BILL ANALYSIS Ó
AB 531
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Date of Hearing: April 29, 2015
ASSEMBLY COMMITTEE ON EDUCATION
Patrick O'Donnell, Chair
AB 531
(O'Donnell) - As Amended April 21, 2015
SUBJECT: School finance: budget calculations
SUMMARY: Provides that the limitation on the amount that school
districts may set aside in an assigned or unassigned ending fund
balance in specified years does not apply to monies in a
committed reserve. Specifically, this bill:
1)Provides that the limitation on the amount that school
districts may set aside in an assigned or unassigned ending
fund balance in the fiscal year immediately after a fiscal
year in which a transfer is made into the Public School system
Stabilization Account does not apply to monies in a committed
reserve.
2)Defines "committed reserve" to mean monies set aside for a
designated future purpose by a majority vote of the district
governing board.
3)Clarifies that district governing boards retain the ability to
redirect monies in a committed reserve to an alternative
purpose in any subsequent year.
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EXISTING LAW:
1)Establishes the Public School System Stabilization Account
(PSSSA) at the state level to be funded by a transfer of
capital gains-related tax revenues in excess of 8 percent of
general fund revenues.
2)Specifies that funds will be appropriated from the PSSSA to
schools and community colleges when state support for K-14
education exceeds the allocation of general fund revenues,
allocated property taxes and other available resources.
3)Requires school districts to maintain the following minimum
reserves for economic uncertainties, as a percentage of total
expenditures:
a) The greater of 5% or $64,000 for districts with 0 to 300
average daily attendance (ADA);
b) The greater of 4% or $64,000 for districts with 301 to
1,000 ADA;
c) 3% for districts with 1,001 to 30,000 ADA;
d) 2% for districts with 30,001 to 400,000 ADA; and
e) 1% for districts with 400,001 and over ADA.
4)Limits the amount that districts may set aside in an assigned
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or unassigned reserve in the fiscal year following the fiscal
year in which a transfer is made to the PSSA as follows:
a) For school districts with 400,000 or fewer ADA, the
minimum reserve multiplied by 2; and
b) For school districts with more than 400,000 ADA, the
minimum reserve multiplied by 3.
5)Authorizes a county superintendent of schools to grant a
school district under its jurisdiction an exemption from the
reserve cap for up to two consecutive fiscal years within a
three-year period if the school district provides
documentation indicating that extraordinary fiscal
circumstances, including, but not limited to, multiyear
infrastructure or technology projects, substantiate the need
for a combined assigned or unassigned ending fund balance that
is in excess of the minimum reserve.
6)Requires a school district, as a condition of receiving an
exemption to do all of the following:
a) Provide a statement that substantiates the need for an
assigned and unassigned ending fund balance that is in
excess of the minimum;
b) Identify the funding amounts in its budget that are
associated with the extraordinary fiscal circumstances; and
c) Provide documentation that no other fiscal resources are
available to fund the extraordinary fiscal circumstances.
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FISCAL EFFECT: Unknown
COMMENTS: School districts use assigned and unassigned reserves
to set funds aside for potential future use. An unassigned
reserve is typically the reserve for economic uncertainty, and
its purpose is to provide a cushion against unforeseen
shortfalls in revenue or increases in expenditures. An assigned
reserve contains funds that may be set aside by the district
superintendent and designated for a specific future use, such as
a large, one-time instructional materials acquisition.
Existing law requires districts to maintain a minimum reserve,
specified as a percentage of total expenditures, but does not
impose a cap on reserves except in the year following a transfer
to the PSSSA, also referred to as the Proposition 98 reserve
account. As a consequence of no cap, some districts have
accumulated very large reserves, mounting to 50% or more of
total expenditures. Some have noted that this violates a basic
tenet of public finance, which is that today's tax revenues
should be used to support programs and services for today's
taxpayers. The cap on reserves in specified years was enacted
in part to prevent the accumulation of unreasonably large
reserves and in part to recognize that the transfer of funds
into the state-level Proposition 98 reserve reduces the need for
large local reserves. This is because the state-level reserve
will be used to help maintain K-14 funding during economic
downturns, a purpose previously served by the local reserves for
economic uncertainty.
Concerns have been raised about the cap on reserves. Many in
the education community have raised concerns about the cap on
school district budget reserves. The concerns focus on two
primary issues. First, opponents of the cap argue that it
prevents districts from setting aside prudent reserves to guard
against an economic downturn and a reduction in state funding
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for schools. The minimum requirement to guard against such an
event is 3% of total expenditures for most districts. The cap
is twice that amount, or 6% of total expenditures for most
districts. Supporters of the cap argue that 6% is sufficient
protection, because (1) it is applied only in a year following a
year in which funds are deposited in the state Proposition 98
reserve, and (2) the state reserve serves the same purpose as
the local reserve-to provide a cushion against a reduction of
revenue to schools. Hence, the state reserve reduces the burden
placed on local reserves for this purpose.
Opponents of the reserve cap also argue that it prevents
districts from setting aside monies for a specific purpose in
future years. For example, districts may need to accumulate
monies over two or more years to purchase technology,
instructional materials, or deferred maintenance. Districts may
use an assigned reserve for this purpose, however assigned
reserves are also subject to the cap.
This bill addresses this issue by specifying that committed
reserves are not subject to the cap and defines committed
reserves as monies set aside for a future purpose by a majority
vote of the district governing board. Using committed reserves
instead of assigned reserves for this purpose has two
advantages:
It strengthens the role of the governing board. Unlike
assigned reserves, it takes a vote of the governing board
to set aside monies in a committed reserve. This ensures
that the elected board members have the primary authority
to earmark funds for specific future purposes.
It increases transparency. A board's action to put
funds into a committed reserve occurs during a public
meeting of the board. This provides the public with the
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opportunity to review and comment on the proposed future
use of those funds.
Flexibility is not lost. Funds in a committed reserve
remain flexible. If the governing board decides to
redirect funds in a committed reserve to an alternative
purpose, it can do so with a majority vote, which provides
the same governing board control and transparency as the
original vote to put the funds in a committed reserve.
REGISTERED SUPPORT / OPPOSITION:
Support
None received
Opposition
None received
Analysis Prepared by:Rick Pratt / ED. / (916) 319-2087
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