SACRAMENTO, Calif. /California Newswire/ — California Recovery Task Force Director Herb K. Schultz issued the following statement and sent the following letter to the U.S. Department of Education in response to a March 4, 2010 letter regarding California’s State Fiscal Stabilization Fund Round Two Application:

“California has met all federal requirements for the second distribution of stimulus funding for education. I am disheartened that anyone would try to stand in the way of securing nearly a half a billion dollars in critical funding for our education system during these difficult economic times.”

Text of the Letter:

March 15, 2010

Dr. Joseph C. Conaty, Director
Academic Improvement and Teacher Quality Programs
Office of Elementary and Secondary Education
U.S. Department of Education
400 Maryland Avenue, S.W., Room 3E314
Washington, D.C. 20202

Dear Dr. Conaty,

This letter is in response to the March 4, 2010 U.S. Department of Education letter requesting that California address concerns raised by the Parents and Students for Great Schools, the Education Coalition, and Sequoia Union High School District in regards to the California’s maintenance-of-effort (MOE) data under the State Fiscal Stabilization Fund (SFSF). As noted in our responses below, California is abiding by the federal laws, guidance, and the intent of the SFSF grant. We are also taking the opportunity express our disappointment that, although the State has briefed these parties and shared the back-up for California’s MOE calculations, they continue to misinform their federal representatives and constituents. However what is even more troubling is their willingness to jeopardize future receipt of federal funds and cause there to be a significant delay in the receipt and distribution of SFSF funding. Nearly all of California’s education agencies, including school districts, charter schools, county offices of education, community colleges, the University of California and the California State University systems are expecting to receive these funds to backfill reductions in an effort to help save or create jobs with the overall goal of better serving California’s students.

Despite the fiscal difficulties facing California, we are committed to providing our students with as many resources as possible to prepare them for secondary education or the workforce. The increases in K-12 education funding advocated for by these parties as part of their solution would result in significant cuts to other essential areas of the state’s budget, such as health and human services or higher education. These programs ultimately have a significant impact on the success of our K-12 education system, as well as the future success of our K-12 students. Thus, we must provide a balance that does not undermine the health and welfare of the very students who are being served by our K-12 school system.

The following addresses each allegation from Parents and Students for Great Schools, the Education Coalition, and Sequoia Union High School District in more detail:

Allegation 1. California has not consistently treated deferrals under the Quality Education Investment Act (QEIA). A consistent treatment of deferrals would increase the State’s fiscal year 2006 MOE baseline for elementary and secondary education by over $1 billion and also reduce the levels of State support for fiscal years 2009, 2010, and 2011. With this correction, the State fails to meet the MOE requirements for elementary and secondary education for both fiscal years 2010 and 2011.

Response: The QEIA program was established in 2006 as part of the CTA, et al. v. Schwarzenegger et al. settlement agreement to provide funding that was owed under the Proposition 98 Guarantee in 2004-05 and 2005-06, but no funding was required or provided in those years. The funding for the QEIA program was structured as settle-up funding rather than deferral funding as alleged above. In our May 2009 Amended SFSF Phase I application, we submitted the following explanations of settle-up and deferral funding:


California’s Constitution provides a minimum funding guarantee for K-12 education and community colleges. The guarantee is based on a formula that includes factors such as revenue that keep changing after the close of the fiscal year. As a result, we frequently discover in a subsequent year that insufficient appropriations were made in a prior year to meet that year’s minimum guarantee. The appropriations made to meet these obligations are referred to as settle-up funds. In some cases the settle-up payments were required for not just prior year but for past years. Example: we determined in 2003-04 that we owed settle-up monies for FY 1995-96, 1996-97, 2001-02, and 2002-03. A portion of these monies are still owed, but a portion of these funds were appropriated in 2004-05 and 2005-06. For purposes of California’s constitutional education funding guarantee they count in the prior year, but for purposes of accounting, they are booked as revenue in the year the schools actually receive the appropriation. This is because these appropriations fund education program costs incurred in the year they are appropriated rather than in the prior year for which the constitutional obligation arises.


In recent years, revenue declines during a current year result in a lower constitutional minimum guarantee. Because the guarantee is in most cases based on the prior year funding level, it is necessary to reduce the guarantee during the current year so that the minimum guarantee does not get sustained at a higher level than revenues can support. However, for many local educational agencies (LEAs), an actual budget reduction late in the fiscal year would cause severe hardship. As a result, there has grown a practice of “deferring” a specific amount that was originally budgeted for the current year to a later date for payment. For example, we currently defer the payment of $1 billion from June to July; the result is a shift of appropriation from one fiscal year to the next, thus correcting the guarantee. However, by treating it as a deferred payment for the current year, the LEAs can book it as a receivable and can still spend the funds and balance their budgets. For accounting purposes, the funds are booked in the original year.

The key distinction for purposes of the SFSF MOE calculations is that settle-up is used to fund program costs in the year in which the funds are appropriated, while deferrals fund program costs incurred in the prior year. In all MOE calculations in our Phase I and II applications, California has consistently counted settle-up in the year it was appropriated and deferrals in the year the appropriation was deferred from. As mentioned above, using these definitions allows local educational agencies to count funds in the year they incur expenditures against these funds.

As a result, the QEIA settle-up funding is counted in the year it is appropriated to school districts, therefore, there is no QEIA funding counted towards 2005-06, however, there is QEIA funding counted towards 2008-09, 2009-10, and 2010-11. Allegation 1 incorrectly assumes that the QEIA funding is appropriated in 2005-06. While the funding is appropriated for settle-up obligations that count towards 2005-06, it is appropriated in 2008-09, 2009-10, and 2010-11 as correctly reflected in our MOE calculations.

Allegation 2. California inappropriately counts $250 million of QEIA expenditures for fiscal year 2011, artificially pre-paid at the end of June 2010, as support of public education for fiscal year 2010. This money is specifically earmarked for QEIA obligations that districts are required to undertake in 2011.

Response: The QEIA funding provided to schools is settle-up funding provided to pay past years’ minimum guarantee obligations (please see our response to Allegation 1). The QEIA funding is discretionary funding for schools that can be used for any purpose. However, schools that receive these funds must meet specified criteria to be eligible to receive the funds. This allegation incorrectly identifies QEIA funding as funding for specific program activities when it is actually discretionary funding provided to eligible schools. We note that statute clearly states that QEIA funding is discretionary. Specifically, subsection (f) of section 52055.720 of the California Education Code, when referring to the QEIA, states that: “The funds appropriated pursuant to this article may be expended for any purpose identified under the school sites’s Single Plan for Pupil Achievement established under Section 64001.”

The decision to provide additional QEIA funds in 2009-10 was, in part, in recognition of the revenue limit reduction that local educational agencies are faced with in the current year. Providing more discretionary funding in the current year will help to alleviate the hardships created by these reductions, and help better meet the requirements of the QEIA program.

Please see the attached SFSF Phase II Application Maintenance of Effort chart andthe SFSF Phase II Application Maintenance of Effort Waiver chart for additional data relating to Allegations 1 and 2.

Allegation 3. California does not meet the criterion for a waiver of the elementary and secondary education MOE requirement for fiscal year 2011 because the state improperly bases its waiver eligibility on proposed expenditures rather than revenues.

Response: In the Guidance on the Maintenance-of-Effort Requirements in the State Fiscal Stabilization Fund Program (OMB 1810-691), the federal guidance clearly states that:

“For purposes of the MOE waiver criterion, the terms “total State revenues” or “total revenues available to the State” may include either of the following:

Projected or actual total State revenues for education and other purposes for the relevant years. These data would include both general and special revenues from sources such as personal income taxes; corporate income taxes; sales and use taxes; alcohol, tobacco, and motor fuel taxes; licenses and fees; and other specific levies. The data may also include revenues from lottery sales and tobacco settlements.

Projected or actual total state appropriations for education and other purposes for those years. The data would include the State’s annual operating budget as funded through the various State appropriations acts.”

California chose to use appropriations as the definition when calculating our eligibility for a waiver because we believe that this more accurately reflects the level of resources available to the state for education expenditures, as well as other programs.

Please see the attached General Budget Summary chart for additional data on how final expenditures relate to final revenues.

If you have any questions or need additional information regarding this matter, please contact Jeannie Oropeza, Education Program Budget Manager, California Department of Finance at (916) 445-0328 or me.


Herb K. Schultz, Senior Advisor to the Governor and
Director, California Recovery Task Force.