Wednesday, July 29, 2015

Are school district ending balances too high?

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 revenues.

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 come in.

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 purpose.

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.

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