BILL ANALYSIS Ó
AB 2689
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Date of Hearing: May 4, 2016
ASSEMBLY COMMITTEE ON EDUCATION
Patrick O'Donnell, Chair
AB 2689
(Gray) - As Amended March 15, 2016
SUBJECT: School districts: annual budgets: reserve balance
SUMMARY: Establishes unspecified maximum school district
reserve levels to be applied in a fiscal year immediately after
a year in which a transfer is made into the Public School System
Stabilization Account (PSSSA). Specifically, this bill:
1)Provides that, in a fiscal year immediately after a fiscal
year in which a transfer is made into the PSSSA, 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:
a) For school districts with fewer than 400,000 units of
average daily attendance, the sum of the school district's
applicable minimum recommended reserve for economic
uncertainties adopted by the state board pursuant to
subdivision (a) of Section 33128, multiplied by an
unspecified amount.
b) For school districts with more than 400,000 units of
average daily attendance, the sum of the school district's
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applicable minimum recommended reserve for economic
uncertainties adopted by the state board pursuant to
subdivision (a) of Section 33128, multiplied by an
unspecified amount.
2)Repeals outdated provisions stipulating the conditions under
which the limitation on ending balances becomes operative.
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;
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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
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;
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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: This bill is keyed nonfiscal
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 having no limitation on the size
of reserves, some districts have accumulated very large
reserves, mounting to 50% or more of total expenditures.
Supporters of a cap 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
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purpose also served by the local reserves for economic
uncertainty.
Impact on the reserve for economic uncertainties. Many in the
education community have argued that the cap on reserves
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 for two reasons. First, the cap is imposed only when
General Fund revenue is sufficient to warrant a transfer to the
PSSSA. In other words, it is imposed only during a time when
the economy is healthy, not during economic downturns. Second,
the funds that are transferred to the PSSSA are designed to
maintain school funding during future economic downturns. This
reduces the need to have large local reserves that serve the
same purpose.
Not all reserves are subject to the cap. Opponents of the
reserve cap also argue that it prevents districts from setting
aside monies in an assigned reserve 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. However,
districts may use a committed reserve for this purpose, and
committed reserves are not subject to the cap. The primary
difference between a committed reserve and an assigned reserve
is that putting funds into a committed reserve requires a vote
of the district governing board, whereas putting funds into an
assigned reserve does not. Governing boards may also, if the
need arises, vote to apply funds in a committed reserve to a
different use. Some have argued that using a committed reserve
is preferable, because it sustains the authority of the
governing board and results in more public transparency over the
allocation of school district dollars.
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This bill changes the cap on reserves to an undesignated amount.
However, background information provided by the author's office
indicates that the author is not planning amendments.
Accordingly, it is not possible at this time to assess the
impact of the proposed change to the cap.
REGISTERED SUPPORT / OPPOSITION:
Support
None received
Opposition
None received
Analysis Prepared by:Rick Pratt / ED. / (916) 319-2087
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