BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON EDUCATION
                              Senator Carol Liu, Chair
                                2015 - 2016  Regular 

          Bill No:             SB 774               
           ----------------------------------------------------------------- 
          |Author:    |Fuller                                               |
          |-----------+-----------------------------------------------------|
          |Version:   |February 27, 2015                      Hearing Date: |
          |           |    April 29, 2015                                   |
           ----------------------------------------------------------------- 
           ----------------------------------------------------------------- 
          |Urgency:   |No                     |Fiscal:     |No              |
           ----------------------------------------------------------------- 
           ----------------------------------------------------------------- 
          |Consultant:|Lenin Del Castillo                                   |
          |           |                                                     |
           ----------------------------------------------------------------- 
          
          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  







          SB 774 (Fuller)                                         Page 2  
          of ?
          
          
               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  








          SB 774 (Fuller)                                         Page 3  
          of ?
          
          
               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  








          SB 774 (Fuller)                                         Page 4  
          of ?
          
          
                    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.








          SB 774 (Fuller)                                         Page 5  
          of ?
          
          

          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  








          SB 774 (Fuller)                                         Page 6  
          of ?
          
          
               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
                                      -- END --








          SB 774 (Fuller)                                         Page 7  
          of ?