Budget Reserves: Transparency, Proposition 2 Caps & The Rainy Day Fund

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Element One: Transparency Requirements

◦ Current law

Element Two: Reserve Caps

◦ Implemented only if Proposition 2 is approved by voters November 4

◦ If approved, “Trigger” events must then occur

Reserve Transparency & Reserve Caps – Two Elements

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SB 858 - Created new “transparency requirements” for School District reserves

◦ Budget adoption and all revisions must include “Review and Discussion” of reserves:

Minimum reserve for Economic Uncertainties (3% of expenditures for most districts)

Combined “Assigned” & “Unassigned” ending fund balances in excess of the minimum noted above

Statement of reasons for assigned & unassigned ending fund balances

◦ Provide for each year of the budget

Transparency Requirements

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Applicable funds: Fund 01, General Fund Fund 17, Special Reserve Fund (other than

capital outlay)

Effective with budgets adopted for the 2015-16 year

COE shall confirm District compliance

Transparency Requirements

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SB 858 also places a hard cap on reserves if Proposition 2 passes in November 2014

Would create “Public School System Stabilization Account” (Prop 98 Rainy Day Reserve)

Contributions to the reserve unlikely for years, and likely will occur infrequently – triggers are:◦ Capital gains taxes at 8% of state revenue (7 of last 16 years)◦ Prop 98 at Test 1 (3 of 26 years)◦ Prop 98 maintenance factor paid in full (could take 5-6 years)◦ Prop 98 not suspended (suspended 2x since 2004)

Reserve Cap

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If all of these occur, then a deposit is made to the state Prop 98 Rainy Day Fund

Cap on District reserves will then apply to the next fiscal year◦ Assigned & Unassigned Ending Fund Balance capped at 2x minimum

Economic Uncertainty Reserves (6% for most school districts)

Cap will apply each year after a contribution is made◦ No contribution? No cap on reserves

Cap will become operative December 15, 2014 if Prop 2 passes

Reserve Cap “Trigger”

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County Superintendent may waive the cap

Up to 2 consecutive years within a 3 year period, if:

◦ School District provides documentation of “extraordinary circumstances”, which may include: Multiyear infrastructure or technology projects

◦ School District has no other fiscal resources to fund the extraordinary circumstances

Reserve Cap Exemption

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Implement board policy and regulations regarding reserve practices◦ If policy in place, review in light of Prop 2

implications◦ Consider reasons why you need reserves◦ Identify and define purpose behind all reserve

dollars – never allow funds to “fall to undesignated and unassigned” category

◦ Also in preparation for SB 858 Transparency Requirements effective 2015-16

◦ Sample provided by CSBA (Gamut)

Response to Proposition 2

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Create “Committed” reserve in General Fund as a “Budget Stabilization Reserve”◦ Follow same logic that State used to create its

Rainy Day Fund Create a funding source to stabilize funding swings

◦ These funds are in a “Lockbox” Board resolution determines criteria of when funds

go in, and when they come out Can’t use on a discretionary basis Consult with your auditors

Opinions vary on appropriate use

Response to Proposition 2

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Reserve for implementation of Common Core State Standards◦ Technology, instructional materials◦ Staff development

Fund retiree benefit obligations◦ Transfer to Fund 20 = Special Reserve – can

recapture dollars if needed◦ Transfer to Fund 71 = Irrevocable Trust – can’t

get dollars back!

Response to Proposition 2

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Start spending reserves now◦ Spend the funds before they are capped

Can this be done efficiently and effectively? What if Prop 2 doesn’t pass?

Don’t budget reserves◦ Cap applies to budgets◦ Adopt and approve budgets that don’t reflect

reserves above the state required Economic Uncertainty reserve (3% for most districts) How does this square with Transparency Requirements? Will this budget be approved by COE?

Response to Proposition 2

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Wait and See◦ Implement Transparency Requirements

Required activity per SB 858◦ Wait for Nov 2 election results

If it passes, consider likelihood of Cap given likelihood of Trigger events It’s likely to be at least several years before caps are

implemented

Response to Proposition 2

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Reserve Transparency is now required by state law◦ How do incentives to avoid the cap square up with

transparency requirement? Sudden and hasty spending down of

reserves◦ Is this an effective way to spend millions of

education dollars across the state? LCAP will require more fiscal flexibility, not

less ◦ Cap is inconsistent with local control tenants of

LCAP era

Philosophical Considerations

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ADA Greater of:

Percentage Dollars

0-300 5% $64,000

301-1,000 4% $64,000

1,001 to 30,000 3% n/a

30,001 to 400,000 2% n/a

Over 400,000 1% n/a

Memo: State Required Reserves for 2014-15

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COE’s encourage reserves that exceed the minimum◦ Past recession is proof 3% is insufficient◦ 3% is only two weeks payroll◦ GFOA recommends two months operating

expenditures, or 17%◦ Rating agencies note average reserves have been

about 15% in recent years◦ Cash on hand is enhanced by adequate reserving

Memo: COE Reserve Guidance (per Common Message, Adopted Budgets 2014-15)

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Other considerations for reserve levels◦ External mandates

STRS, PERS rate increases◦ Protection against declining enrollment◦ Volatility of property taxes for basic aid districts◦ Volatility of Basic Aid Supplemental funding◦ Expiring parcel taxes◦ Volatile state revenues◦ Unanticipated expenditures

Memo: COE Reserve Guidance

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The restricted fund balance category includes amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation.

The committed fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the government’s highest level of decision-making authority. Amounts in the assigned fund balance classification are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed. Unassigned fund balance is the residual classification for the government’s general fund and includes all spendable amounts not contained in the other classifications. Governments are required to disclose information about the processes through which constraints are imposed on amounts in the committed and assigned classifications.

Memo: GASB 54 and Fund Balance Reporting