The Sun Prairie School District just cannot come to grips with the idea of actually lowering taxes for a year.It started with Caren Diedrich (you know, Caren "I don't even know what's in my mind" Diedrich) tossing out the seemingly innocent question about whether we had enough reserves in fund balance. Good God, Gertie...she doesn't even know what's in her mind, how could anyone take her seriously?
But some apparently have....and now a discussion on fund balance will occur at tomorrow's Finance Committee meeting. Ostensibly, the idea some have is to put money into fund balance instead of reducing the tax levy.
Clearly, we still don't understand this "fund balance" thing.
Fund Balance Myth #1: A low fund balance affects our credit rating and interest rates.
This is a tall tale frequently told by old Seabass McCourt. We learned that, after the recission, when EVERYONE was taking money out of fund balance, how much of a myth that was. Even before the great recession, the amount of fund balance on hand maybe affected interests rates by a couple of hundredths of a percentage point. That's peanuts for a school district with annual costs of $73-75M.
Fund Balance Myth #2 - We can just "budget" to increase fund balance.
Newsflash, people. That's not a legitimate practice. As outlined very clearly below:
Budget Surpluses
Several Supreme Court decisions and Opinions of the Attorney General have dealt with the question of budget surpluses. As a general rule, local governmental bodies do not have the authority to tax for the purpose of accumulating “unappropriated surplus funds” in the treasury. Money appropriated for a particular purpose in a given year but not used and unallocated surpluses become “funds on hand” which should be applied to the following year’s budget to reduce the amount raised by taxation. --WASB • May 2012, The Annual School District Meeting
Fund Balance Myth #3 - Fund Balance is a just a savings account.
While the value of fund balance is certainly the ability to handle unanticipated, "big-ticket" expenses ( e.g., a boiler goes out, major HVAC repairs), the real value of a fund balance is to have sufficient cash on hand to avoid the need to borrow money for operations. The simple fact is that the state does not pay us aid all at once, but rather parcels it out; yet, salary and insurance costs are major monthly costs that quickly deplete available cash on hand. Similarly, while the school year starts July 1, and costs mount monthly, we do not receive property tax payments until January or so. Subsequently, school districts with low fund balances need to borrow money each fall to help "make payroll" until all state aid is received.
So...what does this all mean for Sun Prairie?
Last year we borrowed $12,000,000 to meet its cash flow needs. The interest rate was 1%, and the "premium" (or loan origination fee) was $33,000. If one looks at line 682 of the school district "Expenditures by Object Code report", we see that the net cost to borrow this $12 MILLION dollars was $116,070.08.
So, really, the net cost of us having a lower fund balance is $116K or 0.16% of our annual budget. Hell,we spend more on that just on Dr. Culver's salary!
More to the point, in order to cut out this temporary borrowing expense, we'd have to increase our fund balance by at least $12,000,000. People...that's not going to happen. At least not any time soon.
First of all, "budgeting" (which we cannot do) to add $500K to fund balance would mean an increase in the tax levy of 1%. So...what if we "accidentally" had a surplus in the budget of $1M for $2012-13? The tax levy would increase by 1% (for every $500K added) and we'd barely be scratching at the amount we need.
Also keep in mind that THIS year (2011-12) we had a final surplus of $200K, BUT on top of that we spent $600K on books and computers for 2012-13, so the TRUE surplus was at least $800K. And all that goes to fund balance is a measly $200K.
We start off each fiscal year in July. Expenses start rolling in. For a $72M budget, on average, the district spends about $6M per month. Yet we don't receive any significant revenue until the first quarterly state aid payment in September. Last year, by the end of September we had spent $11.5M yet only received $5.3M in revenues.
Fund balance can ultimately serve as a means to cover some of this, but we need to borrow money short term to meet demands. For example, as of the end of December 2011, we had expenditures of nearly $29M yet revenues of only about $13M. That left a shortfall "gap" of about $16M. And that is why we needed to borrow $12M last October (and have done so for many years).
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