California was among the states most severely shaken in the recent "great recession," and the state continues to struggle with an underlying imbalance between spending and revenue. State policymakers have relied on optimistic budget projections and deferred payments to balance the state's budgets, pushing the problem further down the road but not solving it.

The 2011-12 state budget was the fourth in a row with a substantially reduced funding level for K-12 education as compared to 2007-08, the year before the recession made a significant impact on the state budget. Considering only the operating funds for K-12 schools, the state’s K-12 education system received a total of $62.9 billion in 2007-08, the year before the recession began, and received $54.8 billion in 2011-12, a decrease of $8.1 billion, or more than 12% (see chart below).

Of the different sources of funding for K-12 education, state general fund support for education has seen the largest decrease during that period. Local property taxes also declined substantially but are now beginning to recover. Federal stimulus money partially compensated for this funding loss as the American Recovery and Reinvestment Act that Congress enacted in February 2009 provided California's K-12 education system more than $6 billion to California's K-12 education system. However, those funds have been used up. In August 2010, Congress passed an “education jobs” bill that provided California school agencies with an additional $1.2 billion for saving or creating positions. This money had to be spent in 2010-11 and 2011-12.

Funding delays also continue to plague local education agencies. To help address the state’s cash flow problems, policymakers delayed the release of funding, disrupting local agencies’ own cash flow and ability to plan.

To help local school agencies manage with less funding, state policymakers in 2008-09 changed the law to give them substantial flexibility in how a portion of categorical funds are spent. (For more information, see the article on categorical aid.)

With the passage of Proposition 30 by California voters in November 2012 bringing in new revenue, the state is approaching a balanced budget for the first time in years. The increased revenues prevented further cuts, and the governor has pledged to pay down delayed payments to schools from previous years. But it may be as much as seven years before revenues are restored to 2007-08 funding levels for all schools.

In addition, the governor has suggested sweeping changes to the school finance system itself. His proposed "Local Control Funding Formula" would eliminate most categorical funding for specific programs and allocate dollars to districts based on student need instead.

This proposal is largely consistent with other recommendations to reform and simplify the system that have been presented over the past decade. But whether it can be implemented in the next year or two is still unclear.

The budget deficit is not the only financial challenge facing the state. California will eventually have to address several large payments, including at least $100 billion in unfunded liabilities for government employee pension funds and a $10 billion deficit in the Unemployment Insurance Fund. Also, the state must repay $15 billion that has been borrowed to close deficits in recent years.

The EdSource web site has extensive information about California's school finance system. For more information about changes to categorical programs, see the Ed-Data article on categorical aid.