Today's St. Cloud Daily Times carries a story that the St. Cloud School District's
fund balance has finally been restored to about $5.4 million, which
takes it for the first time to the minimum level recommended by
financial experts. As the Times article explains "St. Cloud school
district’s fund balance first approached zero in 2001 when board
members voted to spend about $4 million from the reserves to pay for
employee contract’s. The next year, the fund balance was down to
$34,033." That explanation is partly true, but it omits the other
major critical event that occurred in 2001 -- the state legislature's
massive transfer of levy money out of school districts like St. Cloud,
to "equalize" school funding in Minnesota.
I
figured that it would be really hard for people to place a negative
spin on this fabulous news, but I was wrong. One person posted to the
comment line that we should be thankful to teachers for sacrificing pay
increases to make financial progress possible. Actually, the
restoration of the fund balance resulted from passage of our operating
referendum, and specifically the allocation of about 10% of referendum
dollars to that purpose...a commitment made during the referendum
campaigns. If we hadn't made the promise, we wouldn't have the money in the first place. If the District had diverted that funding to increase pay,
we would have been breaking a campaign promise. The Board of Education
has felt that the integrity of past and future levy campaigns require
us to keep those commitments scrupulously.
Another commenter
said that when a school district has reserves, that proves that it has
too much funding. No, that is not true either. Reserves are required in
government and in business, because you pay people for producing your
product (or your services) before you get reimbursed or paid for those
services. And, in Minnesota, the Governor and Legislature have both
used school districts as a State ATM machine when times get rough,
shifting the school aid payments into the next year and forcing school
districts to dip into their reserves, or to borrow money, to make
payroll.
When a school district increases pay by dipping
into its reserves, the consequences are graver than merely putting the
school district at risk of being forced to borrow. When the board of
education back in 2001 spent $4 million out of reserves to pay labor
contracts, it did more than eliminate its reserves. It also agreed to
permanent ongoing expenses that were $4 million greater than revenues.
Dipping into reserves for a one time only expense doesn't have this
impact, but agreeing to ongoing payroll expenses, or any other ongoing
expenses, out of reserves, places the district into permanent deficit,
unless compensating cuts are made.
When a school district
dips into its reserves by say $4 million, it actually requires $8
million in cuts to restore the reserves. The first four million in
cuts are required to stop running a deficit, but another $4 million in
cuts (or additional revenues) are required to restore reserves.
That's why it has taken so long to bring the reserves back to their
former level.
What are the consequences of restoring our
fund balance? What are the consequences of hitting our minimum fund
balance target? One consequence is that as long as we keep our fund
balance at that level, we eliminate $5 million on borrowing to cash
flow operations. The interest that we save frees up money to fund
daily operations. Another consequence is that we don't have to divert
money from operations to restore the fund balance. So, it places the
District in a better position financially, and that is a good thing
too.
It took us about 7 years to restore the fund balance to
the minimum level recommended by conservative financial planners.
Careless management could wipe out that fund balance in a single year,
again. If we remember how difficult it was to restore our fund
balance, perhaps we'll be wise enough to avoid repeating history.
