BILL ANALYSIS Ó
AB 1318
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Date of Hearing: May 13, 2015
ASSEMBLY COMMITTEE ON EDUCATION
Patrick O'Donnell, Chair
AB 1318
(Gray) - As Amended May 6, 2015
SUBJECT: School finance: school districts: annual budgets:
reserve balance.
SUMMARY: Makes various changes to existing law regarding school
district assigned and unassigned ending fund balances.
Specifically, this bill:
1)Specifies that the requirement to disclose, at a public
hearing, the assigned and unassigned fund balance and the
reasons for exceeding the minimum recommended balance takes
effect when the assigned and unassigned ending fund balance in
the General fund and Special Reserve Fund for Other than
Capital Outlay Projects exceed the recommended minimum.
2)Requires the public disclosures to include a description of
the purposes of the amounts in the assigned and unassigned
ending fund balances in each fund.
3)Requires each school district governing board to adopt a
policy setting the amounts of assigned and unassigned balances
the governing board expects to be necessary to address
economic uncertainties, funding volatility, cash flow, and
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savings for expenditures.
4)Deletes the requirement to make these disclosures when a
budget is revised.
5)Specifies that each county superintendent of schools, when
conducting his or her review of school district budgets, to
determine whether the adopted budget includes a combined
assigned and unassigned ending fund balance in the district's
general fund and special reserve fund or other than capital
outlay projects.
6)Changes the cap on assigned and unassigned reserves that takes
effect in specified years from two times the minimum reserve
for districts with fewer than 400,000 average daily attendance
(ADA) and three times the minimum for districts with more than
400,000 ADA to unspecified amounts.
7)Makes other nonsubstantive changes.
EXISTING LAW:
1)Requires, beginning in 2015-16, the governing board of a
school district that proposes to adopt a budget that includes
a combined assigned and unassigned ending fund balance in
excess of the minimum recommended reserve for economic
uncertainties adopted by the State Board of Education (SBE)
to provide the following for review and discussion at a public
hearing:
a) The minimum recommended reserve for economic
uncertainties for each fiscal year identified in the
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budget;
b) The combined assigned and unassigned ending fund
balances that are in excess of the minimum recommended
reserve for economic uncertainties for each fiscal year
identified in the budget; and
c) A statement of the reasons that substantiates the need
for an assigned and unassigned ending fund balance that is
in excess of the minimum recommended reserve.
2)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.
3)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.
4)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;
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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.
5)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.
6)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.
7)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
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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: 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
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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
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.
Unintended consequence? Existing law requires districts to
disclose, at a public hearing, the amount of their reserves and
the reasons for them when the adopted and revised budget
contains reserves in excess of the recommended minimum. In the
absence of specification, existing law has been interpreted to
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refer to General fund balances. This bill specifies the General
fund and the Special Reserve Fund for Other than Capital Outlay
Projects. Adding an additional fund subjects more dollars to
the reserves and increases the likelihood that districts will
exceed the minimum, thus triggering the disclosure requirements.
This may also increase the likelihood of districts exceeding
the reserve cap in years when the cap is in effect. Put another
way, it could be more difficult for districts to stay within the
cap. The author's office has not provided the committee with
any information regarding the purpose of this change.
Unspecified changes. This bill changes the cap on budget
reserves to unspecified amounts. The author's office has not
indicated what the new cap might be.
Related legislation. AB 1048 (Baker), which is pending in the
Assembly Education Committee, repeals the cap on budget
reserves. AB 531 (O'Donnell), which is pending in the Assembly
Appropriations Committee, specifies that 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. A committed reserve serves the same
purpose as an assigned reserve, but, unlike an assigned reserve,
requires a vote of the governing board.
REGISTERED SUPPORT / OPPOSITION:
Support
Ceres Unified School District
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Yosemite Community College District
Opposition
None received
Analysis Prepared by:Rick Pratt / ED. / (916) 319-2087