Snafus are inevitable, right? What then?

Under normal conditions, school districts in California have considerable autonomy. They run the schools in their care and make tradeoffs.

Of course, conditions aren’t always normal, are they? When times are tough it’s easy to succumb to wishful budgeting. School boards faced with tough choices might allow known issues to get worse. Leaders can make mistakes, and those mistakes can cascade like dominos. In a state with about a thousand school districts and more than 1,200 charter schools, financial snafus are inevitable, right?

Why is outright failure so rare?

Here’s the surprise. California schools have been through some rough budget years in the last few decades, but very few school districts have actually failed — at least not financially.

Why?

This post explores the system of checks, information, warnings, alerts, support and intimidation that helps districts avoid going bust — and in doing so, avoids disrupting kids’ education. Many districts are headed for some hard decisions ahead. Some of the pain can be avoided.

How do California school districts control their own finances?

Let’s start with the big picture, simplified. California’s public school finance system relies on taxes — a combination of state, federal, and local revenue sources. For the roughly 10,000 K-12 public schools that serve about 97% of students, funding from the state is mostly determined by economic conditions, filtered through rules established by Proposition 98, the Local Control Funding Formula (LCFF), and a maze of other rules like the disco-era Gann Limit, still in effect.

Under this system, the state allocates operating funds to districts and charter schools based on the number of students who show up to school, plus some extra money if those students are living in poverty and/or learning English. Separately, districts also receive some federal funding, which can vary from year to year depending on whether there has been a recent market meltdown, pandemic or similar crisis. Under California’s constitution, the state may not run a deficit, so every year some money goes into rainy day funds that smooth out the funding potholes a bit. Many school districts set aside some money for their own rainy day funds, too.

Districts can’t easily control their revenue, but they can control how they spend it.

Most K-12 students in California attend schools managed by school districts. About a tenth of students attend a public charter school, managed separately from the district. School boards set priorities and allocate resources. The LCFF system allows districts to control how they spend most of their state and local funding while prioritizing high-needs students.

Districts can’t easily control their revenue — they get what the state constitution says they get, tweaked a bit each year through the budget process. (The main exception is attendance: if more kids show up, they get more money.) Money is delivered to them in scheduled apportionments meted out through their county.

Districts can, however, control their expenditures, within limits. Some funding comes with strings attached — it has to be spent on certain activities, like child nutrition, or to pay for faculty that serve certain student groups, like English Learners, or students with special education needs. Districts also must honor contract commitments made through collective bargaining. They must spend a certain amount on arts education. Not to mention insurance, technology systems, site maintenance, and essentials from network service to sanitary pads. All of these commitments (and more) have to be prioritized, tracked and reported.

Within those bounds, school district boards and charter school boards have leeway. They employ a superintendent, who on their behalf invests in teachers, leaders, specialists, learning materials and services that add up to the experience of education for each child in their care..

What role does the state play in ensuring fiscal accountability for school districts?

Under California’s constitution, the state is ultimately accountable for providing universal public education. The work is delegated to local school districts, but in the end the buck stops at the state. If a school district makes a financial commitment it can’t keep, the state can end up on the hook for it.

AB 1200 to the rescue

In 1991, in response to several high-profile district financial crises (most notably in the Richmond Unified School District, since re-branded West Contra Costa Unified), California legislators passed the School District Fiscal Accountability Act. This law, better known even now by its old bill number, AB 1200, assigned County Offices of Education (COEs) the job of reviewing district budgets to certify that they can meet financial obligations for the current year and the next two years.

To support county offices of education in this work, AB 1200 also created an essential state agency, the Fiscal Crisis and Management Assistance Team (FCMAT, pronounced FICmat). FCMAT provides technical assistance and audit services to help districts get the facts and develop recovery plans before a crisis escalates. In partnership with other organizations, FCMAT also helps train the business officials in district central offices. This stuff can get complicated, and it’s important to have people who know what they’re doing!

A decentralized system can spiral out of control easily. To prevent it from doing so requires structure, transparency and accountability. In California, districts must manage and report their finances using the state’s Standardized Account Code Structure (SACS), which is overseen by FCMAT through the California School Information Services (CSIS, pronounced SEE-sis). For most everybody in a school district, these functions are invisible and can seem irrelevant.

Unless something goes wrong.

What happens if a school district shows signs of financial trouble?

On an ongoing basis, County Offices of Education (COEs) monitor the financial stability of school districts and charter schools. District budgets and contracts are routinely reviewed and must be certified to take effect. If a district is showing signs of financial instability — such as deficits or declining reserves — COEs and FCMAT can step in.

The language of budget certification can be confusing.

• A positive certification is good news. It means that the review found no serious financial risks in the three-year plan. Most districts receive a positive certification.
• A qualified certification is not good news. It signals specific reasons for concern and calls for a closer look. Most of the time, the closer look reveals issues that can be addressed, and the qualified certification is resolved.
• A negative certification is bad news. It signals that the district is off its rails and at risk of running out of money to pay people. Business as usual is not a viable option. A negative certification is rare.
• It can get even worse: California law establishes conditions under which a COE must declare a district not a going concern. (Oh, snap!) Under these conditions, FCMAT gets involved (if it isn’t already) and brings in financial consultants to work with the district (at the district’s expense) to get things under control. Contracts are scrutinized and can be suspended to keep the problems from getting worse. Salaries of district leaders can be withheld to help get their attention.

FCMAT carries a reputation of righteous toughness, like Samuel L. Jackson quoting from Ezekiel before, administering rough justice in Pulp Fiction. In reality, it’s in the business of providing technical assistance and audit services to help districts develop recovery plans before a crisis escalates. Yes, the state can intervene in the worst cases, but it’s thankfully rare. Let's set that aside for a moment.

How do Local Control Accountability Plans (LCAPs) help prevent financial crises?

As part of the planning process each year, school boards must vote to pass their three-year budget and formally adopt an accompanying public document known as their Local Control Accountability Plan (LCAP). The budget is not complete without a matching plan.

As explained in Ed100 lesson 7.10, California law requires that parents and community members be engaged in the LCAP planning process. Community review of the LCAP can help ensure that the plan addresses the concerns of parents, students and educators.

In the Ed100 blog
The Ed100 LCAP Checklist

Conducted well, these public reviews can be essential truth-telling exercises. How will your district provide arts education for all students, as required? Check the plan. When will financial literacy courses be rolled out, as required? Check the plan.

By providing one main source of truth for what’s in the plan and what isn’t, the LCAP increases the chances that problems and errors will be spotted and addressed.

How do County Offices of Education (COEs) help districts stay on track?

People who run for school board aren’t necessarily well-versed in school finance. Voters rarely think to ask about it. School board candidates and new board members are among our most motivated readers!

County Offices of Education serve a critical oversight role in California’s system. They review district budgets and review interim reports from a position of power. If a district’s three-year budget is not sound, the COE can return it with instructions for revision, and bring FCMAT on board to back them up. Failure to meet these requirements can trigger state intervention.

“Never spend one-time money on things that breathe”

The three-year timeframe of the school district budget is central to effective fiscal control. For example, in the Pandemic years districts received substantial money from federal grants. It was tempting to hire teachers, but doing so would create ongoing obligations without funds to sustain them. County Offices of Education are trained to spot these fiscal traps. A common mantra in fiscal oversight: “Never spend one-time money on things that breathe.”

What happens if a district cannot resolve its financial issues?

If a district dithers as its finances worsen, sooner or later it will run out of cash to pay its teachers and meet other financial obligations. In this case, the state can no longer safely delegate its constitutional responsibility to the school board.

State takeovers are rare

Very few school districts have failed so thoroughly that the state has actually taken over. Each case has had its own dramas. The general pattern is that the district school board, out of cash and out of options, votes to accept an emergency loan from the state, with many strings attached. The superintendent is fired and replaced by a state-appointed administrator with extraordinary powers over financial and organizational matters. Until the loan is repaid, the school board has limited power.

It can take years for a school district to recover from financial mismanagement. Prominent examples of the state’s most troubled school districts include Inglewood Unified, West Contra Costa Unified, San Francisco Unified and Oakland Unified.

Why don’t districts keep more funds in reserve?

School districts in California are required to keep some money in reserve for unexpected expenses, but the minimum is very low — generally just 3% of annual expenditures, a sneeze away from having no reserves at all.

Most districts can and do keep significantly larger amounts in reserve, but California law (SB 751 - 2017) limits the amount that larger districts (over 2,500 students) can hold in reserve to not more than 10%, with minor exceptions. For several years, the legal limit was even lower.

Why does this cap exist at all? The logic is partly political. When times are tough for public school funding, the only real remedy is state and federal relief, which requires a sense of urgency. Communities are more likely to advocate for funding for their schools if they know it could disappear. For example, without action, California school communities will lose billions in funding for public education unless they renew the tax on the state’s highest earners, set to expire in 2030.

COVID money was one-time money

The federal government provided substantial funds to support school systems through the COVID crisis. These funds helped keep schools operating and teachers employed. And then they went away. Remember the FCMAT caution about spending one-time money on things that breathe?

In 2024, districts that spent COVID money on staff are struggling to unwind their commitments. Particularly for districts with declining enrollment, the three-year math is dire. County Offices of Education don’t have a lot of good news to share, but at least the numbers are clear. Districts that pay attention and take action can avoid compounding the harm.

Learn more

If you look, you’ll find a world of information about the unsung heroes who keep school districts functioning. This post just scratched the surface. For example, you can learn a lot about district oversight from Episode 23 of the CASBO Podcast — it’s an hour-long interview with Mike Fine, the CEO of FCMAT.

Is your district flirting with fiscal disaster? Learn how the FCMAT professionals think about it from their 2022 presentation Staying Out of Trouble, and check out the 2024 Fiscal Oversight Guide. When FCMAT provides training to COEs, they are in the (good) habit of sharing it. Here’s an example.

Thank you to Mike Fine and Leslie Reckler for advice about this post. If there are errors, they are mine.