BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Senator Carol Liu, Chair
2015 - 2016 Regular
Bill No: SB 774
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|Author: |Fuller |
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|Version: |February 27, 2015 Hearing Date: |
| | April 29, 2015 |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Lenin Del Castillo |
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Subject: School finance: school districts: annual budgets:
reserve balance
NOTE: This bill has been referred to the Committees on
Education and Rules. A "do ????..pass" motion should include
referral to the Committee on Rules.
SUMMARY
This bill repeals the existing statutory cap on the amount of
fiscal reserves that a school district is allowed to maintain.
BACKGROUND
As part of the 2014-15 Budget Act, the state enacted a new law
to cap school district reserves in years following a deposit in
the state school reserve recently established by Proposition 2.
Additionally, the legislation 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
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Education, as specified, multiplied by two.
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 repeals the statutory cap on the amount of fiscal
reserves that a school district would be allowed to maintain
under specified conditions and also repeals the authority for a
county superintendent of school to grant a school district
within its jurisdiction an exemption from this requirement.
STAFF COMMENTS
1. Need for the bill. According to the author's office, "the
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2014 statutory requirement that sets a maximum amount of
fiscal reserves school districts are allowed to maintain is
counter-intuitive to sound budget principles. Districts of
all sizes, levels of wealth, student and community make up
have incredibly different needs that cannot be addressed by
an arbitrary one-size-fits-all cap that is tied to a
contribution of any size, even $1, to the state's
Proposition 98 rainy day fund. The current cap is fraught
with problems for school districts. Those include:
A. The reserve cap applies to assigned and
unassigned ending balances, which includes funds being
saved by school districts 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.
B. Limiting assigned and unassigned ending balances
to two or three times the minimum reserve for economic
uncertainty leaves districts exposed to the next
recession and eventual downturn in Proposition 98
funding. During the Great Recession, school districts
used their reserves to weather mid-year cuts, zero
cost of living adjustments, growing deferrals of state
payments, and to avert greater employee layoffs than
actually occurred.
C. Having the cap on the books, whether or not the
cap is ever triggered, is having an immediate impact
on credit ratings by the nation's most notable rating
agencies. Standard and Poor's and Fitch and Moody's
have reported the cap as credit negative. It makes no
sense for taxpayers to have to pay higher interest on
school district debt, which is perhaps one of the most
secure debt instruments, because of the presence of
the reserve cap.
D. Small school districts and those districts that
are funded with high percentages of property taxes
will be even more exposed to the uncertainties of the
day-today surprises that they deal with constantly,
such as: managing cash flow based on receiving
property tax payments only twice a year, adjusting to
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the ebb and flow of student enrollments, or enrollment
of one or more high cost special education students.
These are just a few examples of issues that stress
district finances and the ability to stay solvent.
E. Triggering the reserve cap would leave school
districts with only a few days' worth of cash flow to
be able to manage payroll and other ongoing expenses."
Additionally, the author's office indicates that reserve
levels are determined by governing boards to meet local
priorities and allow school districts to save for potential
future expected and unexpected expenditures. These include
economic downturns. Funds for crucial services such as
classroom materials, technology, major
textbook/instructional materials, school construction
projects, deferred maintenance, etc. require successful and
ongoing cash flow management and disciplined planning.
2. 2014-15 Budget Act. The provisions that the bill proposes
to repeal were introduced during negotiations with the
Administration shortly before the adoption of the 2014-15
budget and that left a relatively short amount of time for
the Legislature to review them. Proponents of the bill
have expressed concern that the deliberations were
insufficient and left many issues that need to be
addressed, such as the need for district reserves, how
reserves have fluctuated over time, how they vary from
district to district, and how the cap will affect district
finances. Notwithstanding concerns over the process,
proponents of the bill also indicate that healthy reserves
will protect students and teachers from budget cuts during
future economic downturns.
3. Is the bill necessary? To the extent that school districts
are concerned about the potential impact the cap would have
on their ability to maintain adequate reserve levels and
save for future expenditures as well as unanticipated
expenditures, existing law provides a mechanism for school
districts to be exempted from this requirement. A county
superintendent of schools is authorized to grant a school
district under its jurisdiction an exemption if a school
district is able to provide documentation that demonstrates
extraordinary fiscal circumstances.
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4. Premature? 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 and conversations continue, the
Administration has yet to issue any related proposal and
its next opportunity to take budgetary action will be on
May 14th as part of the May Revision for 2015-16 Governor's
Budget. As such, would be prudent to wait until after the
May Revision is released to see if the Administration
includes a proposal to address this issue?
Additionally, the state must make deposits into the Rainy
Day Fund when certain conditions are met to trigger the 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) 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.
5. LAO's assessment and recommendations. The LAO released a
report, "Analysis of School District Reserves" in January
2015. In the report, the 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
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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.
6. Related and prior legislation.
AB 1048 (Baker), similar to this bill, proposes to repeal
the statutory cap on the amount of fiscal reserves that a
school district would be allowed to maintain under
specified conditions. This bill is pending before the
Assembly Education Committee.
AB 1318 (Gray) proposes to modify the calculation of the
statutory cap on fiscal reserves. This bill is pending
before the Assembly Education Committee.
AB 531 (O'Donnell), similar to AB 1318, proposes to modify
the statutory cap on fiscal reserves and is pending before
the Assembly Education Committee.
SUPPORT
Association of California School Administrators
California Association of School Business Officials
California School Boards Association
California Taxpayers Association
EdVoice
Fresno Unified School District
Kern County Superintendent of Schools
San Francisco Unified School District
School Employers Association of California
Letters from individuals
OPPOSITION
American Federation of State, County and Municipal Employees
(AFSCME)
California Labor Federation
California School Employees Association
California Teachers Association
Labor Coalition
Service Employees International Union
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