BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Senator Carol Liu, Chair
2015 - 2016 Regular
Bill No: AB 531
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|Author: |O'Donnell |
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|Version: |April 21, 2015 Hearing |
| |Date: June 17, 2015 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Lenin Del Castillo |
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Subject: School finance: budget calculations
SUMMARY
This bill 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 Stabilization Account
does not apply to monies in a committed fund balance.
BACKGROUND
As part of the 2014-15 Budget Act, the state enacted a new
requirement to cap school district reserves in years following a
deposit in the state school reserve established by Proposition
2. The legislation also created a separate requirement for
districts to disclose certain information about their reserves
each year. Specifically, existing law requires that in a fiscal
year immediately after a fiscal year in which a transfer is made
into the Public School System Stabilization Account, a school
district budget that is adopted or revised shall not contain a
combined assigned or unassigned ending fund balance that is in
excess of the following:
1)For school districts with fewer than 400,000 units of average
daily attendance (ADA), the sum of the school district's
applicable minimum recommended reserve for economic
uncertainties adopted by the State Board of Education, as
specified, multiplied by two.
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2)For school districts with more than 400,000 units of ADA, the
sum of the school district's applicable minimum recommended
reserve for economic uncertainties adopted by the State Board
of Education, as specified, multiplied by three.
Existing law authorizes a county superintendent of schools to
grant a school district under its jurisdiction an exemption from
the 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, multi-year infrastructure or technology
projects, substantiate the need for a combined assigned or
unassigned ending fund balance that is in excess of the minimum
recommended reserve for economic uncertainties. As a condition
of receiving an exemption, a school district shall do all of the
following:
1)Provide a statement that substantiates the need for an
assigned and unassigned ending fund balance that is in excess
of the minimum recommended reserve for economic uncertainties.
2)Identify the funding amounts in the budget adopted by the
school district that are associated with the extraordinary
fiscal circumstances.
3)Provide documentation that no other fiscal resources are
available to fund the extraordinary fiscal circumstances.
(Education Code § 42127.01)
ANALYSIS
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
fund balance, as defined in the California School Accounting
Manual.
2)Provides that school district governing boards retain the
ability to redirect monies in a committed fund balance to an
AB 531 (O'Donnell) Page 3
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alternative purpose in any subsequent year.
STAFF COMMENTS
1)Need for the bill. According to the author's office, some in the
education community have argued that the reserve cap imposes a
burden on school districts, in large part because it prevents
them from setting aside monies in a reserve for a future
specified purpose. The author's office indicates that the
bill is intended to address this issue by specifying that
monies in a committed fund balance are exempt from the cap.
Further, using committed fund balances instead of assigned
reserves for this purpose has several advantages, including an
increase in transparency because a board's action to put funds
into a committed fund balance occurs during a public meeting
of the board.
2)Concerns on the reserve cap. Opponents of the cap have argued
that it prevents districts from setting aside prudent reserves
to guard against an economic downturn and a reduction in state
funding 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.
However, it does not appear that the bill is intended to
address any of these issues. Rather, it proposes clarifying
language that could be helpful for school districts to the
extent there is confusion or misunderstanding regarding which
fund balances are subject to or exempt from the cap. This
could help them to plan accordingly.
3)When will the reserve cap be triggered? The state must make
deposits into the Rainy Day Fund when certain conditions are
met to trigger the reserve cap for districts. Among these
conditions, Test 1 must be the applicable Proposition 98 test
level and the state must have paid off all maintenance factor
created before 2014-15. The Legislative Analyst Office (LAO)
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indicated in its 2015-16 Proposition 98 Education Analysis in
February 2015 that the interaction between these two
requirements makes deposits unlikely in the near term.
Additionally, the 2015-16 Governor's Budget Summary indicated
that "the Administration does not anticipate fiscal conditions
requiring a Proposition 98 Rainy Day Fund deposit and the
related potential for caps on local reserves at any point in
the budget forecast period (through 2018-19). Nonetheless,
the Administration appreciates the concerns expressed by
stakeholders regarding potential caps on school district
reserves and will engage in a dialogue with these groups in
the coming months to protect the financial security and health
of local school districts." While there have been several
meetings with stakeholders, the Administration has yet to
issue any related proposal.
4)LAO's assessment and recommendations on the cap. The LAO
released a report, "Analysis of School District Reserves" in
January 2015. In the report, the Legislative Analyst's Office
(LAO) provided its assessment and recommendations on the
reserve caps. Specifically, the LAO indicated, "to the extent
districts begin shifting monies to avoid the caps, we are
concerned that local budgeting practices could become more
confusing. To the extent districts begin spending down their
reserves, we are concerned that they would incur a number of
risks." The risks include difficulty for school districts to
maintain programs in tight fiscal times, difficulty addressing
unexpected costs, greater fiscal distress, and higher
borrowing costs. The LAO also indicated concern that the caps
become operative following any deposit into the state school
reserve, even if the size of that deposit is smaller than the
triggered reduction in local reserves. To avoid all of these
risks, the LAO has recommended the Legislature repeal the
reserve caps.
5)Related legislation.
SB 774 (Fuller) repeals the existing statutory cap on the
amount of fiscal reserves that a school district is allowed to
maintain. This bill is pending before the Senate Education
Committee.
AB 1048 (Baker), similar to SB 774, proposes to repeal the
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statutory cap on the amount of fiscal reserves that a school
district would be allowed to maintain under specified
conditions. This bill failed passage in the Assembly
Education Committee on May 13, 2015.
AB 1318 (Gray) proposes to modify the calculation of the
statutory cap on fiscal reserves. This bill is pending before
the Assembly Education Committee.
SUPPORT
Association of California School Administrators
OPPOSITION
None received.
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