Sunday, October 18, 2009

Fund balances (new concept enters budget debate)

Legislators are considering using local district fund balances as part of a state budget solution for 2011-12 (Courier-Journal report here), making it important to understand the fund balance concept.

In a nutshell, a district's fund balance is calculated by adding up all the money
a district has available and then subtracting all the amounts it owes to employees, vendors, lenders, and others. It's "a 'snapshot' of the net amount that remains between assets and liabilities at any given point in time," according to Daviess County superintendent Tom Shelton's new white paper "Budget Contingencies and Fund Balances," available here.

Districts maintain a fund balance for multiple reasons:

  • Contingency reserves are one part of the story. Districts must set aside at least at the legally required level of two percent of budget expenses. They are advised to go beyond that and keep the contingency amount at the five percent level. That money is meant to be used for expenses that could not be planned.
  • Cash flow is an issues for any enterprise: money you know will flow in next month doesn't let you write checks this month. In school districts, there's a predictable annual challenge while waiting for the current year's property taxes to come in. Districts meet the challenge by carefully keeping a strong fund balance through the spring and then using that money to meet summer and fall payroll before the tax revenue arrives at year's end.
  • Saving for other projects can be an additional reason to maintain a fund balance, including the costs of equipping a new school or launching an additional service for students.

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