edCored: Explaining the operating fund balance
This blog post was written by Janet Suppes, a budget analyst who lives in the Bellevue School District, for our edCored series on education funding. If you want to be notified when new content is published in this month-long series, please subscribe to the LEV Blog’s RSS feed or once-a-day email digest.
Most people seem to pretty easily grasp the concepts of school revenues and expenses, even the seemingly arcane walls between one fund and another. It may not make sense that bond money can’t be used to staff the classroom, but those are the rules set up by law, so no reason to argue about the rationale. But after the discussion of this is done, and the discussion turns to the fund balance? Eyes begin to glaze over. People just assume that money comes in and goes out in equal portions, and that’s the end of the story.
But it isn’t. Schools have what is essentially a savings account: the operating fund balance. It’s what is left over after expenses are paid. If the balance drops below 2% of prior year expenses, the state regulators will start looking to see if there is a problem and if there is a danger of insolvency. A district has to have a contingency fund, just like any of us should do. One district in our state is now going through that process; it isn’t a theoretical.
The question is: how big should that fund balance be?
To answer that, it is important to understand what is in the fund balance. It isn’t just cash in the bank, ready to be spent. Some of it is non-cash, like inventory waiting to be put into service. Some of it has been purposely set aside for legal obligations, such as insurance payments. Some districts have chosen to put money in the bank in case the state does what it did this year, which was ask for money to fund public employee pensions for past years. The Bellevue School District has chosen to bank those funds in the last few years, rather than let that money go into that year’s expenses. Now that the state wants to collect it, it is there, and cuts are not required from the current year’s budget to meet the obligation.
Once those amounts are accounted for, called restricted and designated funds, the remaining money is what the district has for unseen events. The government board that oversees school districts has asked each district to establish a board policy for what this amount should be. Most districts are setting that amount at 5% of the previous year’s general fund expenses, which is the sum total of what it took to run the district to operate schools. That money is held aside, and not available for current year expenses. It is only used if there is an emergency (the roof blows off a building), or other unforeseen event that has a major financial impact on the district.
But that level may not be high enough for ratings companies, such as Moody’s, thanks to our elected officials in Olympia. Last year, the state Legislature demonstrated that they could reach out and take district reserves, by making mid-year cuts. The teachers were already hired for K-4 class size reductions, so when that income disappeared, districts were forced to pay those teachers with money from their reserves. It is possible that the reserve should be closer to 10%, if the state is going to make this a regular practice. Otherwise they could be faced with having their credit rating reduced, and their borrowing costs increased.
I would hope that districts and unions keep this in mind as they negotiate contracts. That money isn’t there to fund ongoing expenses, such as pay increases or hiring. It is there for the long term financial security of the school district.
At the end of August, our school board approved and the teachers ratified a new two-year contract. The 1.9% salary reduction mandated by our state legislature was not passed down to our teachers. Kent School District, like many districts, pulled the money from somewhere else.