California Code, Welfare and Institutions Code - WIC § 10441

(a) Child development contractors are encouraged to develop and maintain a reserve within the child development fund, derived from earned but unexpended funds.  Child development contractors may retain all earned funds.  For purposes of this section, “earned funds” means those funds for which the required number of eligible service units have been provided.

(c) Notwithstanding subdivisions (a) and (b), a contractor may retain a reserve fund balance for a resource and referral program, separate from the balance retained pursuant to subdivision (b) or (d), not to exceed 3 percent of the contract amount.  Funds from this reserve account may be expended only by resource and referral programs that are funded under contract with the department.

(d) Notwithstanding subdivisions (a) and (b), a contractor may retain a reserve fund balance for alternative payment model and certificate childcare contracts, separate from the reserve fund retained pursuant to subdivisions (b) and (c).  Funds from this reserve account may be expended only by alternative payment model and certificate childcare programs that are funded under contract with the department.  The reserve amount allowed by this subdivision shall not exceed either of the following, whichever is greater:

(e) 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.

(f) 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.

(g) Moneys in a contractor's reserve fund may be used only for expenses that are reasonable and necessary costs as defined in subdivision (n) of Section 10213.5.

(h) Any reserve fund balance in excess of the amount authorized pursuant to subdivisions (b), (c), and (d) shall be returned to the department pursuant to procedures established by the department.

(i) 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.

(j) Expenditures from, additions to, and balances in, the reserve fund shall be included in the contracting agency's annual financial statements and audit.