Question: We are a one-school basic aid district. Basic aid status affords us the ability to spend about $13,000 per student. Our concern is to build and maintain an adequate reserve in order to be prepared for any number of contingencies. Recently, a group of parents asked two questions regarding the reserve. (1) How much is enough? (2) Why not count the money (approximately $1 million) held in fund 40, special reserve fund for capital outlay projects, toward the reserve? With regard to question No. 1, I stated that our goal is to build the reserve to a point that represents the difference between current expenditures and the district's revenue limit. Is this a reasonable goal for the district?  What is your opinion regarding question number 2? I am opposed to applying fund 40 dollars to the general fund reserve but would value your input.

Response:  How much is enough? The answer to this question is different for each individual school district due to a number of issues, including size of district, whether declining in enrollment or not, whether large one time expenditures may be occurring now or in the future, whether or not the board has adopted a specific ending balance requirement larger that the state required amount, whether there is a future liability with an unknown cost, and in general, whether the board feels is necessary to keep a specific reserve amount in place to keep the district in positive fiscal standing  and to continue offering the level of services/education that is currently in place.

Education Code 33127 gives direction to the Superintendent of Public Instruction, Director of the Department of Finance, and the Controller to develop standards and criteria to be reviewed and adopted by the State Board of Education, to be used by local educational agencies for the management of annual budgets and the management of subsequent expenditures from that budget.

The chart for minimum reserve levels in that code is as follows:

ADA Percentage Level

0 to 300 ADA: The greater of 5% or $50,000

301 to 1,000 ADA: The greater of 4% or $50,000

1,001 to 30,000 ADA: 3%

30,001 to 400,000 ADA: 2%

400,001 ADA and above: 1%

In 2003-04 and 2004-05, legislation has passed in which districts must maintain only half of their normal reserve percentage due to state funding issues. At this time, the minimum reserve levels will go back to their normal amount (per Education Code 33127) in 2005-06. Even though educational agencies may have been able to cut their reserve level in half for these two years, many county offices and districts have not taken advantage of the decrease as it only delays the inevitable. The longer it takes for budget cut decisions to be made, the more the deficit spending compounds. Making adjustments as soon as possible makes it easier to move forward and focus on other educational goals.

Reserves are a portion of the standards and criteria review that county offices perform in approving or disapproving district budgets and/or interim reports. If a district cannot show that the reserve can be maintained in the current and subsequent years, the county office will certify the district’s fiscal records accordingly.

The FCMAT Web site contains a guide describing AB 1200 and related responsibilities which explain the criteria and standards in detail, and lists education codes that would assist in explaining reserve requirements to boards, unions, staff and other community members. It explains in detail that fund balances are only one piece of the requirement, albeit a very important one.

Some important code sections to know regarding the requirements:

Education Code 33127: The Superintendent of Public Instruction, the Controller, and the Director of the Department of Finance were to develop on or before March 1, 1989, standards and criteria to be reviewed and adopted by the State Board of Education to be used by local educational agencies in the development of annual budgets and the management of expenditures from the budget. The standards and criteria to be adopted were to include comparisons and reviews of the following:

• average daily attendance
• revenues and expenditures
• reserves and fund balance
• multiyear commitments

Education Code 33128: Became effective on July 1, 2004, and replaces Section 33127, but still lists the same comparisons and reviews.

Education Code Section 42124: States, “The budget may also contain an amount to be known as the general reserve in such sum as the governing board may deem sufficient, for the next succeeding fiscal year, to meet the cash requirements to which the district's credit may be legally extended for that portion of said next succeeding fiscal year until adequate proceeds of the taxes levied for, or apportionment of state funds made to, the district during such succeeding fiscal year are available to the district.”

In addition, Education Code Section 42125 states that “The budget may contain amounts to be known as the designated fund balance, which may be designated for any specific purpose as determined by the governing board of the school district, and the unappropriated fund balance. These funds shall be available for appropriation by a majority vote of the members of the governing board, to cover expenditures that have not been provided for or that may have been insufficiently provided for, or for unforeseen requirements as they may arise.”

(2) Why not count the money (approximately $1 million held in Fund 40, Special Reserve Fund for Capital Outlay Projects, toward the reserve?

Fund 40 primarily exists to provide for the accumulation of general fund capital outlay monies per Education Code Section 42840. Since Fund 40 is specifically for capital projects, it is not allowable to use the dollars for unrestricted purposes, including counting the monies toward ending balance requirements. The fund may be used to account for any other revenues specifically for capital projects that are not restricted to Fund 21, 25, 30, 35 or 49 and is also where the following funds may be deposited:

• proceeds from the sale or lease with option to purchase of real property
• rentals and leases of real property specifically authorized for deposit to the fund by the governing board
• excess amounts sufficient to pay all unpaid bond obligations are deposited. 

Fund 17, special reserve fund for other than capital outlay projects, on the other hand, can be used in calculating the general fund total available reserve, as those funds are used primarily to provide for the accumulation of general fund monies for general operating purposes other than for capital outlay (per Education Code Section 42842). This fund may be what the parents are referring to, but by the wrong fund name and/or number.

4/09/05