Source: Legislative Analyst's Office

The median reserves that districts built up in 2013-14 far exceeded what the cap on reserves would allow.

The California School Boards Association’s campaign to persuade the Legislature to reverse a cap on school district reserves got a boost this week when the Legislative Analyst’s Office issued a report issued endorsing a repeal.

“Less stability in academic programs, increased fiscal distress, and higher borrowing costs all are notable risks associated with lower levels of reserves,” wrote the LAO, a non-partisan, independent agency that advises the Legislature. It issued the report Wednesday.

Last June, at Gov. Jerry Brown’s urging, lawmakers passed a statute placing a ceiling of 3 to 10 percent on districts’ end-of-year reserves. That cap amounts to no more than twice the minimum reserves required by law, depending on a district’s size.

For a medium-size district with between 1,000 and 30,000 students, the ceiling would be 6 percent, less than a third of the median reserves those districts had put aside in 2013-14.

The cap would take effect only in years when the state puts any amount of money into an education rainy day fund that voters approved as part of Proposition 2 last November. The LAO projects that the first contribution to the rainy day fund is at least four years away and then, because of restrictions written into the law, it won’t be funded often.

But the LAO agrees with the school boards association that reserve levels imposed by the cap would not be prudent. Calling the cap contradictory to Brown’s commitment to local control, the association has made rescinding the statute its top legislative priority.

The LAO said districts build up annual reserves for a number of reasons: to even out revenue fluctuations, to guard against financial uncertainty and projected drops in enrollment, to protect against emergency repairs and lawsuit judgments and to save for expected expenses, like technology upgrades. Smaller districts, generally more financially vulnerable to adverse events, tend to have bigger reserves: In 2013-14, the median reserve of a district with less than 300 students was 66 percent. The median was 35 percent for districts with 300 to 1,000 students.

Reserves reached a historic high in 2010-11, as districts responded cautiously amid big state cuts in education funding and uncertainty over the passage of Proposition 30’s temporary tax increases. Reserves have begun to come down. Fewer than 10 percent of districts would meet the requirements of the cap, were it in effect last year, the LAO said.

The California Teachers Association urged Brown to support the cap, arguing that districts should be restoring programs instead of stockpiling taxpayer dollars. The LAO found that reserves in 44 mid-size districts had reserves exceeding 42 percent, twice the median.

But the LAO also said that reserve cap would be far below what credit agencies require for a top rating, therefore likely forcing many districts to pay higher interest rates on bonds and short-term borrowing. Other districts would face difficulty meeting emergency repairs and would have only a few weeks of payroll in reserve. Districts could ask their county offices of education for a yearly exemption from the restrictions.

The cap statute also requires districts to justify higher than permitted reserves at a yearly public hearing, starting in 2015-16. The LAO supports the public disclosure provision, which it says would force school boards to discuss the trade-offs of additional spending and saving.

LAO financial analyst Kenneth Kapphahn wrote the report.


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  1. jskdn 1 year ago1 year ago

    Rahm Emanuel: “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before.”

    This law seems intended to create such crisis opportunities.

  2. Gary Ravani 1 year ago1 year ago

    Not for nothing is economics known as the "dismal science," and those in economics and associated fields, like accountants and budgeting managers, seem to be continuously looking over their shoulder for the "inevitable disaster." Having people with high degrees of efficiency in accounting and budget issues is essential to running a good school system, That being said, as important as the priority for prudent bookkeeping is, it is not the first priority of any … Read More

    Not for nothing is economics known as the “dismal science,” and those in economics and associated fields, like accountants and budgeting managers, seem to be continuously looking over their shoulder for the “inevitable disaster.” Having people with high degrees of efficiency in accounting and budget issues is essential to running a good school system, That being said, as important as the priority for prudent bookkeeping is, it is not the first priority of any school system. That priority is building and maintaining the richest possible instructional program. The sour eye the economic types put on school funding leads them with a tendency to be hoarders. They want to sit on huge reserve funds not because it is necessary but, like those who scale mountains, because “it is there.” It is the function of the state, under current court precedent and statute to fund the schools. It is the function of the local school authorities to allocate those funds in a manner that best supports instruction and keeps the unused reserved funding to the absolute minimum. It is not the responsibility of the local school authorities to usurp the responsibilities of the state. And, yes, CA as a state has chronically underfunded the schools because of the undue influence of anti-tax hysterics. But, that is a battle to be fought at other times and places not in local school board meeting ands district budgeting offices.

    Replies

    • el 1 year ago1 year ago

      In a small school district - say one with a $5m budget - the difference between a 10% reserve and a 5% reserve is only $250k. (Some districts are even smaller.) If your bus blows up, a high needs special education child moves in requiring a dedicated staff member, and 10 kids leave the district (might be only two large families), you've gone from that 10% to not having your legally mandated reserves. This creates … Read More

      In a small school district – say one with a $5m budget – the difference between a 10% reserve and a 5% reserve is only $250k. (Some districts are even smaller.) If your bus blows up, a high needs special education child moves in requiring a dedicated staff member, and 10 kids leave the district (might be only two large families), you’ve gone from that 10% to not having your legally mandated reserves. This creates less stability in the program, more uncertainty for teachers, and damages your long term goals.

      Reserves allow you to ride out this year with your existing program via deficit spending, and give you a year or two to stabilize into whether this is the new normal or to seek other solutions.

      Reserves are only one time money. If our hypothetical $5m district is carrying a reserve of 20%, yes lo, they have an extra $500k. But it can only be spent once and then it is gone.

      I am all in favor of transparency for these reserves – let’s make sure they’re publicly discussed, and let’s make sure there’s a nice obvious line in the budget showing them, rather than squirreling away an extra 5% contingency in every line item. It’s very appropriate for the community and teachers to be able to see that money and make the local decision whether volatility in their local conditions means the money should be held or whether the best use of it is to build out technology or to refurbish the science classroom or buy a new football scoreboard (ugh! 🙂 ) or raise salaries or temporarily fund another FTE.

      One question that I’m not clear about: is the maximum reserve percentage based on the projected annual income for the district or the projected expenses? And note that in a situation where a district is having significant changes in enrollment, both numbers might be quite volatile year to year.

      • Gary Ravani 1 year ago1 year ago

        Smaller districts currently are allowed higher reserves for the reasons you describe.

        • el 1 year ago1 year ago

          Right, 10%. Under this law, small districts are expected to work between a margin of 5% (mandatory min) and 10% (new mandatory maximum). This is an extremely small window for small districts. Take my hypothetical $5m district down to $2.5m (yes they exist) and now you're talking about a margin of only $125,000 in actual dollars. Districts of this size are likely running Necessary Small Schools which are funded in bands, and the loss of … Read More

          Right, 10%. Under this law, small districts are expected to work between a margin of 5% (mandatory min) and 10% (new mandatory maximum). This is an extremely small window for small districts. Take my hypothetical $5m district down to $2.5m (yes they exist) and now you’re talking about a margin of only $125,000 in actual dollars. Districts of this size are likely running Necessary Small Schools which are funded in bands, and the loss of one ADA can cost ~$100k in revenue.

          • Gary Ravani 1 year ago1 year ago

            Yes, as has been established many times now, the school funding situation in CA is one of desperation and that can be even more true for smaller districts with less "margin for error." That being said, it is still the priority for districts to provide students with the richest instructional program possible today and not in some "future" time, that may or may not come to pass, and all based on their personal fiscal heebie-jeebies … Read More

            Yes, as has been established many times now, the school funding situation in CA is one of desperation and that can be even more true for smaller districts with less “margin for error.” That being said, it is still the priority for districts to provide students with the richest instructional program possible today and not in some “future” time, that may or may not come to pass, and all based on their personal fiscal heebie-jeebies . Not that in CA heebie-jeebies aren’t many times well warranted. Life, at times, is a gamble.

            • el 1 year ago1 year ago

              It's not heebie-jeebies to know that enrollment has fluctuated 10% up and down in a year, nor is it bad for current students, most of which will be with the district for 13 years, to have stability in the program. It benefits no one if we have to lay off a teacher for a year if we expect to have the students to support that position another year out. This is the kind of 'flapping' … Read More

              It’s not heebie-jeebies to know that enrollment has fluctuated 10% up and down in a year, nor is it bad for current students, most of which will be with the district for 13 years, to have stability in the program. It benefits no one if we have to lay off a teacher for a year if we expect to have the students to support that position another year out. This is the kind of ‘flapping’ I would want to avoid.

              I’m not going to defend an ongoing 50% or 100% reserve with no plan for spending that money in out years. But the 10% reserve – which is really only 5% because you can’t spend the last 5% – is just too low in an absolute cash sense.

              This rule was put into place because people couldn’t talk about money like grownups. Let’s start with the disclosure and sunshine and see where that goes, instead of assuming that a flat formula makes sense across the board.

            • Gary Ravani 1 year ago1 year ago

              Yea, but it does no good to students today to not have a teacher or two to reduce class size because a district wants to sit on a pile of cash. I negotiated for 20 years on a local level and have been in close contact with other union leaders for almost 30. The stories are the same "almost" everywhere. Districts move dollars around to different budget categories, they over project expenses for the coming … Read More

              Yea, but it does no good to students today to not have a teacher or two to reduce class size because a district wants to sit on a pile of cash. I negotiated for 20 years on a local level and have been in close contact with other union leaders for almost 30. The stories are the same “almost” everywhere. Districts move dollars around to different budget categories, they over project expenses for the coming year, under project income, under project enrollment, and the “golden time” for the budget is usually 3 years out, because that’s how far they have to project the budget to get county office approval. “Happy days’ are always just around the corner, they are rarely here today at the bargaining table. I have had enough experience to know this is not just about fiscal prudence it’s a matter of management psychology. They just like to sit on that money. And there are districts that, even during state cutbacks, cut much more than needed and now have the 20%-30%-40% in reserves. Instructional program suffered because of that, and districts are often resisting restoring program.

              That does not mean I know anything about your specific district and its particular needs or conditions. I do have a pretty good view of conditions in the meta sense, for 6 million students and close to 400K teachers. Districts need to be protected from their own instincts, that is, the “dismal science” instincts of local budget officials and those that inhabit the LAO.

            • Manuel 1 year ago1 year ago

              Hey, Gary, it is not just the official "reserve" that districts use to stash cash. While this probably would never happen in el's district, it is routine at LAUSD. For instance, I know for a fact that part of revenue streams can be placed in a "prudent reserve" by the Superintendent's office staff and the Board will never even hear about it as they don't even show up in the interim budget reports. This happened in … Read More

              Hey, Gary, it is not just the official “reserve” that districts use to stash cash.

              While this probably would never happen in el’s district, it is routine at LAUSD.

              For instance, I know for a fact that part of revenue streams can be placed in a “prudent reserve” by the Superintendent’s office staff and the Board will never even hear about it as they don’t even show up in the interim budget reports.

              This happened in 2013-14 for Title I, when the total allocation was $290.4 million and the prudent reserve carved out was $39,009,485. Is it a surprise that the carryover into 2014-15 was $63.7 million? Of course, if you ask the staff why they will have all kinds of sensible explanations for these practices. Do they hold water? Of course not.

              Given that Title I are federal dollars and are supposed to be spent in the year granted, what possible justification could they have against distributing all the funds as soon as they are earmarked? It is not like the state is going to yank the funds (yes, they can be reduced if the ADA goes down, but still). If they can do this with “set” funding, what else are they doing with other accounts?

              Nevertheless, I support el’s point that this has to be done carefully and not precipitously because small districts like hers can go underwater if things go wrong.

              However, I do believe that many districts just want to sit on the cash to fund whatever programs they want to keep alive. Not for nothing did these programs used to be deemed as “encroaching.” Nowadays LAUSD calls them “off-school resources.” Ha!

            • el 1 year ago1 year ago

              Gary, I am totally with you on the concept of spending the money we get this year for the kids we have now. I am not advocating for the deliberate creation of a large reserve via intentionally spending less than we are allocated each year. Our district has reserves of greater than 10% and it is deficit spending this year to maintain small class sizes and a program of extras like art and music. It is … Read More

              Gary, I am totally with you on the concept of spending the money we get this year for the kids we have now. I am not advocating for the deliberate creation of a large reserve via intentionally spending less than we are allocated each year.

              Our district has reserves of greater than 10% and it is deficit spending this year to maintain small class sizes and a program of extras like art and music. It is able to deficit spend because of happy surprises in previous years, when more students showed up, or when expected funding cuts did not materialize. And it makes sense to do so while the district has hopes that enrollment will pop back up.

              The reserves are not ‘robbing funds from current students.’ The reserve money already exists. This year’s students are getting every penny and then some that the state and feds are sending this year.

              Spending it all down in a single year would create pressure for frivolous large purchases instead of using how it is being spent, to maintain a larger staff for a couple years longer than the revenue alone allows.

              In some situations, I’ve seen budgets where extra money was padded in to various categories to hide the reserves and create some padding for uncertainty. In my mind, this is the worst possible outcome. I would rather see reserves called out in cash for all to see, so that everyone understands that yes, if the roof is gone, there is money for more than blue tarps, or that really, we can afford to keep the K-3 at <20 kids by spending that money down, or that we can keep the successful CTE program whose funding is going away next year. Or that yes, we have money for staff raises and can maintain it for a few years. These are all choices and having the money in the reserve fund makes it easier for them to be honest choices understood by all stakeholders.

              Put sunshine on the reserves and the history of ending fund balances. If you must have statutory limits on the reserves, then you could simply require deficit spending for districts over a certain amount, or you could help small districts by recognizing that percentages fail when you are dealing with very small numbers.

        • Paula Campbell 1 year ago1 year ago

          i agree with the comments about small school districts and would add the difficulties of cash flow. What is unclear in some discussions is the fact that once a reserve is established, districts can allocate 100% of their income to current programs. Our small district has a combined 21% reserve, including the mandated 4%. We will use this for cash flow and unanticipated expenses and can now spend 100% of our current revenues.

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