Existing law prescribes procedures for the formation of port districts and regulates the operation and development of ports in the state, including the operation of port facilities, equipment, and certain sea-going vessels.

This bill would establish the Southern California Port Congestion Authority and would require that the authority be governed by a board consisting of 7 members appointed by the Secretary of Transportation. The bill would authorize the authority to plan, develop, and implement measures and projects necessary to alleviate congestion in the Port of Los Angeles and the Port of Long Beach, as specified. The bill would require each marine terminal operator at the Port of Los Angeles and the Port of Long Beach to report to the authority specified information with respect to traffic at the ports. The bill would also require the authority to hold quarterly public hearings to discuss the results of these reports.

To the extent that the bill would impose new duties upon local government entities, it would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions.

Existing law, unless the school district is granted an exemption, limits the amount of the combined assigned or unassigned ending fund balance contained in a school districts annual budget in any fiscal year immediately after a fiscal year in which a transfer is made into the Public School System Stabilization Account, and establishes a formula for calculating the maximum amount allowable for school districts with less than 400,000 units of average daily attendance, and a formula for school districts with more than 400,000 units of average daily attendance, as specified.

This bill would instead make the formula for school districts with less than 400,000 units of average daily attendance applicable to school districts with 400,000 units of average daily attendance or less. The bill would specify that the limitation on the combined assigned or unassigned ending fund balance does not apply to moneys in a committed reserve, fund balance, as defined. The bill would also make a technical change by deleting an obsolete provision. To the extent the bill would impose additional duties on school districts, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions.

Existing law, unless the school district is granted an exemption, limits the amount of the combined assigned or unassigned ending fund balance contained in a school districts annual budget in any fiscal year immediately after a fiscal year in which a transfer is made into the Public School System Stabilization Account, and establishes a formula for calculating the maximum amount allowable for school districts with less than 400,000 units of average daily attendance, and a formula for school districts with more than 400,000 units of average daily attendance, as specified.

This bill would instead make the formula for school districts with less than 400,000 units of average daily attendance applicable to school districts with 400,000 units of average daily attendance or less. The bill would specify that the limitation on the combined assigned or unassigned ending fund balance does not apply to moneys in a committed reserve, as defined. The bill would also make a technical change by deleting an obsolete provision. To the extent the bill would impose additional duties on school districts, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions.

Existing law, unless the school district is granted an exemption, limits the amount of the combined assigned or unassigned ending fund balance contained in a school districts annual budget in any fiscal year immediately after a fiscal year in which a transfer is made into the Public School System Stabilization Account, and establishes a formula for calculating the maximum amount allowable for school districts with less than 400,000 units of average daily attendance, and a formula for school districts with more than 400,000 units of average daily attendance, as specified.

This bill would instead make the formula for school districts with less than 400,000 units of average daily attendance applicable to school districts with 400,000 units of average daily attendance or less. The bill would also make a technical change by deleting an obsolete provision. To the extent the bill would impose additional duties on school districts, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions.

 THIRD READING  

Bill No: AB 531

Author: O'Donnell (D), et al.

Amended: 6/9/15 in Senate

Vote: 21

SENATE EDUCATION COMMITTEE: 8-0, 6/17/15

AYES: Liu, Runner, Block, Hancock, Leyva, Monning, Pan, Vidak

NO VOTE RECORDED: Mendoza

SENATE APPROPRIATIONS COMMITTEE: 6-0, 7/6/15

AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza

NO VOTE RECORDED: Nielsen

ASSEMBLY FLOOR: 74-0, 5/22/15 (Consent) - See last page for vote

SUBJECT: School finance: budget calculations

SOURCE: Author

DIGEST: This bill provides that the limitation on the amount that school districts may set aside in an assigned or unassigned ending fund balance in the fiscal year immediately after a fiscal year in which a transfer is made into the Public School System Stabilization Account does not apply to monies in a committed fund balance.

ANALYSIS: Existing law authorizes a county superintendent of schools to grant a school district under its jurisdiction an exemption from the cap for up to two consecutive fiscal years within a three-year period if the school district provides documentation indicating that extraordinary fiscal circumstances, including, but not limited to, multi-year infrastructure or technology projects, substantiate the need for a combined assigned or unassigned ending fund balance that is in excess of the minimum recommended reserve for economic uncertainties. As a condition of receiving an exemption, a school district shall do all of the following:

1. Provide a statement that substantiates the need for an assigned and unassigned ending fund balance that is in excess of the minimum recommended reserve for economic uncertainties.

2. Identify the funding amounts in the budget adopted by the school district that are associated with the extraordinary fiscal circumstances.

3. Provide documentation that no other fiscal resources are available to fund the extraordinary fiscal circumstances. (Education Code § 42127.01)

This bill:

1. Provides that the limitation on the amount that school districts may set aside in an assigned or unassigned ending fund balance in the fiscal year immediately after a fiscal year in which a transfer is made into the Public School System Stabilization Account does not apply to monies in a committed fund balance, as defined in the California School Accounting Manual.

2. Provides that school district governing boards retain the ability to redirect monies in a committed fund balance to an alternative purpose in any subsequent year.

Background

As part of the 2014-15 Budget Act, the state enacted a new requirement to cap school district reserves in years following a deposit in the state school reserve established by Proposition 2. The legislation also created a separate requirement for districts to disclose certain information about their reserves each year. Specifically, existing law requires that in a fiscal year immediately after a fiscal year in which a transfer is made into the Public School System Stabilization Account, a school district budget that is adopted or revised shall not contain a combined assigned or unassigned ending fund balance that is in excess of the following:

For school districts with fewer than 400,000 units of average daily attendance (ADA), the sum of the school district’s applicable minimum recommended reserve for economic uncertainties adopted by the State Board of Education, as specified, multiplied by two.

For school districts with more than 400,000 units of ADA, the sum of the school district’s applicable minimum recommended reserve for economic uncertainties adopted by the State Board of Education, as specified, multiplied by three.

Comments

Need for the bill. According to the author’s office, some in the education community have argued that the reserve cap imposes a burden on school districts, in large part because it prevents them from setting aside monies in a reserve for a future specified purpose. The author’s office indicates that this bill is intended to address this issue by specifying that monies in a committed fund balance are exempt from the cap. Further, using committed fund balances instead of assigned reserves for this purpose has several advantages, including an increase in transparency because a school district governing board’s action to put funds into a committed fund balance occurs during a public meeting of the board.

When will the reserve cap be triggered? The state must make deposits into the Rainy Day Fund when certain conditions are met to trigger the reserve cap for districts. Among these conditions, Test 1 must be the applicable Proposition 98 test level and the state must have paid off all maintenance factor created before 2014-15. The Legislative Analyst’s Office (LAO) indicated in its 2015-16 Proposition 98 Education Analysis in February 2015 that the interaction between these two requirements makes deposits unlikely in the near term. Additionally, the 2015-16 Governor’s Budget Summary indicated that “the Administration does not anticipate fiscal conditions requiring a Proposition 98 Rainy Day Fund deposit and the related potential for caps on local reserves at any point in the budget forecast period (through 2018-19).

LAO’s assessment and recommendations on the cap. The LAO released a report, “Analysis of School District Reserves” in January 2015. In the report, the LAO provided its assessment and recommendations on the reserve caps. Specifically, the LAO indicated, “to the extent districts begin shifting monies to avoid the caps, we are concerned that local budgeting practices could become more confusing. To the extent districts begin spending down their reserves, we are concerned that they would incur a number of risks.” The risks include difficulty for school districts to maintain programs in tight fiscal times, difficulty addressing unexpected costs, greater fiscal distress, and higher borrowing costs. The LAO also indicated concern that the caps become operative following any deposit into the state school reserve, even if the size of that deposit is smaller than the triggered reduction in local reserves. To avoid all of these risks, the LAO has recommended the Legislature repeal the reserve caps.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

According to the Senate Appropriations Committee, there is no anticipated fiscal impact as the provisions included in this bill appear to be declaratory of existing law. The California Department of Education indicates that costs related to providing technical assistance to the field on this bill’s provisions would be absorbable.

SUPPORT: (Verified 7/7/15)

Association of California School Administrators

OPPOSITION: (Verified 7/7/15)

None received

ASSEMBLY FLOOR: 74-0, 5/22/15

AYES: Achadjian, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Wilk, Williams, Wood, Atkins

NO VOTE RECORDED: Alejo, Jones, O’Donnell, Olsen, Waldron, Weber

Prepared by: Lenin Del Castillo / ED. / (916) 651-4105

7/7/15 17:13:28

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

AB 531 (O'Donnell) - School finance: budget calculations.

This bill does not meet the criteria for referral to the Suspense File.

Bill Summary:

This bill provides that the cap on school district reserves in a fiscal year immediately after a fiscal year in which a transfer is made into the Public School System Stabilization Account does not apply to monies in a committed fund balance.

Fiscal Impact:

• There is no anticipated fiscal impact as the provisions included in this bill appear to be declaratory of existing law. The State Department of Education indicates that costs related to providing technical assistance to the field on this bill’s provisions would be absorbable.

Background:

As part of the 2014-15 Budget Act, the state enacted a new requirement to cap school district reserves in years following a deposit in the state school reserve established by Proposition 2 of 2014. The legislation also created a separate requirement for districts to disclose certain information about their reserves each year. Specifically, existing law requires that in a fiscal year immediately after a fiscal year in which a transfer is made into the Public School System Stabilization Account, a school district budget that is adopted or revised shall not contain a combined assigned or unassigned ending fund balance that is in excess of the following:

1. For school districts with fewer than 400,000 units of average daily attendance (ADA), the sum of the school district’s applicable minimum recommended reserve for economic uncertainties adopted by the State Board of Education, as specified, multiplied by two.

2. For school districts with more than 400,000 units of ADA, the sum of the school district’s applicable minimum recommended reserve for economic uncertainties adopted by the State Board of Education, as specified, multiplied by three.

Existing law authorizes a county superintendent of schools to grant a school district under its jurisdiction an exemption from the cap for up to two consecutive fiscal years within a three-year period if the school district, among other things, provides documentation indicating that extraordinary fiscal circumstances, including, but not limited to, multi-year infrastructure or technology projects, substantiate the need for a combined assigned or unassigned ending fund balance that is in excess of the minimum recommended reserve for economic uncertainties. (Education Code § 42127.01)

Proposed Law:

This bill:

1. Provides that the limitation on the amount that school districts may set aside in an assigned or unassigned ending fund balance in the fiscal year immediately after a fiscal year in which a transfer is made into the Public School System Stabilization Account does not apply to monies in a committed fund balance, as defined in the California School Accounting Manual.

2. Provides that school district governing boards retain the ability to redirect monies in a committed fund balance to an alternative purpose in any subsequent year.

Related Legislation:

SB 774 (Fuller) repeals the existing statutory cap on the amount of fiscal reserves that a school district is allowed to maintain. This bill is pending before the Senate Education Committee.

AB 1048 (Baker), similar to SB 774, proposes to repeal the statutory cap on the amount of fiscal reserves that a school district would be allowed to maintain under specified conditions. This bill failed passage in the Assembly Education Committee on May 13, 2015.

AB 1318 (Gray) proposes to modify the calculation of the statutory cap on fiscal reserves. This bill is pending before the Assembly Education Committee.

Staff Comments: This bill is flagged as potentially imposing a new reimbursable mandate on school districts. However, since this bill is consistent with current law, it is unlikely that the Commission on State Mandates would determine this bill to impose a higher level of service.

According a recent Legislative Analyst’s Office report, school districts are currently required to categorize monies in their reserves. The categories reflect varying levels of discretion that districts have in spending their reserves. School districts can use the committed category to indicate amounts that have been earmarked through an action by the school board. The assigned category indicates amounts that have been earmarked by a district official. The unassigned category indicates all amounts not designated for a specific purpose.

Existing law specifies that school district fund balances must not have a combined assigned or unassigned ending fund balance that is in excess of specified amounts. This bill provides that the caps triggered by Proposition 2 deposits not apply to monies in a committed fund balance. Since the state accounting manual provides a district category for a committed fund balance, this bill appears to be declaratory of existing law. In its report, the Legislative Analyst’s Office indicates that districts that classify some part of their reserves as committed, assigned, or unassigned may later reclassify those amounts if desired. This interpretation of the law is consistent with the provisions of this bill.

-- END --

SENATE COMMITTEE ON EDUCATION

Senator Carol Liu, Chair

2015 - 2016 Regular

Bill No: AB 531

Subject: School finance: budget calculations

SUMMARY

This bill provides that the limitation on the amount that school districts may set aside in an assigned or unassigned ending fund balance in the fiscal year immediately after a fiscal year in which a transfer is made into the Public Stabilization Account does not apply to monies in a committed fund balance.

BACKGROUND

As part of the 2014-15 Budget Act, the state enacted a new requirement to cap school district reserves in years following a deposit in the state school reserve established by Proposition 2. The legislation also created a separate requirement for districts to disclose certain information about their reserves each year. Specifically, existing law requires that in a fiscal year immediately after a fiscal year in which a transfer is made into the Public School System Stabilization Account, a school district budget that is adopted or revised shall not contain a combined assigned or unassigned ending fund balance that is in excess of the following:

1. For school districts with fewer than 400,000 units of average daily attendance (ADA), the sum of the school district’s applicable minimum recommended reserve for economic uncertainties adopted by the State Board of Education, as specified, multiplied by two.

2. For school districts with more than 400,000 units of ADA, the sum of the school district’s applicable minimum recommended reserve for economic uncertainties adopted by the State Board of Education, as specified, multiplied by three.

Existing law authorizes a county superintendent of schools to grant a school district under its jurisdiction an exemption from the cap for up to two consecutive fiscal years within a three-year period if the school district provides documentation indicating that extraordinary fiscal circumstances, including, but not limited to, multi-year infrastructure or technology projects, substantiate the need for a combined assigned or unassigned ending fund balance that is in excess of the minimum recommended reserve for economic uncertainties. As a condition of receiving an exemption, a school district shall do all of the following:

1. Provide a statement that substantiates the need for an assigned and unassigned ending fund balance that is in excess of the minimum recommended reserve for economic uncertainties.

2. Identify the funding amounts in the budget adopted by the school district that are associated with the extraordinary fiscal circumstances.

3. Provide documentation that no other fiscal resources are available to fund the extraordinary fiscal circumstances. (Education Code § 42127.01)

ANALYSIS

This bill:

1. Provides that the limitation on the amount that school districts may set aside in an assigned or unassigned ending fund balance in the fiscal year immediately after a fiscal year in which a transfer is made into the Public School system Stabilization Account does not apply to monies in a committed fund balance, as defined in the California School Accounting Manual.

2. Provides that school district governing boards retain the ability to redirect monies in a committed fund balance to an alternative purpose in any subsequent year.

STAFF COMMENTS

1. Need for the bill. According to the author’s office, some in the education community have argued that the reserve cap imposes a burden on school districts, in large part because it prevents them from setting aside monies in a reserve for a future specified purpose. The author’s office indicates that the bill is intended to address this issue by specifying that monies in a committed fund balance are exempt from the cap. Further, using committed fund balances instead of assigned reserves for this purpose has several advantages, including an increase in transparency because a board's action to put funds into a committed fund balance occurs during a public meeting of the board.

2. Concerns on the reserve cap. Opponents of the cap have argued that it prevents districts from setting aside prudent reserves to guard against an economic downturn and a reduction in state funding for schools. The minimum requirement to guard against such an event is 3% of total expenditures for most districts. The cap is twice that amount, or 6% of total expenditures for most districts. Supporters of the cap argue that 6% is sufficient protection because (1) it is applied only in a year following a year in which funds are deposited in the state Proposition 98 reserve, and (2) the state reserve serves the same purpose as the local reserve—to provide a cushion against a reduction of revenue to schools. Hence, the state reserve reduces the burden placed on local reserves for this purpose.

However, it does not appear that the bill is intended to address any of these issues. Rather, it proposes clarifying language that could be helpful for school districts to the extent there is confusion or misunderstanding regarding which fund balances are subject to or exempt from the cap. This could help them to plan accordingly.

3. When will the reserve cap be triggered? The state must make deposits into the Rainy Day Fund when certain conditions are met to trigger the reserve cap for districts. Among these conditions, Test 1 must be the applicable Proposition 98 test level and the state must have paid off all maintenance factor created before 2014-15. The Legislative Analyst Office (LAO) indicated in its 2015-16 Proposition 98 Education Analysis in February 2015 that the interaction between these two requirements makes deposits unlikely in the near term.

Additionally, the 2015-16 Governor’s Budget Summary indicated that “the Administration does not anticipate fiscal conditions requiring a Proposition 98 Rainy Day Fund deposit and the related potential for caps on local reserves at any point in the budget forecast period (through 2018-19). Nonetheless, the Administration appreciates the concerns expressed by stakeholders regarding potential caps on school district reserves and will engage in a dialogue with these groups in the coming months to protect the financial security and health of local school districts.” While there have been several meetings with stakeholders, the Administration has yet to issue any related proposal.

4. LAO’s assessment and recommendations on the cap. The LAO released a report, “Analysis of School District Reserves” in January 2015. In the report, the Legislative Analyst's Office (LAO) provided its assessment and recommendations on the reserve caps. Specifically, the LAO indicated, “to the extent districts begin shifting monies to avoid the caps, we are concerned that local budgeting practices could become more confusing. To the extent districts begin spending down their reserves, we are concerned that they would incur a number of risks.” The risks include difficulty for school districts to maintain programs in tight fiscal times, difficulty addressing unexpected costs, greater fiscal distress, and higher borrowing costs. The LAO also indicated concern that the caps become operative following any deposit into the state school reserve, even if the size of that deposit is smaller than the triggered reduction in local reserves. To avoid all of these risks, the LAO has recommended the Legislature repeal the reserve caps.

5. Related legislation.

SB 774 (Fuller) repeals the existing statutory cap on the amount of fiscal reserves that a school district is allowed to maintain. This bill is pending before the Senate Education Committee.

AB 1048 (Baker), similar to SB 774, proposes to repeal the statutory cap on the amount of fiscal reserves that a school district would be allowed to maintain under specified conditions. This bill failed passage in the Assembly Education Committee on May 13, 2015.

AB 1318 (Gray) proposes to modify the calculation of the statutory cap on fiscal reserves. This bill is pending before the Assembly Education Committee.

SUPPORT

Association of California School Administrators

OPPOSITION

None received.

-- END --

Date of Hearing: May 13, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

ABPCA Bill Id:AB 531

Author:(O'Donnell) – As Amended Ver:April 21, 2015

Urgency: No State Mandated Local Program: Yes Reimbursable: Yes

SUMMARY:

This bill provides that the limitation on the amount that school districts may set aside in an assigned or unassigned ending fund balance in the fiscal year immediately after a fiscal year in which a transfer is made into the Public School System Stabilization Account (PSSSA) does not apply to monies in a committed reserve. Specifically, this bill:

1. Defines "committed reserve" to mean monies set aside for a designated future purpose by a majority vote of the district governing board.

2. Clarifies that district governing boards retain the ability to redirect monies in a committed reserve to an alternative purpose in any subsequent year.

FISCAL EFFECT:

No net Proposition 98/GF impact. This bill appears to be largely technical and clarifying. To the extent districts accumulate higher reserve levels at the local level, as currently permitted; this could result in less Proposition 98/GF pressure to assist with future school district budget deficiencies.

COMMENTS:

1. Background. Proposition 2 (Rainy Day Fund), approved by the voters in November 2014, placed formulas into the State Constitution that determine the minimum amount of debt payments and budget reserve deposits to be made in a fiscal year. Proposition 2 also established the PSSSA (also known as the Proposition 98 reserve account) which is funded by a transfer of capital gains-related tax revenues in excess of 8 percent of general fund revenues. Funds are deposited in the PSSSA in years when the state is experiencing strong growth in state revenue, among other factors.

SB 858 (Committee on Budget), Chapter 32, Statutes of 2014 included a provision that caps districts' reserves in the year following a deposit into the PSSSA. Specifically, the cap prohibit districts from adopting a budget that contains total assigned and unassigned reserves of more than twice the applicable state minimums for unassigned reserves. The minimum reserve requirement is 3% of total expenditures for most districts. For Los Angeles Unified, the minimum reserve is 1% of total expenditures and the cap on reserves is three times the minimum.

2. Purpose. Some school advocates, including California School Boards Association, have expressed concern that the cap on reserves prevents districts from setting aside prudent reserves to guard against an economic downturn and/or a reduction in state funding for schools. Further, they argue the reserve cap prevents districts from setting aside monies for a specific purpose in future years. For example, districts may need to accumulate monies over two or more years to purchase technology, instructional materials, or deferred maintenance.

According to the author, this bill specifies that "committed reserves" are not subject to the cap and defines committed reserves as monies set aside for a future purpose by a majority vote of the district governing board.

Committee staff notes this bill appears to be largely declaratory of existing law. According to the Legislative Analyst's Office (LAO) January report, Analysis of School District Reserves, "…other components of district reserves, including nonspendable, restricted, and committed reserves, do not count toward the caps." Further, the LAO offers the option of redesignating assigned reserves as committed reserves to avoid the cap restrictions.

Analysis Prepared by: Misty Feusahrens / APPR. / (916) 319-2081

Date of Hearing: April 29, 2015

ASSEMBLY COMMITTEE ON EDUCATION

Patrick O'Donnell, Chair

ABPCA Bill Id:AB 531

Author:(O'Donnell) – As Amended Ver:April 21, 2015

SUBJECT: School finance: budget calculations

SUMMARY: Provides that the limitation on the amount that school districts may set aside in an assigned or unassigned ending fund balance in specified years does not apply to monies in a committed reserve. Specifically, this bill:

1. Provides that the limitation on the amount that school districts may set aside in an assigned or unassigned ending fund balance in the fiscal year immediately after a fiscal year in which a transfer is made into the Public School system Stabilization Account does not apply to monies in a committed reserve.

2. Defines "committed reserve" to mean monies set aside for a designated future purpose by a majority vote of the district governing board.

3. Clarifies that district governing boards retain the ability to redirect monies in a committed reserve to an alternative purpose in any subsequent year.

EXISTING LAW:

1. Establishes the Public School System Stabilization Account (PSSSA) at the state level to be funded by a transfer of capital gains-related tax revenues in excess of 8 percent of general fund revenues.

2. Specifies that funds will be appropriated from the PSSSA to schools and community colleges when state support for K-14 education exceeds the allocation of general fund revenues, allocated property taxes and other available resources.

3. Requires school districts to maintain the following minimum reserves for economic uncertainties, as a percentage of total expenditures:

   1. The greater of 5% or $64,000 for districts with 0 to 300 average daily attendance (ADA);

   2. The greater of 4% or $64,000 for districts with 301 to 1,000 ADA;

   3. 3% for districts with 1,001 to 30,000 ADA;

   4. 2% for districts with 30,001 to 400,000 ADA; and

   5. 1% for districts with 400,001 and over ADA.

4. Limits the amount that districts may set aside in an assigned or unassigned reserve in the fiscal year following the fiscal year in which a transfer is made to the PSSA as follows:

   1. For school districts with 400,000 or fewer ADA, the minimum reserve multiplied by 2; and

   2. For school districts with more than 400,000 ADA, the minimum reserve multiplied by 3.

5. Authorizes a county superintendent of schools to grant a school district under its jurisdiction an exemption from the reserve cap for up to two consecutive fiscal years within a three-year period if the school district provides documentation indicating that extraordinary fiscal circumstances, including, but not limited to, multiyear infrastructure or technology projects, substantiate the need for a combined assigned or unassigned ending fund balance that is in excess of the minimum reserve.

6. Requires a school district, as a condition of receiving an exemption to do all of the following:

   1. Provide a statement that substantiates the need for an assigned and unassigned ending fund balance that is in excess of the minimum;

   2. Identify the funding amounts in its budget that are associated with the extraordinary fiscal circumstances; and

   3. Provide documentation that no other fiscal resources are available to fund the extraordinary fiscal circumstances.

FISCAL EFFECT: Unknown

COMMENTS: School districts use assigned and unassigned reserves to set funds aside for potential future use. An unassigned reserve is typically the reserve for economic uncertainty, and its purpose is to provide a cushion against unforeseen shortfalls in revenue or increases in expenditures. An assigned reserve contains funds that may be set aside by the district superintendent and designated for a specific future use, such as a large, one-time instructional materials acquisition.

Existing law requires districts to maintain a minimum reserve, specified as a percentage of total expenditures, but does not impose a cap on reserves except in the year following a transfer to the PSSSA, also referred to as the Proposition 98 reserve account. As a consequence of no cap, some districts have accumulated very large reserves, mounting to 50% or more of total expenditures. Some have noted that this violates a basic tenet of public finance, which is that today's tax revenues should be used to support programs and services for today's taxpayers. The cap on reserves in specified years was enacted in part to prevent the accumulation of unreasonably large reserves and in part to recognize that the transfer of funds into the state-level Proposition 98 reserve reduces the need for large local reserves. This is because the state-level reserve will be used to help maintain K-14 funding during economic downturns, a purpose previously served by the local reserves for economic uncertainty.

Concerns have been raised about the cap on reserves. Many in the education community have raised concerns about the cap on school district budget reserves. The concerns focus on two primary issues. First, opponents of the cap argue that it prevents districts from setting aside prudent reserves to guard against an economic downturn and a reduction in state funding for schools. The minimum requirement to guard against such an event is 3% of total expenditures for most districts. The cap is twice that amount, or 6% of total expenditures for most districts. Supporters of the cap argue that 6% is sufficient protection, because (1) it is applied only in a year following a year in which funds are deposited in the state Proposition 98 reserve, and (2) the state reserve serves the same purpose as the local reserve—to provide a cushion against a reduction of revenue to schools. Hence, the state reserve reduces the burden placed on local reserves for this purpose.

Opponents of the reserve cap also argue that it prevents districts from setting aside monies for a specific purpose in future years. For example, districts may need to accumulate monies over two or more years to purchase technology, instructional materials, or deferred maintenance. Districts may use an assigned reserve for this purpose, however assigned reserves are also subject to the cap.

This bill addresses this issue by specifying that committed reserves are not subject to the cap and defines committed reserves as monies set aside for a future purpose by a majority vote of the district governing board. Using committed reserves instead of assigned reserves for this purpose has two advantages:

• It strengthens the role of the governing board. Unlike assigned reserves, it takes a vote of the governing board to set aside monies in a committed reserve. This ensures that the elected board members have the primary authority to earmark funds for specific future purposes.

• It increases transparency. A board's action to put funds into a committed reserve occurs during a public meeting of the board. This provides the public with the opportunity to review and comment on the proposed future use of those funds.

• Flexibility is not lost. Funds in a committed reserve remain flexible. If the governing board decides to redirect funds in a committed reserve to an alternative purpose, it can do so with a majority vote, which provides the same governing board control and transparency as the original vote to put the funds in a committed reserve.

REGISTERED SUPPORT / OPPOSITION:

Support

None received

Opposition

None received

Analysis Prepared by: Rick Pratt / ED. / (916) 319-2087