SAN FRANCISCO - A bill that would limit the amount of money California school districts can keep in reserves has sparked widespread criticism among Republican lawmakers and school officials, who say the proposal is fiscally irresponsible.
On Friday, Gov. Jerry Brown signed an education trailer bill that would cap school districts' reserves at two or three times the state's minimum reserve requirement for economic uncertainty when the state deposits money into its own state level school reserve.
For most districts in the state, this means that they would have to spend reserve funds in excess of 4% to 6% of their budgets, depending on the size of the school district. The bill allows for exceptions to be granted for school districts with "extraordinary fiscal circumstances."
The proposal was added on to the rainy day fund measure in the budget, which would increase the fund size and allow the state to deposit spikes of capital gains revenue into the fund. Both the rainy day fund measure and education trailer bill will go before voters on the November ballot.
"A 4% reserve, which is essentially only enough to pay for two weeks of obligations, is not sufficient," said Kent Stephens, San Juan Unified School District's chief financial officer. "Districts rely on reserves for paying unexpected costs, managing cash flow, smoothing budget requirements from year to year, and demonstrating sound fiscal stewardship."
He added that the proposal seems to be inconsistent with the governor's philosophy of more local control.
Last year Brown signed into law a new financing plan for schools called the local control funding formula, which shifts spending decisions from the state to the local level.
Proponents of the reserve proposal say it will prevent money from being stockpiled instead of spent in the classroom.
The California Teachers Association, one of the largest teachers' unions in the state, said the bill would channel more dollars to the classroom by capping the amounts districts are able to hold back in budget reserves when the state's own education rainy day fund provisions are triggered.
"Our children have endured years of devastating budget cuts, and Californians overwhelmingly voted to pass Proposition 30 to keep the cuts from happening. It is unacceptable for districts to sit on up to 30% budget reserves when California ranks 50th in per pupil expenditures nationwide," said CTA president Dean Vogel. "Transparency is in order and the time is now."
Stephens said the legislation would probably lead to downgrades among school districts that have passed bond measures, which would ultimately cost taxpayers millions of dollars in extra interest costs.
"This legislation will increase borrowing costs for districts that must finance short-term loans to manage cash flow," Stephens said. "Budgets, particularly multi-year budgets, will be built even more conservatively because districts will have an insufficient safety net."
Moody's Investors Service, which doesn't comment on pending legislation, said fund balance is an important metric that it considers when looking at school districts' credit quality.
For a school district's general obligation bond rating, finances make up 30% of the overall rating methodology, which also includes economic metrics, evaluation of management, and debt profile. Among finances, fund balance carries about a 10% weight.
Moody's currently rates around 330 school districts in California. The districts have a wide range of fund balances — from 2% up to 75%. In general, most have about a 20% fund balance, according to Eric Hoffmann, a senior vice president at Moody's.
How that translates into a rating will vary from district to district.
"We evaluate a school district's financial profile relative to all the other school districts in the country and all the other local governments in the country, and there's no one size fits all," Hoffmann said. "It depends on the nature of the school district."
Most school districts that Moody's rates carry GO bond ratings in the double-A category. Nationally, the fund balance range for districts with double-A ratings is 10% to 25%, Hoffmann said. For A-rated school districts, it's about 2.5% to 10%.
In addition to San Juan USD, many other school districts stand in opposition to the proposal, including the San Diego Unified School District, Fresno Unified School District, and Sacramento City Unified School District.
Assembly Republican Leader Connie Conway and 21 other Republicans sent a letter to Gov. Brown last week, asking him to veto the legislation.
"It is deeply troubling that the budget reserve provisions of the bill were included at the last minute without appropriate legislative deliberation," the letter said. "As a matter of transparency and fairness, the provisions of this measure should be subject to further debate and discussion."
The letter also noted that low-income and English Language Learner students would be hurt the most by the proposal. These students are disproportionately educated by the least-experienced teachers, who are the first to be laid off in a fiscal downturn, the letter said.
In a joint statement, the Association of California School Administrators and California School Boards Association said the proposal conflicts with the principles articulated by the state legislature.
They said that California has worked for years to prevent school district bankruptcies by enacting laws requiring multiyear projections, enforcement of strict fiscal standards, early intervention, and even the authority to override the spending decisions of local governing boards.
"It is therefore ironic that, at the very time an initiative has been placed on the statewide ballot to strengthen the state's rainy day fund, the Legislature would consider statutory changes eviscerating provisions at the local school district level based on the same premise of fiscal prudence and responsibility," the two organizations said.
The legislation would leave districts vulnerable to any unanticipated financial developments, they said, such as those currently facing districts in the form of increased contributions to teachers' retirement funds and rising healthcare costs.
If approved in November, the legislation would go into effect on Dec. 15.
