The 2025-26 Budget: Proposition 98 Guarantee and K-12 Spending Plan

2025-26 BUDGET The 2025-26 Budget: Proposition 98 Guarantee and K-12 Spending Plan GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2025 SUMMARY Each year, the state calculates a “minimum guarantee” for school and community college funding based upon the formulas established by Proposition 98 (1988). Compared with the 2024-25 enacted budget level, the Governor’s budget estimates the guarantee is up $3.9 billion in 2024-25 and $3.6 billion in 2025-26. These estimates build upon revenue assumptions that seem reasonable in light of recent tax collection trends but could reverse quickly if the stock market were to decline. Moreover, the recent extension of tax deadlines in Los Angeles County will complicate revenue projections over the coming months. For 2024-25, the guarantee is exceptionally sensitive to revenue changes and would increase or decrease nearly dollar for dollar with higher or lower revenue. The Governor proposes to mitigate the downside risks by delaying a $1.6 billion “settle-up” payment to schools until the state finalizes the guarantee. We think this proposal addresses a reasonable concern about volatility, but an alternative involving a discretionary reserve deposit is more compelling because it avoids delaying costs into the future. The state also faces the possibility of significant revenue swings in 2025-26, but the guarantee is less sensitive to changes that year. Accounting for increases in the guarantee, the delayed settle-up payment, and baseline cost savings, $7.8 billion is available for new K-12 spending. The Governor proposes to dedicate $4.4 billion to ongoing increases—primarily a 2.43 percent cost-of-living adjustment (COLA) and the expansion of transitional kindergarten (TK). The remaining $3.4 billion would fund one-time activities, including a discretionary block grant, literacy and math coaches, an increase for the Learning Recovery Emergency Block Grant (LREBG), and several teacher training initiatives. The plan has several positive elements, including (1) a balance of one-time and ongoing spending; (2) a cushion that would help protect ongoing programs; and (3) a mix of flexible funding and targeted proposals, including funds school districts could use to address learning loss and various cost pressures. We recommend building a budget that retains these features. Regarding the specific proposals, we recommend approving the discretionary block grant with modifications to ensure districts can direct funds to their most urgent one-time costs. We also recommend approving the LREBG funding with a modification to extend the expenditure deadline. Finally, we recommend approving a proposal to eliminate the payment deferral adopted last year. (For brevity, we refer to school districts, charter schools, and county offices of education collectively as “districts.”) INTRODUCTION This brief analyzes the Governor’s plan for college proposals in our forthcoming publication school spending. The first section examines the The 2025-26 Budget: California Community funding requirement established by Proposition 98 Colleges. On the “EdBudget” portion of our and explains how changes in revenue estimates website, we post numerous tables with additional could affect this requirement. The second section information about the budget. Over the next analyzes the Governor’s plan for spending the several weeks, we plan to release additional briefs available funding. This brief focuses on proposals analyzing many of the proposals in detail. affecting schools—we analyze the community www.lao.ca.gov 1 2025-26 BUDGET MINIMUM GUARANTEE Proposition 98 established a minimum funding near the guarantee. With a two-thirds vote of each requirement for schools and community colleges house of the Legislature, the state can suspend commonly known as the minimum guarantee. the guarantee and provide less funding than the In this section, we (1) provide background on formulas require that year. The state funds the the guarantee, (2) describe the administration’s guarantee through General Fund and local property estimates of the guarantee, and (3) explain how the tax revenue. guarantee could change in the coming months as “Maintenance Factor” Accelerates Growth the state revises its revenue estimates. in the Guarantee. In addition to the three main tests, the Constitution requires the state to track an Background obligation known as maintenance factor. The state Minimum Guarantee Depends Upon Various creates maintenance factor when Test 3 is operative Inputs and Formulas. The California Constitution or the Legislature suspends the guarantee. The sets forth three main tests for calculating the maintenance factor obligation equals the difference Proposition 98 guarantee. Each test takes into between the actual level of funding provided and account specific inputs, including General Fund the higher Test 1 or Test 2 level. Moving forward, revenue, per capita personal income, and student the state adjusts the obligation annually for changes attendance (Figure 1). Whereas Test 2 and Test 3 in student attendance and per capita personal build upon the funding provided the previous year, income. In future years, the Constitution requires Test 1 links school funding to a minimum share of the state to make maintenance factor payments General Fund revenue. The Constitution sets forth when General Fund revenue is growing faster rules for comparing the tests, with one of the tests than per capita personal income. The size of becoming operative and used for calculating the these payments increases in tandem with faster guarantee that year. Although the state can provide revenue growth. more funding than required, it usually funds at or “Spike Protection” Slows Growth in the Guarantee. Figure 1 Whereas maintenance factor payments accelerate growth Three Proposition 98 Tests in the guarantee, a separate formula known as spike protection Test 1 Test 2 Test 3 prevents the guarantee from Share of General Change in Per Change in General growing at an unsustainable Fund Revenue Capita Personal Fund Revenue Income (PCPI) rate. This formula applies when the guarantee increases much General PCPI Fund faster than per capita personal About ADA ADA income and student attendance. 40% The formula works by excluding Prior-Year Prior-Year some Proposition 98 funding from Funding Funding the guarantee calculation in the subsequent year. Technically, it reduces the Test 2 and Test 3 Guarantee based on share Guarantee based on prior- Guarantee based on prior- funding levels from what they of state General Fund year funding level adjusted year funding level adjusted revenue going to K-14 for year-over-year changes for year-over-year changes otherwise would be in the year education in 1986-87. in K-12 attendance and in K-12 attendance and following the increase. These California PCPI. state General Fund revenue. lower levels are then compared ADA = average daily attendance. with Test 1 (which is unaffected). 2 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET The purpose of spike protection is to protect the in school and community college spending after state budget from needing to sustain increases the year is over while still requiring the state to in the guarantee resulting from temporary make settle-up payments if the guarantee rises. revenue spikes. The policy does not address drops affecting the At Key Points, the State Recalculates the guarantee in the current year, and the state has Guarantee. The state makes an initial estimate of tended to reduce school spending in response to the guarantee when it enacts the annual budget, these drops. but this estimate typically changes as the state Proposition 98 Reserve Deposits and updates the relevant Proposition 98 inputs. Withdrawals Required Under Certain The state recalculates the guarantee at the end of Conditions. Proposition 2 (2014) created a state the year based upon revised estimates of these reserve specifically for schools and community inputs, then makes a second recalculation at the colleges—the Public School System Stabilization end of the following year. This schedule means that Account (Proposition 98 Reserve). The Constitution for any given budget, the state has new estimates requires the state to deposit Proposition 98 funding of the guarantee for the prior year, current year, and into this reserve when the state receives high upcoming year. The state finalizes its calculation for levels of capital gains revenue and the minimum the prior year through “certification.” Certification guarantee is growing quickly relative to inflation. is a six-month process involving the publication of It also requires the state to withdraw funding the underlying Proposition 98 inputs and a period when the guarantee is growing slowly relative to for public comment and review. The most recently inflation. When the state’s overall fiscal condition certified year is 2022-23. The certification process is relatively weak, the Legislature can suspend or for 2023-24 will begin in May of 2025. reduce required deposits or make discretionary When the Guarantee Rises, the State Must withdrawals. Unlike other state reserves, the Make Settle-Up Payments. When the guarantee Proposition 98 Reserve is earmarked exclusively for rises after the enactment of the budget, the state school and community college programs. makes a one-time payment to settle up to the Administration’s Estimates higher guarantee. These payments can be allocated Guarantee Revised Up in 2024-25. Compared for any school or community college purpose. with the June 2024 budget estimates, the The timing of these payments is not addressed administration’s estimate of the minimum guarantee explicitly in the Constitution. Since 2019-20, the is up $3.9 billion (3.4 percent) in 2024-25 (Figure 2 state has made settle-up payments as soon as it on the next page). This increase primarily reflects recognized the increase in the guarantee. Before higher General Fund revenue estimates. Test 1 2019-20, the state sometimes recognized a higher is operative, meaning the guarantee increases guarantee but did not make the settle-up payment by nearly 40 cents for each dollar of additional for several years. Current law specifies that if the General Fund revenue. The increase in the state has an unpaid settle-up obligation when it guarantee also includes a $1.6 billion increase in the finishes certification, the Director of the Department required maintenance factor payment. Under the of Finance must develop a schedule for making the administration’s estimates, the state would make required payments. a $5.6 billion total maintenance factor payment, When the Guarantee Drops, the State leaving $2.7 billion outstanding. Regarding property Decides Whether to Reduce Spending. If the tax revenue, the administration’s estimate is down guarantee drops relative to a previous estimate, $101 million relative to the June 2024 budget the state can reduce school spending by a estimate. When Test 1 is operative, this reduction commensurate amount. As part of the 2019-20 has a dollar-for-dollar effect on the guarantee. budget, the state adopted a statutory policy (The budget contains no changes to overall funding addressing drops in the prior year (the fiscal year in 2023-24 because the state suspended the that ended before the current fiscal year). This guarantee that year.) policy commits the state to avoiding reductions www.lao.ca.gov 3 2025-26 BUDGET Figure 2 Proposition 98 Guarantee Revised Up in 2024-25, Unchanged in 2023-24 (In Millions) 2023-24a 2024-25 June 2024 January 2025 June 2024 January 2025 Estimate Estimate Change Estimate Estimate Change Minimum Guarantee $98,484 $98,484 $0 $115,283 $119,188 $3,905 General Fund $67,095 $67,093 -$2 $82,612 $86,619 $4,006 Local property tax 31,389 31,392 2 32,670 32,569 -101 General Fund tax revenue $185,490 $188,918 $3,428 $200,107 $206,495 $6,388 a The June 2024 budget suspended the Proposition 98 guarantee in 2023-24 and set forth $98.5 billion as the intended funding level. Guarantee Grows in 2025-26 Relative and the guarantee would have been $5.7 billion to Previously Enacted Budget Level… The higher than the estimate in the Governor’s budget. administration estimates the guarantee is Required Reserve Deposits Anticipated $118.9 billion in 2025-26, an increase of $3.6 billion in 2024-25 and 2025-26. The administration (3.2 percent) relative to the 2024-25 enacted budget estimates the state must make Proposition 98 level (Figure 3). Test 1 is operative in 2025-26, Reserve deposits of $1.2 billion in 2024-25 and with increases in General Fund and local property $376 million in 2025-26. These deposits would tax revenue contributing to the higher guarantee. bring the balance in the reserve to $1.5 billion. The state does not make maintenance factor (The state previously withdrew the entire balance payments because General Fund revenues are not to address drops in school funding that occurred growing as quickly as per capita personal income. in 2023-24.) The mandatory deposit in 2024-25 The increase in the guarantee also includes an replaces a $1.1 billion discretionary deposit the upward adjustment of nearly $900 million for the state made as part of the June 2024 budget. expansion of TK. (The Legislature and Governor previously agreed Figure 3 to increase the guarantee for the students who are newly eligible Proposition 98 Exceeds under this expansion.) Previous Budget Level in 2025-26 …But Decreases Slightly (In Billions) Relative to Revised Estimate of 2024-25. Whereas the guarantee June 2024 Enacted Budget exceeds the previously enacted January 2025 Governor's Budget budget level by $3.6 billion $3.9 $119.2 $3.6 $118.9 in 2025-26, it is $264 million $115.3 (0.2 percent) below the revised estimate for 2024-25 (Figure 4). This year-over-year decrease results from the spike protection $98.5 $98.5 formula, which excludes a portion of the guarantee in 2024-25 from the calculation of the guarantee in 2025-26. Absent this constitutional adjustment, a different 2023-24 2024-25 2025-26 Proposition 98 test (Test 3) would have been operative in 2025-26, 4 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET consumer spending. Given Figure 4 these concerns, we advise the Proposition 98 Key Inputs and Outcomes Under Legislature to approach the recent Governor’s Budget revenue improvements cautiously. (Dollars in Millions) Tax Payment Extensions Add Uncertainty to Revenue 2023-24 2024-25 2025-26 Estimates. The state ordinarily Minimum Guarantee receives payments from the General Fund $67,093 $86,619 $84,603 personal income tax and Local property tax 31,392 32,569 34,321 corporation tax on a consistent Totals $98,484a $119,188 $118,923 schedule and adjusts its Change From Prior Year projections based on trends in General Fund -$6,853 $19,526 -$2,016 Percent change -9.3% 29.1% -2.3% these collections. In response to destructive wildfires in Los Angeles Local property tax $1,618 $1,177 $1,752 Percent change 5.4% 3.8% 5.4% County, the state extended Total guarantee -$5,235 $20,703 -$264 the deadline for several tax Percent change -5.0% 21.0% -0.2% payments ordinarily due between General Fund Tax Revenueb $188,918 $206,495 $213,621 January and September until October 15, 2025. This extension Growth Rates K-12 average daily attendance 0.8% 1.0% 0.7% applies to all individuals and Per capita personal income (Test 2) 4.4 3.6 6.4 businesses located in the county. Per capita General Fund (Test 3)c 7.3 9.6 3.8 These taxpayers account for a Maintenance Factor significant share of state revenue, Amount created (+) or paid (-) $7,960 -$5,637 — including more than 20 percent Total outstandingd 7,960 2,695 $2,887 of the personal income tax. Proposition 98 Reserve The extension means the state will Deposit (+) or withdrawal (-) -$8,413 $1,157 $376 Cumulative balance — 1,157 1,533 have to develop its May revenue Operative Test Suspended 1 1 estimates with incomplete data. (The state faced a similar problem a The June 2024 budget suspended the guarantee and set forth this amount as the intended funding level. when it adopted the 2023-24 b Excludes nontax revenues and transfers, which do not affect the calculation of the guarantee. budget after a tax extension c As set forth in the State Constitution, reflects change in per capita General Fund plus 0.5 percent. d Includes adjustments for growth in per capita personal income and K-12 attendance as required by affecting nearly all counties. That the State Constitution. extension masked a severe revenue shortfall that did not become LAO Comments evident until the fall of 2023.) General Fund Revenue Estimates Are Guarantee Is Highly Sensitive to Revenue Reasonable but Depend on Volatile Stock Changes in 2024-25. To the extent General Fund Market. Since the adoption of the June 2024 revenue differs from the estimates in the Governor’s budget, state tax collections from personal budget for 2024-25, the guarantee would increase income tax withholding and the corporation tax or decrease nearly 95 cents for each dollar of have been running ahead of projections. Based higher or lower revenue. This high level of sensitivity on these trends, the higher revenue estimates in exists because Test 1 is operative and the state the Governor’s budget seem reasonable. On the is paying maintenance factor. Specifically, for other hand, the recent revenue gains build primarily each dollar of higher or lower revenue, the Test 1 upon a booming stock market—which could requirement would change by nearly 40 cents, reverse rapidly and without warning. The overall and the maintenance factor payment would state economy remains lackluster, with elevated change by almost 55 cents. One consequence unemployment, a stagnant job market (outside the of this sensitivity is that the guarantee could government and healthcare sectors), and sluggish vary much more than usual from the estimates www.lao.ca.gov 5 2025-26 BUDGET in the Governor’s budget. Moreover, higher or Proposition 98 Reserve Deposit Likely lower revenue estimates in 2024-25 would have Not Required in 2025-26. The Proposition 98 relatively little effect on programs funded outside Reserve formulas require the state to meet several of Proposition 98 because nearly all of the increase conditions before a deposit becomes mandatory. or decrease would be absorbed by changes in the One condition is that the calculation of the guarantee. Since the adoption of Proposition 98 guarantee under Test 1 must exceed the calculation in 1988, this level of sensitivity has occurred only under Test 2. Under our estimates, Test 2 is a twice before (in 2012-13 and 2014-15). few billion dollars higher than Test 1 in 2025-26, Guarantee Is Moderately Sensitive to meaning no reserve deposit would be required Revenue Changes in 2025-26. Similar to 2024-25, that year. The state will receive updated data in Test 1 is likely to remain operative in 2025-26 March clarifying whether this condition is met. If the even if General Fund revenue or other inputs vary revised data show that a deposit is not required, the from the estimates in the Governor’s budget. In state could still make a discretionary deposit equal contrast to 2024-25, the state is unlikely to pay to the amount proposed by the Governor (or any any maintenance factor because state revenues other amount). are unlikely to outpace the growth in per capita Los Angeles Fires Likely to Have Modest personal income. (The administration estimates Negative Effect on Statewide Property Tax a 3.3 percent increase in per capita General Estimates. The Los Angeles fires burned more Fund revenues and a 6.4 percent increase in per than 37,000 acres and destroyed thousands of capita personal income. Our November outlook homes and other structures. Affected property estimate for per capita personal income was even owners must continue paying property taxes but higher at 8.4 percent. The state will compute are eligible for a reduction in their bills to reflect the final per-capita income factor for 2025-26 the lower market value of their properties. Our based on growth from the last quarter of 2023 to preliminary assessment is that the fires will reduce the last quarter of 2024.) In Test 1 years without property tax revenue by $100 million to $200 million maintenance factor payments, the guarantee is in 2025-26. (A partial-year reduction in 2024-25 also moderately sensitive to changes in General Fund is likely.) This reduction will fade over time as debris revenue—increasing or decreasing about 40 cents is removed and homes are rebuilt. Schools receive for each dollar of higher or lower revenue. about 30 percent of the property tax revenue Proposition 98 Reserve Deposit Highly collected in Los Angeles County, meaning the Sensitive to Capital Gains Estimates in 2024-25. school share of this reduction in 2025-26 will likely Whereas the guarantee is highly sensitive to range from $30 million to $60 million. For individual changes in General Fund revenue in 2024-25, the districts, state law generally provides an automatic required Proposition 98 Reserve deposit is highly increase in General Fund to offset the reduction. sensitive to changes in revenue from capital gains. At a statewide level, however, lower property tax Specifically, the required deposit would increase revenue would reduce the overall funding available or decrease by nearly 95 cents for each dollar for schools under Proposition 98. This reduction is of higher or lower capital gains revenue. This relatively modest compared with the $34.3 billion in requirement means that an increase or decrease property tax revenue schools would receive under in the guarantee might not translate into more or the Governor’s budget estimates for 2025-26. less funding for school and community college programs. If the guarantee were to increase based on higher revenues, but these higher revenues came mainly from capital gains, the state would need to deposit most of the increase into the reserve. 6 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET K-12 SPENDING PLAN In this section, we analyze the Governor’s plan The budget provides $3.5 billion for various for allocating the available Proposition 98 funding targeted proposals that restrict funding to specific to schools. First, we describe the Governor’s uses or require districts to meet particular overall approach and explain the most notable conditions (such as serving additional students). spending proposals. Next, we assess the Most of these proposals revolve around four merits of this approach and analyze the most programmatic areas: (1) TK, (2) literacy and math significant proposals. Finally, we provide our initiatives, (3) teacher training and recruitment, recommendations for the Legislature. and (4) expanded learning (after school programs and summer programs). In addition to the flexible GOVERNOR’S BUDGET and targeted proposals, the budget provides $247 million to eliminate a payment deferral. Spending Overview Contains $7.8 Billion in Figure 5 Proposition 98 Spending Governor’s Budget Has $7.8 Billion in Proposition 98 Proposals for Schools. Of the Spending Proposals for Schools $7.8 billion in new spending, the (In Millions) Governor proposes $4.4 billion for ongoing augmentations and Ongoing $3.4 billion for one-time activities LCFF COLA (2.43 percent) $1,858 (Figure 5). From an accounting Transitional kindergarten expansiona 1,065 Transitional kindergarten lower student-to-adult ratios 746 perspective, $5.8 billion is Expanded Learning Opportunities Program 435 attributable to 2025-26 and COLA for select categorical programs (2.43 percent)b 206 $2 billion is attributable to Universal school meals 84 2024-25. The spending in 2024-25 Statewide System of Support: literacy 5 K-12 High Speed Network 4 mainly reflects increases in California College Guidance Initiative 3 the Proposition 98 guarantee. Homeless education technical assistance centers 2 The spending in 2025-26 FCMAT salary adjustment 1 reflects growth in the guarantee Subtotal ($4,408) and savings from the end of One Time previous one-time expenditures. Discretionary block grant $1,776c Literacy and math coaches 500 (The June 2024 budget allocated Learning Recovery Emergency Block Grant 379 almost $3 billion in ongoing funds Pay down LCFF deferral 247 for one-time spending. In 2025-26, Teacher recruitment incentive grant 150 these funds are freed up for Kitchen infrastructure and training 150 National Board Certified Teacher Certification Incentive Program 100 new activities.) Training for literacy screenings 40 Allocates New Spending Transitional kindergarten English language proficiency screeners 10 for a Mix of Flexible Funding Statewide System of Support: literacy 5 IEP template digitization and translation 2 and Targeted Proposals. The Evaluation of standards and materials adoption process 1 budget provides $4 billion for Subtotal ($3,359) three proposals that would Total $7,768 provide flexible funding for a Reflects additional LCFF costs associated with serving more students in transitional kindergarten, including costs of existing 12:1 staffing ratios. districts—a COLA for the Local b Applies to the Foster Youth Services Coordinating Program, American Indian Early Childhood Control Funding Formula (LCFF), Education, Special Education, Child and Adult Care Food Program, Charter School Facility Grant Program, American Indian Education Centers, Equity Multiplier, and K-12 mandates block grant. a new discretionary block grant, c Includes $2.8 million in reappropriated Proposition 98 funds. and an increase for the LREBG. LCFF = Local Control Funding Formula; COLA = cost-of-living adjustment; FCMAT = Fiscal Crisis and Management Assistance Team; and IEP = Individualized Education Program. www.lao.ca.gov 7 2025-26 BUDGET Delays $1.6 Billion Settle-Up Payment in Maintains Funding Near Previous Peak. 2024-25 Pending Final Calculation. Under the Under the Governor’s budget, total Proposition 98 Governor’s budget, total spending on schools funding for schools would be $18,935 per student and community colleges in 2024-25 would be in 2025-26, an increase of $203 (1.1 percent) over $1.6 billion less than the revised estimate of the the revised 2024-25 level. As Figure 6 shows, Proposition 98 guarantee. The difference between school funding peaked following rapid increases in these two amounts creates a $1.6 billion settle-up 2020-21 and 2021-22. Since that time, funding has obligation the state would need to pay in the future been roughly flat after adjusting for inflation. if revenues remain unchanged. The administration Major Ongoing Proposals indicates the state would address the payment in the June 2026 budget plan—after the state makes $2.1 Billion for COLA. The state calculates its final revenue estimate for 2024-25, recalculates the COLA rate using a price index published by the guarantee, and determines the amount owed the federal government. This index accounts to schools. According to the administration, the for changes in the cost of goods and services delay is intended to mitigate the risk that the purchased by state and local governments across guarantee drops. The proposal does not involve any the country during the preceding year. For 2025-26, changes to certification—the statutory mechanism the administration estimates the statutory rate is for ensuring the final spending level meets or 2.43 percent. The Governor’s budget provides exceeds the guarantee. For the state, delaying the $2.1 billion to cover the associated increase payment would reduce costs in this year’s budget for existing school programs. Of this amount, but increase costs in the June 2026 budget if the $1.9 billion is for the LCFF and $206 million is for guarantee does not drop. (The proposal only affects categorical programs (primarily special education). 2024-25. For 2025-26, the proposed spending level $1.1 Billion for Expansion of TK. In 2022-23, equals the estimate of the guarantee.) the state began implementing a plan to make all four-year-old children eligible for TK. Figure 6 Proposition 98 Funding Per Student Is Up Notably Since 2019-20 Through 2025-26 Under Governor's Proposed Budget $20,000 18,000 16,000 14,000 Inflation Adjusted 12,000 10,000 Actual 8,000 6,000 4,000 2,000 2007-08 09-10 11-12 13-14 15-16 17-18 19-20 21-22 23-24 25-26 8 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET The Governor’s budget provides $1.1 billion to (1) teacher professional development, (2) teacher fund the final year of this expansion in 2025-26. recruitment and retention activities, (3) career Of this amount, $860 million is for the LCFF funding pathways, and (4) dual enrollment programs. generated by the newly eligible students and According to the administration, the funding is $206 million is for an add-on that funds additional intended to be entirely discretionary. Districts would staff. The law currently requires districts to have be able to spend the grant through 2028-29. at least 1 adult for every 12 TK students to receive $500 Million for Math and Literacy Coaches. this add-on. These cost estimates assume that Of the total, $250 million is for math coaches that statewide attendance for TK students is 229,200 in will support teachers with implementing math 2025-26, an increase of 61,300 compared with the instruction and interventions. Districts are eligible attendance in 2024-25. to receive funding for schools where at least $746 Million for Additional Staff in TK 90 percent of students are EL/LI (rural schools Classrooms. In addition to covering costs for qualify if at least 75 percent of students are EL/LI). additional TK students, the Governor proposes In addition, the Governor proposes $235 million to increase the TK add-on funding rate. Whereas to support literacy programs, coaches, and the add-on currently provides about $3,150 for interventions at schools where at least 94 percent each student, the budget would increase it to of students are EL/LI. (The state has provided about $6,400 per student. This increase is to almost $500 million for this purpose in recent years. cover the cost of having at least one adult for every Schools that received previous grants would be ten students beginning in 2025-26. The budget ineligible for additional funds.) The budget also provides $746 million to cover the higher add-on. includes $15 million for one or more county offices $435 Million for the Expanded Learning of education to provide training to develop literacy Opportunities Program (ELOP). ELOP funds after coaches and reading specialists. school programs and other enrichment activities $379 Million for LREBG. The state provided outside regular school hours. The program has a $7.9 billion for the LREBG in the 2022-23 budget two-tier rate structure. If at least 75 percent of the to mitigate the learning loss and social disruption students in a district are English learners or from students experienced during the pandemic low-income families (EL/LI), the district receives a (see box on the next page). The accompanying higher funding rate and must offer the program to legislation allowed districts to spend these funds all students in grade 6 or below. All other districts through 2027-28. The state reduced the grant by receive a lower funding rate and are only required $1.1 billion in the 2023-24 budget but adopted to offer the program to EL/LI students in grade 6 intent language to restore the original amount over or below. The state currently provides $4 billion three years, beginning in 2025-26. The Governor’s per year for the program. The Governor’s budget budget provides $379 million to cover the first year proposes an increase of $435 million to lower of the restoration. The proposal leaves the original the threshold for the first tier from 75 percent to 2027-28 spending deadline in place. 55 percent. $247 Million for Eliminating Payment Deferral. The June 2024 budget deferred $247 million in Major One-Time Proposals payments from 2024-25 to 2025-26. It implemented $1.8 Billion for Discretionary Block Grant. this deferral by moving a portion of the payment The Governor proposes $1.8 billion to create the schools typically receive at the end of June 2025 Student Support and Professional Development to the beginning of July 2025. The Governor’s Discretionary Block Grant. Districts would receive budget leaves this deferral in place but proposes funding based on their average daily attendance to eliminate the deferral and restore the regular in 2024-25—$323 per student based on current payment schedule beginning in 2025-26. attendance estimates. Trailer legislation would direct districts to use the grant to “address rising costs” and fund specified state priorities, including www.lao.ca.gov 9 2025-26 BUDGET UPDATE ON LEARNING RECOVERY EMERGENCY BLOCK GRANT Learning Recovery Emergency Block Grant (LREBG) Established in 2022-23. The June 2022 budget created the LREBG to support learning recovery efforts in schools and the social and emotional well-being of students and staff. Examples of allowable expenditures include lengthening the school day or year, tutoring and small-group instruction, counseling and mental health services, training for teachers and staff, literacy programs for younger students, and credit recovery programs for high school students. The state initially provided $7.9 billion for the program. Districts received funding based primarily on their count of English learners and low-income students. Trailer legislation made this funding available for learning recovery initiatives through 2027-28. It also required districts to submit an interim spending report by December 1, 2024 and a final report by December 1, 2029. State Reduced LREBG in 2023-24 to Address Budget Shortfall. The state faced a revenue shortfall in 2023-24, accompanied by a drop in Proposition 98 funding for schools. To help address the shortfall, the June 2023 budget implemented a $1.1 billion (14.3 percent) reduction to the LREBG. This reduction lowered the funding for the program to $6.8 billion (equivalent to about $1,800 for each English learner and low-income student). The budget also contained intent language to restore this funding. Specifically, the language indicated the state would provide $379 million annually in 2025-26, 2026-27, and 2027-28. New Requirements Added in 2024-25 Following a Legal Settlement. In late 2020, the families of several students living in Oakland and Los Angeles filed a lawsuit alleging the state had failed to ensure that schools provided adequate instruction during the pandemic (Cayla J. et al. v. State of California). In early 2024, the state agencies involved in the suit announced a settlement agreement with the plaintiffs. The agreement called for the Governor to propose new requirements for the LREBG. The requirements consisted of actions districts would need to take before spending the rest of their grants, including (1) conducting a needs assessment to identify the students in greatest need of support, (2) documenting the rationale for their proposed use of the grant, (3) explaining how research or other evidence supported their plans, (4) soliciting and responding to community feedback through their local planning process, and (5) tracking relevant measures of student engagement and academic performance. The agreement recognized that districts had already spent some of their LREBG funds but presumed at least $2 billion in unspent funds would be subject to the new requirements. The Legislature approved the changes as part of the 2024-25 budget. LAO ASSESSMENT be unable to sustain during tighter fiscal times. The Governor’s plan addresses these trade-offs by Overarching Comments proposing a balance of new ongoing and one-time Plan Contains a Reasonable Mix of One-Time spending. This approach seems like a reasonable and Ongoing Spending. Ongoing spending starting point for building the budget. increases can help districts address longer-term Plan Builds a Budget Cushion That Would challenges and state priorities, sustain new Help Protect Ongoing Programs. Of the one-time programs, and cover their ongoing cost pressures. school spending, $1.4 billion is attributable to Conversely, one-time funds can help districts 2025-26. Other one-time allocations attributable cover one-time expenses and pay for starting up to 2025-26 include the $376 million deposit into programs. One-time spending also allows the state the Proposition 98 Reserve and $331 million to avoid committing to ongoing increases it might in one-time community college spending. 10 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET Districts Spent $1.6 Billion Districts Spent $1.6 Billion in Through 2023-24 and Report LREBG Funds Through 2023-24ª Faster Spending in 2024-25. (In Millions) The December 2024 interim reports show that districts spent $565 $1.6 billion through the first two $525 years of the program (2022-23 and 2023-24). Most of this spending $401 supported academic activities, including additional instructional time, additional staff, accelerated instruction (such as tutoring), and teacher training (refer to the adjacent figure). Although statewide $80 data for subsequent years are $34 not yet available, many districts indicate they accelerated spending Additional Accelerated Supportive Services Credit Recovery Other Academic Instructional Instruction Programs Services significantly in 2024-25. Based Time and Staff and Staff Training on this information, we anticipate that more than half of the initial a Preliminary data as of January 20, 2025. $6.8 billion allocation will be spent Examples: Additional Instructional Time and Staff: increasing the length of the school year or school day, by the end of the year. Many adding summer instruction, reducing student-staff ratios. districts also indicate they have Accelerated Instruction and Staff Training: tutoring and small group instruction, early literacy programs, teacher training on state math and English frameworks. specific plans for the remainder of Supportive Services: counseling, mental health services, school meals. their allocations. Credit Recovery Programs: instruction allowing students to make up credits for high school graduation or college entrance requirements. Other Academic Services: assessments of student learning, diagnostic testing, progress monitoring. LREBG = Learning Recovery Emergency Block Grant. Accounting for all these allocations, the budget and create cohesive local programs. Conversely, has $2.1 billion in ongoing Proposition 98 funds targeted proposals help ensure districts use their dedicated to one-time activities. This budgeting funding for activities the Legislature considers approach creates a cushion that helps protect its highest priorities. The Governor’s plan has ongoing programs. For example, if the guarantee significant proposals in both categories but places were to drop by as much as $2.1 billion in 2026-27, more emphasis on flexible funding. This budgeting the state could accommodate the drop without approach could allow districts to address their cost reducing programs or deferring payments. The pressures and a few core state priorities without state most recently took a similar approach when it being overwhelmed by new requirements. adopted the 2022-23 budget. When the guarantee Most of the Targeted Proposals Expand declined the following year, the cushion helped the Upon Existing Programs. In contrast to some state avoid reductions to ongoing programs. previous budgets, the Governor does not propose Plan Contains a Reasonable Mix of Flexible any significant new programs. Instead, the targeted Funding and Targeted Proposals. Flexible funding proposals generally expand existing programs allows districts to implement programs based on or support one-time activities the state funded in their unique circumstances and local priorities. previous years. This budgeting approach would It also helps districts cover their cost increases encourage districts to prioritize activities that are www.lao.ca.gov 11 2025-26 BUDGET already underway. For the upcoming hearings, the One compelling alternative is to make a $1.6 billion Legislature could focus its review of the proposed discretionary deposit into the Proposition 98 expansions on a few core issues: (1) whether Reserve. This deposit would count toward the underlying problem remains unaddressed, the guarantee in 2024-25 and supplement the (2) whether the existing program is meeting its $1.2 billion required deposit. The state could objectives, and (3) whether additional funding rescind the deposit if revenues fall short—lowering would allow districts to address the problem state costs without affecting previous school more effectively. payments. (If revenues meet expectations, the Settle Up Proposal Addresses a Reasonable deposit would remain to help protect school Concern About Volatility… The state generally programs from future downturns.) This alternative makes settle-up payments as soon as it recognizes would increase state costs by $1.6 billion this a higher estimate of the guarantee. Although the year relative to the Governor’s budget. The higher Governor’s proposal to delay $1.6 billion departs cost would mean adopting a budget with lower from this practice, it would mitigate some of the general-purpose reserves or additional solutions volatility in the 2024-25 guarantee. If the guarantee like spending reductions. The main advantage is drops below current estimates, the state could that the state would avoid the settle-up payment— reduce or eliminate this payment more easily making the budget easier to balance in 2026-27. than if it had already appropriated that amount As we explain in The 2025-26 Budget: Overview to schools. This reduction would reduce the risk of the Governor’s Budget, the state has a roughly of the state committing to a spending level that balanced budget this year but will likely face a would be unaffordable with lower revenues. This significant deficit in 2026-27. buffer seems especially important if the state …As Well as Two Other Alternatives. A intends to avoid downward adjustments to school second alternative is to appropriate a $1.6 billion appropriations after the year ends. The Governor’s payment this year but delay disbursing the funds proposal also recognizes that the guarantee is to schools until June 2026. By then, the state will unusually volatile in 2024-25 due to (1) the state’s have its final revenue estimate for 2024-25. The reliance on unpredictable stock market growth state could release the payment if revenues meet for its higher revenue estimates and (2) the high projections or rescind the payment if revenues fall sensitivity of the guarantee to changes in revenue short. This alternative is conceptually similar to the estimates. This volatility means the guarantee discretionary reserve deposit because it increases could easily drop billions of dollars below state costs this year while lowering costs in the current estimates. future. The main difference is that the state would …But a Compelling Alternative Is Available… commit to a specific use of the funding instead of The Legislature could consider several alternatives saving it in reserve. A third alternative is to suspend that would mitigate volatility in the guarantee the guarantee. Assuming the state sets funding without creating a settle-up obligation (Figure 7). at the level proposed by the Governor, it would Figure 7 Comparing the Governor’s Settle-Up Proposal With Three Alternatives Helps Balance the Increases Future When Would State Decide How to Option Budget This Year? State Costs? Allocate the Funding?a Governor’s settle-up proposal Yes Yes June 2026 budget Discretionary reserve deposit No No Future year(s) whenever funds are withdrawn Appropriation with delayed disbursement No No June 2025 budget Suspending the guarantee Yes Yes Future year(s) based on maintenance factor formulas a Assuming revenue estimates for 2024-25 meet the projections in the Governor’s budget. 12 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET create a $1.6 billion maintenance factor obligation— the pandemic. Other districts indicated they would adding to the existing obligation of $2.7 billion—but fund programs focused on academic intervention eliminate the settle-up payment. The state would and literacy for younger students. Districts also pay the maintenance factor in future years when could use the grant to pay for certain costs. For revenue is growing relatively quickly. This alternative example, several districts indicated they intend to is conceptually similar to the Governor’s proposal replace or update the technology they purchased because it would reduce state costs this year while when the pandemic began. Some districts are increasing costs in the future. planning facility updates, such as replacing ventilation systems and refurbishing classrooms for Specific Proposals TK students. Many districts also could use funds COLA Rate Likely to Be Slightly Below the to cover one-time and ongoing cost increases Budget Estimate. On January 30, the federal they have experienced for property and general government released updated data for the price liability insurance. index that determines the COLA rate. With this …But Language on the Allowable Uses Is release, seven of the eight quarters of data that Somewhat Unclear. The language regarding the affect calculation are now available. Based on this allowable uses of the grant could be interpreted update and our projections for the final quarter, we in multiple ways. Regarding the cost language, estimate the final rate to be about 2.26 percent— some districts might interpret it to mean the grant slightly below the estimate in the Governor’s may cover any costs, whereas others might read budget. This lower COLA rate would reduce it as limiting the grant to costs that grow over the cost of the COLA for LCFF and categorical time. Regarding the state priority areas, the state programs by about $145 million compared with the historically has provided discretionary block estimate in the Governor’s budget. The state will grants with two components: (1) intent language be able to finalize the COLA rate after the federal encouraging districts to consider specific activities government publishes the last quarter of data and (2) local control language allowing each district on April 30. to make the final decision about its funding. The Proposed Funding Increase for TK Staffing Governor’s proposal does not have the local Seems High. The Governor’s proposal to increase control language, which could leave districts the TK add-on rate would provide more funding uncertain about spending on activities outside the than necessary for districts to implement the state priorities. additional staffing requirements in 2025-26. Additional Funding for LREBG Is In our brief The 2025-26 Budget: Transitional Reasonable… The original impetus for the Kindergarten, we analyze the proposal and provide program—helping students recover from learning the Legislature with alternatives that are better loss—remains a significant issue. Test scores aligned with staffing costs. and other measures of academic performance Districts Could Use Discretionary Grant show that student achievement remains notably to Support Local Programs and Address below pre-pandemic levels. Districts also report Certain Costs… During the pandemic, the federal students coming to school with much higher government provided more than $20 billion in levels of socio-emotional challenges than they flexible one-time grants for districts. Districts used experienced before the pandemic. Interim spending these funds—which expired in September 2024—to data suggest that districts have spent their LREBG hire staff, expand programs, cover one-time costs, funds on various initiatives that could address and build reserves. The proposed discretionary learning loss, including additional instructional grant could allow districts to sustain some of these time, additional staff, accelerated instruction local programs for another few years. For example, (such as tutoring), and teacher training. Additional we spoke with several districts that indicated they LREBG funding could help districts sustain the would use the grants to continue the additional most promising activities for another few years. counseling and coaching they have provided since www.lao.ca.gov 13 2025-26 BUDGET The proposal also is consistent with the intent to state priorities. Whether the Legislature decides restore the grant to its original funding level. to fund proposals in the programmatic areas …But Original Expenditure Deadline Now proposed by the Governor or in different areas, we Seems Less Feasible. The state adopted the recommend adopting a similar mix of flexible and 2027-28 spending deadline for the LREBG as targeted spending proposals. part of its original plan to fund the entire grant in Address Volatility in 2024-25 Guarantee 2022-23. Under the changes adopted in 2023-24, Proactively. The Proposition 98 guarantee in however, districts would not receive their final 2024-25 is unusually volatile and uncertain. installment of funding until 2027-28. Moreover, We recommend adopting a plan that addresses districts must undertake a much longer planning the downside risk proactively. Although the and consultation process than the state required Governor’s settle-up proposal is a viable option, initially. If the deadline remains unchanged, districts we think the most compelling approach is to would have three years to adopt plans and spend make a discretionary reserve deposit that could the LREBG funds they receive in 2025-26, two be rescinded if revenues fall short. This approach years for the funds they receive in 2026-27, and increases state costs this year but reduces costs one year for the funds they receive in 2027-28. This in the future when the state is likely to face a large deadline could be difficult to meet—especially over deficit. In selecting among the Governor’s proposal, the final two years—and might encourage districts the discretionary deposit, or the other alternatives, to spend their remaining funds quickly rather the Legislature will need to consider its plan for than purposefully. balancing the state budget now and in the future. Eliminating the Deferral Is Prudent. The Adopt Discretionary Block Grant With Some Governor’s proposal to eliminate the deferral would Refinements. A discretionary block grant would make the budget more resilient by aligning the help districts support local programs and address ongoing cost of school programs with the ongoing various costs. We recommend adopting a version funding necessary to support those programs. of the Governor’s proposal with some refinements. It also would improve local cash flow and simplify Regarding the amount, the $1.8 billion proposed state and school accounting. by the Governor is reasonable, but the Legislature could consider higher or lower amounts to conform Recommendations with its overall plan for school funding. For example, Maintain One-Time Budget Cushion. the Legislature could reduce the amount if the A one-time cushion helps mitigate future drops in guarantee decreases by May or increase the the Proposition 98 guarantee and protect ongoing amount if it rejects some of the Governor’s other programs. Regardless of the specific proposals proposals. Regardless of the final amount, we the Legislature decides to fund, we recommend recommend modifying the accompanying language maintaining a cushion at least as large as the one in three ways: proposed by the Governor ($2.1 billion across all • Clarify Grant Is Discretionary. We school and community college programs). This recommend modifying the language to clarify approach means the final budget would have a that the funding is entirely discretionary. This mix of one-time and ongoing spending, which the modification would align the language with Legislature could use to address its short-term and the intent of the proposal and allow districts long-term spending priorities. to focus on the local programs and costs that Maintain Focus on Flexible Funding With represent their highest priorities. Some Targeted Spending. The Governor’s plan • Refine Intent Language on Costs. Districts to dedicate most new spending to flexible funding indicate that intent language sometimes while reserving a smaller portion for targeted influences how they use a grant, even if the proposals is a reasonable way to build the budget. funding is discretionary. We recommend This approach would allow districts to address their modifying the language related to “rising local priorities while making progress on a few core costs” so that the grant explicitly references 14 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET fiscal liabilities and temporary costs. (through 2028-29). Delaying the deadline would Examples could include technology updates, allow districts to complete the detailed planning facility improvements, and one-time insurance process and spend their funding more evenly over increases. This change would encourage the next several years. Accounting for the additional districts to consider the costs that one-time LREBG funding and the discretionary block grant, funds are best suited to address. all districts would receive an allotment of flexible • Adopt Standard Mandate Offset Language. funding for each student and targeted funding to A few districts have claims for unreimbursed support learning recovery based on their EL/LI state mandates, generally pre-dating the students. This funding structure parallels the LCFF. creation of the mandates block grant in Adopt Proposal to Eliminate the Deferral. 2012-13. The state routinely adopts language The Governor’s proposal to eliminate the deferral is specifying that any one-time discretionary prudent budgeting, and we recommend adopting funds these districts receive count toward it. Whereas the Governor proposes to eliminate their outstanding claims. We recommend the deferral beginning in 2025-26, the Legislature adding this language to help pay down the could consider early action to eliminate the deferral mandates backlog. in 2024-25. This accelerated approach would eliminate the state and local workload associated Adopt Funding for LREBG but Delay with calculating each district’s share of the Expenditure Deadline. The additional funding for June 2025 deferral and processing requests for the LREBG could help districts mitigate learning exemptions. If the Legislature were interested in this loss. We recommend adopting the proposal but approach, it would need to act by early April. delaying the expenditure deadline for at least a year www.lao.ca.gov 15 2025-26 BUDGET LAO PUBLICATIONS This report was prepared by Kenneth Kapphahn, and reviewed by Edgar Cabral and Ross Brown. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 16 LEGISLATIVE ANALYST’S OFFICE