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