The Mill Valley School District, flush with more than 43% of its budget in reserves only a year ago, now faces a $7.3 million budget deficit that could force a series of cuts and possibly layoffs early this year.

Paula Rigney, assistant superintendent of business and finances, said she is filing, for the first time in her long career in school fiscal operations, what is called a “qualified” budget with the Marin County Office of Education. A qualified budget means that the district is not able to guarantee the state minimum of 3% or more in reserves for the current year and two years out.

According to Rigney’s presentation at last month’s board meeting, reserves in the district’s approximately $54 million spending plan are forecast to drop from 43.67% in 2023-24 to 22.73% in the current year, 10.44% in 2025-26 and 1.82% in 2026-27. This is based on the district’s “first interim budget” that covers the first four months of the current year, or from July 1 to Oct. 31, she said.

Rigney said several “unexpected” factors are contributing to the deficit, including the loss of $6.2 million in expired pandemic relief funds.“We are not alone,” Rigney said. “A lot of districts added some amazing programs with COVID funding, but now they will have to make a hard decision.”

Other factors in the deficit are a drop in parcel tax revenue, ongoing teacher salary schedule step pay increases that were not properly logged into the system, the addition of unfunded transitional kindergarten classes and the loss of $400,000 in lease income, Rigney said.

In addition, the district had to pay $1 million in a legal settlement over a claim related to the California Environmental Quality Act, and cover unplanned additional contracts for special education teachers and rising retirement benefits, particularly for classified staff, according to Rigney.

The district declined to provide details about the $1 million CEQA-related settlement. The Independent Journal has filed a request for information under the California Public Records Act.

In a statement released by an administrative aide, the district generally described “a significant increase to legal expenses.”

“These costs span several important areas, including matters related to personnel, student settlements, and various facilities issues,” the statement said. “Among these, a significant portion was attributed to the ongoing legal dispute with Terra Marin regarding unpaid rent for the property located at 80 Lomita Avenue.”

“Additionally, legal expenses related to the district’s Measure G (modernization) projects have been substantial,” the statement said. “In particular, preliminary work for the modernization of Mill Valley Middle School involved extensive legal investigations concerning the title of Friends Field and compliance with the California Environmental Quality Act.”

“It is important to note that, while these legal costs were essential to the planning and due diligence process, they are distinct from the actual construction and modernization work that Measure G was intended to fund,” the statement said. “As such, these preliminary legal expenses were drawn from the district’s general fund, rather than from Measure G funds, in accordance with the specific language of the Measure G initiative. There is no settlement in regards to Measure G projects.”

A qualified budget status is the step between a positive budget and a negative budget status. If the qualified status is not corrected and returned to a positive state by the time of the adoption of the 2025-26 budget in June, the district could face the loss of local control and a state takeover of its budget.

As a result of the qualified budget status, the county will send the district a notice later this month. The notice will require that district officials set up and implement a cost-cutting plan by March that could involve budget cuts, layoffs and program changes, Elizabeth Kaufman, the district superintendent, said at a Dec. 16 board meeting.

Kaufman said she would propose a series of cuts to the board later this month.

“I can guarantee that not everyone’s going to like it,” Kaufman said. “Our goal is going to be to meet the greatest needs of the greatest number of students.”

Layoff warning notices are due by March 15, according to state law. They could be rescinded in May if the funding situation changes.

Transitional kindergarten, which prepares 4 year olds for kindergarten at age 5, is perhaps the most controversial of the cost-cutting decisions the district will have to make.

The district is community-funded by parcel tax revenue and so receives no extra state money for transitional kindergarten. It had dropped the program before the pandemic, but then restarted it in the last few years as the concept won growing support, including from Gov. Gavin Newsom.

In the district, which serves 3,200 children at five elementary schools and one middle school, transitional kindergarten has taken off. Rigney said she included funding to hire three more TK teachers in the current year’s budget.

Many parents don’t want the district to cut transitional kindergarten. More than 325 residents recently signed an online petition opposing the move, and several residents spoke at the Dec. 16 meeting.

“We want to send our son to TK in the fall because TK works for kids and it works for families,” Zack Abrahamson said in an email. “There’s got to be a way to keep TK alive in some form while meeting the challenges that the district faces.”

Elli Abdoli, a district trustee, said she wants to save transitional kindergarten if it can be done.

“I think it’s an incredibly critical and wonderful program,”Abdoli said at the board meeting. “I hope we can figure out a way to preserve it.”

Meanwhile, Kaufman said, she and Rigney recently put in place a crucial financial structure called “position control” that had been missing in the district financial system. It is a mechanism in which every staff member is logged in the system with a name, title, salary and where the money to pay that person was coming from. It should help right the budget, Kaufman said.

“I inherited the problem,” said Kaufman, the superintendent since July 2023. “I hope we can work to solve the problem together.”

Board president Sharon Nakatani agreed.

“None of us wants to be in this position. None of us like it,” she said. “But it’s the trustees’ job.”

The district has also retained the Public Agency Retirement Services, a firm in Newport Beach, to set up a retirement incentive plan this year.

If enough workers opt in and the plan generates enough cost savings benefits to the district, eligible employees could receive a one-time payment of 85% of the last year’s salary as an incentive to retire.