Policy & Finance > School Finance

Cap on district reserves passes despite lawmakers’ reservations

Source: Webcast of Senate committee hearing

Michael Hulsizer said the cap on reserves contradicts good policy recommendations of national fiscal oversight organizations.

Check out our graphic explainer on the budget.

The Legislature passed a state budget Sunday with a big funding increase for K-12 schools that pleased school district leaders and a last-minute statutory change that angered them.

The $61 billion in fiscal 2014-15 for Proposition 98, the formula setting K-12 and community college revenue, includes $4.75 billion more for implementing the Local Control Funding Formula that will raise per-pupil spending nearly 10 percent, on average.

During a hurried hearing before the Senate Budget and Fiscal Review Committee on Sunday, even the committee chairman, Sen. Mark Leno, D-San Francisco, who led the budget negotiations with the governor’s office, acknowledged, “I can’t tell you why the governor made it (the cap on district reserves) such a high priority; that this is part of our overall agreement on the budget.” He said he would have preferred if the proposal had gone through the normal legislative process, where the potential impact could have been explored. “There’s no way I would have done it this way, but this is where we are now,” Leno said, before he and other committee members approved the language in AB 1463, the trailer bill on K-12 issues, by a 12-3 vote, sending it to the full Legislature for passage.

For years, the Legislature has required that districts keep minimum reserves to stave off fiscal crises. Relaxed during the recession, next year it will be restored to between 1 percent of their budgets for Los Angeles Unified to 5 percent for small districts, with the average being 3 percent. But it has never imposed a maximum reserve, leaving it to each district to determine what’s appropriate. The new maximums, in years in which the cap is activated, would range from 3 to 10 percent of the district budgets, with 6 percent for most districts.

The cap on reserves would be tied to voter passage in November of Gov. Brown’s revised plan for a state rainy day fund, and even then only in years when the state actually puts money into a new reserve for Prop. 98. The rationale for the cap is that in revenue-healthy years, when the state puts aside money into its reserve for education, districts also wouldn’t need to accumulate big reserves of their own, and so should spend down anything above the maximum allowed. Districts that can justify reserves above the maximum will be able to get a waiver from county offices of education under AB 1463, said Todd Jerue, chief operating officer of the California Department of Finance. He testified Sunday that some districts currently have reserves of 30 to 50 percent.

Employee unions, whose support Brown is counting on for his re-election and for passage of the rainy day ballot measure, are the chief advocates of the cap on reserves. Steve Henderson, a lobbyist for the California School Employees Association, testified Sunday that districts tend to follow the state’s lead. If the state puts money in a rainy day fund, districts will add to their reserves, even when not necessary, he said. A representative from the California Teachers Association, which also pushed for the reserve limit, did not testify on Sunday. On Friday, Josephine Lucey, president of the California School Boards Association, accused the teachers association of pushing for the cap so that more money would be freed up for pay raises.

Sen. Mark Leno acknowledged that the proposal to restrict  reserves deserved more extensive hearings. Source: webcast of Senate hearing.

Sen. Mark Leno acknowledged that the proposal to restrict reserves deserved more extensive hearings. Source: Webcast of Senate hearing.

As EdSource has noted previously, it would be at least seven years before the state could begin diverting money into a Prop. 98 reserve, and even then strict preconditions would have to be met to trigger the cap on district reserves. Because the cap would be years away, supporters argued that legislators would have time to fix it. “No harm, no foul,” as Leno put it. But opponents threw back the same argument: If it’s not going to happen for years, “why the rush to enact it now?” asked Andrea Ball, a lobbyist for the California School Boards Association.

Edgar Zazueta, a lobbyist for Los Angeles Unified, said mandatory lower reserves would affect districts’ credit rating – one of several effects that proponents hadn’t considered.

Other critics said districts would have to draw down reserves potentially by hundreds of millions, if not billions of dollars, regardless of the amount, however small, the state filled the Prop. 98 reserve. Jennifer Kuhn, deputy legislative analyst with the Legislative Analyst’s Office agreed that the lack of a linkage between the sizes of the state and local reserves is a concern.

Michael Hulsizer, chief deputy for government affairs for the Kern County Superintendent of Schools, said a 6 percent cap would “contradict the best practices of national organizations,” which recommend 15 to 17 percent reserves in order to cover two months of district expenses. “We have learned during the recession that districts’ reserves were  the biggest protection from fiscal insolvency and the need to come to you for loans,” he told senators. “Every education management group has agreed this is bad public policy.”

John Fensterwald covers education policy. Contact him and follow him on Twitter @jfenster. Sign up here for a no-cost online subscription to EdSource Today for reports from the largest education reporting team in California.

Filed under: School Finance, State Education Policy



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20 Responses to “Cap on district reserves passes despite lawmakers’ reservations”

  1. Don said

    on June 19, 2014 at 10:03 am

    Correct my if I’m wrong, but I seem to remember something about a Local Control Funding Formula. The State was getting out of the business of the districts. Those were the days!

  2. Mary Smith said

    on June 19, 2014 at 8:01 am

    I am a teacher. Our small single school district has a reserve of 100% (based on a budget of $2 million) and has had this reserve for several years. They THINK they are being prudent with their money. However, we are one of the lowest paid school districts in our area, our infrastructure has serious problems and the business manager behaves as if she is Chicken Little (no, the sky is NOT falling!!)

    Do I like the idea of a cap on the reserve? You betcha!!

    • el replied

      on June 19, 2014 at 9:24 am

      Has the reserve been discussed in open session? The problem with setting inflexible rules in Sacramento is that they’re inflexible rules in Sacramento and it’s really hard to have a discussion about them.

      On a $2m budget, your max reserves would be $200k and your minimum would be $100k. That’s not a bad operating range but a new roof and a a few students moving out, or a bus needing a new engine and suddenly you’re in deep hurting to keep the 5% mandatory reserve.

      In the last few years, it’s been terrifyingly easy for $100k or even $200k to slosh in or out of a school budget of that size. $100k is likely less than one payroll.

      $2m on a $2m budget is higher than I’d want to see, but I also sure wouldn’t want to spend it all down in one year unless it was on infrastructure improvements. Now that Sacramento has started paying on time again, it’s appropriate to spend it down – but on your community’s terms. Maybe you want to use it to fund two new positions for the next five years. Maybe you want to spend it on raises. Maybe you want to buy tablets. Maybe your school needs air conditioning. Maybe you’re looking at your kindergarten class and seeing a lot fewer students than you used to have.

      But being able to let your reserve float up to $250k or $300k when all the financial dice go your way isn’t so terrible.

      Please don’t use Sacramento as a crutch to avoid having a meaningful local conversation about budgeting and financial priorities. It’s a good opportunity to model civic engagement for your kids, especially given the context of the LCAP.

      • navigio replied

        on June 19, 2014 at 4:20 pm

        I expect one of the side-effects of imposing a limit will be that, as you mention, using it for recurring costs is probably not a good idea (won’t be able to continue funding that for very long) and thus people will tend to use it for one-time, probably often infrastructure or technology resources. While those things obviously also need to be funded, if those reserves occurred via squirreling away more standard ‘operating’ funds then those will be used in a way they might not normally have been (especially if it ends up being spent on something that construction bonds otherwise would have been used for). Although it would be difficult to do, it would be interesting to see how different district go about this.

  3. Skeptic said

    on June 18, 2014 at 3:26 pm

    Does the cap on reserves apply to all LEAs (school districts, charters, COEs)?

  4. Tressy Capps said

    on June 18, 2014 at 1:31 pm

    Etiwanda is sitting on a huge reserve all the while telling desperate parents they are too broke for busing. Guess they will have to squirrel their reserve away on something or other. From the perspective of an involved parent, transparency and accountability is key. Don’t tell parents you can’t afford something they are desperately need and are willing to pay for (busing) and then pull the broke card when you are sitting on a huge reserve.

    • Jennifer Bestor replied

      on June 25, 2014 at 11:12 am

      When you get an answer from Etiwanda’s school board, would you be willing to share it here?

      Looking at the Ed-data.k12.ca.us website, the district appears to have had about 31% of its $87M annual budget on hand last June (at the end of the 2012-13 school year). It’s unclear how much of that was cash on hand to pay accounts payable or included deferral receivables (the ‘odd’ accounting practices that the LAO identified in its Jan 2011 deferral whitepaper). However, since the district has an unusually high percentage (of its unusually low per-student revenue) from State Aid revenue-limit funding (75% vs. 65% normally) — and since revenue-limit funding bore the brunt of deferrals (which reached 39% in the prior year) — it doesn’t seem unthinkable that its ending balance was 30% of annual spending.

      Another $100M is shown in Special Revenue Funds (cafeteria, capital outlay, debt service, non-capital outlay). Typically, most of those come from bond measures and other outside funding sources, hence are restricted and couldn’t be used for busing, even if the Board wished, but this is a worthwhile question.

  5. Don said

    on June 18, 2014 at 10:20 am

    If you look at what happened in then Richmond USD in 1991 and the Butts case, the insolvency led to 21 years of receivership and a 5.75% interest rate that strapped the district for years on end – a cautionary tale on poor fiscal management and failure to build up reserves for a rainy day. We would have had dozens of such receiverships had the rules not been eased during the crisis of the last few years. It is no wonder that irresponsible fiscal management is engendered by the State. This politicians wrote the book on it. It’s all about encouraging salary increases and currying favor with the unions.

    • tom replied

      on June 18, 2014 at 1:52 pm

      Don – in our district close to yours (San Ramon Valley USD) there was judged to be excess money in reserves THIS YEAR and sure enough, the local union went after it an got 4% salary raises for their members. This was on top of one-time payments of 4% of salary last year. No doubt this will get Brown some votes come November. Remains to be seen how badly the additional CalStrs payments hurt the classroom.

      • don replied

        on June 18, 2014 at 4:33 pm

        It isn’t my intention to conclude that teachers should not get raises. Generally speaking, they are pass due. But the policy on reserves and caps is being politicized in an election year. Funding for salary increases is still limited as a result of backfilling and broken State promises.

  6. Jennifer Bestor said

    on June 18, 2014 at 9:28 am

    Perhaps the oddest thing about this is its one-minute-before-midnight timing. Legislators are quoted as having no idea what they were voting for. There was no LAO report or other external documentation suggesting that excessive reserves were even an issue.

    And, as Rob outlines below, what is included as “reserves” is clearly ill-considered … to say nothing of the idea that any contribution on the State’s part triggers the emetic, no matter how small.

    The question becomes whether the Governor was tricked into inserting a poison pill into his own reserves proposition (alienating the conservative voters who would normally back reserves) or punishment to school boards for rebuilding reserves with this year’s one-time disbursements (rather than pouring one-time funds into increased teacher salaries).

    One can only hope that, budget done, the Governor will reverse this stupidity and carry on with his (previously unassailable) drive toward fiscal stability and responsibility.

  7. Rob Manwaring said

    on June 17, 2014 at 7:07 pm

    The assumption that this requirement will not kick in for 7 years is based on the current forecast, and assumes that Prop 30 will phase out. I expect that the education community will be working to make the case for some extension of Prop 30. In that case, this requirement will trigger on much quicker.

    Also, it should be clear that the fund balances that count against this requirement are not just reserves (unassigned funds balances), but also funds that are already assigned for a specific use. So, if a district carries funds over from one year to the next for things like – a July payroll payment, a deferred maintenance project, or an instructional materials purchase – those funds would also count against this reserve cap. So, even though the funds might be assigned to a specific use, they would count against this maximum. This requirement would likely lead to districts engaging in massive purchases at the end of each school year to get their balances down. Not very sound budgeting

    • el replied

      on June 18, 2014 at 10:20 am

      That would be extremely dangerous then, especially for districts that have fluctuating enrollment. I also don’t know how you would save up money for larger projects like new roofs or new buses or adding technology.

      Necessary Small Schools, for example, are funded in ‘bands’ rather than by precise ADA. So a difference of 1 ADA can be ~$100,000 for a school with around 100 students. Using reserves can be key to maintaining stable programs from year to year.

  8. Debby Beymer said

    on June 17, 2014 at 3:27 pm

    The governors desire to impose a one size fits all cap on school district reserves is ludicrous. In an election year it is and has been typical of this governor to make these types of decisions that clearly place him in the good favor of the California Teachers Association. The Education Protection Account (EPA)(when trying to get the teacher vote on Prop 30) is a perfect example of his further erosion of relationships in California Schools between administration and the teaching staff. The EPA account is not additional $ but a portion of what was unrestricted before the passage of Prop 30 and cannot be spent on anything “Administrative” in nature. Thank you Gov for making it more difficult to bargain collectively in California Schools.

  9. Romero Maratea said

    on June 17, 2014 at 1:13 pm

    I am a parent, and educator and a taxpayer. I do not pay property taxes for school districts to keep in excess of 20% of their funds in reserves. The money should be spent on educating kids. That includes better structures, materials, technology and, yes, educators’ salaries. I am glad this step was taken.

  10. John Fensterwald said

    on June 17, 2014 at 8:06 am

    Thank you, Martha and Joan. You are correct. The money for Common Core is mandate reimbursement (I had noted this in an earlier, longer article), and only $400 million will go to K-12. I will make the correction.) One can argue that, were it not for the need for carrying out Common Core, Brown might have continued to delay repaying the money owed into the indefinite future.

    And yes, I am getting ahead of myself. It will be the second year under the formula.

  11. Martha Alvarez said

    on June 16, 2014 at 10:18 pm

    Great piece, John. Thank you for covering this important issue on local reserves. Just two small clarifications. 2014-15 is the second year of LCFF implementation, not the third. And in regards to the “Common Core” funds, those funds are from the repayment of past mandate claims owed to school districts. The total amount of mandate repayment will be closer to $400 million since $49.5 million will be appropriated to community colleges for past mandate claims.

  12. el said

    on June 16, 2014 at 4:14 pm

    It sounds amazing to hear that a district might have 50% in reserves, but almost certainly that is happening in very small districts where the absolute amount of cash involved is fairly small. It would be interesting to hear the total reserves of all districts divided by the total budget of all districts to know perhaps a bit better if there really is a big wad of cash out there.

    Basic aid districts may have some different issues as well.

    Small, rural districts are especially vulnerable to declining enrollment that can happen without warning. Two large families move away and you can be down $50k in revenue in a heartbeat.

  13. Joan Laursen said

    on June 16, 2014 at 1:39 pm

    John – Isn’t the $450 million that you are mentioning as intended for Common Core implementation just money the state owed us anyway in mandate reimbursements? I believe it is disingenuous of the Governor and Legislature to call that “more money intended for CCSS implementation”.

    • Martha replied

      on June 16, 2014 at 6:49 pm

      Joan…you are correct about the “Common Core” money. The actual amount for K-12 is $400.5 million as the remaining is for Community Collge mandates. The money is to pay off previous mandate reimbursements and language in the budet trailer bill states this funding is “discretionary.” The langauge further states it is the intent of the Legislture that LEAs use it for common core implementation specifically – PD, technollogy, and instructional materials. Intent is different than required. Last year the $1.25 was required to be spent on CCSS implementation.

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