School District Fiscal Health: A Tale of Two Insolvencies

ALBANY, NY (09/06/2012)(readMedia)-- Not only will some school districts soon deal with the inability to pay their bills, in worst case scenarios those same school districts in New York State could also come up short in meeting their education mandates, according to a report released Thursday by the New York State Association of School Business Officials (NYSASBO).

The report's data suggests that lower-wealth school districts face the possibility of losing all of their savings, or unrestricted funds, much sooner than average-wealth or higher-wealth school districts. If current trends continue, approximately 215 lower wealth school districts could begin to lose all of their savings by 2015.

"These unrestricted fund balances have traditionally served as a financial buffer for schools to meet unexpected expenses like increases in enrollments, resolution of tax certiorari cases, or spikes in energy costs. Now schools are routinely spending down their savings or "rainy day" funds to meet ongoing operational expenses or plug budget gaps caused by either state imposed revenue caps or unfunded mandates," stated Michael J. Borges, NYSASBO Executive Director.

An analysis of data reported to the state Education Department suggests that lower-wealth school districts in the state are more likely to dip into their savings – and take out more amounts of unrestricted funding - than higher-wealth school districts. Based on a three-year review, the problem appears to be getting worse over time.

Furthermore, 99 percent of school districts utilized their savings funds, and 64 percent of school districts cut staff, in order to balance their Fiscal Year 2012-2013 budgets, according to the survey.

By law, school districts are permitted to set aside up to 4 percent of their budgets annually into the unrestricted fund, while bond-rating firm Moody's suggests a "good medium" savings rate for local governments is 15.5 percent.

Due to the report results, the NYSASBO concludes that fiscal insolvency, with districts unable to pay their bills, and educational insolvency, in which they are unable to provide a sound basic education, could be quickly approaching. And, in certain cases, both could be faced simultaneously.

The current options available to school districts facing fiscal insolvency are limited and most require state intervention. They include: 1) deficit financing – allows school district to borrow for ongoing operational expenses, 2) advance of state aid from future years, 3) bailout – extra state aid in current year to meet operational needs, or 4) a state Education Department takeover (similar to Roosevelt School District on Long Island).

"These options are a band-aid approach and do not address long-term structural problems, i.e. the lack of sufficient revenue or costs driven by unfunded mandates," stated Mr. Borges.

NYSASBO believes the state has three options available to it to address this impending fiscal calamity: 1) prevent fiscal insolvency from happening in the first place by granting waivers to schools exempting them from regulations or laws that hamper their ability to stay solvent, 2) the state can react to each crisis as they develop on a case by case basis as outlined above, or 3) develop a statewide approach with an early warning system and intervention process with corrective action plan.