School groups pursue compromise on budget reserves

September 1, 2015

California School Boards Association President Jesús Holguín explains SB 799 at an Aug. 18 press conference in Sacramento. Behind him are the main authors, Sen. Steve Glazer, D-Orinda (left), and Jerry Hill, D-San Mateo (behind Holguín), along with co-author Assemblywoman Kristin OIsen, minority leader in the Assembly.

A year-long battle between a coalition of school organizations and the California Teachers Association over district reserves has taken a new turn.

The dispute is over how much districts should be allowed to keep in reserve as a result of new limits that were set last year. The reserve cap became law after the CTA persuaded legislative leaders and Gov. Jerry Brown to insert the change into cleanup language as part of last year’s state budget negotiations.

The CTA had complained that districts were hoarding a bonanza of post-recession funding that it argued should be spent on student programs and services. Groups including the California School Boards Association, Association of California School Administrators, the California Association of School Business Officers, the California State PTA and the League of Women Voters countered that the new reserve cap was fiscally irresponsible, even though it likely is years away from taking effect. They claim it is a ploy to force more money saved for emergencies onto the bargaining table for potential pay raises and benefits.

But having failed to persuade the Legislature to repeal the cap, the groups, led by the school boards association, have  proposed a late-session compromise to loosen the restrictions and fully exempt the state’s smallest districts.

Senate Bill 799, which the school boards association wrote, would raise the limit on a district’s unrestricted budget reserve to 17 percent of its general fund, in those years when a reserves cap is imposed. That’s nearly triple the 6 percent reserve under current law for most large and moderately sized districts. The new limit would not apply to money that districts have set aside for specific purposes.

The exemption would remove the cap entirely for districts with fewer than 2,501 students and the 10 percent of property-wealthy districts, known as “basic aid” districts, that are funded primarily through local property taxes, not state revenues. Together, small and basic aid districts comprise nearly two-thirds of all districts, according to the school boards association.

“We believe this bill is a good compromise and a solution that both houses of the Legislature and the governor can support,” said Dennis Meyers, assistant executive director, governmental relations, for the school boards association.

In a video statement, Molly McGee Hewitt, executive director of the business officers association, said, “We believe repeal is not a political reality even though (the cap) is not sound public policy. This is a chance to modify and change the reserve cap and to give back for our school districts some stability that we have lost.”

Even if the cap won’t be triggered for several years, the school boards association and other groups want it changed now. They view it as an intrusion on the principle of local control.

The school boards association made repealing the cap its top legislative priority for the year. But in May, Democrats who formed the majority in the Assembly Education Committee defeated repeal legislation sponsored by Assemblywoman Catharine Baker, R-Danville. Republican Sen. Jean Fuller, R-Bakersfield, withdrew her version of the bill from the Senate Education Committee.

Prospects for SB 799, with less than two weeks before the Legislature adjourns for the year, remain uncertain. Two Senate Democrats, Jerry Hill, D-San Mateo, and freshman Steve Glazer, D-Orinda, are the prime authors, with 15 Republican and Democratic legislators as co-authors. But the bill is stuck for now in the Assembly Rules Committee, which could send it either to the Assembly Education Committee for review or directly to the Assembly floor for a vote.

A spokesperson for the CTA said, without elaborating, that the union opposes the bill.

Districts currently have no limit on the size of their reserves, which are funds left over at the end of a year. They can use the reserve as a stockpile for emergencies and downturns in state revenue or as a set-aside for future purchases, such as technology or building repairs.

Democrats supporting the current law, led by Assemblyman Patrick O’Donnell, a former teacher who chairs the Assembly Education Committee, said that the school boards association and others are exaggerating the risks of the budget cap.

Under current law, the cap on district reserves would go into effect only in a year after the state puts any money into a special rainy day fund for K-12 schools and community colleges. Those years, tied to tight revenue requirements under Proposition 98 and other conditions, would be rare – and probably not in the next three years at the earliest, the Legislative Analyst’s Office predicted in May. Districts could apply to county offices of education for an exemption.

Credit: Legislative Analyst's Office

Districts substantially increased their reserves as a protection from budget cuts after the recession. The size of the reserves varied widely, with the smallest districts building the largest reserves. The median reserve for large districts – those with more than 30,000 students – was under 20 percent in 2013-14. The proposed limit for SB 799 would be 17 percent for money not designated for specific purposes.

Depending on a district’s size, the cap would range from 3 percent of a district’s general budget for the state’s largest district, Los Angeles Unified, to 10 percent for the smallest districts, with 6 percent the average for moderately sized districts.

Even if the cap won’t be triggered for several years, the school boards association and other groups want it changed now. They view it as an intrusion on the principle of local control that Gov. Brown espoused and the Legislature adopted with the Local Control Funding Formula. And they said the low cap could jeopardize their financial stability in an economic downturn, make it harder to manage their cash and cause bond rating agencies like Moody’s and Standard and Poor’s to lower districts’ credit ratings, raising the cost of borrowing money.

An LAO analysis earlier this year of 2013-14 found that, had the cap been in effect then, less than 10 percent of the state’s districts would have met the reserve requirements. Districts had $7.3 billion in unrestricted reserves, while the law would have set a limit of $2.8 billion.

Democrats: Potential harm is overstated

Democrats supporting the current law, led by Assemblyman Patrick O’Donnell, a former teacher who chairs the Assembly Education Committee, said that the school boards association and others are exaggerating the risks. The law already permits school boards to vote to shift money for specific future uses into what’s called a “committed reserve” that doesn’t count toward the cap. And that’s what districts would do to bring the unrestricted reserves down if the cap went into effect, they predict.

But Meyers called this option an unnecessary work-around, adding complexity to a bad law. SB 799 instead would require school boards to present annually an explanation of what’s in the reserves and justify the uses – a better form of transparency, he said.

Hill and the school boards association chose 17 percent as the limit because that’s the amount that the Government Finance Officers Association, a national organization, recommends that local districts keep in reserve, with more money in times of volatile revenue. That amount equals between two and three months of a district’s operating expenses, said LAO analyst Kenneth Kapphahn, who wrote the LAO analysis. The LAO found that the median reserve for large districts with the strongest bond ratings was 17 percent.

Sen. Bob Huff, R-Diamond Bar, who stepped down this week as Senate minority leader, said that Republicans favor repeal of the cap, which he called a “dumb” policy, but would support SB 799 as written. However, noting that the finance officers recommended 17 percent as a minimum reserve, not as a limit, he said he was concerned that the number would be whittled down in negotiations over the bill.

Gov. Brown has not indicated whether he would support revising the reserves cap that he agreed to insert in the budget language a year ago.

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