BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     SB 799


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          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;










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             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  








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            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









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             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.









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          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  








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               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  








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          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  








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          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  








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               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  








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          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








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          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 








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          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