Ending fund balance-how much is enough?
July 15, 2009
Unions are targeting “ending fund balances” as a source to fund their salary and benefit proposals. This has become a popular issue at the legislature, in budget meetings and at bargaining tables. So, what is ending fund balance and why do we need it?
Ending fund balance is an essential tool that districts can use to limit current and future risks such as revenue shortfalls and unexpected expenditures. Establishing and maintaining an adequate ending fund balance allows districts to stabilize overall revenue in order to maintain instructional programs for students, even when unexpected revenue shortfalls or unexpected expenditure needs occur. For example, having adequate levels of ending fund balance allowed many school districts to complete their full school year during 2002-03 and 2003-04 while others were forced to close early.
Ok, but how much should a district maintain as an ending fund balance? Well, that varies depending upon who you ask. First, and foremost, the amount of ending fund balance should be based upon an individual district’s current circumstance. For example, a district that has been setting aside resources through the years to be used to renovate a school building may well require a significantly higher fund balance than a district who has relatively new facilities.
As a “rule of thumb” OSBA recommends boards maintain a minimum ending fund balance of five to eight percent of its General Fund resources. This is based upon an average-size district (ADM of about 6,000) and assumes that districts will be able to anticipate a fairly reliable level of funding each year. The Government Finance Officers Association (GFOA) recommends, at a minimum, governments maintain an unreserved (not earmarked for a specific purpose) ending fund balance of no less than five to fifteen percent of its general fund operating revenues, or of no less than one to two months of regular general fund operating expenditures. The GFOA recommends a range of 5% to 15%, regardless of the size of the government while OSBA’s recommendation is based upon an average size district and isn’t intended to cover districts of all size.
Other factors to consider when establishing an appropriate level of ending fund balance are:
- The size of your district - the smaller the district, the larger the percentage is likely to be because you should keep enough to pay one or two months of bills, such as payroll. In a small district, this amount could likely be larger than five percent of your small budget.
- Your ability to predict your revenues and expenditures each year. The more unpredictable your revenues and expenditures are, the more likely you will need to maintain a larger ending fund balance.
- Anticipated or potential expenditures that may be pending the outcome of other factors the district doesn’t control such as, PERS litigation. These situations may require the district to establish reserves and hold them until such time as the litigation has been resolved.
All of these factors should be considered along with the long-term plan for the district when deciding what is an appropriate amount of ending fund balance. The key word in talking about this hot topic is sustainability. We want to be able to utilize ending fund balance to cover the peaks and valleys of revenue collections as well as unexpected expenditures. Unexpected expenditures are typically those that are one-time or infrequent in nature, such as equipment. Salary and benefit costs are considered on-going expenditures and are of the type that we must continue to fund year after year. Ending fund balance is not a sustainable source of revenue for a district, thus it is generally designed to address the one-time expenditures. Once you draw those reserves down to cover lost revenue or to pay for ongoing expenditures, they are gone.
A few cautions about shortening the school year or eliminating days
Consider replacing early retirement incentives with TSAs
Engaging the community in budget development