BILL ANALYSIS Ó
SB 799
Page 1
Date of Hearing: June 22, 2016
ASSEMBLY COMMITTEE ON EDUCATION
Patrick O'Donnell, Chair
SB
799 (Hill) - As Amended August 20, 2015
SENATE VOTE: Not applicable to this version.
SUBJECT: School finance: school districts: annual budgets:
reserve balance
SUMMARY: Modifies provisions in existing law related to school
district budget ending reserves. Specifically, this bill:
1)Requires, commencing with budgets adopted for the 2016-17
fiscal year, the governing board of a school district that
proposes to adopt a budget that includes unassigned ending
balances in the school district's general fund and special
reserve fund for other than capital outlay projects that are
in excess of the minimum recommended reserve for economic
uncertainties to provide the following for public review and
discussion:
a) The minimum recommended reserve for economic
uncertainties for each fiscal year identified in the
budget;
SB 799
Page 2
b) The unassigned ending balances in the school district's
general fund and special reserve fund for other than
capital outlay projects 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 reasons explaining the unassigned ending
balances in the school district's general fund and special
reserve fund for other than capital outlay projects that
are in excess of the minimum recommended reserve for
economic uncertainties for each fiscal year that the school
district identifies any unassigned ending fund balances
that are in excess of the minimum recommended reserve for
economic uncertainties.
2)Requires, commencing with the 2016-17 fiscal year, the
governing boards of school districts to adopt a policy
establishing procedures for reporting the fund balances as
reflected in the school district's governmental fund financial
statements. Requires the policy to:
a) Outline how the school district's fund balances are
intended to ensure that adequate financial resources are
available to address revenue shortfalls, unanticipated
expenditures, planned future one-time expenses, and any
other financial or educational needs of the district; and
b) Include a requirement for an annual report to the
governing board of the school district in a public meeting
at the same meeting as budget adoption.
3)Repeals the requirement that information regarding budget
ending balances be publically disclosed each time a budget is
adopted or revised and instead requires disclosure only when a
SB 799
Page 3
budget is adopted.
4)Repeals the requirement that county superintendents of schools
determine whether a school district has complied with ending
balance provisions prior to verifying that the district has
done so.
5)Repeals existing limitations on school district ending
balances (see Existing Law) and instead provides that in a
fiscal year immediately after a fiscal year in which a
transfer is made into the Public School System Stabilization
Account (PSSSA), a school district shall not contain
unassigned ending balances in the school district's general
fund and special reserve fund for other than capital outlay
projects in excess of 17 percent of those funds.
6)Changes from "may" to "shall" the duty of a county
superintendent of schools to grant an exemption from ending
balances limitations for up to two consecutive fiscal years
within a three-year period if the school district provides
documentation indicating that extraordinary fiscal
circumstances substantiate the need.
7)Repeals the requirement that a school district, in requesting
an exemption, do the following:
a) Provide a statement that substantiates the need for an
ending balance in excess of the minimum recommended
reserve;
b) Identify the funding amounts in the budget that are
associated with the extraordinary fiscal circumstances; and
SB 799
Page 4
c) Provide documentation that no other fiscal resources are
available to fund the extraordinary circumstances.
8)Requires each county superintendent of schools to adopt a
policy establishing the procedures for submitting exemption
requests and the criteria by which the county superintendent
of schools shall determine whether extraordinary fiscal
circumstances exist.
9)Exempts school districts with fewer than 2,501 average daily
attendance and basic aid districts from the limitations on
ending balances.
EXISTING LAW:
1)Establishes the Public School System Stabilization Account
(PSSSA) at the state level to be funded by a transfer of funds
from the General Fund when capital gains-related tax revenues
are in excess of 8% of General Fund revenues.
2)Provides that the transfer from the General Fund to the PSSSA
shall not occur if:
a) Proposition 98 growth and COLA have not been fully
funded;
b) A Proposition 98 maintenance factor is determined; or
c) Proposition 98 is suspended.
SB 799
Page 5
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;
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
SB 799
Page 6
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
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: State mandated local program
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
SB 799
Page 7
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,
which is 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
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.
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
SB 799
Page 8
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. As explained
below, however, districts can use committed reserves-which are
not subject to the cap-for this same purpose.
So far, the cap has never been imposed, and the conditions for
triggering the cap are not projected to occur during the
economic forecast period prepared by either the Department of
Finance or the Legislative Analyst's Office.
This bill addresses these concerns with the following
provisions:
It raises the cap to 17%;
It applies the cap only to unassigned reserves, instead
of assigned and unassigned reserves;
It applies the cap only to adopted budgets instead of
adopted or revised budgets; and
It exempts small districts (fewer than 2,501 ADA) and
basic aid districts.
It requires, rather than authorizes, county
superintendents of schools to grant a waiver of the cap if
SB 799
Page 9
a district documents a need for the waiver.
Assigned, unassigned, and committed fund balances. This bill
applies the cap only to unassigned balances, so districts would
have no limit on the size of their assigned ending balances.
Assigned balances are used to set aside funds for a designated
future purpose, such as purchasing educational technology.
However, districts may also use committed balances for this
purpose, and existing law does not impose a cap on committed
balances. The only difference between an assigned balance and a
committed balance is that it takes a vote of the governing board
to set funds aside in a committed balance.
Accordingly, this bill does not increase the amount that
districts can set aside for future designated purposes, because
there is no limit under existing law. Rather, it simply
increases the amount that districts can set aside in an assigned
reserve, instead of a committed reserve. By doing so, it
reduces the role of the governing board in making those
decisions and reduces the transparency and public accountability
that come from a public vote.
Adopted and revised budgets. School districts are required to
adopt their budgets by July 1 and to revise them in September.
The reason is that school district budgets are dependent on the
state budget, which is not signed until late June. This means
that the budgets that are adopted by school districts in June
(to meet the July 1 deadline) are based on incomplete and
tentative information. By contrast, the September revised
budget can incorporate up to date information from the state
budget. The revised budget is sometimes referred to as the
"real" budget. Budgets are also revised later in the year as
circumstances warrant. It is the revised budgets that actually
govern school district spending and reserves. By applying the
ending balance restrictions only to the tentative budget that is
adopted in prior to July 1 and not to the later revisions, this
SB 799
Page 10
bill effectively repeals the cap.
Arguments in support. Supporters argue that existing reserve
levels are "far too low to assure that a district's reserve is
prudent." They state that even a small contribution to the
state level Proposition 98 reserve would trigger the cap, and
there would not be enough money in the state level reserve to
protect districts against an economic downturn. They also argue
that a cap on reserves is "credit negative" that could increase
borrowing costs.
Arguments in opposition. Opponents argue that large local
reserves would duplicate the reserve at the state level, and
would therefore not be necessary. They also point out that,
during the last economic downturn, instead of using reserves to
protect programs and services for students, districts actually
made deep spending cuts and added to their reserves.
REGISTERED SUPPORT / OPPOSITION:
Support
Association of California School Administrators
Bret Harte Union High School District
California Association of Suburban School Districts
California County Boards of Education
SB 799
Page 11
California School Boards Association
California State PTA
Central Valley Education Coalition
Clovis Unified School District
Compton Unified School District
Kern County Superintendent of Schools
Lemoore Union High School District
Lewiston Elementary School District
Los Angeles County Office of Education
Marin County Superintendent of Schools
Merced County Office of Education
Orange County Department of Education
San Mateo County Office of Education
SB 799
Page 12
Schools for Sound Finance
Torrance Unified School District
Tustin Unified School District
Numerous individuals
Opposition
California Teachers Association
Analysis Prepared by:Rick Pratt / ED. / (916)
319-2087