Tuesday, 28 July 2026, 19:59
The Los Angeles Unified School District, the second-largest in the nation, is facing a severe financial crisis. County officials have warned LAUSD could run out of cash within two years, despite repeated assurances to parents that schools will continue operating as normal. The situation has alarmed parents and stakeholders, even as district leaders assure that schools will operate normally.
On July 2, 2026, Los Angeles County Superintendent of Schools Debra Duardo sent a letter to LAUSD Board President Scott Schmerelson, formally issuing a 'Lack of Going Concern' determination. The letter warns that the district's cash balance could plunge $231 million into the red by November 2027, leaving it unable to make payroll. This is the first time the county has issued such a determination for LAUSD under Education Code Section 42127.6. The determination also warns that the district may not be able to meet its financial obligations during the 2027-28 and 2028-29 school years.
The county has appointed Octavio Castelo, Executive Director of Business Advisory Services at the Los Angeles County Office of Education (LACOE), as a fiscal expert to work with district staff. If the district fails to address the deficit within 45 days, the county could appoint a fiscal adviser with authority to overturn school board spending decisions. A state bailout would strip the elected board of its authority entirely.
L.A. schools Supt. Andrés E. Chait suggested there was no need for alarm. “This determination does not change our commitment to students, families or employees,” Chait said in a statement. “Our schools will continue to operate as normal while we work closely with LACOE to strengthen our long-term financial outlook. We welcome the opportunity to collaborate and remain focused on making thoughtful, responsible decisions that protect classroom instruction and student success.”
At this juncture, the county is not taking over the district. Instead, it is moving in two stages, as mandated by state law to ensure school districts remain fiscally sound. On July 1, the county assigned a fiscal expert — Octavio Castelo, an official from the county education office — to work alongside district staff. That role is “advisory and diagnostic,” the letter said. Castelo cannot unilaterally make district budget decisions. The second stage involves major restrictions. If the district does not address the budget issue to satisfy legal requirements, the county may assign a “fiscal adviser” with “stay and rescind authority” — the power to overturn school board spending decisions.
Van Nguyen, a LACOE spokesperson, confirmed via email that this is the first time the county has issued such a determination for LAUSD under Education Code Section 42127.6. In its seven-page letter, LACOE said LAUSD’s financial outlook deteriorated after the Board of Education approved new collective bargaining agreements on June 16 despite previous county warnings that the agreements were not financially sustainable. County officials said the agreements, combined with existing structural deficits and continued enrollment declines, are projected to push the district below the state’s minimum reserve requirement, drive its unrestricted general fund to a negative balance of roughly $1.46 billion by 2027-28 and leave the district with insufficient operating cash to meet payroll and other obligations beginning as early as November 2027. The county also cited approximately $231 million in previously identified spending reductions that remain unimplemented, concerns over the district’s ability to carry out its Fiscal Stabilization Plan and the Board of Education’s decision to draw $175 million from its retiree health benefits trust over the objections of the district’s chief financial officer.
Educational consultant Jamie Bacall noted that the warning was widely anticipated. “I think it's something everyone was hoping would be avoided, but I don't think it's really a surprise to anyone,” Bacall said. She warned that the worst-case scenario would be a state takeover, which would strip local control over curriculum and class sizes. Nicolle Fefferman, co-founder of Parents Supporting Teachers, expressed cautious optimism about the county's involvement, saying, “I think it might actually be a good thing to have a sort of like a neutral pair of eyes on the LAUSD budget.” Fefferman emphasized that any budget reductions should avoid affecting students and campuses as much as possible: “We just have to make sure that the cuts are made as far away from our school sites as possible.”
The county also directed LAUSD to submit budget revisions within 45 days to account for the costs of the recently approved labor agreements and said the district will undergo a mandatory Fiscal Crisis and Management Assistance Team fiscal health review. “LACOE is working closely with LAUSD to support their efforts to improve their fiscal outlook,” Nguyen said. “This letter and the appointment of a fiscal expert is part of the process county offices of education take when a district is unable to meet its financial obligations over a three-year period.” Nguyen said the county hopes the district “will take the appropriate actions to implement budget solutions that will stabilize their long-term financial stability.”
The determination was publicly addressed by LAUSD on Wednesday, July 8. In a statement included in a district news release, Superintendent Chait reiterated his commitment to collaboration. Under California law, a “Lack of Going Concern” determination is issued when a county superintendent concludes a school district may be unable to meet its financial obligations for the current or two subsequent fiscal years. The finding triggers an elevated level of county oversight intended to help prevent fiscal insolvency.
The crisis stems from several factors. The LAUSD Board of Education approved new collective bargaining agreements on June 16, 2026, despite repeated county warnings that they were unaffordable. These contracts will add approximately $1.13 billion in costs this school year, rising to $1.44 billion by 2027-28, driven by double-digit raises for teachers, aides, custodians, and other employees. The contracts include a 24% increase over three years for SEIU support staff, nearly 14% over two years for teachers, and almost 12% over two years for administrators.
Compounding the issue, the district has failed to implement about $231 million in previously identified spending reductions. On the same night it approved the contracts, the board overruled its own chief financial officer and withdrew $175 million from a retiree health benefits trust fund, a move the county said 'further erodes confidence' in LAUSD's budgeting.
Enrollment has also plummeted. LAUSD now serves about 390,000 students, roughly half its peak in the early 2000s, reducing state funding while staffing levels have not kept pace. The district's month-end cash balance is projected to turn negative in November 2027 and remain below zero for several months—a sign county officials call 'the most immediate and severe indicator of insolvency.'
The Los Angeles County Office of Education is responsible for ensuring the fiscal health of school districts within the county. This intervention reflects the severity of LAUSD's situation, which has implications for the entire region. The district's budget already includes over 1,000 job cuts, with thousands more expected over the next three years, along with unpaid furlough days that could begin as early as fall 2026.
County Supervisor Lindsey Horvath has emphasized the need for creative solutions to keep families housed, but the financial strain on the district could ripple through local communities. The crisis also comes amid broader challenges for California schools, including the expiration of one-time pandemic relief funding and rising operating costs.
LAUSD has faced financial warnings for years. County officials repeatedly cautioned that union contracts were unsustainable, but the board approved them anyway. The district's Fiscal Stabilization Plan has been criticized as insufficient, and the board's decision to draw from the retiree health benefits trust over the objections of its CFO has raised further concerns. Employee unions have argued that state funding increases will cover the costs, but county officials remain skeptical.
School board member Tanya Ortiz Franklin called the district's predicament “preventable.” Franklin was one of two board members in June who voted against a “fiscal stabilization plan” that the district was required to submit to the county due to its shaky finances. The plan limited cuts to a Black Student Achievement program and drew down funds from a retiree health benefit trust fund to show the district could stay solvent. The county letter cites the health fund withdrawal as a concerning move. “This was preventable — not just in June, but months and years ago,” Ortiz Franklin said. “But now that we’re where we expected we would be, it’s important we do everything possible together to maintain solvency and retain decision-making power within LAUSD.”
Employee unions have repeatedly downplayed financial warnings, saying the projections don’t fully account for increases in state funding that are almost certain to become available. Education advocates have asserted that California schools are legally entitled to billions more under state law. State tax revenues have been at record levels but are heavily dependent on the current stock performance of artificial intelligence companies. Gloria Martinez, president of United Teachers Los Angeles, said the problem was not unions but the need for more financial support from Sacramento. “Labor contracts are not the issue,” Martinez said. “For far too long, it has been expected that school districts balance their budgets on the backs of students and teachers, when in reality school funding is determined at the state level.”
Duardo described the situation as “very serious,” telling the Los Angeles Times, “They have some serious financial concerns that they need to address.” She also said the goal is to keep the district from sinking so far that it would need a state bailout. “What we’re talking about is just making sure that they don’t get into a situation where they have to take out a loan from the state, and we’re going to do everything possible to make sure that that doesn’t happen.” Were L.A. Unified to need a state bailout, its school board would lose authority over the school system, with authority transferring to an administrator appointed by Duardo.
Gov. Gavin Newsom recently signed legislation increasing K-12 special education funding by $2.4 billion, a 43% increase over the previous year, though county officials say LAUSD must still balance its books.
The warning signs were there for everyone to see. In April, after tentative labor agreements were announced, an editorial noted that LAUSD was buying labor peace with money it did not have. In June, before the school board formally approved those agreements, county officials warned they were too expensive. The board approved them anyway. Less than a month later, the county's warning became a formal finding.
The county's auditors, who deal in numbers rather than hope, disagree with union assurances that new state money will materialize. LAUSD cannot claim it was blindsided. Enrollment has been falling for years. The district now educates roughly half as many students as it did two decades ago. Temporary federal COVID money was running out. As structural deficits were growing, reserves were shrinking. A district serving half the students should not need the same bureaucracy, staffing structure and spending commitments it carried at twice the enrollment. District leaders knew all of this and approved enormous new permanent obligations anyway, even as they contemplated more than 1,000 layoffs, unpaid furlough days and thousands of additional job cuts over the next three years. This was not rosy forecasting. It was fiscal malpractice.
The reason is obvious: The officials supposedly representing taxpayers are politically beholden to the unions sitting across the bargaining table. United Teachers Los Angeles and other district unions do far more than negotiate contracts. They recruit candidates, endorse them, finance their campaigns and mobilize the political machinery that puts them in office. The Los Angeles Times reported this year that a majority of the seven-member board consists of candidates elected with UTLA's endorsement. In this year's primary, UTLA spent more than $800,000 defending board member Rocio Rivas alone. The union's own endorsement page praised another board member for signing a commitment to support an immediate contract settlement aligned with UTLA's bargaining priorities. The unions help elect the board, then return to that same board demanding richer contracts. When the bill arrives, they insist Sacramento should send more money. This is not collective bargaining in any meaningful sense. The unions have political leverage on both sides of the table.
Meanwhile, LAUSD keeps failing at its core mission: educating children. Census Bureau data show LAUSD spent $25,631 per student in fiscal 2024, roughly double a decade earlier. Only three of America's 100 largest districts spent more. Yet only 46.5% of students met or exceeded state standards in English, just 36.8% did so in math, and only 27.3% met the science standard. LAUSD is not starved for money. It is failing to turn extraordinary spending into student success.
The 45-day deadline set by the county is a pivotal moment for LAUSD. The school board must submit budget revisions by mid-August to account for the costs of the labor agreements and demonstrate a path to solvency. Failure to do so could lead to heightened oversight or even a state takeover. Parents and students are watching closely, hoping that the district can navigate this crisis without disrupting education.
The LAUSD Board's next meeting is a closed session scheduled for 10 a.m., Tuesday, Aug. 11. Find your LAUSD board member below:
