the school district governing board that may affect the district’s financial condition. By October 31 annually, Type 1 loan districts must prepare a report on the district’s financial condition for the county superintendent of schools, state superintendent of public instruction, the president of the State Board of Education and the state controller, until the loan, including any interest, is repaid. Trustee’s Role and Requirements A trustee remains in place until the following conditions are met: • The school district establishes adequate fiscal systems and controls. • The state superintendent of public instruction determines that the district’s future compliance with its fiscal recovery plan is likely. • The county superintendent of schools, state superintendent of public instruction, and president of the State Board of Education terminate the trustee’s appointment (no earlier than three years after the trustee’s appointment). The trustee serves under the direction and supervision of the county superintendent of schools. Following the trustee’s term and until the loan is repaid, the county superintendent of schools may stay or rescind any action of the school district governing board that may affect the district’s financial condition. Type 2 Loans Type 2 loans are emergency apportionments that are more than 200% of a school district’s recommended reserve for economic uncertainties, and consequently result in additional condi- tions affecting the district’s local control. Before applying for a Type 2 loan, the school district governing board must discuss its need at a regular or special public meeting that allows for testimony from interested parties (e.g., parents, employees and the community). For Type 2 loans, the respective county superintendent of schools assumes temporary control of the district and, with concurrence of the state superintendent of public instruction and the president of the State Board of Education, appoints an administrator to resolve the district’s challenges. The district’s superintendent is released, and the school district governing board serves in an advisory role with no legal rights, powers, or duties. Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 34 School and community collEgE diStrict EmErgEncy apportionmEnt To evaluate the progress of a district with a Type 2 loan in implementing its recovery plans, EC 41327.1 requires the Fiscal Crisis and Management Assistance Team to conduct an annual comprehensive assessment of five operational areas (financial management, pupil achievement, personnel management, facilities management, and community relations and governance) using professional and legal standards adopted by the State Board of Education that define a good educational program and fiscal and management practices. Statute authorizes the county super- intendent of schools, with concurrence from the state superintendent of public instruction and the president of the State Board of Education, to return authority to the governing board for any of the five areas if performance under the recovery plan for that area has been demonstrated to the satisfaction of the county superintendent of schools. Administrator’s Role and Requirements The administrator is tasked with implementing substantial changes in the school district’s fiscal policies and practices, including, if necessary, filing a petition under Chapter 9 of the federal Bankruptcy Code for an adjustment of indebtedness. The administrator remains in place for at least one complete fiscal year following the loan’s acceptance and until the county superin- tendent determines that the district’s compliance with recovery plans is probable. At that point, with the concurrence of the county superintendent of schools, state superintendent of public instruction, and president of the State Board of Education, the governing board regains its gover- nance authority, a superintendent is hired, the administrator’s appointment is terminated, and a trustee is assigned in the same manner as for a district with a Type 1 loan. As in the case of an appointed trustee, an administrator serves under the direction and super- vision of the county superintendent of schools. Prerequisites for Receiving Loan Funds School districts must request an emergency apportionment. As a condition of receiving an emergency apportionment, the school district must submit the following to the county super- intendent of schools: a report by an independent auditor on the school district’s financial conditions and budgetary controls; a management review written by a qualified management consultant who is approved by the county superintendent of schools; and a fiscal plan adopted by the school district governing board to resolve the district’s financial problems. Upon their approval of these documents, the county superintendent submits them to the state superintendent of public instruction, the Joint Legislative Audit Committee, the Joint Legislative Budget Committee, the director of finance, the president of the State Board of Education, and the state controller. The county superintendent of schools, with the concurrence of the state superintendent of public instruction, must certify to the director of finance that the proposed action is realistic and will place the school district on a sound financial basis. Upon the state superintendent of public instruction’s approval of the repayment schedule, and the trustee or administrator’s appointment, the state controller disburses the emergency loan proceeds to the school district. Community College Districts Statutes specific to community college district emergency appropriations are less defined. In the case of the one community college district loan issued since 1990, the acceptance conditions in the authorizing legislation were established specifically for that district. Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 35 victimS’ compEnSation Fund Victims’ Compensation Fund A victims’ compensation fund should be premiums paid by public agencies to public established as an alternative means of entity risk pools, commercial carriers, or providing remedies for victims. Victims self-insured agencies. The important principle deserve a more compassionate and timely is that costs be shared across a broad remedy than litigation. A frequent point of base. A well-structured fund is likely to be discussion among public agencies affected supported, including financially, by the liability by childhood sexual assault claims is the insurance industry. creation of a statewide victims’ compensation Although a victims’ compensation fund may fund. All victims alleging injury have a right be of some help in resolving current claims to a trial, so use of a compensation fund filed because of AB 218 or otherwise, it is would be a voluntary alternative to the judicial likely more useful on a prospective basis. A process. A victims’ compensation fund would compensation fund may be most helpful to work to resolve claims through a reasonable all involved when the offense is more recent process that invites the victim to present their and the claim is first presented to the public claim in an uncontested environment that agency. focuses on care and compassion, and where remedies are offered, discussed and decided The organization administering the fund and on. its processes would also need to aggregate all data to inform future policymakers and The fund could assemble specialists and help develop prevention strategies. This experts in care and resolution of these types organization could house the statewide data of claims. Additionally, and important for repository recommended above. more recent victims, the fund could offer victims comprehensive services to help them There are limited victims’ compensation funds succeed and advance through the trauma in California. Some are managed by the state of the offense. Services the fund could treasurer’s office and others by nonprofit arrange for and cover include counseling, organizations. One example is the California therapy, other medical and behavioral health Victim Compensation Board. However, what related assistance, and child welfare. Limited this recommendation envisions is more eligibility criteria should be established, robust than any existing process and service including cooperation with law enforcement for victims. The existing victim compensation to support prosecution and possibly with board is the payer of last resort; however, the the perpetrator’s public agency employer to victim compensation fund recommended here support employment actions. Victims should would be the payer of first resort. A frequent not need a lawyer to submit a claim, though example shared is the federally authorized legal representation should not disqualify a September 11th Victim Compensation Fund claimant. for victims of the September 11, 2001, terrorist attacks in New York, Pennsylvania Participation in the fund would likely need and at the Pentagon. to be mandatory for all public agencies subject to childhood sexual assault claims, The Legislature should commission a study including public schools, charter schools, that identifies the structure and attributes of counties, and other municipalities. Without a victims’ compensation fund for childhood a mandatory support requirement, the fund sexual assaults involving a public agency. The would be subject to adverse selection. There study should be presented to the Legislature are alternatives to this approach that may no later than January 1, 2026, and the be considered. The fund could be financed Legislature should consider establishing a through an assessment on liability insurance victims’ compensation fund by July 1, 2026. Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 36 prEvEntion conSidErationS Prevention Considerations The goal should be to completely eliminate across 10 to 50 acres on a typical school childhood sexual assault in local public campus. Plaintiffs’ attorneys also compare agencies. One of the frequent criticisms the training risk management organizations of AB 218 and AB 452 is that neither bill (including public entity risk pools) recommend promoted a state policy priority of elimi- to what an employer is actually offering. nating childhood sexual assault offenses, Expand requirements regarding mandated and neither addressed prevention. Preventive reporting of child abuse and neglect. For measures are essential to eliminating local educational agencies and other public childhood sexual assault and must be and private organizations, certain employees increased to fully protect children. Generally, and volunteers are mandated reporters and local educational and other public agencies are required to receive training on child abuse interviewed for this report were supportive and neglect and the reporting of it pursuant of increased prevention measures. Culture to Penal Code (PC) 11165.7 and EC 44691. must change, and the tone is set at the top. Specifically, PC 11165.7(a) provides a list of Therefore, the Legislature should ensure that individuals who are considered mandated state policies set consistent standards to reporters based on occupation. Paragraphs achieve zero tolerance for childhood sexual 1-5, and 9 provide for certain public school assault, and leaders and governing board employees to be mandated reporters, yet members of schools and municipalities must not all school employees who interact do the same. with children are included on the list (e.g., The recommendations below provide principals and assistant principals are not some ways the Legislature may strengthen specified), and the list is inconsistent in which preventive measures for local agencies. positions it specifies as mandated reporters at private schools. It is recommended that the Local policies and practices should be Legislature amend paragraphs 1-5 and 9 of improved to foster a positive culture that PC 11165.7(a) to simply include all employees, focuses on safety. For schools, policies that volunteers and governing board members of set a tone of high expectations for student a public or private school, including charter safety are paramount. But policies alone schools. are not sufficient. Practices must reflect commitment to the policy. To this end, the Increase mandated training to build Legislature should require comprehensive awareness of, and reporting options for, school safety plans (ECs 32280 – 32289.5) childhood sexual assault. As noted above, that include required policies and proce- some risk management experts believe the dures designed to improve supervision and risk of childhood sexual assault increases protection of children. Policies, procedures not with the number of students but with the and safety plans should be communicated number of adults with access to students. regularly and followed at all times. In recent years, schools have expanded services and employees to support social The subject of training and appropriate and emotional learning. These types of supervision of employees and others on services are an essential component of a school campus is raised routinely in whole child educational initiatives and are settlement negotiations and trials. It is impos- a large part of an expansion of services in sible for a principal at a school to supervise response to the pandemic. Examples include and monitor every adult interaction with a 1) programs to lengthen the school day or student. Classrooms, meeting spaces and year, such as the $4 billion investment in the interactions are subdivided and scattered Expanded Learning Opportunities Program, Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 37 prEvEntion conSidErationS which brings more adults on campus, in many assault children. At the high school level, cases employed by third-party communi- experience suggests that more often adult- ty-based organizations; and 2) arts and music to-student boundaries break down and what programs funded through Proposition 28 may have started as a well-meaning profes- (2022), which increase the opportunities for sional relationship changes to an inappro- students to engage with community volun- priate one. Often high school victims are teers and nontraditional instruction providers. at-risk students who seek additional adult-to- student relationships because of challenges These programs encourage positive at home. relationship building and improve adult-to- student ratios, but they also introduce an The approach to prevention training programs additional risk of childhood sexual assault. must vary to properly prevent and eliminate At the same time, an increase in adults can childhood sexual assault in every context. be a positive deterrent to predatory actions, Train students to promote awareness and particularly if adults are well trained and help provide 24-7 protection. Although knowledgeable about professional bound- there was debate in the past about whether aries, inappropriate behaviors (including it is a best practice, many risk management grooming), and how to report concerns. and child psychology experts now view Expanded training should focus on increasing the training of children as an important the quality of instruction. Some risk component of protection. Overall, students management professionals believe training is are a close second to teachers as the best accomplished in person and not through highest-frequency perpetrators. And in the self-paced, minimally-interactive web-based case of students with disabilities, 61% of programs. Training should be well-docu- perpetrators are other students, with teachers mented to avoid variances in implementation constituting 17%. across an organization. For local educational Children are in school approximately six agencies, the most daunting hurdle to quality hours per day, 180 days per year. The rest of training is time, especially for teachers who the time, they are involved in other life activ- work a specific contract period, usually with ities and social environments. Training for minimal nonstudent days. More time means students should focus on building awareness more expense. For twelve-month employees and promoting reporting options, and should in other local agencies, time may be less of a include parents and legal guardians, families, hurdle. and the public. Specifically, the training It is recommended that the Legislature should focus on principles of acceptable increase the quality and consistency behavior, red flag indicators of certain of mandated training to prevent, build behaviors in adults and children, and how to awareness of, and increase access to report concerns in a safe environment. reporting options for, childhood sexual Recently a great deal of attention has been assault. paid to training students on the subject of Improve training programs to increase cyberbullying and the use, access, context knowledge about the varying contexts in and influences of social media platforms. which childhood sexual assault occurs. The The Legislature should mandate the same grooming of victims by perpetrators is funda- urgency and effort regarding the prevention of mentally different at the high school level than childhood sexual assault through training that at the elementary level. At the early childhood builds awareness and reporting options. and elementary grade levels, there are Criticism of this idea has been that it shifts serious psychological issues and sometimes the burden from adults to children. But not all malice in the hearts of perpetrators who adults in a child’s life are trained or Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 38 prEvEntion conSidErationS monitored. Building awareness that sexual assault and exploitation are wrong and District Impact Story promoting reporting are important steps in the defense of children. The Legislature Some school districts are contracting with should mandate training of students to insurance archeology services to maximize promote awareness and help provide 24-7 recoveries for AB 218 claims, as well as strength- protection. ening preventive practices to guard against future events. A unified school district located Public and private school organiza- on the central coast with approximately 9,000 tions and other governmental agencies students has hired an outside firm to uncover lost or should establish policies that promote unknown insurance policies for four AB 218 claims common sense professional boundaries for events that occurred between 1969 and 1981. between adults and children. Several risk To date, the district has paid almost $15,000 for management experts interviewed for this these insurance archeology services and estimates report, who are familiar with claim allega- a total potential uninsured exposure of more than tions and details, identified the following $10 million. Although the district has been able suggestions for establishing and promoting to identify liability coverage for these years, the professional boundaries, specifically in a underlying insurance carriers in all but one case are school setting: either insolvent or have not accepted ownership of 1. Electronic communication between the claim’s coverage. The district also reports that adults and students is needed in the it conducts annual sexual assault and molestation secondary grades. A good example prevention evaluations, including reviews of its is between a coach and players to prevention policies, employee training, and use of advise of a last minute change in technology. These evaluations also include physical game time or transportation plans for inspections of schools, including classrooms, an away game. Such communication offices, athletic areas, theaters, gyms, locker rooms, should only be allowed at the labs, restrooms, common areas, and other areas secondary level if the parent or where students may be present. guardian is included. Electronic communication between adults environments for all perils. Couches and students includes social media should not be allowed as classroom interactions. Such communication is furniture. not appropriate for elementary-age Public entity risk pools have developed solid students and should be limited to guidelines in this regard. At a minimum, between school employees and these guidelines should be instituted locally parents. through policy, but state mandates may be 2. Set policies in place to prohibit warranted. These recommendations can one-on-one adult-student presence be made more generic to be applicable to and interactions in isolated areas. nonschool organizations. The Legislature Private offices should have uncovered should establish a statute that promotes windows, and instructional spaces professional boundaries between adults for one-to-one interaction (e.g., and children and strengthens the safety of speech and language pathology learning environments. services) should be clearly in Expand screening of applicants and volun- view to those walking by and teers to strengthen prevention. The hiring supervisors. Classrooms should of applicants who are assigned to work also be visible, all while maintaining around children, and the hiring of all public a balanced approach to safe school and private school employees, should include Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 39 prEvEntion conSidErationS more screening, background checks, and employment information); or using a combi- prior work history requirements. Temporary nation of data collection systems with and substitute employees, walk-on coaches aggregation and accessibility to public and assistants, and volunteers should be and private school employers. Many public fully vetted the same as any other employee employers already produce employment and assigned to a school or to work around compensation reports for a variety of public children. and private uses under the California Public Records Act. As such, reporting employment Assembly Bill 2534 (Chapter 570, Statutes information is not a hardship. Lastly, it is of 2024) is applicable to public school recommended that the Legislature apply employers and was a start but falls short in the definition of egregious misconduct to its scope and practical application. Existing all public and private school employees law limits the requirement that an applicant and ensure that instances of egregious disclose their complete list of work history to misconduct are reported to an appropriate 1) public school employers, and 2) to certifi- state agency and included in available work cated personnel. history data accessible to school employers Further, existing law requires every public as described above. school employer to contact each previous The Penal Code’s definition of sexual public school employer the applicant grooming lacks clarity. Grooming is the term discloses in their work history and inquire often used to describe how a perpetrator whether the applicant was the subject of builds a relationship with a child to abuse any report to the Commission on Teacher or exploit them. It involves a series of nonvi- Credentialing. The bill does not provide a olent, calculated activities that engender trust reliable mechanism for the employer to verify and affection to cross generally accepted a complete work history. The employer must relationship boundaries. The Legislature depend on the applicant’s truthfulness. The should provide a clearer, improved definition bill also does not require applicants to report, of grooming that specifically addresses or public school employers to inquire of, grooming in school, childcare, educational, out-of-state employers. recreational, and incarceration or probation Education Code 44932 describes egregious settings. misconduct by certificated employees. Consistent with a clearer definition of However, the definition and consequences for grooming, the existing reasons an individual such behavior by classified employees is not is prohibited from being hired for a certif- consistently applied in the Education Code. icated position (e.g., EC 44830.1), existing It is recommended that the Legislature reasons a certificated employee may be expand the work history verification and dismissed (e.g., EC 44932(a)), and the inquiry mandate to include all public and definition of sex offense (e.g., EC 44010) private school employers and employees. should be expanded to include the following: Further, the Legislature should provide for • Violations of Penal Code 288.2, an electronic database of school employee 288.3, 288.4 or 528.5 (note: PC work history in California’s public and private 288.2 is already included in EC schools. This can be done by expanding 44010). the accessibility of the Commission on Teacher Credentialing database for certif- • Once defined, grooming. icated employees or those holding other Further, consideration should be given to Commission-issued authorizations; devel- applying the prohibitions to private schools, oping a new database and mandating and to expanding such prohibitions to all reporting (likely required to capture classified employees. Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 40 Summary oF rEcommEndationS Summary of Recommendations The following recommendations are summa- • Extend state and local payment rized from the above sections of this report. intercept mechanisms to public The Legislature should: financings by local public agencies rather than limit the • Require the development and mechanism to the California maintenance of a statewide data School Finance Authority (page repository, including mandating 28). cooperation and information sharing by public agencies (page • Expand or direct an appropriate 13). role for the state’s Infrastructure and Economic Development • Mandate a classification system Bank in financing childhood to provide objective, actuarially sexual assault settlements and based information on childhood judgments (page 28). sexual assault claims (page 14). • Adopt an alternative receiv- • Amend Government Code 970.6 ership statute for school districts to provide for the determination requesting emergency apportion- of unreasonable hardship by ments solely due to childhood the local governing body tied to sexual assault obligations (page established standards (page 22). 32). • Amend Government Code 970.6 • Extend the maximum repayment to provide a sliding scale of time term of 20 years for emergency for repayment based on the apportionments when the loan judgment amount, plus interest amount is significantly higher thereon (page 22). than the school district’s ability • Extend the payment due date to pay and based on analysis to 150 days from when a performed and disclosed during judgment is entered by the court the process leading to an for judgments that are greater emergency apportionment (page than 50% of the local agency’s 33). unrestricted reserves (page 23). • Commission a study that • Clarify that a Code of Civil identifies the structure and Procedure 860 validation attributes of a victims’ compen- proceeding may be brought by a sation fund for childhood sexual public agency before tort action assaults involving a public judgments are entered against agency. The study should be the public agency (page 27). presented to the Legislature no • Consider a limited exception later than January 1, 2026, and the Legislature should consider to the prohibition on the use of establishing a victims’ compen- lease financing proceeds for sation fund by July 1, 2026 (page general operating purposes in 36). EC 17456 for situations where an otherwise financially stable • Ensure that state policies set school district is faced with an consistent standards to achieve extraordinary liability. (page 27). zero tolerance for childhood sexual assault (page 37). Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 41 Summary oF rEcommEndationS • Require comprehensive school • Expand the work history verifi- safety plans to include required cation and inquiry mandate to policies and procedures include all public and private designed to improve supervision school employers and employees and protection of children (page (page 40). 37). • Provide for an electronic • Amend paragraphs 1-5 and 9 of database of school employee Penal Code 11165.7(a) to simply work history in California’s public include all employees, volunteers and private schools (page 40). and governing board members • Apply the definition of egregious of a public or private school, misconduct to all public and including charter schools (page private school employees, 37). and ensure that instances of • Increase the quality and consis- egregious misconduct are tency of mandated training to reported to an appropriate state prevent, build awareness of, and agency and included in available increase access to reporting work history data accessible to options for, childhood sexual school employers (page 40). assault (page 38). • Provide a clearer, improved • Mandate training of students to definition of grooming that promote awareness and help specifically addresses grooming provide 24-7 protection (page in school, childcare, educational, 39). recreational, and incarceration or probation settings (page 40). • Establish a statute that promotes professional boundaries Upon request, the Fiscal Crisis and between adults and children and Management Assistance Team will be strengthens the safety of learning pleased to provide proposed statutory environments (page 39). amendments for each of the recommenda- tions listed above. Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 42 Fcmat’S rolE FCMAT’s Role This report was prepared by Erin Lillibridge, Michael Fine and John Lotze of FCMAT, with significant contributions from Donald Field, Esq., a public finance partner at Orrick, Herrington & Sutcliffe LLP. The Fiscal Crisis and Management Assistance Team was created in 1991 by the California Legislature to help California’s TK-14 LEAs avoid fiscal insolvency. Today, FCMAT helps LEAs identify, prevent and resolve financial, management, program, data, and oversight challenges; provides professional learning; produces and provides software, checklists, manuals and other tools; and offers other related school business and data services. Childhood Sexual Assault: Fiscal Implications for California Public Agencies Report to the Legislature 43