State should not be forcing districts to spend down their budget reserves
June 12, 2014 | By Vernon Billy / commentary and Wes Smith / commentary | 12 Comments
The governor and Legislature are preparing to approve budget language that severely limits the amount of funding school districts can maintain in their local reserves for economic uncertainties.
Both the Association of California School Administrators and California School Boards Association, representing superintendents, school boards and county boards of education, vehemently oppose this fiscally irresponsible proposal, as it is inconsistent with the principle of subsidiarity – a key principle of the state’s new Local Control Funding Formula. It also discounts the critical role that prudent budget reserves play in the ability of local educational agencies to maintain education programs during economic downturns.
Education is not solely a “state” program. It is governed, administered and provided by local school districts with locally elected governing boards and community engagement.
Should voters approve the State Rainy Day Fund ballot measure (Assembly Constitutional Amendment 1 or ACA 1) in November, school districts would be forced to spend down excess reserves whenever the state deposits money into its own state-level school reserve. The intrusive requirement would effectively impose an absolute cap of twice the state minimum standard of 3 percent that nearly every school district would be allowed to maintain for economic uncertainties.
The proposal is fiscally irresponsible.
To enact these provisions is fiscally irresponsible and in conflict with the principles articulated by the Legislature in placing ACA 1 on the ballot. For most of the last two decades, California worked to prevent school district bankruptcies by enacting laws requiring multiyear projections, enforcement of strict fiscal standards by county offices of education, early intervention, and even the authority to override the spending decisions of local governing boards. It is therefore ironic that, at the very time an initiative has been placed on the statewide ballot to strengthen the state’s rainy day fund, the Legislature would consider statutory changes eviscerating provisions at the local school district level that are based on the same premise of fiscal prudence and responsibility. The creation of a state Proposition 98 reserve does not eliminate the need for prudent local reserves.
- The proposal fails to recognize the critical role that prudent budget reserves play in the ability of school districts to maintain fiscal solvency.
For most districts, a 3 percent reserve requirement represents only six to eight days of payroll. This proposal would allow for a 6 percent reserve, which equals three weeks of payroll. Districts at the minimum level of reserves are vulnerable to any unanticipated financial developments, such as those currently facing districts in the form of increased contributions to CalSTRS and CalPERS, and rising healthcare costs due to the Affordable Care Act.
The governor’s proposed increases in CalSTRS alone will phase in higher employer contribution rates for the next seven years: going from 8 percent to 19 percent, equating to $60 per pupil starting in the 2014-15 fiscal year. This is more than the increased level of funding many districts will receive via the new funding formula and will have major implications as boards are finalizing budgets and LCAPs. With last-minute surprises like this, it is essential that districts have tools at their disposal to effectively manage their budgets in the short and long term.
- The proposal ignores recent history
Simply put, many school districts were able to survive the great recession only through prudent management of budget reserves. Prudent reserves allowed districts to avoid having to make even greater cuts to educational programs and reductions to certificated and classified staff due to budget reductions and deferrals.
This year the governor and the leaders of the Senate and Assembly have eloquently articulated the need for California to strengthen its rainy day fund. As they have all noted, California revenues are volatile and, in many years, uncertain. Those uncertainties inevitably trickle down to school districts, and it is unclear why the state would propose a reserve policy for school districts that is entirely counter to the one being considered for the state.
Last, we object to the process by which this language is being considered. This language was not proposed in the governor’s January budget or the May Revision, and has not been discussed in any public hearing in either legislative house. The proposed language represents a permanent, significant fiscal and policy shift in education finance which should be publicly vetted before the language is voted on by the Legislature.
Vernon Billy is the CEO and Executive Director of the California School Boards Association. Wes Smith is the Executive Director of the Association of California School Administrators.
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