School districts struggling to get reserves cap repealed

May 19, 2015

Catharine Baker appeals to members of the Assembly Education Committee to pass AB 1048, her bill to rescind the cap on district reserves.

Advocates for school districts are still hoping they can persuade legislative leaders and the governor to repeal the limit on how much money districts can annually keep in reserve. So far, though, they’ve struck out.

Last week, on a party-line vote, the majority Democrats on the Assembly Education Committee rejected Assembly Bill 1048, sponsored by Assemblywoman Catharine Baker, R-Dublin. The bill would have rescinded the reserve cap, which has yet to go into effect. Democrats and Republicans disagreed on how much of a problem, if any, the ceiling on reserves will create. A Senate version of the bill, sponsored by Sen. Jean Fuller, R-Bakersfield, failed to move out of that body’s Education Committee.

School management groups were incensed over a last-minute deal last year in which Democratic leaders and Gov. Jerry Brown attached the cap on district reserves to the bill containing legal language associated with the state budget, called the trailer bill, without a hearing. The school management groups say they didn’t learn about the cap until shortly before the vote on the budget.

The California School Boards Association blamed the California Teachers Association for persuading Democratic leaders to include the cap as a way to free up money tied up in reserves so that it would be subject to contract negotiations. The CTA, while not publicly taking credit for orchestrating the deal, is the primary opponent to rescinding the cap. The school boards association said the ceiling on reserves violated local control over local budgets – the principle behind the Local Control Funding Formula – and has made rescission its top priority this year.

Baker, in a hearing on her bill last week, called the cap “a destabilizing policy we have imposed on every district in the state.”

Under current law, districts must maintain minimum end-of-year balances in their general funds, ranging from 1 percent for Los Angeles Unified to 5 percent for the smallest districts. The cap on reserves would range from 3 percent for L.A. Unified to 10 percent for small districts of under 1,000 students.

CTA lobbyist Estelle Lemieux said it was “unconscionable” for districts to hoard money in reserves that taxpayers expect to be spent on education programs.

The Legislative Analyst’s Office, which also has called for the cap’s rescission in a January 2015 report, found that fewer than 10 percent of the nearly 1,000 districts in the state would have met the new cap requirement had it been in effect in 2013-14. Faced with big cuts in state funding following the 2008 recession, as well as uncertainty about whether there would be further cuts if voters failed to pass temporary taxes under Proposition 30 in 2012, most districts built up double-digit reserves. In 2013-14, according to the LAO, reserves averaged 66 percent of general fund expenditures for small districts, 21 percent for mid-sized districts and 15 percent for large districts.

State revenues have surged the past two years, but school boards and superintendents argue they remain subject to volatile state taxes and a possible decline in state revenue when Prop. 30 is phased out over the next three years. Districts, they argue, should determine their own reserve levels, based on individual circumstances that they, not Sacramento politicians, know best.

But CTA lobbyist Estelle Lemieux said it was “unconscionable” for districts to hoard money in reserves that taxpayers expect to be spent on education programs. Districts laid off librarians, counselors and nurses at the same time they were building huge surpluses, she said.

The cap on reserves would go into effect the year after the state makes payment of any size into a new rainy day fund for K-12 and community colleges that’s part of Proposition 2, which voters passed last year. The rationale behind the cap is that districts wouldn’t need large reserves if the state also has a rainy day fund to cushion revenue declines.

Contributions into the state education rainy day fund would be rare, however. Revenue from the capital gains tax would have to be above average, and all debts owed to schools under Proposition 98, called the maintenance factor, would have to be paid off. The LAO, in the latest analysis of the May budget revision, predicts no contributions to the rainy day fund – and no triggering of the reserve cap – for at least the next three years. In its analysis of the May budget revision, School Services of California, a Sacramento-based education consulting firm, concluded that there is an outside chance that the reserve cap could be enacted next year.

But Josh Daniels, an attorney and a member of the Berkeley Unified school board, testified at the AB 1048 hearing that the mere existence of the reserve cap law is already creating harm. The bond rating agency Standard & Poor’s cited the cap as one reason to deny his district a better credit rating, which could have saved Berkeley taxpayers potentially millions of dollars in lower interest payments, Daniels said. Not knowing when the cap may be triggered is prompting some districts to lower reserves despite their better judgment, the school boards association has argued.

Source: California Channel webcast.

Assemblyman Patrick O’Donnell, who chairs the Assembly Education Committee, said there has been misinformation about the need for the repeal.

Democrats counter that worries about the reserve cap are overblown, based on what the chair of the Assembly Education Committee, Patrick O’Donnell, D-Long Beach, called “confusion and misinformation.” O’Donnell, a teacher and former CTA leader, said that a district could appeal to its local county office of education to grant a one-year waiver from the reserve restriction. And a school board could designate savings for specific purposes, such as new computers, school buses or a roof replacement, that wouldn’t count toward the reserve cap. To emphasize the point, O’Donnell has sponsored AB 531, confirming that committed reserves are an option that districts can use.

But Daniels called committed reserves “a red herring” that appears to give districts flexibility the Legislature took away with the reserve cap. Rescinding the cap is the only way to make things right, he and others say.

Dennis Meyers, a lobbyist for the school boards association, said he and other school groups will continue to make their case to the Brown administration for a solution, although CTA is not likely to give up the cap without getting something in return. It’s not clear what the price will be to make it vanish.

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