In his initial January budget, Gov. Gavin Newsom said he planned to withhold $5.6 billion from TK-12 and community colleges, even though state revenue forecasts showed there would likely be enough to fund education in the 2026-27 budget. Newsom said he’d wait and see. Given the volatility in state tax receipts, he indicated he didn’t want to overpromise.

Last week, school board members and teachers union leaders held press conferences and banged on legislators’ doors in Sacramento, demanding the money in the May revision. They said Proposition 98, which determines the portion of state revenues that must go to schools and community colleges, requires it.

“We cannot allow budget maneuvers to undermine that promise when we need to concentrate resources in the service of improved student performance and closure of persistent achievement gaps,” said California School Boards Association President Debra Schade.

“Diverting $5.6 billion dollars from our students isn’t some maneuver or adjustment, it’s a violation of our state constitution,” said United Teachers Los Angeles President Cecily Myart-Cruz.

The odds are good they’ll get at least most of it — and maybe more — if not in the May revision, then after final closed-door negotiations between legislative leaders and Newsom by mid-June. That’s when the Legislature must send a budget to the governor.

New Projected COLA Is 2.87%

The state uses a federal formula-driven cost-of-living adjustment (COLA) based on the cost of a basket of goods. The revised calculation for 2026-27 for school districts’ general operating budgets is nearly a half-percent higher — equal to about an additional $500 million — than Newsom included in January.

The formula doesn’t come close to covering districts’ actual expenses. These include rising employee health care premiums and pay raises and special education expenses, plus countering the negative impact of declining enrollment on most school districts.

Governors and the Legislature usually include only what the formula calls for, but districts are clamoring for a higher COLA.

$10 Billion Budget Surplus for K-14

That potential 2026-27 budget surplus for schools and community colleges is a huge bonanza. It’s beyond what Newsom projected in January. The Legislative Analyst’s Office last week said the surplus has either already been collected or could be counted on in the coming months. The projected state general fund surplus is $25 billion, so under the Prop. 98 formula, 40% of the total is allotted to education spending.

Throw in the $5.6 billion that Newsom withheld for a game-changing $15.6 billion.

How that money — or less if the Department of Finance’s revised budget projections are lower — will be spent is the question that the May revision will begin to answer.

“To get $5.6 billion would be a stunning victory if you’re looking at the budget in January terms. But if you look at the budget today, well, would $5.6 billion be a consolation prize?” asked Kevin Gordon, president of Capitol Advisers, a Sacramento-based school consulting firm.

Leaders in the Senate and the Assembly pledged in separate budget blueprints that schools and community colleges would get the $5.6 billion. The Assembly’s statement was blunt: “The Governor’s January proposal shortchanged schools by billions. The state Constitution requires those dollars to flow — and they will. This will also be the highest per-pupil funding in California history.”

Saving for a Rainy Day

The Senate’s version proposes to put nearly $6 billion into the Prop. 98 budget reserve, bringing it close to the goal for a potential downturn. The Assembly’s version isn’t specific but appears to endorse the strategy. It says, “With more Proposition 98 state reserves, we can help our education system prepare for more uncertain budget terrain, ongoing enrollment fluctuations and additional rising costs under Trump.”

Even with funding the reserve, that could still leave $9 billion more revenue for 2026-27 for schools and community schools than in the January budget. The LAO and the Senate would treat nearly all of it as a one-time spending gift from surging income tax and capital gains receipts from investments in AI that are too unpredictable to assume moving forward.

Newsom will likely agree, and the May revision will lay out how to spend it. The January projected budget included money to continue some of the new programs he established over the past half-dozen years, including community schools and financial incentives to pursue teaching credentials.

Local Control Funding Formula

That’s where the 2.87% COLA enters the picture. Teachers unions and school districts argue the priority should be shoring up districts’ base spending by giving a larger COLA to the Local Control Funding Formula, which funds about 80% of districts’ spending. And unions and district leaders want this to be ongoing.

Sen. John Laird, D-Santa Cruz, who chairs the Senate Budget Committee, said about $2 billion of the $10 billion projected new Prop. 98 funding could be counted as ongoing. Rob Manwaring, senior adviser to the nonprofit advocacy group Children Now, agreed that’s reasonable.

An additional 2% ongoing COLA, on top of 2.87%, would translate to about an additional $2 billion for the funding formula. Another option would be to increase funding for special education, which would have the same effect, since a fast-increasing portion of district operating budgets fills in what state and federal governments fail to fund.

One other number to watch — coincidentally $2 billion — will also be in play. That’s how much the state is not allocating to the funding formula because of districts’ declining enrollment. Those savings, euphemistically called the “declining enrollment dividend,” will provide an ongoing pot of money and will increase annually over the next decade.

There are lots of ideas for using it, such as easing the burden on districts due to lost enrollment, phasing in a regional cost adjustment to the funding formula or permanently funding teacher training in math or literacy instruction.

Let the debate begin.

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