September 2024

California school districts are funded in two ways: community-funded and state-funded. Huntington Beach City School District is a state-funded district. However, we have been monitoring the potential transition to community-funded status in recent years. Our transition status remains fluid, and we regularly update revenue projections throughout the year, considering factors such as actual enrollment, attendance, property tax estimates, and other variables that influence funding calculations.

Approximately 100 out of the 1,000 school districts in California operate as "community-funded" or "basic aid" districts, relying primarily on local property taxes for funding.

The State utilizes the Local Control Funding Formula (LCFF) to determine annual allocations for school districts. First, local property taxes are considered, and if they fall short of the LCFF funding target, the State supplements the difference to meet the District's funding allocation. However, in the case of community-funded districts, local property tax revenues are sufficient to cover the funding target, allowing these districts to retain their local property tax revenues for educational purposes. Community-funded districts still receive some State funding, approximately $120 per student, as mandated by the State Constitution.

The accompanying chart provides a historical comparison of HBCSD's LCFF revenues. The blue line illustrates the District's historical State-funded status, while the green line represents estimated revenues under the community-funded status. Based on the latest projection models, the District will transition to community-funded status in 2024-25 as local property taxes exceed the State funding by approximately $3.5 million.

It is important to note that districts determine their property tax revenue well into the fiscal year, and future projections are volatile. Therefore, community-funded districts usually maintain a reserve level higher than 3%, and HBCSD Board policy requires an additional 4% of annual expenditures to ensure financial stability and meet its obligations.

There are two ways California school districts are funded: community-funded and state-funded. Huntington Beach City School District is a state-funded district. However, in recent years we have been monitoring the potential transition to community-funded status. Below are some of the frequently asked questions (FAQs) you might find helpful. 

What does community-funded mean?

A community-funded district, also known as a basic-aid district, receives most of its funding from local property taxes because local property tax revenues exceed the State's guaranteed funding under the Local Control Funding Formula (LCFF) calculation.

Community-funded districts are allowed to retain all of their allotted property tax revenue, and State contributions to a community-funded district's budget are minimal.

Is the District in community-funded status this year?

The updated revenue projections as of December 2023 indicate an increase in State funding attributed to an enrollment change. State funds have surpassed local property taxes and therefore, the transition is now postponed to the 2024-25 fiscal year.

Our transition status remains fluid since property tax revenues for this year are near the State-funded allocation, we will continuously update our calculations throughout the year as we receive information on tax collections from the Auditor-Controller. We will update revenue projections in May/June to incorporate the Orange County Auditor-Controller property tax actual collections, enrollment, attendance, and other factors that affect the LCFF funding calculation to determine if we transition to community-funded status in 2023-24 or 2024-25.

Why didn’t we become community-funded in past years as anticipated?

The transition to community-funded status for our district did not occur as anticipated in the past years due to the impact of the COVID-19 pandemic. The State implemented a hold harmless provision, ensuring that districts received funding based on the 2019-2020 average daily attendance despite enrollment declines. As a result, our district's revenues for the 2020-2021 and 2021-2022 school years were different from the significant decline in enrollment that we had originally anticipated before the pandemic. Additionally, the State budget allocated extra funds last year and changed the funding calculation method to consider the prior three years of attendance, further postponing the transition. 

Can we move in and out of basic aid and if yes, what would that look like?

Yes, it is possible for school districts to move in and out of basic-aid status, and this transition depends on several key factors, such as property tax growth, enrollment variances, and state funding allocation changes. Moving in and out of basic aid status can create financial uncertainty for the district, making it challenging to predict revenues and operational cash flow. 

Will declining enrollment matter once we become basic aid?

Declining enrollment may not impact the LCFF (Local Control Funding Formula) revenues. Still, it will have implications for other funding from federal and state sources, such as special education, Title I, lottery funds, and other grants. Enrollment plays a crucial role in determining staffing formulas, and facilities needs, and it is used to adjust expenditures. Additionally, enrollment will matter if the District moves in and out of basic aid status, as enrollment affects how the District is funded. Basic Aid relies on property tax revenue, and state-funded relies on student attendance for funding.

Does COLA (Cost of Living Adjustment) impact community-funded districts?

COLA does not affect the LCFF revenues of community-funded districts since their funding comes from local property taxes, not from state funds. However, COLA applies to other state funding received by the District, such as Special Education, Child Nutrition, State Preschool, and Mandated Block Grant.

What are the key considerations that community-funded districts look for when projecting future funding?

Community-funded local property tax projections depend upon economic conditions, local assessed values, and tax rates. Cash flow is more volatile due to the dependency on two large tax deposits, occurring in December and April. In contrast, state-funded districts rely on monthly cash deposits from the state.

Why do community-funded districts need higher reserves if they receive more than the state allocation? 

While community-funded districts typically have relatively higher property tax bases, districts only know their estimated property tax revenue well into the fiscal year, and future year projections are subject to volatility. This is why community-funded districts usually maintain a reserve level higher than the state-required minimum of 3%.

What is the plan to increase our reserves to prepare us for community-funded status?

In 2021, the Board approved a 4% reserve above the State-required minimum of 3%, establishing a dedicated allocation for economic uncertainties of 7%. Additionally, the District holds reserves for other commitments. As of the 2023-24 First Interim Report, the reserves, including commitments, represent 14% of the total general fund expenditures.

In October during the Budget 101 session with the Board, Matt Phillips of School Services of California presented recommendations for reserve levels between 17 and 25%.

As funds become available and in tandem with considerations for funding other Board priorities, the District could incrementally augment reserves. One approach entails a gradual percentage increase, such as ½ or a full percentage annually. Alternatively, following the model of some community-funded districts, a special reserve could be maintained reflecting the difference between local property tax funding and State-guaranteed funding.

Are community-funded districts required to develop LCAPs (Local Control and Accountability Plans)?

Yes, community-funded districts operate in the same manner as state-funded districts and must adhere to the same state requirements. The only distinction is that the primary source of LCFF revenues is from property taxes.

What are the financial reporting requirements and how do they differ from traditional school funding information?

Community-funded districts follow the same budget and financial cycle as state-funded districts. Below is an illustration of the financial reporting requirements and timeline.