School District Fund Balances

Politicians and members of the public sometimes ask why schools aren’t using their reserve fund balances to cover the dramatic shortfalls in state funding they have experienced over the last few years.

What are Fund Balances?

School district cash flow reserve funds (to which some have referred as school district rainy day funds) differ from what most of us think of as “reserves” in some important ways. As State Auditor Stacey Pickering lays out in his statement on this issue, “…cash flow reserves are funds specifically set aside and allocated to cover known or expected revenue shortfalls during the year. These allocated funds cover a school district’s operation from one period to the next for anticipated times when local revenues are not available.”

A district’s fund balance is the balance left in a school district’s maintenance account, or checking account, less any accounts payable, at the end of the fiscal year. All MAEP and local funds (but not federal funds, which must be expended within 3 days of receipt) are held in and expended from these accounts.

A good portion of a school district’s budget is made up of a “local contribution,” funds from local ad valorem taxes which are collected & dispersed to districts once a year in January or February. Because the school district fiscal year runs from July 1 to June 30, these local funds must be budgeted over two fiscal years. This results in a balance at the end of the fiscal year — the time when the snapshot of the “reserve” balance is taken.

Unlike the state “Rainy Day Fund,” school district fund balances are held for specific purposes, usually for operating expenses and often for capital improvements or repairs (see “Capital and Other Large Expenditures” below). See State Auditor Stacey Pickering’s brief on The Myth of School Rainy Day Funds.

The Mississippi Department of Education and the state auditor have recommended that districts hold in reserve at least 7.5% of their annual budgets to tide them over in cases of emergency, just as we are advised to do with our household budgets. Districts that have not maintained these reserves have fallen into financial distress, and some have required an expensive state takeover. To address this problem in the 2010 Legislative Session, legislators adopted a law that requires districts to maintain 7.5% of their budgets in reserve or be subject to some state oversight of their budgets.

Much of the Funding Concentrated in Few Districts

The amount held in reserve varies dramatically by district, generally corresponding to the size of a district’s overall budget.

Reasons Districts Need Fund Balances

In Cases of Emergency. As mentioned earlier, districts are required to hold in reserve at least 7.5% of their annual budget to tide them over in cases of emergency. Districts with high student populations whose fund balances appear to be large, in most cases have only enough in reserve to cover payroll for one or two months. Asking districts to spend down their reserves below this point is asking them to be fiscally irresponsible. One emergency such as a tornado, fire or flood could deplete immediately a district’s reserves. Unlike the state “Rainy Day Fund,” school district fund balances are most often funds that are saved for specific purposes, such as capital improvements or repairs, as noted below.

For Capital and Other Large Expenditures. Many Mississippi school districts operate so close to the margins that they must budget long-term for big-ticket items such as facilities repairs and reroofing, replacement of worn-out school buses, replacement or repair of heating/cooling systems, or facilities expansions and improvements. Prudent districts set aside a small amount of their funding each year until they can save enough for these very costly expenditures – expenditures which can easily cost hundreds of thousands of dollars. These funds are held in the fund balance until they are expended, and the projects for which they have been saved would be jeopardized if districts are required to spend the reserved funds for operational costs.

For Unforeseen Increases in Fuel and Utilities. The amount of funding allocated to school districts for fuel and transportation costs has not increased at all since 1993. Gasoline prices have increased substantially since that time; therefore districts have to use MAEP and local dollars to fund the balance of their transportation costs.

To Front Federal Programs Prior to Reimbursement. Federal programs are funded on a reimbursement basis. Therefore, school districts must incur the costs, expend dollars they have in reserve, and then apply for reimbursement from the federal government. In poorer districts, federal expenditures are significant, and districts bear the up-front burden of funding those programs until they are reimbursed.

To Front Local Expenditures Prior to Receipt of Local Funds. Local ad valorem taxes, which provide as much as 30-50% of a school district’s budget, flow in a lump sum to the district in January or February. All local taxes must be budgeted for the fiscal year in which they are received, which ends June 30th. Administrator salaries, local teacher supplements, and many other monthly expenses are paid with local tax dollars. Therefore, districts must either hold funding in reserve to cover these expenses for the months of July through December, or they must borrow against anticipated local tax receipts to meet payroll until the next year’s local dollars are received. The interest on these borrowed funds is an additional expense for school districts.

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