Cal. Education Code § 8336

(a) All contractors are encouraged to develop and maintain a reserve within the child development fund, derived from earned but unexpended funds. Contractors may retain all earned funds, up to the reserve account maximum. For purposes of this section, “earned funds” are those for which the required number of eligible service units have been provided. (b) (1) Earned funds shall not be expended for activities proscribed by Section 8315. Earned but unexpended funds shall remain in the contractor’s reserve account within the child development fund and shall be expended only by programs that are funded under contract with the department. (2) A California state preschool program contracting agency may retain a reserve fund balance equal to 15 percent of the sum of the maximum reimbursable amounts of all California state preschool program contracts, or two thousand dollars ($2,000), whichever is greater. (c) Each contractor’s audit shall identify any funds earned by the contractor for each contract through the provision of contracted services in excess of funds expended. (d) Any interest earned on reserve funds shall be included in the fund balance of the reserve. This reserve fund shall be maintained in an interest-bearing account. (e) Moneys in a contractor’s reserve fund may be used only for expenses that are reasonable and necessary costs as defined in Section 8205. (f) Any reserve fund balance in excess of the amount authorized pursuant to subdivision (b) shall be returned to the department pursuant to procedures established by the department. (g) Upon termination of all child development contracts between a contractor and the department, all moneys in a contractor’s reserve fund shall be returned to the department pursuant to procedures established by the department. (h) Expenditures from, additions to, and balances in, the reserve fund shall be included in the contracting agency’s annual financial statements and audit.