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Districts protesting closed-door deal restricting control over their budgets



Organizations representing school districts and superintendents are trying to stop a last-minute effort to limit the size of their budget reserves, which they’re characterizing as a bald-faced attempt by Gov. Jerry Brown and the Legislature to meddle with their finances. With the Legislature set to vote Sunday on the measure and the state budget, they have two days to head it off.

Issuing a warning to Gov. Brown, the presidents of three main education organizations threatened Friday to oppose the governor’s proposal to strengthen the state’s rainy day fund – which is on the November ballot – if he allows the cap on districts’ reserves to go through.

The cap on reserves, which education organizations say they never saw coming, was inserted this week in the state budget trailer bill, which is the technical language accompanying the budget that Gov. Brown and legislative leaders negotiated behind closed doors.

As of next year, state law will reset the minimum for school districts’ reserves. For Los Angeles Unified it will be 1 percent and for small districts, which have less room for error during a fiscal crisis, it will be 5 percent. For most districts, the minimum will be 3 percent.

The trailer bill, if approved, would set a maximum reserve that districts could set aside in their budgets for a potential fiscal emergency. Under the proposal, the maximum reserve for most districts would become 6 percent, with 3 percent in Los Angeles and 10 percent for small districts.


Coming out of the recession, a number of districts have built up reserves much larger than that: 20 to 30 percent in some of the smaller districts. Initially they did this because they didn’t know if Proposition 30 – which raised sales and income taxes partly to help fund schools – would pass. Then they didn’t know how much they would get under the first years of the Local Control Funding Formula. As a result, districts have been cautious about committing to future spending.

Christine Frazier, the Kern County superintendent of schools, in a teleconference on Friday, said districts’ prudent budgeting has saved teachers’ jobs and protected students. “Those districts with minimum reserves had huge layoffs,” she said.

“To me this asks our districts to spend, spend and live paycheck to paycheck,” Frazier said. “It goes against what the governor has been saying about living within your means.”

Teachers unions, which advocated the proposed cap on reserves, said that after years of employee sacrifices and cuts, districts shouldn’t be sitting on piles of money. “Districts get public money for the purpose of spending it in the classroom, not for hoarding it,” Mike Myslinski, a spokesman for the California Teachers Association, told the Los Angeles Times.

But in the Friday teleconference, Josephine Lucey, president of the California School Boards Association, called the proposal “fiscally irresponsible” and “a blatant maneuver by CTA to move dollars to the negotiating table for salary increases” by draining reserves. She said that if the reserve limit goes through, she would urge the school boards association to oppose Brown’s rainy day fund in November. The presidents of the Association of California School Administrators and the California Association of School Business Officials, also on the phone call, predicted their organizations also would fight the rainy day fund if the reserve cap moves ahead.

Connected to state rainy day fund

The cap on district reserves would be tied to the passage of the state rainy day fund, which would set up two separate state reserves. One would be for the General Fund and the other for spending for K-12 schools and community colleges through Proposition 98, the main source of education funding. Under the proposed cap, every year that the state puts money into the Prop. 98 reserve, districts would then have to spend down reserves to the maximum allowed. As EdSource has written previously, diverting any money into a Prop. 98 reserve would be rare – and definitely wouldn’t happen for the next seven years. But that doesn’t assuage opponents like Lucey and Frazier, who said the state shouldn’t be interfering with districts’ decisions on the size of their reserves.

Bob Blattner, a consultant who advises school districts, predicted districts could face “boom and bust budgets” as they try to build up adequate reserves, only to shred them in years that the state puts money into its own reserve. “A healthy reserve is in the interest of districts and their employees,” he said.

Along with the cap, the trailer bill would also require districts to hold a public hearing to justify a reserve that exceeds the minimum 3 percent. Although they say they’re not against making finances transparent to the public, Lucey and others oppose the provision because it presumes that any money put aside above the minimum is excessive.

Kevin Gordon, president of Capitol Advisors Group, an education consulting firm, said districts address varying concerns in setting their reserves.  A tiny district may worry about replacing the one bus it runs; others may foresee the need to put aside money for building repairs or a decline in school enrollment. “This stigmatizes the notion that it is wise to save for a rainy day,” he said. “That’s contrary to everything Brown has stood for.”

Filed under: School Finance, State Education Policy

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20 Responses to “Districts protesting closed-door deal restricting control over their budgets”

  1. Manuel said

    on June 13, 2014 at 4:22 pm

    Isn’t “living paycheck to paycheck” the same as “living within your means?”

    At least they are not running up the tab in the credit card…
    :-)

  2. Paul said

    on June 13, 2014 at 10:41 pm

    This sounds a lot like the phenomenon of some school districts’ not even trying to “maintain effort” during the recession, not restoring spending now that times are improving, and having the nerve to hit the state up for “repayment” (of deferrals) of money that was never spent! That money should have been in the hands of students and teachers all along.

    A cap on school district reserves makes sense. To use metaphors, there is a middle ground between spending down to the last penny and having to pluck money from a someone’s dead fingers. Districts are upset because they will no longer be able to plead poverty in response to every complaint or request. It will be harder for superintendents and boards to starve disfavored programs of funds while steering money toward their own pet programs.

    • Manuel replied

      on June 13, 2014 at 11:50 pm

      It’s funny that you mention this about “money never spent.” That has been the basis for LAUSD claiming that they have an enormous structural deficit (“$500 million a year for six years!”).

      Curiously, if one looks at their published budgets for the last few years, one finds that they started each year with a lot of money in the kitty. They call it “Beginning Balance” of the Operating Fund. Here are the actual amounts in millions from the 2009-10 and 2013-14 budgets:

      2005-06 – $485.5
      2006-07 – $629.6
      2007-08 – $948.3
      2008-09 – $901.0
      2009-10 – $916.0
      2010-11 – $790.7
      2011-12 – $923.9
      2012-13 – $853.8
      2013-14 – $657.7 (estimated)

      Given these amounts, it is clear that LAUSD is not “spending down to its last penny.” Yet, it claims poverty and denies funds to school programs and has told its teachers for the last seven years that they can’t have a raise.

      I don’t understand why UTLA has not talked about this publicly available information. But they have new leadership now and I wouldn’t be surprised if they do. LAUSD will probably stick to its poverty story and this could lead to a strike.

      • Paul replied

        on June 14, 2014 at 9:19 am

        Fascinating. So much for the structural deficit!

        It would be interesting to know why, and how, LAUSD came to be singled out with special percentages for its reserve floor and reserve ceiling, in the state’s new proposal.

        • el replied

          on June 16, 2014 at 4:32 pm

          It’s by far the biggest district, which makes even a small percent of its budget a huge amount of cash.

      • Jennifer Bestor replied

        on June 14, 2014 at 1:22 pm

        How much of the year-to-year operating fund beginning balance simply reflects what normal business accounting would call “accounts payable” — i.e., money already spent for services/goods received, but not yet paid?

        School accounting is a bizarre form of funds/cash accounting that rarely tells the whole picture. Before claiming that this is somehow unspent or misspent, please characterize it.

        • Manuel replied

          on June 14, 2014 at 2:37 pm

          Schools are not, to the best of my knowledge, “normal businesses.” These sums are often more than 10% of the total General Fund. If a business would defer paying that fraction of its total invoices year after year, fairly soon vendors would stop rendering their services.

          By definition, the General Fund is used for running the day-to-day operations of LAUSD. As such, it does not include the capital, debt service, and internal service funds. The latter is, by the way, double-counted. But these funds are separate and have their own “beginning balances.”

          According to the published budgets, the vast majority of the General Fund goes to salaries and benefits, which, by definition, cannot be for services/goods received not yet paid. If the “Beginning Balance” were applied to “Books and Supplies” and “Other Operating Expense,” no vendor would do business with LAUSD if they had to wait for year’s end to be paid. From my limited experience, the general public, of which I am a member, cannot tell what is going on without extensive access to the district’s ledgers. All I have is the published budgets and cannot characterize why there is a “Beginning Balance.”

          Yes, school accounting can be fairly obfuscating. Yet, this matter is fairly simple: LAUSD reports identify in one single page the “Beginning Balance” and “Revenues” of each fund for the year. By definition, a beginning balance is what’s left from the previous year. Why it is there is not the point here.

          Perhaps Educate Our State can help by calling for an independent audit of the district responsible for nearly one-tenth of California students. Ideally, such an audit would make available to the public the entirety of the information and not just the final report.

          In fact, every district should post their complete budget and expenditure ledgers in the Internet. Isn’t that what budget transparency is all about? We demand accountability of schools, why not accountability of their managers?

        • SD Parent replied

          on June 14, 2014 at 3:45 pm

          Jennifer’s point is valid. Much of the “beginning balance” is carryover to have operating funds at the beginning of the school year. Even with 3% reserves, San Diego Unified must borrow $200 million in TRANS to make payroll and other expenses throughout the year (and this sends million of $ to Wall Street for interest payments instead of to classrooms). And having low reserves also puts the district in a pickle when financial circumstances change suddenly, like the added burden of the CalSTRS pension liability.

          Living “paycheck to paycheck” with low reserves has forced San Diego Unified to live on the brink of insolvency for several years. I don’t doubt LAUSD is in the same position. SDUSD and LAUSD both have qualified certification, which means that based upon current projections, they may not meet their financial obligations for fiscal year 2013–14, 2014–15, or 2015–16. I don’t know the details for LAUSD, but SDUSD is selling real estate each year to meet expenses (and thereby creating a structural deficit), and this week each school site was asked to pony up 1.0 FTE teacher so that the district wouldn’t have to hire as many teachers to fill vacancies left by teacher retiring under SERP. And this is all BEFORE the additional CalSTRS payments get factored in.

          So unless you want your districts to be teetering in fiscal peril, too, having decent reserves to weather the surprises and the general bust years in the state’s economy isn’t a bad idea, because we all know there is going to be nothing in the Gov’s Prop 98 rainy day fund for many years.

      • Karen Swett replied

        on June 15, 2014 at 7:59 am

        Have you done a trend analysis of the beginning fund balance using the Unaudited Actuals? I find the Actuals to be far more revealing than the budget. The “unspents” – known by way of the Unaudited Actuals – tell the real story. And I wonder if anyone has done an analysis of which districts actually tapped into their REUs (Reserved for Economic Uncertainties) during the recent 7-year recession. My district did not really even get close. Yes, the EFB did decline, but the other option was to NOT SPEND on kids. It really comes down to choices: spend on kids now or save for a rainy day….. CALSTRS crisis or KID crisis (now). It’s about choosing to think/act like a banker or an educator…. The kids in the classrooms need the services now. Looking at history we need to ask why districts go into or are close to bankruptcy. Is it because of the Ending Fund Balance or mismanaged spending?

        • Manuel replied

          on June 16, 2014 at 4:06 pm

          Ms. Swett, the problem in believing that the Unaudited Actuals reflect reality is that not all is in the actuals themselves.

          Here’s a particular example: LAUSD is part of the CORE Waiver group. Because of that, LAUSD dismantled its one-on-one tutoring services offered by third parties (and it was horribly mismanaged, but that’s another story). Instead, LAUSD pledged that it would use those funds (around $50 million) for “intervention” during Spring and Summer at selected schools. Because those funds were not spent, they did not show up in the third unaudited report (dated June 2, 2014). This report did not say that the “difference” between the “approved budget”and the “projected total” is a carryover. That carryover now shows up in the 2014-15 published budget but the Superintendent stated to the Board on April 8 that he has other plans for that money. So much for the cries of “we don’t have money to fund all schools because we are paying for intervention?” This particular carryover is not meant to pay salaries. It is nothing more than a slush fund.

          What is the rest of that “beginning balance/carryover” going to be used for? To claim that LAUSD needs that money to make payroll seems without foundation to me because the state starts to distribute the funds apportioned to all districts in July of the school year. Don’t believe me? Here’s the payment schedule for 2013-14:

          http://www.cde.ca.gov/fg/aa/pa/papayschedule.asp

          It states that 5% of the total was disbursed in July and August, with 9% for September through January, with the rest disbursed at different rates. Given that, how can districts claim not to be able to meet payroll?

          I’d say it is both mismanaged spending and hoarding.

          I am not an accountant. But it seems to me that a CALSTRS extra charge of $35 million for 2014-15 is not going to break the back of a $6.8 billion General Fund. LAUSD blew that and more in the Miramonte scandal.

  3. Katherine said

    on June 14, 2014 at 7:36 am

    Districts have just been told they will also be bearing most of the burden of paying down the pennon obligations – their obligation will go from its current level of over 8% to over 19% over the next seven years. This expense will come out of the LCFF allocation that they have ‘control’ over?! It seems unwise indeed to add insult to injury and take control of their savings. What control do districts actually have, after it is all said and done? Maybe just control over how much they allow political decisions coming down the pike to stress them out. :(

    • Paul replied

      on June 14, 2014 at 10:12 am

      Preventing school districts from accumulating and holding on to reserves that they were unwilling to spend even in bad times, will indeed free up some money to help cover legacy pension costs. This is as it should be: past revenue applied to past expenses.

      The unpleasant reality is that districts used the fact of the STRS pension to retain teachers during periods when workload (English Learner adaptations; Special Education accommodations; online gradebooks and parent communication; and most of all, class size) was rising dramatically but cash compensation was stagnating.

      Side Note: The dynamic of rising workload and stagnant pay sometimes stemmed from districts’ unwillingness to use their reserves. Some districts turned away state funds that remained available through the worst years of the recent crisis (by exiting Morgan-Hart 9th-grade academic class size reduction, for example). Even if we buy districts’ claims of high local overhead, when the state was still willing to pay, say, 70%, and you still had reserves, why on earth did you say no?

      Pension cost for a teacher hired after 2012 is 16% of salary. This is less than the teacher, her school district, and the state currently contribute on her behalf (8% + 8.25% + 2.5%). See Page 2, “Fiscal Effect of Pension Legislation” section, first paragraph, of http://edsource.org/wp-content/uploads/CalSTRS-AB430-reformanalysis0922121.pdf#2 . The coming increases in contribution rates are purely to fund pension benefits promised to teachers who first taught before 2013.

      School districts should pressure the legislature to approve cost-based pension contributions, so that the savings from pension reform will follow new teachers, and the legacy costs, old teachers. Then, districts can use the new at-will employment prerogative from Vergara to replace teachers hired before 2013 with teachers new to the profession.

  4. Jennifer Bestor said

    on June 14, 2014 at 1:18 pm

    This is simply mind-boggling. Do school boards have the intellectual capacity and moral judgement to make the right decisions for their children?

    If so, reserve levels above the minimum should be completely and solely within their purview.

    If not, why the “Local Control Funding Formula?” Was it really just a clever name for a weighted student formula to dramatically shift money away from middle-class, English-speaking students and districts? If school boards can’t make the right decisions, why ‘increase’ the decisions they have to make?

    The most astounding thing is that the trailer bill revives deferrals (contrary to Gov. Brown’s promises), which forces districts to reach into their reserves … then tells them to cut reserve levels? Hello?

    • Don replied

      on June 14, 2014 at 2:54 pm

      I don’t want to go off-topic, but when you say, Jennifer, “Was it really just a clever name for a weighted student formula to dramatically shift money away from middle-class, English-speaking students and districts”, this is subject that interests me. Under Revenue limits something like one-third of the Prop 98 state funding was categorical and the vast majority went to compensatory education. Under LCFF only 16 percent comprises the S and C grants. With your background in finance I was wondering if you could shed any light on how much more or less we have allocated for CompEd/categorical/S ad C funding or if this was just a redistribution between districts?

      Other than that, I wholly agree that this cap flies in the face of everything LCFF stands for. What is Brown thinking?

      • navigio replied

        on June 14, 2014 at 3:00 pm

        How much of that one third was special ed and if you add that to S&C grants under LCFF, how would that compare?

  5. john mockler said

    on June 16, 2014 at 11:41 am

    John; Have you seen the level of Reserves in all districts? Business managers think it is cool to increase the ending balance by not spending the resources they have. That reduces services to students for that year that they can never replace. Prudence is fine, but reserves above 15%? That needs real public scrutiny. By the way that one school bus in a small district argument is bogus. That funding can be set aside out side of reserves. Mora:l don’t inhale all of the smoke that Lobbyists blow at you. John

  6. el said

    on June 16, 2014 at 4:43 pm

    A couple of things to keep in mind.

    Reserves probably did get higher in this period, because the uncertainties districts were subjected to in the last few years were ENORMOUS. I don’t think this can be overstated. The state was saying, pass a budget June 15 or else, but wasn’t committing to what revenue would be sent until *January* of the following year, with the school year half over. You had the state willy-nilly saying it would maybe claw back the transportation budget, or several hundred dollars per student. And you had to guess whether they meant that or not.

    In our district, I would say there were about 10 different gambles where it looked like ~3-5% of the revenue would go away due to state factors or local enrollment or loss of funding at the county level or who knows what. In our district, we happened to win all those coin tosses, not something you could have planned on. The money did end up getting spent when Prop 30 passed.

    So the number one way to get districts to carry lower reserves is to lower uncertainty.

    Second, I would caution that the nice thing about reserves is that they are extremely clear. Everyone can see that this money is in reserve and it can be publicly debated that this is appropriate. If there is a statutory cap on this amount, my guess is that the reserves will end up distributed into the budget … more money into deferred maintenance, books and supplies, potential staff increases, whatever – and those are much harder to find and much harder to free up when you suddenly realize there’s an unmet need in the district/community/school. Alternately, there will be pressure to spend money in this fiscal year when maybe it doesn’t need to be spent.

    We spent the last year talking about local control. How about giving it a try before it gets clawed back?

    • navigio replied

      on June 16, 2014 at 7:28 pm

      So the number one way to get districts to carry lower reserves is to lower uncertainty.

      amen.

      of course the proposal to do that is to create a rainy day fund and stoke that by taking more money away from schools.. :-P

      i think the federal stimulus also contributed to some of this unexpected influx (and had other negative, unintended consequences).

      the notion of carryovers is kind of tricky. a constant carryover with constant funding is maintaining effort. its only when the reserve gets created (or increases) that effort is not maintained. In addition, if you spend down reserve you are essentially deficit spending which means in subsequent years you need to decide whether to continue to deficit spend to maintain effort or cut the service. this is particularly problematic in schools where loss of an important or significant resource can cause people to move schools or districts.

      its maybe also worth noting that there were strong criticisms of some charter schools recently on this forum for maintaining a ‘reserve’ that was maybe as much as a couple years of its budget. I think the idea behind this maximum may have been in response to that critique?

      lastly, its probably important to realize that spending decisions may look different at a school level than at a district level (and not all sscs may realize that). districts usually force a reserve of categoricals onto schools, sometimes not even showing that reserve in allocated funds, potentially leading sscs to under-spend, and in the worst case, end up losing some of that funding that has time-limit restrictions on use or is subject to being stolen back by districts. if you’re an ssc member, make sure you understand those numbers.

    • Manuel replied

      on June 18, 2014 at 4:42 pm

      I have a not-so-modest proposal, el: find a way for all essential district employees (i.e., those needed to run the schools such as teachers, school administrators, school staff, etc.) be paid directly by the state. Then you won’t have to worry so much about all this.

      Hey, even better, make the state be fiscally responsible over schools while school board districts take care of day-to-day policy issues. Unless, of course, the district is basic-aid.

      That way the uncertainty on whether or not schools will be staffed will be lowered to zero.

      That would never work, would it? :-)

      • navigio replied

        on June 18, 2014 at 5:13 pm

        funny, i’ve thought about a similar approach for a while, but where staffing is allocated by ratios rather than cost (ie correcting for local cost of living differences). i also think the state really should cover all legal costs directly. im tired of hearing from our board that everything we do is something we’d normally never do if it werent for ‘the budget’. :-(

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