Spurred by a deep recession and large budget shortfalls, the California Legislature in 2009 enacted what was arguably the largest change to California's school finance system in decades--relaxing spending restrictions on more than 40 categorical programs through 2012-13, extended later to 2014-15. Categorical funding, which gives school districts money in addition to the general funds they already receive from the state, had been limited to specific, narrow purposes: buying textbooks or providing summer school, for example. Under the 2009 changes, districts could begin spending these funds for any educational purpose. When the law expires, the legislature will be faced with a decision: whether to return to the previous, tightly restricted categorical fund system or transition to a permanent version of the flexibility now in use. Because they were part of legislative negotiations over the state budget, not education policy, the decisions made in 2009 were far from optimal for K-12 schools. A more systematic and less political reconsideration of categorical flexibility could result in a more equitable and transparent distribution of funds, while also reserving targeted aid for students who need supplemental services. In addition, under the 2009 provisions, districts could spend categorical funds on any educational purpose. Both state policymakers and local district officials have expressed concern about the impact of completely flexible funds on the collective bargaining process; specifically, that those funds would be used inappropriately to increase teacher salaries and benefits rather than to provide additional services or materials for students. This report offers three recommendations to improve current flexibility provisions that the legislature could consider should it pursue categorical flexibility beyond the program's sunset date: (1) Distribute these less-restricted categorical funds more equally; (2) Apply clear criteria for flexibility and consider alternative configurations; and (3) Consider some restrictions on flex item funds. These recommendations would create a more equitable and transparent source of revenue. This would provide local school districts with increased flexibility in meeting student needs, and would be consistent with several recent major school finance reform proposals, as well as Governor Brown's campaign plan for K-12 education. (Contains 6 figures, 5 tables and 36 footnotes.) [For "California's New School Funding Flexibility. Technical Appendices," see ED519504.]