Thursday, November 3, 2011

District Fund Balance Restored to Minimum Target

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. 

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