BILL ANALYSIS Ó
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
(PSSSA).
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
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
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;
and
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
purpose.
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
reductions.
REGISTERED SUPPORT / OPPOSITION:
Support
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
EdVoice
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
Opposition
American Federation of State, County and Municipal Employees,
AFL-CIO
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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