In wake of pandemic, local reserves can help stabilize districts in short term

The Legislative Analyst’s Office on April 5 released an update on state and school district reserves in light of the likelihood of vastly decreased revenues due to COVID-19 pandemic mitigation efforts.

About 40 percent of California’s General Fund is dedicated to K-14 education. This money, received from Proposition 98, accounts for most of the total funding for the state’s school districts. Therefore, the report states, “the fiscal condition of school districts and the state are closely connected. A decline in state revenues — as the state is likely to experience in response to the COVID-19 emergency — is likely to reduce school funding.” The report examines the reserves available to school districts and how effective they might be in mitigating a decrease in revenues.

State-level school reserve
Proposition 2, passed in 2014, created a state-level reserve account for schools and “requires the state to deposit funding into this reserve when school funding is growing relatively quickly and various other conditions are met.” The first deposit to the account in the amount of $377 million was made just this year with the adoption of the 2019–20 state budget. This amount is less than 1 percent of state funding for schools this fiscal year.

Local reserves
According to the LAO, at the end of the 2018–19 fiscal year, districts had a total of $12.8 billion in unrestricted reserves. The report estimates that this equates to 17 percent of district spending for that year, or about enough to cover two months of expenditures. One important thing to note is that districts use reserves for a variety of purposes, one of which is to stabilize their funding streams. For example, a portion of all districts’ funding comes from property tax revenue that is received in December and April. Portions of this revenue are often held in reserve in order to maintain funding stability throughout the year.

Uneven reserve levels
While the 2018–19 district reserves average was 17 percent of statewide school spending, reserves at the district level vary greatly. The report states that the median district holds reserves equal to 22 percent of expenditures. About one-quarter of districts hold reserves that are less than 14 percent of their expenditures and one-quarter hold reserves over 35 percent of their expenditures. The report also noted that small districts are more likely to have larger reserves (as a percentage of their expenditures) than large districts. However, this may be due to the overall smaller operating expenditures and the need to save money for a major facility repair or other large cost.

According to the LAO report, districts with sufficient reserve funds will be able to use some of that money to essentially buy time to plan for inevitable declines in longer-term revenue by gradually adjusting their spending. Districts with less in their reserves may need to make budget cuts more quickly and aggressively.

“Regardless of their exact reserve level, however, few districts have enough to maintain current service levels for an extended period if revenues were to decline significantly. Moreover, the balance in the state-level school reserve is very small compared with the revenue declines schools might face. All of these factors suggest that state and school leaders should be very cautious as they prepare for the upcoming year,” the report concludes.