In 2009, California state legislators freed local educators from the specific guidelines that previously regulated spending on 40 categorical-aid programs known as Tier 3 programs. This Tier 3 flexibility reform, which deregulates $4.5 billion in education funding, was enacted at the same time the legislature made cuts in education spending in response to the economic recession. Drawing on interviews with school district leaders from around the state and with policymakers in Sacramento, this report details how leaders in 10 California school districts are responding to the Tier 3 flexibility reform, including what districts are doing with the newly flexible funds, how allocation decisions were made, and what their consequences have been. The researchers found that school districts felt uncertainty about the new flexibility and generally remained committed to the goals of the Tier 3 programs. Appended are: (1) Tier 3 Categorical Programs Combined into New "Flex Item" (2009-2010); and (2) Advisory Committee. (Contains 5 tables, 7 figures, 1 box and 8 endnotes.) [This paper was written with Mary Briggs, Scott Epstein, Nina Lorenzi, Reino Makkonen, Angeline Spain, and Anisah Waite. Additional funding for this paper was provided by the Dirk and Charlene Kabcenell Foundation.]