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The School Budget Explained

 

Reserve Funds

This article is one of a series to help explain to residents some of the more arcane and complicated aspects of school budgets.




What is a Reserve Fund?

The simplest way to describe reserve funds is that they are a kind of savings account for school districts. They are often informally referred to as "rainy day" funds. At the end of the school year, if a school district has excess funds (as a result of not spending its entire budget or receiving more revenue than anticipated) its options for using those funds are prescribed by the laws and regulations of New York State. The amount of money the district may keep in the bank without designating it for a specific purpose — consequently called an "unreserved" or "undesignated" fund balance — is capped at four percent of the regular school budget. All other funds must either be returned to the taxpayers by reducing the following year's tax levy, or appropriated in a reserve fund.

When money is put into a reserve fund, it can only be expended for the specific purpose of the fund. For example, money in a Worker's Compensation Reserve Fund can only be used to pay for claims and expenses related to workers' compensation. Once money has been allocated to a fund, it cannot be transferred to another fund or withdrawn for any other purpose than the one designated for that particular fund.

The reason why districts have reserve funds is very much the same as the reason why individuals put some of their discretionary income into savings: to set money aside for a later time when it may not be available, or to avoid using regular income for special, non-recurring expenses. The difference is that school districts are required to specify which expenses are anticipated and to dedicate the funds for that purpose.

A reserve fund earns interest, much like a savings account.

The "Controversy" about Reserve Funds

Reserve funds have been in the news in the last few years. New York State Comptroller Thomas DiNapoli first reported in 2009 that, in his view, excessive amounts of money were being held in school district reserve funds across the state. The implication was that property taxes could be lower if school districts held less money in reserve. In 2011, Gov. Cuomo has revived this debate by stating that school districts with reserve funds should use them to mitigate the effects of reductions in state education aid.

School districts have generally objected to this view of reserve funds for several reasons: (1) strong reserve funds are generally acknowledged as a sign of fiscal health (indeed, Moody's has cited Roslyn for "maintaining healthy reserve levels" when it set the district's strong bond rating); (2) reserve funds may be beneficial in navigating through a severe economic downturn, like the one we are experiencing now, but expending them all at once could severely damage a school district's long-term fiscal health; and (3) the state has changed its own long-held policy of encouraging school districts to build up their reserve funds. Because each school district has different needs and different ways of addressing them, how much is "too much" is clearly a variable and subjective judgment which, under state law, is left to the discretion of local school boards.

Types of Reserve Funds

State law authorizes schools to establish and maintain a limited variety of reserve funds. These are the funds currently held by the Roslyn School District:

• Workers' Compensation Reserve

• Unemployment Insurance Reserve

• Repair Reserve

• Capital Reserve

• Employee Benefit Accrued Liability Reserve

• Employees Retirement System (ERS) Reserve

Some of the other kinds of funds available, which Roslyn does not utilize at present, include reserves for insurance, property loss, liability, and tax certiorari.

The rules governing the estalishment and maintenance of reserve funds vary. Some funds are authorized under Education Law, while others come under the General Municipal Law. Some may be established by a resolution of the Board of Education, others require a public vote, while still others require a public vote on some functions of the fund and not others. Examples: the Unemployment Insurance Reserve may be established and its funds expened by board action. However, a public vote is required both to establish a Capital Reserve Fund and to expend money from the fund. The Repair Reserve Fund is a combination of the two: its establishment requires a public vote, but expenditures may be authorized by the Board of Education following a public hearing.

Summary

Reserve funds enable school districts to appropriate money for long-term needs. Used judiciously, they help maintain a district's fiscal integrity. They can also contribute to keeping budget increases moderate and steady by using savings instead of operating funds for unusual and/or large expenses.