School District Cash Balances Remain Steady in 2020

School District Cash Balances Remain Steady in 2020

Kansas public schools educate nearly 500,000 students from all walks of life. Each day, public schools educate, feed and counsel the state’s biggest asset: our future. Running the state’s public schools — the foundation of our democracy — requires extraordinary knowledge and skill, especially in the era of a public health pandemic.

Like any organization, school districts must prudently manage their budgets. One aspect of school funding that frequently raises questions is district cash balances, with some critics suggesting that schools are holding too much of their funds in cash balances. The latest reports show that balances in unrestricted funds compared to expenditures have been stable and within an appropriate range for moderate economic risk as defined by government finance experts.

Why do school districts have cash balances?

School districts maintain ending balances for three major reasons: cash flow, savings for long-term expenditures, and unplanned contingencies.

Cash flow. As noted above, one reason for cash balances is because tax levies are collected during one year for bond payments the next year. Districts need those funds on hand at the start of the year because they will not receive revenues in time for payments. Districts also start the year with cash balances in special education because state aid payments are not made until October and food service because revenues do not begin until students arrive and begin paying fees. Those balances are needed to operate until revenues arrive.

In fact, monthly (not annual) unrestricted school district operating fund balances vary as much as $400 million over the course of the school year, because expenditures and revenues do not match up.

Planned savings. Districts may also have cash balances to save for major purchases without going into debt and paying interest. These projects include savings for building construction and repairs (such as roofs), technology purchases in multi-year cycles, school buses and student materials.

Contingencies. Districts keep balances in the general contingency fund and other funds for special programs to cover unexpected expenses or revenue shortfalls. Cash balances increased as a percent of expenditures during the Great Recession from 2008 to 2012, when districts experienced several rounds of state funding cuts and delays in state aid payments. Balances as a percent of expenditures have been stable in recent years as school funding has stabilized.

Because school funding is primarily based on the previous year’s enrollment, districts also maintain balances for expected change in enrollment, especially in specialized programs such as special education, in case they need more staff and supplies than budgeted.

How do cash balances compare to school budgets?

Kansas school districts had total cash balances of just under $2.29 billion on July 1, or about 32.4 percent of last year’s total expenditures of $7.075 billion. Cash balances as a percent of total spending have averaged about 32 percent for the past five years.

Nearly 70 percent of these cash balances are in highly restricted funds that cannot be used for general operations. These include almost $650 million to make construction bond payments; $576 million in capital outlay funds district use for long-term capital projects or emergency building repairs; $138 million in school district insurance reserves; and other areas such as federal funds, gifts and grants and student fees for textbook and material purchases.

The remaining funds, $711 million in less restricted funds, equal 10 percent of total school spending, the lowest percentage since 2010, and below the 10-year average of 10.9 percent. Total dollars in school district contingency funds were $233 million, or 3.3 percent of total expenditures in 2020.

How do Kansas cash reserves compare to recommended guidelines?

An efficiency study commissioned by the Kansas Legislature several years ago cited a Governmental Finance Officers Association recommendation that 15 percent balances for operating budgets were appropriate for “moderate” finance risk environments. With the current economic issues facing the state and nation, the risk of financial uncertainly is certainly increasing.

The $711 million in unrestricted funds equals 15.1 percent of school district general fund, local option budget and special education state aid expenditures, which totaled $4.7 billion last year. That percentage was the same as in 2021 and the lowest since 2010.

In simple terms, a 15 percent reserve equals about two months average operating expenditures for districts.

Should school districts use cash balances to increase spending for educational programs?

Currently, Kansas is half-way through a six-year plan to increase funding each year until operating funds are restored to 2009 levels, after adjusting for inflation. The Kansas Legislature and Supreme Court agreed this plan would return funding to a

constitutionally suitable level. Since 2009, Kansas school funding per pupil did not keep up with inflation and average spending by other states. After several years, various measures of student performance (test scores, graduation rates, ACT scores and educational attainment) either declined or fell behind other states, or both.

It is sometimes asked if school districts could use cash balances to increase education funding. First, as noted, the largest portion of cash balances cannot be used for general operations (such as capital outlay and bond expenditures raised from local mill levies restricted for those purposes). Second, a significant amount of funds on July 1 actually WILL be spent during the year to manage cash flow, when school expenditures exceed revenues.

It is also important to note that spending cash balances is a one-time revenue. If those funds are not replaced by the state or other revenues, the districts will have to cut that level of spending in the following year.

Finally, lower cash balances could result in higher risk for districts if revenues are reduced or expenditures increased, based on governmental finance standards.