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San Bruno Park ESD |  BP  3002  Business and Noninstructional Operations

District Fiscal Reserves   

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Purpose

A reserve policy is a framework that suggests recommended levels and proper usage of fiscal reserves for the school district. A significant benefit of a reserve policy is the ability to provide a consistent level of educational services to out children. Also, a reserve policy allows for proactive and long-term planning activities by providing a financial buffer during economic downturns or periods of increasing un controllable expenses (i.e., special education). Overall, the reserve policy is intended to mitigate periodic volatility in State funding allow the district to manage for uncertainty. It is recommended that a fiscal reserve policy be review annually.

Historically, long-term planning has been difficult for the school district due to limited fiscal reserves and volatile revenue and expense levels. This has caused situations where the Board has had to react by making material service level adjustments in certain years, which negatively impacted programs, students, teachers and the community.

The intent of the reserve policy is primarily to ensure that the district has sufficient liquidity to meet its financial obligations at all times without having to make abrupt mid year expense reductions. Secondarily, the reserve policy gives the Board more latitude to smooth out revenue and expense volatility, allowing for consistent education levels during multi-year economic planning cycles. Based upon the need to address budget fluctuations which may be caused by either specific one-time events or multi-year trends, the reserves will be separated into two parts: Core Reserves and Contingency Reserves. Should the district be designated a Basic Aid status, then an incremental level of reserves should be identified to mitigate the higher volatility of revenue, inherit in the Basic Aid status.

Core Reserves

Core Reserves are intended to provide sufficient liquidity to support budget variances during the year, and are not intended to bridge long-term changes in budget forecasts. These reserves may be appropriately utilized to maintain an orderly transition to a lower funding level, or to cover non-recurring, unanticipated expenses.

Purposes: To fund unanticipated expenditures, revenue reductions or emergencies arising after completion and adoption of the annual budget.

Use of Funds: These reserves should not be used to resolve long-term budget deficits, as that would merely compound the issues in the future (i.e. shifting funding from the following year into the current year).

Replenishment: To be restored annually.

Contingency Reserves

Contingency Reserves are intended to partially insulate the school district from volatility in revenues and uncontrollable expenses, in order to provide a more consistent level of education during budget cycles. It is intended that the following reserves would be gradually built during periods of improving budget conditions (i.e. increasing revenues and/or decreasing special needs expenses) and then used during periods of deterioration in one or more of these areas. Contingency Reserves will give the Board greater latitude during difficult times, and will ensure that the education provided to our students does not vary widely based on which year they happen to attend, even though they will give up some program funding in very strong years.

Economic Uncertainty

Purpose: To bridge the temporary impairment of review from Revenue Limit or other related funding sources, or to transition gradually to permanently reduced levels of long-term funding.

Replenishment: Funded during periods of increasing revenues and/or declining expenses (special education primarily). Contingency Reserve requirements maybe increased, decreased or kept at status quo over time due to their specific nature. The reserve levels will be reviewed each year to determine increases or decreases in the specific levels or to identify new contingency reserves.

Purpose: To fund heightened levels of special education obligations over multiple years, and to limit the effects of these non-discretionary services on the remainder to the district's programs. Supplemental funding to occur from Core Reserves if the Contingency Reserves are exhausted.

Replenishment: From excess program funding caused by not outflow of special needs students during the budget year. Further, the savings between budgeted amounts for two successive years should be used to replenish this reserve.

Reserve Levels

The reserve percentages should be sized according to the maximum annual volatility for the three most volatile budget variables. Those budget variables are the State Deficit, Average Daily Attendance, and Special Education Encroachment. Per the chart below the aggregate maximum percentage volatility is 9.64%. The amounts are based on the five last years of data. We recommended that the maximum percentages be updated annually.

Maximum Annual Volatility

BUDGET VARIABLE 1990-1991 through 2007-2008

State Deficit -3.96%

ADA -2.68%

Special Education -11% of Budget (2007/08)

AGGREGATE MAXIMUM -9.64% (combined historic maximums)

The recommended total reserve percentage will initially be an amount ranging between 7% and 12% of the average total expenses budget for the trailing three years, excluding extraordinary one-time expenses. The Core Reserves will represent an amount approximately equal to 73% of the total maximum volatility of the three largest drivers combined, while the Contingency Reserves at any given time will represent an amount between 0% and 125% of the maximum volatility of the largest single historic budget driver. Although the maximum volatility for these three drivers has not occurred concurrently in any single year, the potential exists for these to contribute to greater volatility individually and in aggregate. The following chart depicts the coverage provided by the recommended reserve levels.

Recommended Multiple of Largest Multiple of Two Multiple of total

Reserve Level* Single Drive 3.96% Largest Drivers (6.64%) Budget Drivers (9.64%)

Contingency 0-5% 1.25x .72x .52x

Core 5% 1.0x .73x

Total 7-10% .73x to 1.25x

The Contingency Reserve would cover the largest historic variance in a single budget driver by 1.25x (or 1.25 years), while the Core Reserve would cover the largest two variables by 1.0x.

Locally Restricted Funds

Locally restricted funds are funds that have been pledged or earmarked by the Board for a specific use. These funds will be used to pay invoices received in connection with these designations, or for new commitments made within a limited period of time and consistent with the original pledge. These amounts will be scheduled and presented with the year-end audit, and will be monitored to ensure timely usage. While earmarked, these funds will not be considered unrestricted reserves. However, unused or excess amounts will be reallocated to top up Contingency Reserves, or released into unencumbered funds to be allocated to priority programs.

Policy SAN BRUNO PARK SCHOOL DISTRICT

adopted: January 14, 2009 San Bruno, California