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School districts can run out of cash on their own schedules. California’s emergency-loan process runs on the Legislature’s.
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In May, that mismatch became increasingly concerning as Sacramento City Unified School District’s financial projections pointed to a potential cash crash, prompting state officials to consider a proposal that could have helped districts facing cash shortages access emergency aid more quickly.
“Our regular updates on Sac City kept the group informed to the point that they realized that we needed to potentially do something,” said Michael Fine, CEO of state-funded Fiscal Crisis and Management Assistance Team.
FCMAT initially projected that the district would run out of cash in February. Officials worried, Fine said, that a request for an emergency loan made after Aug. 30, just before the Legislature’s Aug. 31 deadline to pass bills, would have to wait until lawmakers returned in January. The process would then take about 90 days after the governor signed the bill, meaning the money might not arrive before the district ran out of cash.
FCMAT has since updated its estimate, projecting that the district could run out of cash in April or early May.
“I was worried that the school district, whether it’s Sac City or another school district, would wait till the last minute to realize that they were in trouble.”
A proposal takes shape
A group made up of state education and finance officials, legislative leadership staff and committee staff settled on the proposal about 10 days before the legislative session ended, according to Fine.
In the draft proposal reviewed by The Sacramento Bee, the accelerated funding would have come with conditions: a fiscal adviser would have to be in place, and the district could use the money only to pay existing obligations while continuing to meet state and federal education requirements.
The proposal would have allowed the state Department of Finance to advance future state funding to a school district facing cash insolvency. Normally, it takes roughly 90 days for an emergency apportionment to be released after the governor signs the measure for money. The proposal could have provided an initial portion of that funding within roughly 25 days, Fine said.
For example, if a district were approved for a $100 million emergency apportionment but needed $20 million immediately to make payroll, it could receive that amount early and then receive the remaining $80 million once the full process was complete.
The proposal ultimately stalled after Assembly leaders asked that it be introduced as a separate policy bill rather than as a trailer bill, Fine said. A regular bill passed during the legislative session usually takes effect on Jan. 1 of the following year, while a trailer bill could take effect immediately.
“It was at the very end of the session. The capacity for the Legislature to take on something new at the very end is difficult,” Fine said.
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While Fine noted that the proposal was not written specifically for Sacramento City Unified, its language suggests it was designed as a temporary option for districts facing immediate cash shortages, with the provision expiring on June 30, 2028.
“There’s still an opportunity in my mind for this to happen in January — introduced in January as an urgency measure,” Fine said. An urgency bill can take effect immediately after the governor signs it, making the expedited funding process available before the district might need it.
“So it’s not lost, I guess is what I would want to say — that what appears to be a delay is not necessarily harmful for Sac City.”
Sacramento City Unified officials have spent nearly a year scrambling to address one of California’s most severe school district fiscal crises. In July, the Sacramento County Office of Education said the district faced an overall structural deficit of approximately $221.8 million. FCMAT’s latest projection earlier this month showed a cash shortfall of about $60 million, even after accounting for money received from the district’s retiree health benefits trust.
The district’s fiscal crisis helped prompt two proposals during the legislative session. The other sparked a dispute between the California County Superintendents association and the district over State Superintendent Tony Thurmond’s fiscal oversight authority.
In an Aug. 25 letter to lawmakers opposing the proposal to limit Thurmond’s fiscal oversight authority, the California Teachers Association said it supported the apportionment proposal to expedite emergency funding, calling it “a practical, effective way” to help stabilize school districts facing financial distress.
When the money runs out
If SCUSD ran out of cash and could not meet payroll — and an emergency state loan was not available in time — it could potentially pursue Chapter 9 bankruptcy. The process that would protect the district from creditors but would not automatically provide the cash needed to keep operating, Fine said.
Bankruptcy could also put the district’s collective bargaining agreements at risk and potentially interfere with pension obligations. In 2013, Detroit filed for Chapter 9 bankruptcy. The following year, a U.S. bankruptcy judge that reduced general retirees’ pensions by 4.5% and ended future cost-of-living adjustments.
Financial experts have long emphasized the urgent need for Sac City Unified to identify and implement a long-term fiscal plan that would address its financial distress rather than merely delay the crash. The district’s latest long-term plan, however, raised questions last week over assumptions about future funding assumptions as “risky.”
If the district ran out of cash in May, Fine said, property-tax revenue expected in early July could temporarily stabilize it — but only temporarily.
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“The problem would hit again about five months later,” Fine said.