The Santa Monica-Malibu Unified School District board unanimously approved its First Interim Budget Report for 2025-26 on Thursday, which projects significant deficits over the next three years while still earning a positive financial certification from Los Angeles County education officials.
The district projects a deficit of $10.9 million for the current fiscal year, followed by deficits of $6.4 million in 2026-27 and $7.3 million in 2027-28, according to the report presented by Assistant Superintendent of Business and Fiscal Services Gerardo Cruz.
Despite the red ink, the district received a "positive certification," meaning officials have determined SMMUSD can meet its financial obligations for the current and next two fiscal years. The certification must be submitted to the Los Angeles County Office of Education as required by state education code.
According to the staff report, the district will be able to meet its obligations in the current and next two fiscal years despite the projected deficits.
The district's financial position reflects both encouraging enrollment trends and mounting cost pressures, particularly in employee healthcare benefits.
Enrollment Stabilizes After Years of Decline
After years of steep enrollment losses, SMMUSD has seen student numbers stabilize, marking a significant shift in a trend that had been driving budget cuts. The district recorded 8,520 students as of its official count day Oct. 1, 2025 — a decline of only 80 students from the prior year.
"Unlike previous years where enrollment dropped by 300 to 600 students annually, the district saw a decrease of only about 80 students this year," according to a summary of the report. "This stabilization is attributed to families from the Palisades fire area moving permanently into the district and a steady number of inter-district permits."
Cruz emphasized the change from historical patterns during his presentation, noting that in previous years the district would report enrollment decreasing by 300 or 600 students annually, but now enrollment has started to stabilize.
The enrollment stabilization is significant for SMMUSD, which operates as a "basic aid" district. Unlike most California school districts that receive state funding based on enrollment, basic aid districts are funded primarily through local property taxes because their property values are high enough to exceed state funding formulas.
Property taxes comprise 59% of the district's revenue, while federal funding accounts for only 2% — meaning SMMUSD is relatively insulated from federal funding cuts but vulnerable to property value fluctuations.
Healthcare Costs Drive Structural Deficit
The projected deficits are driven largely by escalating employee healthcare costs, which pose what board members described as a structural budget challenge.
Healthcare and welfare benefit costs increased by $665,000 in the current budget and are projected to rise by 7% annually in future years. The multi-year projection anticipates potential increases of 9% as the district exhausts one-time healthcare credits achieved during a transition from CalPERS to the Self-Insured Schools of California.
Board Member John Kean warned that the district's reserve policy and careful accounting, while providing stability, cannot solve underlying budget problems.
"The reserve policy would be a big step forward, but it doesn't change the structural budget," Kean said during the meeting. "At some point all the time we talk about program, where do we really want to put our attention to and at a certain point we are going to have to choose what we're supporting that is effective. We can't keep going like this. It's just not sustainable."
Salaries and benefits comprise 81% of the district's general fund budget, limiting flexibility for cost reductions without affecting personnel.
Reserve Levels Below Recommendations
The district's financial reserves stand at 21.31% of expenditures, up from 17.61% at the adopted budget but still below recommended levels for basic aid districts.
The state recommends that basic aid districts maintain reserves of 33%, while unified state-aid districts average 24.36%. SMMUSD's current reserve equals approximately two months of general fund expenditures, or about $30.7 million.
Cruz noted that reserves are essential for managing cash flow, particularly in months when property tax revenues have not yet arrived, preventing the district from having to choose which bills to pay.
The board is also considering updates to Board Policy 3100 regarding budget reserves to formalize the district's practice of maintaining a two-month reserve.
Revenue Bright Spots
The budget includes some positive revenue adjustments, including a $500,000 increase in Redevelopment Agency funds due to better forecasting and understanding of how these property tax revenues work.
Cruz told board members the district is trying to get ahead of having to report in September that another half million dollars fell short because of projection issues.
The district also saw increases from the Santa Monica Education Foundation ($75,000) and Malibu Education Foundation ($83,000), as well as higher-than-expected property tax collections.
Board Member John Kean moved to approve the First Interim Budget Report and corresponding budget adjustments, with Board Member Stacy Andersen seconding the motion. The board voted unanimously to approve the report. The next budget checkpoint will be the Second Interim Report in March 2026.