The California School Boards Association filed a lawsuit on September 22, 2026, in Alameda County against the State of California, Director of Finance Joe Stephenshaw, and Controller Malia Cohen. The suit challenges the state's withholding of $3.9 billion in Proposition 98 education funding under the 2026-27 State Budget. The California Teachers Association has filed a separate lawsuit on the same issue.
Proposition 98, approved by voters in 1988, is a constitutional amendment that guarantees minimum funding levels for TK-12 schools and community colleges. The guarantee is determined each year by a formula that factors in General Fund revenues, per capita personal income, and school attendance. For 2025-26, the state calculated the minimum guarantee at $125.3 billion but funded only $121.3 billion.
The state's rationale for the withholding is that the Proposition 98 calculation is an estimate based on revenues that will continue to flow in over the next year. Because much state revenue comes from volatile sources such as capital gains taxes, state officials argue it is prudent to withhold $3.9 billion to avoid overpaying districts and then cutting funding later. Governor Newsom and the Legislature made no commitment on when the funding would be repaid, according to EdSource.
The enacted budget includes a statutory requirement that in spring 2027, if revenues remain at the same or higher levels for 2025-26, the Legislature must pay the $3.9 billion back to TK-14 schools, scheduling payment in the 2027 Budget Act. The budget also allocates 33 percent of new General Fund revenues over 2026 Budget Act projections, as calculated at the 2027 May Revision, to pay down any remaining settle-up balance for 2025-26.
The dispute at the center of the lawsuit
CSBA contends the withholding violates the constitutional guarantee and threatens staffing, class sizes, and student services. CSBA CEO and Executive Director Vernon Billy stated that the lawsuit asks the court whether the state can calculate the guaranteed funding and then withhold a portion for its own convenience. The $3.9 billion withholding equals approximately $643 per student, according to CSBA.
The state's ability to delay payment rests on a structural lag in the Proposition 98 certification process. The most recently certified year as of the 2026-27 budget cycle was 2023-24, meaning the 2025-26 guarantee will not be finalized until spring 2027. That certification involves publishing underlying inputs and allowing public comment. The state argues this lag justifies withholding pending final revenue figures. CSBA argues the calculated guarantee must be paid regardless.
How the settle-up mechanism has worked before
The current lawsuit is not the first time California has used a delayed-payment approach for Proposition 98 funds. In the 2025-26 budget, the state withheld $1.9 billion from revenues collected in 2024-25. The Legislature later repaid that amount, and the 2026-27 enacted budget includes a $1.9 billion payment that fully retires the 2024-25 settle-up obligation.
In 2022-23, the state overestimated Proposition 98 revenues by about $8 billion. Rather than cutting school funding, the Legislature borrowed from future Proposition 98 revenues to fund other budget areas including Medi-Cal, childcare, and university funding. State officials cite this precedent as evidence of the risk of overappropriating based on volatile revenue estimates.
In 2019, CSBA resolved three lawsuits through a settlement that provided for repayment of $686 million in prior-year underpayments to schools and community colleges. That agreement also addressed provisions governing future funding calculations and certification, involving the treatment of childcare expenditures, accounting adjustments, and the state's obligation to resolve previously identified funding shortfalls.
What the research says about the funding gap and its risks
The Legislative Analyst's Office recommended that the Legislature fully fund the estimate of the guarantee rather than delaying payment. The LAO noted that the Governor's proposed $5.6 billion delay shifts costs to the future when the state must settle up and meet this obligation. The LAO proposed an alternative using the Proposition 98 Reserve to address the Governor's concern about exceeding the guarantee while avoiding new settle-up obligations.
The LAO also found that the guarantee is moderately sensitive to revenue changes in Test 1 years, changing by about 40 cents for each $1 change in General Fund revenue. That means a major downturn could reduce revenues by tens of billions of dollars and correspondingly reduce the guarantee. In November 2025, the LAO projected the 2026-27 guarantee at $117.8 billion, approximately $10 billion below the Governor's budget estimate, and warned that revenue estimates do not account for elevated stock market risks.
State Superintendent of Public Instruction Tony Thurmond expressed concern about the $3.9 billion withholding while praising other budget investments including a 4.31 percent super cost-of-living adjustment for the Local Control Funding Formula, a $5 billion one-time Student Support and Professional Development Discretionary Block Grant, and $2.4 billion in special education funding increases.