Each July, Kansas school boards receive reports from their superintendents on the unencumbered cash balance of specific funds as of July 1. As districts struggle with tough choices as budgets get adopted over the next month, questions are expected to be raised about whether cash balances are too high.
The facts are: school districts have actually been cutting
cash balances compared to budgets, school balances are actually lower than
comparable state balances, and districts continue to face uncertainty in state
Districts have cash balances for three major reasons. The
first is to have money on hand to pay expenses that come due before the income
to pay for those expenses arrives. This is called “cash flow.”
It is similar to individuals who need money in their
checking account at the end of the month to cover rent or a house payment due
at the first of the month before the next payday. That doesn’t mean the person
ended the month with “extra” money. Likewise, school districts need money on
hand in areas like special education and food service at the start of the year
to begin operating until state, federal and local revenues such as student fees
The second reason for cash balances is if income turns out
to be less than expected, or expenses run higher than budgeted. This is called
having money for contingencies.
For an individual, that means keeping extra money on hand in
case of working fewer hours or receiving smaller commissions than planned, or
having an unplanned expense. For school districts, it means state aid might be
reduced mid-year (as happened last Spring).
The third reason for cash balances is to allow for planned
expenses in the future without borrowing. For individuals, this might mean
saving for a vacation or home improvement. For school districts, it means
building up funds for a new school bus, roof repair or textbook purchase.
Critics of school district balances have noted the total
amount at the start of the year on July 1 has increased significantly, from
about $1.16 billion in 2006 to $1.71 billion last year. However, as a
percentage of total school district expenditures, cash balances increased from
approximately 25 percent of expenditures prior to 30 percent during and
following the economic recession of 2008 through 2010, and has been declining
since 2011. (Cash balances and total expenditures for 2015 have not yet been
released by the state.)
School district balances accelerated at exactly the time
when districts faced delays in state aid payments, reductions in state funding
levels and general uncertainty over future funding. In fact, the Kansas Senate
passed a resolution specifically encouraging districts to build up reserves to
address the revenue when federal economic stimulus funding ended in 2011. That
is exactly what happened statewide.
The Legislature has recognized much of the money in district
cash balances cannot be used for regular operating purposes. In fact, school
districts have about 30 different “funds” established by the Legislature to
allow tracking of how school districts spend their money and make sure it is
spent for appropriate purposes.
Over 70 percent of cash balances in school district funds
are essentially restricted because they are raised from special mill levies,
federal funds or student fees, or are required for special education programs
or insurance reserves.
However, in recent years the Legislature has given districts
more flexibility in shifting money from special funds to general operations,
beginning with Senate Bill 111 in 2012. The largest is the contingency reserve
fund, but there are about a dozen other “operating” funds where the Legislature
has allowed more flexible use.
Like total cash balances compared to total expenditures, the
money in these flexible funds increased as a percentage of state and local
operating budgets in the late 2000s, but has started to decline.
July 1 cash balances in school district flexible funds were
about 6 percent of the combined general and supplemental general (or local
option budget) fund budgets in 2006 through 2008, rose to around 10 percent in
2011 and 2012, and dropped back to 9 percent last year.
By comparison, the state of Kansas is supposed to have an
ending balance of 7.5 percent in the State General Fund, although this
requirement is frequently not followed. The ending balance acts as a kind of
contingency reserve for the state, but in order to manage its own cash flow
needs, the state each year has to borrow from other state funds using what are
called “certificates of indebtedness.” However, these certificates must be
repaid by the end of the fiscal year.
The combination of ending balance plus certificates of
indebtedness has never been less than 12 percent of the state general fund
since 2006, which means the state’s cash flow and contingency funds are higher
as a percentage of budget than school district flexible funds for the same
The current projection for the state general fund is it will
end the current fiscal year with a balance of $67 million, or 1.1 percent -
assuming the Governor makes an additional $50 million in spending cuts. This
means if revenues are just 1.1 percent below estimates, the state will face a
revenue shortfall which could require cuts in spending, including school
district state aid. Last year, state aid was reduced by $50 million in the
middle of the year.
The choice local school boards face: whether their budget
plans should reduce cash balances to avoid spending cuts now, or hold on to
those balances in case the state makes additional reductions.