“Categorical” funding refers to state dollars that are tied to specific programs. In light of the budget crisis in recent years, the state granted a limited amount of categorical flexibility, meaning some of these dollars can be spent on other needs of the district. Basically, this means that all program requirements and compliance issues are waived for these Tier III programs some of these dollars can be spent on other needs of the district.

Education Code §42605 grants districts flexibility in Tier III categorical programs and authorizes districts to use these funds for any educational purpose. For the 2008-09 fiscal year through the 2014-15 fiscal year, inclusive, local educational agencies that use the flexibility provision of this section shall be deemed to be in compliance with the program and funding requirements contained in statutory, regulatory and provisional
language. As a condition of receipt of the funds, the governing board is required, at a regularly scheduled open public hearing held prior to and independent of a meeting where the governing board of the district adopts the annual budget, to take testimony from the public, identify any program that is proposed to be closed, discuss, approve or disapprove the proposed use of funding, and make explicit the purposes for which the funding will be used.