As part of the proposed creation of a constitutionally mandated state "rainy day" fund that will be on the November ballot, Governor Brown and the legislature made a last minute inclusion of budget language that would force school districts to spend down their reserves and cap the amount that most districts could hold in reserve to approximately 6% starting with the 2015-16 budget year. At a time when the Governor is touting the need for fiscal responsibility and the importance of local control, such a restrictive cap weakens both at the local level.
Financially Stressing Districts: The Double Whammy
As I wrote about several weeks ago, Governor Brown's new budget plan more than doubles (from 8.25% of payroll to 19.1%) school districts' share of teachers' pensions in the K-12 system. Using the Menlo Park City School District (MPCSD) as an example, this will mean that the district will need to find another $2.7 million annually (for an annual total of $4.7 million) to contribute to the California State Teachers' Retirement System, or CalSTRS. Where will that money come from? According to School Board President Joan Lambert, the extra pension funding will need to come out of the district's emergency Economic Uncertainty Reserve (our local example of a "rainy day" fund), which is fortunately at a healthy level due to conservative planning by the district.
Unfortunately, the size of that reserve will drop dramatically under the caps included as part of "rainy day" fund ballot measure. It's a Double Whammy: districts have to double their CalSTRS contribution at the same time they have to pay down the reserve many of them would need to use to cover the increase.
The MPCSD has not yet closed the books for the 2013-14 fiscal year but expects to have approximately 17% set aside in its General Fund Economic Uncertainty Reserve according to the MPCSD's Chief Business Official, Diane White. Current Board Policy maintains that 20% is the targeted amount, requires no less than 15% be maintained in any budget year, and requires not less than 10% in multi-year projections. At 17%, the district's $6.7M reserve can cover the additional $2.7M needed to pay into CalSTRS. At 6%, the financial picture gets a lot more stressful.
For basic aid districts (like MPCSD) that do not receive state funding but are funded through local property taxes in two installments each year, healthy reserves are important for cash flow. Districts need to have reserves to make payroll and continue services between receiving installments. Here again, greatly reducing the reserves would put even a financially healthy district in a less stable financial position. In fact, the California School Board Association (CSBA) warned it could limit districts to only two weeks of payroll and three weeks of cash flow on hand.
The move could also have a profound impact to credit ratingsand therefore on districts' ability to obtain bonds. According to a statement put out by Fitch Ratings back in June, "Capping reserves could have a negative impact on school district credit ratings, therefore a number of California school districts could see their credit quality weaken if a fund balance cap included in the fiscal 2015 budget becomes effective," Fitch Ratings wrote. In the past, MPCSD's strong bond rating has helped return proceeds from bond refinancing back to property owners and has made it possible for older homeowners to get exemptions to parcel taxes (which in turn makes it more likely for parcel taxes to get passed in the first place).
The school districts have been sounding alarm bells in Sacramento. In a letter dated June 19th 2014 to Governor Brown, the CSBA argued that a requirement to spend down reserves "to the tune of billions of dollars runs completely counter to good budgeting, fiscal prudence, and the ability for locally elected boards of education to plan ahead for economic surprises and future expenses". Unfortunately, their concerns seem to have fallen on deaf ears as they were even cut out of the process.
A Closed Door Process
In a strongly worded editorial, Vernon Billy, Executive Director of the CSBA, and Wes Smith, Executive Director of the California school administrators, criticized the process by which the language mandating the caps made its way into the measure in the first place, citing a lack of transparency and openness. "This language was not proposed in the governor's January budget or the May Revision, and has not been discussed in any public hearing in either legislative house," they charge. "The proposed language represents a permanent, significant fiscal and policy shift in education finance which should be publicly vetted before the language is voted on by the Legislature."
Why The Cap?
For their part, Brown administration officials and proponents of the cap say it is necessary to ensure districts aren't stockpiling money during years when the state could otherwise be setting aside money into the "rainy day" fund. (It should be pointed out that cap exemptions could be made for districts undertaking special projects.) The California Teachers Association (CTA) is also behind the measure. An editorial blog on the CTA'S website states:
"We support this because taxpayer dollars need to be spent in our classrooms and on our children not sitting in bank accounts. Parents and communities need to know how much money local school districts are holding back and not spending on our students. Asking for school district transparency on school district reserves is all about local control and accountability for parents and communities."
The California Teachers Association was one of the many public unions that opposed then-Governor Schwarzenegger's plan to establish the rainy day fund in 2011, arguing the it should be pushed out to 2014 in order to give school districts time to recover funding that was cut during the recession. Despite the fact that the stock market has roared back, a look at headlines from school districts throughout the state would call into question the idea that districts have recovered.
While the issue of making sure that district fund balances are clear (what is nonspendable? What is restricted? What has been committed? etc.) and accessible is an important one, there is a major difference between that and constitutionally mandating a ceiling on reserve levels. Furthermore, critical steps have already been taken by the Governmental Accounting Standards Board (GASB) on the issue of transparency. In 2009, the GASB issued Statement 54, which requires districts to provide clearer fund balance classifications. According to MPCSD Superintendent Maurice Ghysels, most school districts, including MPCSD, have already followed up on that clarification some time ago. For those districts who are still a problem, other remedies could and should be directly applied to the violators.
A Move Awash In Contradictions
Setting aside the more risky financial position a cap on reserves would put local districts in, Governor Brown's inclusion of the cap on local school districts "rainy day" funds in order to fund a central one is a move awash in contradictions. In his January 2014 State of the State speech, the governor extolled the virtues of local control when it came to school districts. Citing a specific example of the newly enacted Local Control Formula for school funding, Brown pointed out "Instead of prescriptive commands issued from headquarters here in Sacramento, more general goals have been established for each local school to attain, each in its own way. This puts the responsibility where it has to be: In the classroom and at the local district." Yet, under the cap, the opposite would take place; districts would have less control over planning for future expenses, growth, and for planning for financial setbacks (like MPCSD's $3.5M loss that occurred six years ago with the collapse of Lehman Brothers.)
A statewide "rainy day" fund sounds like a good ideaan example of prudent financial restraint. But the devil is always in the details, and in this case, one of them could wreak havoc. A financial house cannot be in order when the very foundationlocal districts and municipalities-- are having their ability to be financially independent undercut by the state at the very time the state is shifting a greater burden for pension support down to them. That's not getting your house in order. That's building a house of cards.