BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Senator Carol Liu, Chair
2015 - 2016 Regular
Bill No: SB 1249
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|Author: |Bates |
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|Version: |February 18, 2016 Hearing |
| |Date: April 20, 2016 |
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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 Budget and Fiscal Review. A "do pass" motion
should include referral to the Committee on Budget and Fiscal
Review.
SUMMARY
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 schools to grant a school district
within its jurisdiction an exemption from this requirement.
BACKGROUND
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 (SBE), 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 SBE, as specified, multiplied by three.
Existing law also 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 schools 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
2014 statutory requirement that sets a maximum amount of
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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-to-day surprises that they deal with constantly,
such as: managing cash flow based on receiving
property tax payments only twice a year, adjusting to
the ebb and flow of student enrollments, or enrollment
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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) Proposition 2 Rainy Day Fund. Proposition 2's Rainy Day
Initiative was passed by voters in 2014 and created a state
reserve for schools and community colleges when state tax
revenues from capital gains are higher than average and
certain other conditions are met. The state has the
ability to spend money out of this reserve to lessen the
impact of difficult budgetary situations on schools and
community colleges. Additionally, Proposition 2 created a
new maximum amount of reserves that school districts could
keep at the local level. For most school districts, the
maximum amount of reserves would be between three percent
and ten percent of their annual budget, depending on their
size.
3) 2014-15 Budget Act. As part of the 2014-15 budget, the
Legislature passed and the Governor signed a budget trailer
bill that included a provision of law that limits school
district ending balances to no more than twice the required
minimum reserve for school districts in the year a
contribution is made to the state reserve for schools and
community colleges. This provision was introduced during
negotiations with the Administration shortly before the
adoption of the 2014-15 budget. 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
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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. An argument can also be made that
imposing a cap would erode the ability of locally elected
school district governing boards to make decisions that
best serve their local needs, which is contrary to the
principles of the Local Control Funding Formula.
Notwithstanding concerns over the process and local
control, proponents of the bill indicate that healthy
school district reserves will protect students and teachers
from budget cuts during future economic downturns. On the
other hand, proponents of the existing cap argue that the
purpose of establishing the state level reserve was to
avoid future cuts to local school districts, lessening the
need to have larger local district reserves.
4) 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.
5) Premature? 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 2016-17 Proposition 98 Education Analysis in February
2016 that one of these conditions will be satisfied in
2015-16-having paid all maintenance factor that was created
prior to 2014-15. However, the LAO does not anticipate the
state will meet the other condition within the next few
years. Specifically, the LAO notes that, "a deposit
requires the minimum guarantee to be growing more quickly
than per capita personal income. Under the projections
released by our office in November and by the
Administration in January, this condition will not be met
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in 2016-17 or any of the following three years. To meet
all of the conditions for a deposit, the state very likely
would need to experience a year-to-year revenue surge of at
least several billion dollars relative to these
projections."
6) 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
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.
7) Related and prior legislation.
SB 799 (Hill, 2015), which was gutted and amended in the
Assembly, proposes to modify 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 in the Assembly Rules Committee.
AB 1048 (Baker, 2015), similar to this bill, proposes to
repeal the statutory cap on the amount of fiscal reserves.
This bill failed passage in the Assembly Education
Committee.
AB 1318 (Gray, 2015) proposes to modify the calculation of
the statutory cap on fiscal reserves. This bill failed
passage in the Assembly Education Committee.
AB 531 (O'Donnell) proposes clarifying changes to the
statutory cap on fiscal reserves. This bill was heard by
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and passed this Committee by a vote of 8-0 on June 17,
2015, and is now pending in the Senate Rules Committee.
SUPPORT
Association of California School Administrators
California Association of School Business Officials
California School Boards Association
California Taxpayers Association
Riverside County Superintendent of Schools
Torrance Unified School District
OPPOSITION
California School Employees Association
California Teachers Association
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