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CSBA Report Finds New Budget Reserve Cap Will Harm Financial Stability of Schools

December 11, 2014

On December 1, the California School Boards Association (CSBA) released its Report on School District Reserves, presenting data and analysis of the potential negative impacts on California school districts resulting from SB 858, Section 27, that became operational when Proposition 2, the state Rainy Day Fund, was recently passed.

CSBA’s Report on School District Reserves reviewed information from the California Department of Education for the 2012-13 fiscal year and found that all of California school districts’ “assigned and unassigned ending balances” included 28 separate funds totaling nearly $17 billion. These balances include funds for building fund reserves, bond interest redemption funds, self-insurance, and retiree benefits. Even if only the general fund and special reserve fund for other than capital outlay project balances were considered, this low-end amount would still total $7.9 billion statewide.

Regardless of the amount placed into the state Proposition 98 reserve, whether $1 or $500 million, that contribution would result in school districts being forced into spending sprees to bring their balances to $2.6 billion, twice the level of their reserves for economic uncertainty. The spending spree could total between $5.3 billion and $14.4 billion depending on the definition of “assigned and unassigned balances” used.

“The first dollar contributed to the state Proposition 98 reserve account will force school districts to bring local reserve balances to arbitrarily imposed levels that could lower district bond ratings, limit borrowing ability, and threaten their ability to meet financial obligations, including deferred maintenance, retiree and employee benefits, and school programs,” said CSBA President and Cupertino Union School District board member Josephine Lucey. “The cap on school districts reserves is an affront not only to local control but to sensibility. It’s fiscally irresponsible, inconsistent with the principle of subsidiarity and must be repealed to protect our schools’ financial security and the students we serve.”

The CSBA report also points to a disproportionate risk for small districts that must maintain higher reserves for economic uncertainty, and for districts that are highly dependent on local property taxes, such as basic aid districts.

“As the legislature starts a new session today, we want to remind legislators that district reserves are not one-size-fits-all for a good reason. Local reserves are critical for district solvency, especially for the large number of small districts in California where even relatively minimal changes in financial circumstances are magnified and can be devastating for entire communities,” said CSBA CEO & Executive Director Vernon M. Billy. “Governing boards must be allowed the discretion to determine reserve levels needed to maintain fiscal solvency for the school systems they govern.”

The report also found that:

  1. While some cite the statewide average for reserves is 30 percent, that number is skewed by the large number of small districts in California which by nature of their size need to have greater reserves than larger districts. For the 40 percent of districts in the state with 1,000 or fewer children, the average ending balance level is 52 percent. Compare that to the 26 districts with 30,000 or more students where the average ending balance is 11 percent.
  2. The ending balance cap has many predictable negative impacts on school districts’ fiscal health, including (1) more districts in fiscal distress, (2) districts would need to increase borrowing, (3) smaller reserves could impact credit ratings and interest rates for borrowing, (4) districts will have greater staffing volatility, (5) most vulnerable students will suffer the most from staffing volatility, (6) higher volume of pink slips can be detrimental to district morale, and (7) end-of-year spending sprees may not be most efficient use of funds.
  3. Current factors identified as contributing to risk associated with capping reserves include declining enrollment, increases to CalSTRS and CalPERS contribution rates in the 2014-15 state budget, increased technology needs, Common Core State Standards implementation, and facility and deferred maintenance.
  4. The reserve cap puts more districts at risk of financial distress according to Fiscal Crisis and Management Assistance Team (FCMAT), which has identified ending balances as key predictor of districts’ fiscal health. Inadequate reserves are likely to result in increased need to borrow to meet cash flow needs at higher interest rates.

According to Moody’s Investors Service, a leading provider of credit ratings, research and risk analysis, the maximum amount of local reserves for most school districts under SB 858 would be between 3 and 10 percent of their annual budget, depending on the district’s size. A 6 percent reserve is approximately equivalent to three weeks of operational funding. Moody’s-rated districts averaged about 21.5 percent in reserve fund balances during fiscal year 2013 and their analysts reported, “a reduction of local control, responsibility, and financial accountability will weaken the quality of school districts.”

“The claim that some district ending balances are too high completely ignores the diversity among school districts in the state and the work that they do to ensure fiscal stability, including planning and funding employee benefits and educational programs,” added Lucey. “Local reserves are critical for district solvency and, more importantly, for the stability of educational programs for each and every student in California. CSBA remains determined in our efforts to repeal the statutory limit on district reserves.”

To view the full report, click here.

Source:  California School Boards Association