Why the Fuss About School Finances and Banking One-Month’s Reserves?

Like many industries, there are accepted accounting and financial practices for school districts.  While the world of school finance is frustratingly opaque, in recent years legislators and the Alabama State Department of Education (ALSDE) officials have made clear rules about minimum requirements from school districts, even mandating a bit more transparency.  Some of the requirements may not make sense (why save money in a bank account when you have students on whom you need to spend it?), but these rules are accepted accounting practice.

So why are we talking about this now?  Well, it appears that the ALSDE is getting serious about what the Act calls for…specifically, making certain that school districts have a one-month’s-worth-of-operating-expenses’ amount in reserve.  And that is making news in Central Alabama as one of the state’s largest school districts engages with the ALSDE to build it’s reserve fund.

The Birmingham City Board of Education recently rejected the ALSDE’s plan to set the district on a more sound financial path.  The school board president has now asked the ALSDE to allow the board to draft their own financial plan.  State Superintendent Dr. Tommy Bice will recommend a course of action to the Alabama State Board of Education in the coming week.

What is all of the fuss about?  Why must school districts keep one month’s worth of operating funds in a reserve account?

Well, first of all, it’s just a good accounting practice.  In case of a financial meltdown, school districts need to be able to pay their personnel and their light bills.  Dave Ramsey, noted financial guru, recommends the rest of us keep three to six months’ worth of operating expenses in our personal accounts.  Ramsey appropriately names this an “emergency fund”.  Nonprofit organizations are encouraged to keep three months’ operating expenses on hand to deal with emergencies.

Secondly, it’s the law.  The law is called the School Fiscal Accountability Act and was passed by the Alabama legislature in 2006.  Here is the law as enacted.  Here is the ALSDE’s presentation of what the Act means to school districts (it’s a PowerPoint file).

The Requirements of the Law

Among other things, the law mandated that each and every school district keep a minimum of one-month’s operating expenses in reserve.  This is a tough thing for many districts, including Birmingham City, to accomplish given the difficult financial conditions within which school districts have been operating.  This mandate was suspended during recent periods of proration.

The law upped the requirements for school districts to share information with their school community, via their district web sites.  It also marked the first time that the ALSDE mandated anything be posted on district web sites.

The law mandated the posting of not only a district’s current annual budget, but also monthly financial statements. Monthly financial statements must be posted on the district web site not later than 45 days after the end of a calendar month.  Having to produce monthly financial statements and share them with the public is a motivator to ensure a district’s financial house is in order.  Those financial statements are only helpful, though, if somebody takes the time to look at them.

In a memo from October 2009, Dr. Pouncey “encouraged [districts] to simplify the location of the required financial reports on your local internet site”, adding, “we recommend posting a link on your home page that will take the user to your financial reports”.  [NOTE:  In 2010, districts were mandated to post monthly check registers listing district expenditures, but that was not a part of this law.]

The law specifically requires the following (these are taken from the presentation linked above):

For example, here is Shelby County’s FY12 Budget Summary on file with the ALSDE. (Remember that we’ve learned that “FY” stands for Fiscal Year, which is the period from October 1 of one year to September 30 of the next.  FY12 is the year from October 1, 2011, to September 30, 2012.) Yearly operating expenses are $200 million.  [This figure is only the General column of “Total Expenditures” for purposes of this discussion.  The actual operating expenses for a district are a blend of expenditures from various columns, but this figure is good for this purpose.]  

One month’s operating expenses would be 8.3% of that total, or $16.6 million.  As you can see, the “Ending Fund Balance – September 30” is projected to be $21.9 million, so Shelby County meets the requirement.

It is very important to understand that Alabama’s school districts consider their budget to be a planning tool, as opposed to a “set in stone” type of budget.  There is likely to be a bit of a shift once the fiscal year is over and all the dollars are counted.  There shouldn’t be too much of a shift, though, or one could begin to question the CFSO’s planning skills.

Now let’s look at Birmingham City Schools’ FY12 budget. Birmingham City’s financial folks also expect to spend $200 million in FY12.  So their requirement would be $16.6 million as well.  [Remember, this is a simplified calculation looking only at the “General” column.]

The ALSDE investigation team sent to work with Birmingham City Schools to improve its financial condition proclaimed the figure to be $17 million.  Regardless of the exact figure, the budget document shows that the “Ending Fund Balance – September 30” is expected to be $2.2 million.  Birmingham City Schools do not meet the requirement.

Dr. Craig Pouncey, the ALSDE’s top financial officer, at the May 31 presentation to the Birmingham Board of Education, stated that it is the ALSDE’s job to work with school districts to ensure compliance with the law and to help districts put together a plan to build that reserve.  He said that it is more difficult for school districts who do not have the tax base to build a reserve, but that Birmingham City Schools is fortunate in that it does have the tax base.  He added that 31 school districts currently do not meet the one-month’s-operating-expenses requirement.

Certainly the last few years have been some of the most difficult financially in history for Alabama’s school districts.  Proration was declared four times in the last five years:  2008 (6.5%), 2009 (18%), 2010 (9.5%), and 2011 (3%).  2008’s proration was offset by transferring money from the Proration Prevention Account, but state monies were cut to districts in each of the following three years.  2009’s proration was lowered to 11% after officials emptied the Rainy Day Account.

Those difficult financial times have put an unprecedented strain on school districts as they were forced to use local monies (from local property or other taxes, contributions, etc.) to fill in the gaps for salaries (which cannot be prorated by law) and other expenses that could not be prorated due to contractual obligations. Remember that local monies are really the only monies that school districts have discretion, or options, over how to spend.  Local money is the difference-maker in most school districts.

Regardless of the strain, school districts use the public’s money to deliver education to their community’s children.  Sound financial practices must be used in order for schools and school districts to sustain proper functioning.  The one-month’s reserve requirement is a bare minimum amount, and when school districts are using tens or even hundreds of millions of its community’s dollars, there must be financial safeguards in place to ensure that money is managed wisely.  Additionally, there must be accountability for what is done with a school community’s money.

We, the public, need to understand the language of school finance in order to be better consumers of public education.  While we see the results of our tax monies in the form of teachers and athletic teams and buildings and supplies, that is not all on which school district officials are spending our money.  When times get tough (as they have been) public officials scare us with projections of doom and gloom, cutting teachers first in an effort to show how dire the situation is.

There is much “fluff” in school district budgets, but teachers aren’t one of them.  Protecting the classroom should be the first duty of school boards and superintendents.  But all too often, the “fluff” stays and the teachers go.

So let’s figure out how to read the same financial documents school officials use to scare us into believing they have no choice but to cut back on the classroom.  The ASC will produce a series of trainings on how to read these documents over the summer of 2012 to get you ready for your district’s budget hearings this fall.