In one of those déjà vu moments, we are growing concerned about the possible “trigger” of the school district reserve cap in the next fiscal year. While it is still early, CSBA wants to alert all school board members, superintendents and chief business officials of the possibility the reserve cap will go into effect for non-basic aid school districts with more than 2,500 average daily attendance.
Current year conditions of the state General Fund remain healthy and prospects for the Fiscal Year 2019–20 are better than they were in January when Governor Gavin Newsom introduced his budget proposal. If 2019–20 progresses as currently expected, there is a distinct chance that the reserve cap trigger could be pulled. If the trigger is pulled, impacted school districts would need to reduce their budget reserves, in some cases substantially, when they adopt their budget in June of 2020 for the 2020–21 fiscal year.
CSBA is bringing this to members’ attention now because districts subject to the reserve cap may want to analyze their current reserves before finalizing this year’s budget in preparation for a possible 10 percent cap on general fund reserves in 2020–21.
Background on the trigger: Proposition 2, a 2014 measure placed on the ballot by the Legislature in concert with then-Governor Jerry Brown, created a rainy day fund for the state and a separate rainy day fund for schools — the Public School System Stabilization Account (PSSSA). The pulling of the school district reserve cap trigger depends upon deposits into the PSSSA reaching a certain level. Deposits into the PSSSA are made when three factors happen simultaneously:
- Capital gain revenues are strong (at least 8 percent of the state General Fund revenues);
- Proposition 98 is determined by the Test 1 factor (Test 1 requires that around 40 percent of the General Fund go to K-14 education plus local property tax revenues); and
- The state has no outstanding maintenance factor (extra funding owed to schools generally following a recession).
It appears that these criteria are likely to be met in the 2019–20 state budget, and that the first deposit will be made into the PSSSA. If total cumulative deposits into the PSSSA exceed 3 percent of the K-12 share of Proposition 98, then the school district reserve cap trigger will be pulled for the 2020-21 budget that will be adopted in June 2020.
First, the good news: CSBA-sponsored Senate Bill 751 (Hill) from 2017 changed the reserve cap drastically in a number of ways:
- Exempted all small school districts and basic aid districts. Small school districts are defined as those having an ADA of 2,500 or fewer students. The old law applied to all districts.
- Changed the reserve cap trigger to require a balance in the PSSSA of at least 3 percent of the K-12 portion of the Proposition 98 guarantee, or around $2.1 billion currently. The old law required that only $1 be deposited into the PSSSA.
- Increased the reserve cap to 10 percent for non-basic aid districts above 2,500 ADA. The old law included a cap that generally equaled two times each district’s statutory minimum reserve levels (reserves that ranged from 3 percent to 10 percent, depending on size, and 6 percent for most districts).
- Tightened the definition of what the cap applies to. The new definition applies the cap only on combined assigned and unassigned general fund The old law applied to all assigned and unassigned balances.
What should be done? With the reserve cap applying only to non-basic aid school districts with more than 2,500 ADA, impacted districts can consider the following options as budgets are adopted:
- Ensure your district’s adopted budget (or revised budget) does not include general fund assigned and unassigned amounts above the cap. These budgeted amounts are often not widely discussed at budget adoption and many times are administered by staff. But it is imperative that to stay under the cap, funds must be (a) budgeted for expenditure in the adopted budget, (b) assigned to special non-general fund reserve accounts or (c) committed to specific expenditures.
- Apply to your county superintendent of schools for a one- or two-year exemption from the reserve cap, which will include providing documentation to substantiate the need of maintaining a general fund reserve of greater than 10 percent for extraordinary fiscal circumstances.
- Spend down general fund reserves. This approach is not recommended by CSBA, but it is an option for consideration and there will be pressure locally to do so to cover employee and other costs. Reserves are an important component of a healthy school district budget and need to be available to cover everyday cash flow (remember that while state aid is apportioned to districts monthly, property taxes are deposited only twice each year), emergency expenses and even planned one-time investments in education programs. Under this option, careful consideration must be given to protect against committing one-time reserve funds for ongoing commitments.
With the potential of the trigger being pulled in time to significantly impact the 2020–21 budget, CSBA recommends that governing boards and their staff in potentially impacted districts begin discussing their options now to best prepare for 2020–21.
When the original reserve cap was enacted in the 2014 state budget, CSBA immediately drew battle lines around the issue, citing it as an offensive intrusion into local governing board authority that ran completely counter to the state’s efforts in Proposition 2 to strengthen its own cash flow position, while leaving school districts dangerously exposed to financial challenges, whether they were urgent emergencies, such as natural disasters, or a fiscal crisis caused by the state’s economy.
We truly hope that this alert becomes unnecessary to follow as we learn more about what is contained in Governor Newsom’s May Revision, which will be released tomorrow, May 9. And we certainly hope that if the scenario does exist for 2020–21, the Legislature and Governor act in time to repeal the reserve cap before the “trigger” is pulled.