The Los Angeles Unified School District faces “severe” indications that it will be insolvent by November 2027—falling $231 million into the red and unable to make payroll—county analysts have concluded, setting up a 45-day deadline for the school board to amend their budget or face losing significant future authority over spending decisions.
The county has appointed a “fiscal expert” to work with the district to eliminate the projected deficit. If that effort falls short, county authorities will appoint an official empowered to overturn school board spending decisions, according to the letter sent to L.A. Unified.
The July 2 notice, from county education office Supt. Debra Duardo to L.A. school board President Scott Schmerelson, said the district’s recent budget adoption “erodes confidence” in its decision-making. The county attributes the crisis largely to union contracts it repeatedly warned L.A. Unified officials the district could not afford. The projected annual cost of the union settlements and employee raises is well over $1 billion a year.
“They have some serious financial concerns that they need to address,” Duardo said in an interview Thursday. “It’s very serious.”
The letter formally issues LAUSD a “Lack of Going Concern” determination, meaning the district may not be able to meet its obligations in the 2027-28 and 2028-29 school years. It is a step the Los Angeles County Office of Education, or LACOE, takes only when a district faces serious deficit spending, Duardo said.
L.A. schools Superintendent Andrés E. Chait suggested there is 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.”
Employee unions have repeatedly downplayed financial warnings, saying that 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.
Duardo 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.
A financial expert now, possible oversight later
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 over board actions,” such as the power to block the board’s spending. The adviser would not run the district but could reject board spending decisions.
The step beyond that would be a full takeover. That happened in 2012 in Inglewood, where the school system received an emergency state loan. Duardo said she is optimistic LAUSD can avoid that fate.
Why the district is in trouble
The county’s chief complaint is the high cost of district employee-union contracts. On June 16, the school board approved new contracts covering multiple employee unions. County officials warned the board at the time that deals were too expensive. The board approved them anyway.
The contracts add about $1.13 billion this school year, rising to $1.44 billion in 2027-28, the letter said. The deals, reached to avert a strike in April, promised double-digit raises to teachers, aides, custodians, and other workers.
The letter also faults the district’s planning. About $231 million in previously planned cuts were never carried out. On the same night it approved the contracts, the board overrode its own chief financial officer to pull $175 million from a fund set aside for retiree health benefits. The county said it all “further erodes confidence” in the district’s budgeting abilities.
Enrollment is another issue. L.A. Unified, the nation’s second-largest school system, educates about 390,000 students. That is roughly half the size it was in the early 2000s. As enrollment falls, so does state funding. But the district has not adjusted its staffing to match, the letter says.
The district also has undergone leadership change at the top. Chait has been superintendent since Alberto Carvalho resigned last month amid a federal investigation.
The district’s month-end cash balance is projected to go negative by $231 million in November 2027, and negative again from February through May 2028. A district that cannot maintain a positive cash balance cannot make payroll or pay its bills. The letter says that is “the most immediate and severe indicator of insolvency.”
Fixing the problem will be painful. The district’s plan already calls for unpaid furlough days beginning as early as fall break this year; if they are not in place, the county has said it will consider escalating to a fiscal adviser. Layoffs are also coming. The budget the board approved in June already included more than 1,000 job cuts, with thousands more projected over the next three years.
What happens next
The 45-day clock puts the next decision point in mid-to-late August. The board resumes meeting in August, giving it time to adopt a revised budget before an adviser would be named. District officials also have the option to appeal the county’s findings to the state superintendent of public instruction within five days.
Duardo said she has spoken with Chait since the letter went out and said that the superintendent “understands the need for them to balance their budget and to make some hard decisions about how they’re going to cut, and he’s very collaborative and very willing to work together.”
“They’ve gotten into a situation where they’re very close to possibly running out of money if they don’t put the measures in place that they need to,” Duardo said. “And I’m confident that they will.”
