BILL ANALYSIS                                                                                                                                                                                                    

                                                                    AB 1048

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          Date of Hearing:  May 13, 2015

                           ASSEMBLY COMMITTEE ON EDUCATION

                              Patrick O'Donnell, Chair

          AB 1048  
          (Baker) - As Introduced February 26, 2015

          SUBJECT:  School finance:  school districts:  annual budgets:   
          reserve balance

          SUMMARY:  Repeals the statutory cap on school district budget  
          reserves and related statutory provisions that are applied in a  
          fiscal year following the fiscal year in which funds are  
          transferred into the Public School System Stabilization Account  

          EXISTING LAW:  

          1)Establishes the 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  


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            reserves for economic uncertainties, as a percentage of total  

             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  
            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  


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            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.

          FISCAL EFFECT:  Unknown

          COMMENTS:  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  


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          large local reserves.  This is because the state-level reserve  
          will be used to help maintain K-14 funding during economic  
          downturns, a purpose also served by the local reserves for  
          economic uncertainty.

          LAO report.  The Legislative Analyst's Office (LAO) issued an  
          "Analysis of School District Reserves" in January 2015.  The  
          report notes that there are five components to a district's  
          General Fund reserve:

                Components of a School District's General Fund Reserve


          |   Component    |     Description      |         Example         |
          |                |                      |                         |
          |                |                      |                         |
          |Non-spendable   |Amount that is        |A donation toward a      |
          |monies          |unavailable for       |permanent endowment that |
          |                |spending              |does not allow the       |
          |                |                      |principal to be spent.   |
          |                |                      |                         |
          |                |                      |                         |
          |Restricted      |Amount that can       |An unspent state grant   |
          |monies          |legally be spent only |for serving students     |
          |                |for specific purposes |with disabilities        |
          |                |                      |                         |
          |                |                      |                         |
          |Committed       |Amount that has been  |Funds set aside by the   |
          |monies          |designated for        |school board to paint a  |
          |                |specific future uses  |building next year       |


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          |                |by the school board   |                         |
          |                |                      |                         |
          |                |                      |                         |
          |Assigned monies |Amount that can has   |Funds set aside by the   |
          |                |been designated for   |superintendent to        |
          |                |specific future uses  |replace computers next   |
          |                |by a district         |year.                    |
          |                |employee              |                         |
          |                |                      |                         |
          |                |                      |                         |
          |Unassigned      |Amount that has not   |Funds not designated for |
          |monies          |been designated for   |any specific future use  |
          |                |any specific use      |                         |
          |                |                      |                         |
          |                |                      |                         |

          The LAO reports that, statewide, about $9.8 billion was set  
          aside in these five components in 2013-14.  About half of this,  
          or about $4.8 billion (roughly $765 per student), was in  
          unassigned reserves.  Committed reserves, which require an  
          action of the governing board and are not subject to the cap,  
          accounted for about $300,000, while assigned reserves, which do  
          not require governing board action, accounted for $2.5  
          billion-more than 8 times the amount in committed reserves.  The  
          cap applies only to assigned and unassigned reserves.  Assigned  
          and unassigned reserves equaled about 15% of total expenditures,  
          on average.

          The following figure from the LAO report shows that the amounts  
          in assigned and unassigned reserves increased from 2003-04 to  
          2010-11, but have begun to decline since 2010-11.


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          The LAO suggests several reasons for this increase in reserve  
          levels, including:

                 Several large infusions of one-time state and federal  
               funding between 2005-06 and 2013-14;
                 Potential funding reductions that did not materialize;

                 Pessimism regarding the state economy and state budget;  

                 Concerns regarding cash and payment deferrals.

          The LAO report states, "As a result of [these] one-time state  
          and federal actions, as well as local pessimism and caution,  
          many districts have built higher reserves than they have  
          traditionally maintained.  In a more stable budget environment,  
          however, districts seem less likely to view reserves of this  
          level as essential."


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          The budget cap is not currently in effect.  The school district  
          budget cap has not been imposed and will not be imposed until  
          after the state transfers money into the PSSSA, otherwise known  
          as the Proposition 98 reserve account.  The purpose of the  
          Proposition 98 reserve is to protect schools against reductions  
          or slow-downs in state General Fund revenue, which would  
          otherwise result in reductions in school funding.  This is the  
          same primary purpose as local unassigned reserves.  The  
          availability of a state level hedge against economic downturns  
          reduces the need for a local reserve that serves the same  

          Options to respond to the cap.  Although opponents of the cap  
          have argued that it would "force" districts to slash reserves  
          and increase risk, there are multiple options available to  
          districts to avoid this outcome.  First, districts can obtain an  
          exemption from the county superintendent of schools.  The  
          exemption is available for two consecutive years within a three  
          year period.  To obtain an exemption, districts need to document  
          that its financial circumstances justify a higher level of  
          assigned and unassigned reserves.

          Second, districts could assign more monies to their committed  
          reserves.  Related legislation, AB 531 (O'Donnell), which passed  
          the Assembly Education Committee on a 6-0 vote, clarifies that  
          committed reserves are exempt from the cap.  Using a committed  
          reserve has other benefits:


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                 A committed reserve requires an action of the governing  
               board, enhancing the board's fiduciary role.
                 Because it requires board action, using a committed  
               reserve increases transparency, enabling the public to see  
               how much money is being reserved and for what purpose(s).

                 Using the committed reserve does not result in any loss  
               of flexibility, because the governing board can vote to  
               redirect funds in a committed reserve to an alternative  
               purpose at any time.

          Third, as noted by the LAO, districts could shift monies from  
          the General Fund to nearly any of the other 29 accounts they  
          maintain.  Funds could be transferred back to the General Fund  
          in future years.

          Related legislation.  AB 531 (O'Donnell) clarifies that funds  
          set aside in a committed reserve are not subject to the cap.  AB  
          1318 (Gray) changes the cap to unspecified levels.

          Arguments in support.  Supporters argue that the cap is in  
          "direct conflict" with the principle of local control that  
          underlies the local control funding formula.  In addition, the  
          cap may have a negative impact on a school district's credit  
          rating and would undermine a district's ability to save funds  


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          "for such things as school construction, school repair,  
          self-insurance, post-employment benefits for employees,  
          investments in education programs including textbooks and  
          technology, and larger purchases such as school buses."

          Arguments in opposition.  Opponents argue that large reserves  
          were not used to compensate for revenue losses during the recent  
          economic downturn.  In fact, reserves increased at the same time  
          districts were making a "significant number of program cuts that  
          impacted students, such as larger class sizes, and shortening  
          the school year, which equated to less instructional time for  
          our students."  In addition, opponents argue that the funding of  
          a state-level Proposition 98 reserve will reduce the need for  
          local reserves to provide a buffer against potential revenue  




          Association of California School Administrators

          Cal Tax

          California Association of School Business Officials


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          California School Boards Association

          California State PTA

          Children Now

          Educate Our State

          Education Trust-West


          Kern County Superintendent of Schools

          Kings Canyon Unified School District

          Public Advocates

          San Francisco Unified School District

          San Joaquin Office of Education

          San Ramon Unified School District

          School Employers Association of California


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          Small School Districts' Association

          Numerous individuals


          American Federation of State, County and Municipal Employees,  

          California Labor Federation

          California School Employees Association

          California Teachers Association 

          Labor Coalition

          Analysis Prepared by:Rick Pratt / ED. / (916) 319-2087


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