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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