The 2024-25 Budget

State Preschool

Summary

Recommend Further Reducing State Preschool to Align Funding With Program Costs. The Governor’s budget proposes reducing Proposition 98 funding for State Preschool by $446 million and non-Proposition 98 General Fund by $123 million on a one-time basis in 2024‑25. This is intended to align funding with anticipated program costs. Instead, we recommend reducing State Preschool by $138 million Proposition 98 ongoing beginning in 2023‑24. This would eliminate funds intended for expansion and prior rate increases where costs have come in lower. For 2024‑25, we recommend increasing Proposition 98 funding for State Preschool by $78 million one time compared to the Governor’s budget. This difference from the Governor’s budget primarily accounts for a $64 million augmentation consistent with the two-year collectively bargained early education and parity agreement and likely enrollment growth in 2024‑25. (While the majority of State Preschool funding is not based on the number of children served, some provisions of the early education and parity agreement are based on enrollment.) In total, relative to the Governor’s budget, these actions would result in Proposition 98 savings of $138 million in 2023‑24 and $60 million in 2024‑25. (In 2024‑25, the $138 million ongoing decrease is offset by a one-time $78 million increase.)

Recommend Repealing CDE Authority to Augment Rates. Chapter 4 of 2023 (AB 110, Committee on Budget and Fiscal Review) provided the California Department of Education (CDE) new authority to issue temporary rate increases to contractors if funding was available within the State Preschool budget appropriation. This fall, CDE used the recently granted authority to provide temporary rate increases, bringing rates for State Preschool providers up to the 87^th percentile of the regional market rate (RMR). To fund these increases, CDE used $167 million temporary COVID-19 relief funds that were set to expire and $265 million Proposition 98 from the set-aside for collective bargaining. We recommend the Legislature remove this newly added authority, as it allowed CDE to provide a temporary increase without explicit legislative input or approval. This action resulted in $265 million in additional Proposition 98 spending that otherwise would have been available to address the Proposition 98 budget shortfall.

Preschool Budget Overview

Governor’s Budget Includes $5.3 Billion for Preschool Programs in 2024‑25. The Governor’s budget provides $3.1 billion for transitional kindergarten and $2.1 billion for State Preschool. As Figure 1 shows, this is an increase of $211 million (4 percent) from the revised 2023‑24 level. The budget includes a $334 million increase in Proposition 98 General Fund, which is due to increases in transitional kindergarten offset by a decrease in State Preschool. This increase is offset by a $69 million decrease in non-Proposition 98 General Fund and a $54 million decrease in temporary federal funds related to State Preschool. The increase for transitional kindergarten is associated with scheduled expansion of the program—the state is expanding eligibility of the program to all four-year olds by 2025‑26—and a cost-of-living adjustment (COLA) to the Local Control Funding Formula. For State Preschool, the decrease is based on the administration’s estimate of funds anticipated to go unspent in 2024‑25.

Background

2023‑24 Budget Package Redirected $1.5 Billion of State Preschool Funds for Other Purposes Within the Program. The 2023‑24 budget package redirected a total of $1.5 billion of unspent or delayed funds to various other purposes within the program. As summarized in Figure 2, the funds were used to cover estimated costs associated with the collectively bargained early education and parity agreement ($1.3 billion), the Inclusive Early Education Expansion Program ($163 million), and a reduction in family fees ($22 million). (The state generally extended the collectively bargained program changes to non-represented, center-based child care and State Preschool providers to ensure parity in compensation and program operations.) The bulk of the funds redirected ($964 million) were anticipated to go unused because the cost of implementing prior actions came in lower than estimated. The remaining $529 million was made available by delaying program changes intended to go into effect in 2023‑24 and 2024‑25 and redirecting funds that would have traditionally been provided for the statutory COLA.

CDE Estimates Set-Aside for Collective Bargaining Exceeds Anticipated Costs. CDE estimates the two-year collectively bargained early education and parity agreement will cost $282 million Proposition 98 General Fund and $138 million non-Proposition 98 General Fund. The amount set aside for collective bargaining as part of the of the 2023‑24 budget agreement ($1.3 billion) exceeds the estimated costs by $888 million.

2023‑24 Budget Extended Temporary Reimbursement Flexibility for Two Additional Years. Since 2020‑21, the state has allowed State Preschool providers to receive the lesser of reimbursable program costs or the contract amount, but did not take attendance into consideration. This allows providers to receive their full contract amount regardless of how many children are enrolled in the program. Prior to the pandemic, reimbursement for direct contract programs was based on the lesser of reimbursable program costs, the contract amount, and the reimbursement rate multiplied by attendance. With this approach, providers had to serve a specified number of children to fully earn the contract. If a provider did not earn a contract, funds would be returned to the state. The 2023‑24 budget temporarily extended the pandemic-related reimbursement flexibility until June 30, 2025.

CDE Recently Granted Authority to Augment Rates Set in Budget Package. Assembly Bill 110 provided CDE new authority to issue temporary rate increases to contractors if funding was available within the State Preschool budget appropriation. The intent of this new authority was to allow CDE to fully expend temporary COVID-19 relief funds before they were set to expire at the end of September 2023. CDE issued two types of temporary payments under this new authority. The first payment provided an additional $1,442 per child to providers on a one-time basis. The second payment brought 2023‑24 provider rates to the 87^th percentile of the RMR. (Prior to CDE action, rates for the 2023‑24 fiscal year were set at the 75^th percentile of the RMR.) To fund these actions, CDE used $167 million temporary COVID-19 relief funds that were set to expire and $265 million Proposition 98 from the set-aside for collective bargaining.

Governor’s Proposal

Reduces State Preschool Funding by $569 Million One Time in 2024‑25. The Governor’s budget proposes reducing Proposition 98 funding for State Preschool by $446 million and non-Proposition 98 General Fund by $123 million. The administration indicates these reductions would be made on a one-time basis in 2024‑25 to reflect its estimate of State Preschool funds that would otherwise go unused. The proposal is not intended to reduce rates or slots.

Assessment

Proposed Downward Adjustment Is Reasonable. Given the budget condition, the Governor’s proposal to adjust State Preschool funding downward to align with anticipated program costs is reasonable. Below, we describe several issues the Legislature may want to consider when determining the appropriate level of funding for State Preschool.

Governor’s Budget Does Not Include $64 Million Increase for Additional Proposition 98 Costs in 2024‑25. In 2022‑23, the state began requiring that 5 percent of State Preschool enrollment be set aside for children with disabilities. This increased the costs of the program, since providers receive higher funding rates for serving children with disabilities. The requirement was initially set to increase to 7.5 percent in 2023‑24 and 10 percent in 2024‑25 and future years. The 2023‑24 budget package delayed these requirements for two years and redirected the associated funding increases in 2023‑24 and 2024‑25 to the collective bargaining set-aside. As such, the state must provide additional Proposition 98 funding for State Preschool in 2024‑25 consistent with the collective bargaining and parity agreement. The Governor’s budget includes a $49 million non-Proposition 98 General Fund increase to cover these costs, but does not include the associated $64 million Proposition 98 funding increase for this purpose. The administration has indicated it intends to address this issue in the May Revision.

Governor’s Budget Assumes Flat Enrollment. Some provisions of the two-year collectively bargained early education and parity agreement distributed funding to providers based on the number of children served. The Governor’s budget uses April 2023 enrollment data to estimate the cost of these provisions—effectively assuming enrollment will remain the same through 2023‑24 and 2024‑25. For 2022‑23, enrollment grew 8 percent compared to 2021‑22. Preliminary enrollment data for 2023‑24 indicate growth of less than one-half of 1 percent in 2023‑24 compared to 2022‑23. Given these trends, State Preschool enrollment is likely to increase in 2024‑25. The Legislature may want to include additional funding in 2024‑25 to address costs associated with enrollment growth. (The base funding State Preschool providers receive is not dependent on the number of children served given the extension of pandemic era reimbursement flexibility through 2024‑25.)

Estimate Additional Unspent Funds in 2023‑24 and 2024‑25. We estimate an additional $138 million Proposition 98 will go unused in 2023‑24. These are excess funds that were initially provided for slot and rate increases, and not part of the collective bargaining set-aside. This spring, CDE issued a request for applications from providers to award up to $33 million Proposition 98 funding for additional expansion slots beginning 2024‑25. If all $33 million is awarded to providers, then only $105 million of the $138 million would be unused in 2024‑25 on an ongoing basis. If not all $33 million is awarded to providers, additional funding would go unused.

Additional Funds Will Become Available in 2025‑26. Since the administration only proposes one-time reductions in 2024‑25, the state will again have anticipated unspent funds in 2025‑26 that could be used to ease future budget pressure. We estimate $310 million ongoing will be available in 2025‑26. Additional funds could also become available with the expiration of the pandemic related reimbursement flexibility in 2025‑26. If enrollment does not increase from spring 2023 levels, the state may be able to reduce the State Preschool program allocation by an additional $573 million in 2025‑26. This is because, on net, State Preschool programs are currently serving 43,000 fewer children than they were prior to the pandemic, while the pandemic related reimbursement flexibility allows providers to receive their full base amount regardless of how many children attend or are enrolled in the program. Returning to the reimbursement policy prior to the pandemic, State Preschool providers would only receive funding based on the number of for children served.

Concerns With CDE’s New Rate Augmentation Authority. Typically, the Legislature sets rates and provides funding to implement these rates through the annual budget process. However, this fall, CDE used the recently granted authority to redirect excess funds that were set aside for a different purpose, without explicit legislative input or oversight. These actions resulted in $265 million in additional Proposition 98 spending that otherwise would have been available to address the budget shortfall.

Recommendations

Recommend Further Reducing State Preschool to Align Funding With Program Costs. Given the state’s budget condition, we recommend fully aligning funding with anticipated costs and recommend the Legislature direct CDE not to award any of the $33 million for slot expansion being considered this spring. To this end, as shown in Figure 3, we recommend reducing State Preschool by $138 million ongoing Proposition 98 beginning in 2023‑24. This would eliminate funds intended for expansion and prior rate increases where costs have come in lower. For 2024‑25, we recommend increasing Proposition 98 funding for State Preschool by $78 million one-time compared to the Governor’s budget. The difference from the Governor’s budget primarily accounts for a $64 million augmentation consistent with the two-year collectively bargained early education and parity agreement and likely enrollment growth in 2024‑25. (While the majority of State Preschool funding is not based on the number of children served, some provisions of the early education and parity agreement are based on enrollment). In total, relative to the Governor’s budget, these actions would result in Proposition 98 savings of $138 million in 2023‑24 and $60 million in 2024‑25. (In 2024‑25, the $138 million ongoing decrease is offset by a $78 million one-time increase.)

Repeal CDE Authority to Augment Rates. We recommend the Legislature remove the newly added language that allows CDE to provide a temporary rate increase without explicit legislative input or approval. CDE’s actions resulted in additional Proposition 98 spending that could have instead been directed to address the projected Proposition 98 shortfall.