Pa. school district reserves rise despite aid cut
By JAN MURPHY
HARRISBURG — Mechanicsburg Area School District was sitting on reserves equal to 33.4 percent of its annual operating budget in 2012-13, but convinced its teachers to agree to a pay freeze the next year anyway.
Susquehanna Twp. School District raised taxes in 2013-14 even though it ended the year with enough in its reserve funds to cover 27 percent of its 2012-13 operating budget.
Venango County's Valley Grove School District had enough money in reserve in 2012-13 to operate the district for a full year with little need for any additional income.
Much has been said about the roughly $1 billion cut from school funding three years ago after federal stimulus dollars dried up. But little attention has been given to the fact that many Pennsylvania school districts still managed to build their rainy day funds in the years since.
In 2011, the year Gov. Tom Corbett took office, the state's school districts held a combined total of $3.5 billion in their committed, assigned and unassigned fund balances — their reserve funds. In 2012-13, the most recent year the state Department of Education had this data available, that financial cushion grew to more than $4 billion.
Why the increase? District officials and others offered several explanations:
— Some districts said they were — and still are — setting money aside for future pension bills, or school construction projects.
— It's an unintended consequence of Act 1, the 2006 law aimed at controlling school property tax increases.
— Districts want a contingency in case of delayed state reimbursement or subsidy payments in the event of a late state budget passage.
— Schools are keeping money available to cover unforeseen expenses and emergencies.
But a state lawmaker and a midstate superintendent say some districts are taking this idea of squirreling money away too far.
“It's one thing to set aside for next year's pension payment," said state Rep. Mike Vereb, R-Montgomery. “But to hoard millions and then cry you're not getting enough money from the state and you have to cut kids' programs because they are not getting money from the state is total nonsense."
Vereb and Northern Lebanon School District Superintendent Don Bell suggest the recently organized commission tasked with developing a new school funding distribution formula consider making district reserves a factor in how much state aid a district receives.
“It has to be part of the conversation," said Vereb, a co-chair of the Basic Education Funding Commission. “Let's face it, the fund balance comes from the same pocket of taxpayers who are being asked to pay more in taxes... To have a school district with large cash reserves they have stowed away still raising taxes, it's a travesty."
Northern Lebanon School District Superintendent Don Bell, admitting he may be a lone wolf among his colleagues, said he would favor having ending fund balances as part of the school funding distribution formula.
“A district that has been blessed with a large ending fund balance, such as above 12 percent, as a direct result of local financial prosperity, I think that should be taken into account and possibly lessen their state subsidy that district would receive," he said. What those districts don't receive could “then be applied to other struggling less financially healthy school districts."
His district in 2012-13 had a fund balance that was equal to just more than 2.2 percent of its $31.5 million district budget that year, which was among the lowest percentages of the 485 school districts in Pennsylvania that had a fund balance that year.
But a few districts elsewhere in the state had general fund balances capable of nearly covering their entire 2012-13 budget.
Valley Grove School District had amassed reserves equal to 99.7 percent of this Venango County district's 2012-13 budget of nearly $12.5 million. Jefferson County's Brockway School District, with a 2012-13 budget of $13.1 million, had almost $11 million, equal to 84 percent of the operating budget, set aside in its rainy day fund.
Vereb said he may call in officials from districts holding fund balances equal to high percentages of their annual budgets to explain to the Basic Education Funding Commission why they have such large reserves.
Almost certainly, districts have plans for the money being held in these “committed," “assigned" and “unassigned" reserve funds. But district officials interviewed confirmed the money in “committed" reserves can be redirected to other uses by a majority vote of the school board and the rest can be done by the district's administration without board approval.
Among the 87 of 89 school districts in the nine southcentral Pennsylvania counties that had money in reserve, the one with the largest balance in its rainy day fund was Lancaster School District with $22.1 million, while the smallest was Berks County's Twin Valley School District, with $704,127.
Looking at how fund balances compare to operating budgets, though, six school districts — Gettysburg Area, Susquenita, Susquehanna Twp., Mechanicsburg, Lower Dauphin and Berks County's Antietam — had enough in reserve in 2012-13 to equal a full third of their district budgets.
Mechanicsburg Assistant Superintendent Alan Vandrew said his district intentionally overbudgeted for pension costs from 2008 until last year to mitigate the impact of future year's anticipated higher pension bils. The other reason its reserves rose stem from the district being self-funded for health insurance.
“When the years are good and claims are low, we reserve that savings for the years when claims are bad," he said. “We've had some positive years for health insurance up through 2012-13 but that has taken a turn in 2013-14."
Mike Ferguson, a former Susquehanna Twp. School Board member who became board president in 2012, said he recalls that board's philosophy in building up its fund balance was to prepare for future known costs, such as pension obligations, so the board wouldn't be forced to ask voters for a property tax increase higher than Act 1 allowed.
“It would take the edge off any hard need," he said.
Sen. Rob Teplitz, D-Dauphin County, who serves on the Basic Education Funding Commission, said he believes fund balances are a symptom of the unpredictable and inequitable nature of the current school funding system.
“So if the commission accomplishes its goal in establishing a fair and equitable and predictable funding system, the fund balance issue I think will resolve itself," he said.
How much is too much?
The financial industry recommends maintaining a minimum of 5 percent of an annual operating budget in an unrestricted reserve account. But what it often boils down to for school districts is what amount a school board feels comfortable holding.
In Northern Lebanon, Bell said the school board several years ago made a conscious decision that it wanted to keep money in taxpayers' pockets as long as possible, figuring when it needed to turn to taxpayers for more money, “they'll give it to us." The current board now feels it may be time to start building the reserves back up, he said.
Cumberland Valley School District had nearly 19 percent of its annual budget held in reserve in 2012-13. Superintendent Fred Withum, who took over the district's helm in October, couldn't speak specifically to the rationale behind fund balance decision-making prior to his arrival.
“In most districts, particularly Cumberland Valley, the board is actually saving money for a very conservative agenda" Superintendent Fred Withum
But generally, he said district officials “need to strike a balance of not taking from the taxpayers any more than they need to but at the same time, not shorting the district so much so that when they need to meet their primary financial obligations, the money isn't there to do so."
An influx of new children could show up, forcing the district to hire an extra teacher or two. A student with special education needs costing hundreds of thousands of dollars to educate could enroll. School building's roof or heating and ventilation system don't last forever and are expensive to replace.
All of those are examples of big — and sometimes unplanned — expenses a district could face. But he said taxpayers may not think about that when they see large dollar amounts sitting in district reserve accounts.
“I think you will find in most districts, particularly Cumberland Valley, the board is actually saving money for a very conservative agenda . to deal with all the obligations districts have," Withum said.
Another reason for keeping a fund balance on hand was offered in a Temple University Center on Regional Politics policy statement issued this month on school fund balances. It noted that districts' credit ratings can be affected directly by the level of their fund balances.
“Those with little or no money in reserve are considered to be higher risk and their ratings — along with their cost of borrowing — suffer accordingly," it states.
However, Northern Lebanon's Bell said he knows of some districts' decision-makers who have a different motivation for holding a certain amount in reserve.
He said they get a set figure in mind of what they want to have in reserve even if it isn't for any specific future expense. Once that balance dips below that, the school board raises taxes to bring it back up to that desired level.
Although keeping less than 3 percent in Northern Lebanon's reserves is dangerously low in his opinion, Bell said, “I do believe there are some districts that have some really, really extremely high ending fund balances."
On the rise
Sen. Scott Wagner doesn't get it. Looking at the numbers, he said it doesn't jibe with what he hears from Democratic gubernatorial candidate Tom Wolf who is bashing Corbett, the Republican incumbent, for cutting funding to schools. If funding was cut, why are the majority of districts' fund balances on the rise?
Four billion dollars “is a lot of money to be sitting out there not earning more than a quarter to a half percent interest," he said. “I'm not saying anybody is being irresponsible but at the end of the day, we all have to agree it adds up to a lot of money."
Cumberland Valley's Withum said one of the biggest reasons districts are building up their fund balances is the coming pension obligations. Those costs are expected to be double the current rate in five years before plateauing for about 15 years. Rising health care costs and building expenditures are other anticipated expenditures for which districts plan ahead.
“As a result, we're trying to smooth out the impact of that by having some money set aside to just stay ahead of the curve," Withum said.
Another explanation he offered for the increasing fund balances are the efficiencies that districts are achieving through cutting programs and positions. “When programs are cut, all of that savings may not be applied in the same year the cuts were made so it shows up in the fund balance," he said.
Jay Himes, executive director of the Pennsylvania Association of School Business Officials, said aside from those explanations, he also attributes the rising district fund balances to an unintended consequence of Act 1 that applies brakes to how high a school board can raise school property tax rates in any one year.
Prior to that law, he said districts could be less conservative in their budgeting knowing if an unanticipated expense came up, they could raise taxes high enough to recover the next year. Now, districts don't have that to fall back on.
If they don't increase taxes by the maximum amount allowed under Act 1, the unused portion can't be banked for future years. So Himes said, “I think (Act 1) promotes much more cautious budgeting and much more cautiousness with reserve funds."
To show how cautious, he noted that in 2012-13, school districts combined spent all but 1.7 percent of the revenue they took in.
“So there is not this huge conspiracy to have taxpayers pay more than they should," Himes said. “it's very close budgeting that matched up revenues and expenditures in the right way and that's what's producing these fund balances."
He, for one, is hopeful fund balances do not become part of the Basic Education Funding Commission's recommended formula for state funding to schools. He said he may feel differently if the pension costs weren't anticipated to escalate.
“But without fund balances, these (program and staffing) cuts that already have occurred will continue and escalate," Himes said. “I don't know how districts will succeed in paying future pension expenditures without a fund balance."
That's why districts have fund balances, he said. Those reserves are not there to help pay for the next year's budget, but the next five years. Nevertheless, he finds the hullabaloo over fund balances to be interesting.
“This is about districts saving money as opposed to spending it," Himes said. “It's hard to win. We're criticized if we spend too much and we're criticized if we save."
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