The question of whether the Wake County school board should return to the county around $15 million in excess fund balance is likely to be a big issue during the budget process next year.
In a nutshell, the school system's undesignated fund balance, colloquially called its rainy day fund, has grown so much in the past few years that board policy dictates that about $15 million be returned to county commissioners.
But with next year's budget being tight, is that the right call? Also, it would take a two-thirds majority to waive policy to keep the $15 million so would a bi-partisan coalition agree to that decision?
How will keeping, or not keeping, that $15 million impact how commissioners handle next year's budget request?
Let's back up by looking at last week's school board discussion of the Comprehensive Annual Financial Report.
During the presentation, Mark Winters, the district's chief financial officer, talked about the undesignated fund balance. The undesignated fund balance is money that can be used for emergencies, one-time expenditures and, while not recommended, for recurring expenses.
As pg. 89 in the online version of the report shows, the undesignated fund balance has sharply risen in the past two years. It was $12.1 million in fiscal year 2009. It went to $25.9 million in fiscal year 2010 and now $33.9 million for fiscal year 2011.
Winters told the board in the past two years that Central Office had taken "proactive measures" to prepare for the "funding cliff" that will take place when federal stimulus dollars are all gone. For instance, Wake won't have $28 million next year in federal funds that were used to save more than 500 teacher jobs this year.
Winters described actions taken such as freezing hiring for non-school based positions and several rounds of employee layoffs.
Winters said the $33.8 million in undesignated fund balance puts it at 10.9 percent of the county appropriation, or 2.6 percent of the overall operating budget.
It takes $4.9 million a day to operate the school system so Winters said the undesignated fund balance would be enough to run Wake for a week.
Winters then pointed to this policy adopted in 2007 says the goal is to have the undesigned fund balance be 6 percent of the county appropriation. The policy also says that the board won't use more than 50 percent of its undesignated fund balance to balance the budget.
The policy was adopted because the school board frequently dipped heavily into the undesignated fund balance whenever commissioners didn't give them as much money as they requested. The money often went to cover recurring expenses. But this practice lowered the fund balance so much and created such funding concerns that the policy was adopted to curb the practice.
The policy says that any amount of undesignated fund balance over 6 percent would be returned to the commissioners. Winters said that provision was probably written at a time when the county appropriation was increasing on a yearly basis.
County funding has essentially stayed flat the last few years.
So with the undesignated fund balance sitting at 10.9 percent, that represents some $15 million that policy says should be returned to commissioners unless it's waived by the board.
During the board discussion, board members Jim Martin and John Tedesco staked out what could turn into the competing positions on whether to keep the $15 million.
"Did I hear correctly though that this is a set aside that we really need to protect because of the loss of the Recovery Act funding coming up for next year?" Martin asked. "If that is correct, then do we really not need to think about making sure that we don’t send it back to the county because we’re looking at, as I understand it, about $30 million hole when that money disappears next year?”
Winters said Superintendent Tony Tata, Chief Finance Officer David Neter and Budget Department Senior Director Terri Kimzey have looking at how to come up with the money needed to fill the hole. He said using the undesignated fund balance is one possible use.
Tedesco brought up the concerns raised by commissioners that the school board hasn't been using its fund balance enough. A view held by some Republican commissioners is that the school board should have a very small fund balance — or none at all.
"I appreciate your remarks Mr. Winters about this board needing to consider the policies of our fund balance," Tedesco said. "I am a strong proponent of organizations maintaining fund balances. It’s just good fiscal policy. But to what extent is the question.
And I know a couple of years ago when we were talking with our county commissioners about additional resources and, correct me if I’m wrong, but some of them were severely concerned that we weren’t maximizing our fund balance appropriately or suggesting that we should be using our fund balance at a better rate before we ask them for dollars. Was that some of the discussion as well?”
Winters said that "we have heard that.”
“So I would think, especially now, showing a doubling of the fund balance over the last couple of years, when we look at this policy we should have some serious discussion with our county commissioners prior to going into what is likely going to be another round of budget cuts, particularly how we’re going to manage our fund balance as a board," Tedesco replied.
Tata jumped in next.
“I agree 100 percent," Tata said. "I think that the team has done an excellent job of trying to create a soft landing from the AARA (American Recovery and Reinvestment Act) cliff that we face.
And as Dr. Martin mentioned, that is exactly what our strategy has been so if we can apply, for example, half of the fund balance this year and then maybe get more money from somewhere, and then half the following year then I think we’ll achieve that soft transition that we’re looking for."
With the school board now led by Democrats and the board of commissioners led by Republicans, it should be an interesting budget negotiation process next year.
Now that I think about it, they actually don't need a two-thirds majority to keep the money.
They'd need the two-thirds to suspend or waive policy. But they could likely just have a simple majority to vote to change the policy to drop the requirement about returning excess fund balance.
During Tuesday's Rick & Donna Martinez Show on WPTF, the conservative talk show hosts split on the issue of whether the school board should keep the $15 million.
Rick Martinez said the school board should keep the $15 million as a reward for saving the money. He said returning the money would discourage the school system, or other governmental departments, from saving money in the future.
Donna Martinez said the $15 million should be returned to the county, which she said could return the money to taxpayers. She said the school board should only keep the money if it's willing to reduce the amount it wants from commissioners by $15 million next year.