Explaining School Fund Balances – Are PA Schools Holding Too Much in Reserve?

CORP’s newest policy brief provides data on the status of fund balances for Pennsylvania’s 500 school districts at the end of fiscal year 2015-16. Although the data show that total reserve funds have increased by about $800 million since 2012-13, from $3.9 billion to $4.7 billion, they also show that the flexible reserves of most districts (439 of 500) are within or even below the minimum standards recommended by bond raters and government finance professionals and allowed by state law.

The brief summarizes trends for districts, charters, and technical schools, and data on specific school districts has been made available on the CORP website. The brief explains the four types of fund balances: restricted, committed, assigned, and unassigned. It also explains the government accounting standards and the restrictions on unassigned fund balances. Committed funds can be used to save for capital projects, while unassigned fund balances are available for use without restriction and can be used as a hedge against future budgetary uncertainty due to emergencies, delays, or cuts in state funding. School districts may also accumulate unassigned balances to mitigate the impact of predictable increases in pension, health care, or labor contract costs.

The financial industry suggests an unassigned fund balance between 5% and 10% of total operating expenditures, while the Pennsylvania School Code limits the amount of unassigned fund balance to 8% for a district whose expenditures exceed $20 million if that district is going to raise taxes. The Government Finance Officers Association recommends unassigned balances be between 5% and 15% of total expenditures. Thirty-four districts have unassigned balances at or below zero, 281 have balances below 8%, and 124 are above 8% but within a sliding scale allowed by state law.

The question may arise as to whether the relative size of fund balances is related to the relative wealth or poverty of a district. In other words, are more affluent districts likely to have larger fund balances than poor districts? In short, no. Statistical tests show no correlation. Some districts with high fund balances are poor, perhaps reflecting a desire to fund capital projects or avoid borrowing costs. It should also be noted that fund balance is a point-in-time measure; they change from year to year. The amount of fund balance is not necessarily an indicator that school districts are collectively, or even individually, irresponsibly hoarding a pot of gold that could or should be used to avoid tough budget decisions.

Find the Policy Brief, a shorter Research at a Glance, and an interactive map showing the district percent of expenditures in the unassigned fund balance, including overlays of House and Senate districts, here.