State Watchdog Says New Law Slashing School Budget Reserves Should be Repealed

Tuesday, January 27, 2015

California lawmakers last year passed a law that runs a great risk of causing “less stability in academic programs, increased fiscal distress, and higher borrowing costs” for K-12 schools throughout the state, according to the independent Legislative Analyst’s Office (LAO), which recommended it be repealed.

Senate Bill 858 caps the reserve funds that school districts maintain in their budgets during years when the state puts money into an education rainy day fund established by Proposition 2, passed by voters last November. The LAO doesn’t figure any money will be put in the fund for four years and might not be used very often. But danger lurks.

Districts use the reserves to manage cash flow, mitigate funding volatility, boost their credit ratings, cover unexpected costs and save for big purchases. Capping them, or threatening to cap them, will have consequences that did not seem to be understood when the bill was approved.

The Analyst calculated that 91.4% of school districts (81 of 944) would fail to meet the new standards if they were applied to present budgets, setting off a scramble among them for ways to comply. Overall, school district reserves would have to shrink from $7.3 billion to $2.8 billion.

Cap levels vary depending on the size of a school district. But according to the LAO, the smallest district would suffer the largest percentage cut. The cap is about one-fifth of their present median reserve level. It’s about one-third of mid-size school levels and about half the size for large ones.

The LAO said lawmakers passed the legislation in haste as part of the giant budget bill in June, “allowing relatively little time for the Legislature to review the proposals.” Since then, “members of the Legislature, school district officials, and members of the public have asked for more information about school district reserves.” They ask questions like, “Why do districts have reserves?”

The LAO answered that question and a number of others that should have been asked earlier. The Analyst also gave a little history lesson on reserve funds in school budgets, compared K-12 school reserves with other entities (like colleges) and actually inquired of school districts what they are doing with their reserves.

As it turns out, schools seem to be doing the right thing. “Caps are low relative to current and historical levels,” the report concludes. They also aren’t very high compared to California community colleges and cities, and school districts in some other large states.

Reserve levels varied greatly between school districts, with larger districts maintaining lower reserves as a percentage of the total budget for various reasons, not the least of which is their ability to withstand unexpected large expenses. The LAO surveyed 28 districts that showed particularly large reserves and seemed to accept their explanations as valid. “Most responses included at least one of the following circumstances: saving for large purchases and facing unusual circumstances,” the report said.

The LAO acknowledged that school reserves were higher during The Great Recession (2006-07 thru 2013-14) than in past economic downturns, but attributed the difference to unprecedented actions by state and federal government, heightened local fears about the future and skepticism about what wild and crazy things lawmakers in Sacramento might do next.   

–Ken Broder


To Learn More:

Calif. Watchdog Agency Recommends Repeal of New School Budget Caps (by Robin Respaut, Reuters)

LAO Backs Repealing Cap on Districts’ Reserves (by John Fensterwald, EdSource)

Analysis of School District Reserves (Legislative Analyst’s Office)

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