The Fund Balance

asset-allocation-funds-can-balance-your-portfolio

Getting to know what a Fund balance actually is, and how important it is to have one.

This post will attempt to outline the complexities in the definition of school district fund balances. The most important thing to know is that many people who claim to know do not actually.

The facts are that a positive fund balance is a sign of a financially responsible School Board. A School system that is able to maintain a proper fund balance, operate without a deficit, promises to lower its portion of the tax, and still provide a quality healthy learning environment with an ability to expand with the growth of the community is doing a fantastic job. That would be a School Board that is doing what they were elected to do. This is in fact the case for Schiller Park School District 81.

The common complaint by most is that the “savings account” should be returned to the taxpayers, Or why increase the tax levy when there is extra money. This action would be actually incredibly irresponsible, and also present a one time not very substantial payment that would put the education of every child in the School District at risk. Most people who say this is an option typically just don’t understand the reason for a fund balance, or are simply listening and repeating the complaints of those who don’t have the best intentions at heart. There is also the people who want this to happen because they do not care about the education of children in any way.

Some of the people that claim to know, but do not actually know have been spoken about many times on this blog, and so have the people who do not care about the education of children. The simple fact is they do not have the best interests of every tax payer in mind when they speak to you. They are worried about their own self interests.

Fund Balances

School budgets are quite complex, as well as the state funding formula that greatly impacts the budget. I will not pretend to be an expert, but I am making an attempt to share what I have learned. School budgets are best simplified as one budget having several individual funds within. These individual funds have specific parameters set by laws that dictate the income and what each fund can or can’t be used for.

If fund balance is broadly useful, it is equally broadly misunderstood. Research has found that even the most sophisticated and experienced users of governmental financial information may not agree on what fund balance actually communicates. The confusion is exacerbated by bad information being shared with people that have genuine concerns, and are then convinced that there is a problem that doesn’t truly exist.

The following points require a little understanding by the reader in how accounting methods of cash, accrual and modified accrual affect fund balance or how tax receipts by any county on any given date affect fund balance, but this is just a small part of a larger picture.

• A unit of local government, based on its own policies, reserves a fund balance through intentional actions to serve its local interests. No local government maintains a fund balance to loan, underwrite, or otherwise subsidize another governmental body.

• Building and maintaining an adequate Fund Balance is a prudent fiscal policy with increasingly critical benefits for any governmental body. These include the ability of the body to:

  1. Stabilize year over year educational performance
  2. Minimize educational service disruptions
  3. Maintain cash on hand to counter unanticipated cash flow shortfalls
  4. Address emergency situations, particularly those that threaten health and life safety
  5. Fund educational growth and change opportunities
  6. Enhance credit rating strength and increase access to debt markets at lower interest costs.
  7. Increase long-term fiscal performance
  8. Allow the government to manage unforeseen expenditure demands and revenue shortfalls

• The Government Finance Officers Association recommends a minimum fund balance of two months of either revenues or expenditures. It should be stressed that this is a minimum recommendation only and other local factors must be considered, including the timing and dependability of significant revenue sources (i.e. state, federal and county tax distribution and program funding).

• ISBE gives only those districts with three months (25%) fund balance to expenditures its highest Financial Profile sub score. This is a minimum expectation to be qualified to receive a high score and does not take into consideration particular elements of local funding or educational/operational planning. ISBE requires any district budgeting a deficit to have three times the deficit in fund balance to avoid filing a deficit reduction plan.

• Fund Balances are an overly simplistic and inconsistent lens through which to measure a district’s financial strength. To be useful, a measure should mean the same thing from district to district and year to year. Fund balances are neither, as they are determined by a variety of accounting practices. Cash flow across districts varies due to the timing of liabilities, such as how summer payroll practices are implemented and due to how tax receipts are received and budgeted. The accounting of “early taxes” across school districts varies depending on the accounting practice used and the county resided in, and can have a very big impact on how fund balances are determined at the end of any given fiscal year. Cash on hand does not equate to fund balance in a full accrual accounting methodology.

• Fund Balances are affected by when a county distributes taxes. Counties do not distribute taxes at the same times; therefore fund balances are not comparable from district to district. Should a county be late in distributing taxes, a district’s fund balance can be much less than expected, should a county distribute taxes early a district’s fund balance can appear inflated and distort cash flow reality.

• Some counties do not distribute taxes at the same time from year to year; therefore fund balance comparisons year to year are inconsistent. Not only can fund balance and cash flow be affected by inconsistent tax distribution, a district may find themselves in a position of having to issue tax anticipation warrants to meet obligations should their fund balances decline based on a requirement to use fund balance in lieu of state contributions.

• Other timing factors, such as receipt of State payments or disbursement schedules, make fund balance comparisons inconsistent from district to district and year to year. Late reimbursements for districts on an accrual or modified accrual basis are impacted differently than districts that use a cash based accounting method. Fund balance calculations can be misleading in such situations.

• Fund balances can be temporarily affected by a district’s need to meet its obligations, such as by using interfund loans, abolishment of the Working Cash Fund, or by issuing Tax Anticipation Warrants or Working Cash Bonds. Such legitimate actions cause further inconsistency.

• Fund balances are affected by the method of accounting (i.e. cash, accrual, or modified accrual) for funds on a given date each year.

• Through Local Board of Education control, an appropriate level of Fund Balance is determined based on multi-year analysis of the district’s finances and with an expectation of consistent funding by the State. A change as described circumvents a Board of Education’s planning process and at the very least deserves both full public hearing and sufficient forewarning to allow a local Board time to review and adjust its determination.

• Using Fund Balance to justify lower State payments to school districts decreases anticipated Fund Balance. Lower Fund Balance decreases interest income earnings and may cost the district more by having to break investments before maturity to meet obligations. Lesser Fund Balance may increase the need to issue more debt, thus increasing the amount of interest paid on that debt. This downward spiral has no impact on the State, but certainly impacts taxpayers and the local district.

Fund Balance Recommendations:

The Government Finance Officers Association of the United States and Canada (GFOA) website clearly recommends the following:

(http://www.gfoa.org/downloads/AppropriateLevelUnrestrictedFundBalanceGeneralFund_BestPra ctice.pdf )

“(I)t is essential that governments maintain adequate levels of fund balance to mitigate current and future risks (e.g., revenue shortfalls and unanticipated expenditures) and to ensure stable tax rates.”

“Fund balance levels are a crucial consideration, too, in long-term financial planning.”

“The adequacy of unrestricted fund balance in the general fund should be assessed based upon a government’s own specific circumstances. Nevertheless, GFOA recommends, at a minimum, that general-purpose governments, regardless of size, maintain unrestricted fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures. The choice of revenues or expenditures as a basis of comparison may be dictated by what is more predictable in a government’s particular circumstances.’ (emphasis added)

“Furthermore, a government’s particular situation often may require a level of unrestricted fund balance in the general fund significantly in excess of this recommended minimum level.” (footnotes deleted)

The most important things I have found with maintaining a fund balance:

 

 

 

 

  1. The level of fund balance is established by the local school board and affect both the district’s investment interest income and its ability to weather uncertain financial conditions. Both have been extremely important variables in recent years as state and local resources have been undeterminable and interest rates are at all time lows.
  2. A district’s credit rating as determined by Moody’s or Standard & Poors is impacted by fund balance and can potentially increase both the need for short-term borrowing and the interest paid on that debt. Under the most adverse circumstances, fund balance implications can also impact whether a district can issue debt or not.

More to come as I continue to educate myself. This is all complicated stuff, but it is important to understand. How can any one of us have valid complaints if we have not tried to learn and understand the very thing we are complaining about.

Stand up and speak out, but do it with knowledge. Knowledge gained from an accurate truthful source.

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