Framing the Issue

TALKING POINTS: DISTRICT FUND BALANCES

FRAMING THE ISSUE

 The goal of Michigan’s school finance system was to close the gap between rich and poor spending districts, by eliminating the heavy burden on property taxes. Explain how your district’s fund balance aligns with this goal and how it’s being used.  Don’t hide your fund balance. Be accountable for the money you saved and/or used and be able to explain it.  Districts with an unreasonably large fund balance can be seen as undermining state efforts to create educational equity. If local districts don’t spend the money they were given to provide programs or services for the children in their districts, legislators and citizens will question the validity of closing the funding gap.  A district with very little (under 15%) in their fund balance, may be questioned about their district’s money management skills, be prepared to explain.  People in your community need to understand what a fund balance is and why it does not equate to their personal savings account.  Explain how the state’s budget cuts, rising health insurance and retirement rates impact your school district. Communicate early and often with key audiences, especially if difficult decisions are occurring now or will be in the future.  Rather than talking about fund balances in terms of percentages or dollars and cents; talk about hows and whys of your fund budget and how it relates in terms to cuts, or prevention of cuts, and the inevitable impact on young people, the classroom and the community.  Remember public education is NOT a for-profit business. The money you spend is the public’s money and they have a right to know how it’s being used.

KEY MESSAGES

What is a Fund Balance?

 A fund balance is the difference between the money that comes into the district (through state aid, federal money, grants etc.) and the money that is spent (salaries, text books, maintenance costs, utility bills etc.)

o A district’s fund balance is in place to protect programs for that community’s children. Schools want to ensure that they graduate students with the skills to succeed in work and life. o A fund balance is a one-time source of funding, not an ongoing revenue source. o The fund balance is NOT equivalent of a person’s savings account. It is NOT all cash that can be used for any purpose. o By accounting rules, a school’s fund balance also includes “receivables” (such as the two months of School Aid payments that are due, but not yet received from the state at the end of a district’s fiscal year). A typical fund balance also includes some inventory (teaching, custodial, and offices supplies and fuel in storage tanks).

 Three reasons for having a fund balance

1. Helps protect a district from borrowing for cash flow; because there are two months each year during which schools do not receive funds from the state, yet payrolls must be met, bills must be paid. School districts don’t receive their first State Aid revenue check for the new school year until mid-October, and about four payrolls have been covered by that time. 2. Provides a way to set money aside for repairs (roof) maintenance (new heating systems etc.), purchases (buses, textbooks) or catastrophic (or near catastrophic) events. 3. Uncertainty about state and federal funding. Schools did a better job of projecting the economy than state government did. Some were able to put money away to prepare for the inevitable budget shortages under Proposal A due to tax reductions. Others have not been so fortunate.

Why do fund balances exist?

 Michigan School Business Officials (MSBO) and leading accounting and auditing firms, recommend school districts have a fund balance of at least 15 percent of their budget. o As a general rule, MSBO recommends that districts have a fund balance of at least 15 to 20 percent of their budget. In simple terms this level of fund balance is necessary to avoid borrowing during the two- month period between the August and October State Aid payments. o Additionally it is important to have a sufficient fund balance to allow a school district to absorb cuts in state funding. Having a financial cushion allows a district to avoid drastic changes in educational programs and/or employee layoffs during the school year.

 Fund balances that are too small or too large can cause problems.

o MSBO recommends 15 percent of budget in fund balance. A 15 percent fund balance gives districts the ability to operate for about two months before going completely out of money. o Schools build up fund balances for a variety of reasons. They may be planning to pay cash for buses, a new roof or equipment. You CANNOT lump all schools with fund equities into one category. o Many districts did a good job of projecting the economy and preparing for the inevitable budget shortages under Proposal A due to tax reductions. Others were unable to build up a 15 percent fund balance because of a variety of issues, declining enrollment being a major factor.