August 27, 2014
For as long as I can remember, the common wisdom was that school districts should be run more like businesses. The arguments against this are many and persuasive: To use the language of business, school districts have no control over their “raw materials,” over the length of time each “unit” remains in the production line, over the regulations that govern how they operate, and so on.
But one way that schools seem to surpass business practices year after year, was their agility in dealing with rapidly changing and daunting budget constraints. One tool districts utilized to adapt so quickly to changing circumstances was the careful creation of budget reserves that proved critical in dealing with cash flow issues and emergencies.
Many districts worked long and hard to build up sufficient reserves beyond the minimum required by the state so that they could continue to react to changing needs. Most people agree that building and retaining reserves for emergency purposes and cash flow issues is essential, and should be rewarded and applauded. It is simply good business practice.
The reserve restriction included in budget trailer bill SB 858 turns that wisdom on its head. It is bad legislation that needs to be changed. In essence, it restricts school districts’ reserves and chips away at the whole premise of local control — having local school boards make the decisions critical to the well being of the district it is their responsibility to help manage. I agree with those experts who warn that it actually puts fiscal solvency at risk. Reducing reserves is certainly a poor way to run a business.
The language that creates this change was inserted into this year’s state budget, enabling legislation at the last minute, and was therefore never discussed in budget subcommittees where public analysis and discussion could take place. It was not a part of the Governor’s May Revision and did not appear in the final budgets adopted by the Senate and Assembly.
It’s not clear why or how this language became part of the budget, but the rationale is tied to the Public School System Stabilization Account, sometimes referred to as the “rainy day fund.” If the state deposits money into that account for schools, the theory is that those funds will be sufficient to cover district needs in times of hardship. The way the language is written, however, means that even if a small deposit is made by the state into that fund, districts statewide would have to spend down billions of dollars in the reserves that they worked so hard to build.
The reality is that it will take years for our state to build enough funds in that stabilization account. But in one year, districts would be forced to spend down their reserves and ending balances to levels many believe could jeopardize their fiscal solvency.
The ironies should be clear to all: If voters approve a measure on the November ballot to establish a very worthwhile rainy day fund for the state, statutory changes would bind school boards statewide from exerting that same form of fiscal responsibility.
The language of this bill ignores the critical role that budget reserves play in the ability of districts to maintain fiscal solvency and it ignores how districts have used their reserves during the recent recession to avoid even greater cuts to education programs and staffing.
What kinds of numbers are we talking about? The state’s minimum reserve requirements are based on the size of a district and usually are set at three percent of the overall budget. Well-managed districts have generally felt more secure carrying more than that in reserve because a three percent reserve represents between six and eight days of payroll for an average district. The new requirement transforms this minimum reserve into the maximum allowable for districts.
Some more numbers: Between 2008 and 2011 school districts had to manage $6 billion in ongoing revenue reductions, including $2.85 billion in unexpected mid-year cuts. Many districts would not have been able to stay solvent without the prudent fiscal management of healthy budget reserves. That was their safety net.
People ask what factors determine what level of reserve a district considers healthy. Those factors include the district’s size, its source of revenues, the trends of those revenues, projections for student attendance, pending litigation, state cash deferrals, and many more. School boards and district administrators always try to identify the key priorities for the district, the students, and the staff. One size does not fit all.
We all know that our state’s revenues are volatile and often uncertain. Those uncertainties directly impact school districts, because the major portion of their funding comes directly from the state. Strengthening the state’s rainy day fund is a worthy goal. It simply makes no sense that that same prudence would be undermined for school districts.
I join those urging the governor and legislature to rethink this problematic mandate on such a crucial portion of school district budgets, and return budget reserve control to local school boards who know best the economic uncertainties facing their local districts. It is the right thing to do.