Wednesday, September 8, 2010

October in the red? Some basics of school district finance

Should Pennsylvania districts spend their $2.75 billion in fund balances to avoid staff cuts or tax increases?  That's the issue in this AP wire story shared by EdWeek.

The districts may need those June 30 fund balances to meet their October 31 payrolls.  Until you check the full year's cash flow issues, you can't tell whether those districts have anything to spare.

Suppose District A gets $1 million a month in state and federal funding year-round, and $4 million a month in property tax revenue in November, December, and January only.

Now suppose District A spends just about $2 million each month.

For the year, that's $24 million coming in and $24 million going out, and nicely balanced.

For July through October, though, it's $4 million in and $8 million out.

If District A starts the year without money on hand, it will be $4 million behind when October ends.

If it starts the year with $4 million, it can pay its bills on time for those first four months.

For District A, a fund balance of $4 million on June 30 is no extra money at all.  It's simply enough money to pay its bills on time.

It's just a mistake to think of that first $4 million as rainy day money or contingency funds or fiscal reserves.  For District A, that's essential operating money, and every penny will be needed during the year.  There's nothing left over that could allow lower taxes or retain current staff.

Many districts use a large portion of their fund balances to pay summer and fall bills. The amount each district needs depends on when money will come in and when it will need to go out.

Knowing the June 30 fund balance simply does not tell you whether the district can pay its October 31 bills.  It certainly does not tell you whether the district has any money set aside that it can use to meet rising costs or adjust to declining support.

That applies equally to the $2.75 billion in the Pennsylvania article and to the $772 million fund balances for Kentucky districts' general funds shown in the 2009-10 report (unaudited) available at the Department of Education website.

Here's the same financial analysis in a table form:

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