What Are the Reserves For?
by Patrick Sullivan
Not every dollar saved is done so wisely. And, not every roller coaster ride is fun. Indeed, Jeffco’s recent history of financial decisions has given taxpayers plenty of cause for heartburn and vertigo.
The general fund is the Jefferson County R-1 School District’s primary operating fund, with the majority of revenues coming from property tax levies and state aid. Mill levy overrides, including the 3A electoral success in 2012, add an ongoing annual amount of $39 million from property tax revenues to the general fund.
The Taxpayer’s Bill of Rights (TABOR), an amendment to the state constitution, requires an emergency reserve of at least 3 percent of fiscal year spending. This reserve can only be used for declared emergencies; TABOR specifically excludes economic conditions, revenue shortfalls, or district salary or fringe benefit increases from the definition of emergency reserves. The district complies with the 3 percent minimum requirement. Oddly, this reserve should be referred to as the rainy day fund, but it is not, because the TABOR reserve fails to satisfy the district’s general fund balancing objectives during revenue shortfalls and periods of economic decline.
Another reserve policy, set at the Jeffco Board of Education’s discretion, requires the district to set aside another 4 percent of budgeted expenditures. Although not mandatory, the extra reserve is authorized by Colorado education law, which suggests the district establish a general fund operating reserve up to 15 percent of the general fund’s current budgeted amount. Jeffco’s extra operating reserve consists of unappropriated funds, often referred to as the rainy day fund, a phrase used interchangeably with the Board of Education’s contingency fund.
The district’s rainy day fund policy covers the emergencies that TABOR does not. Most notably, changes in economic conditions, revenue shortfalls, and salary and fringe benefit increases. Many districts throughout the state operate a rainy day fund within their general fund budgets.
However, the availability of new revenue sources leads to competing interests. Voters approved two primary revenue sources during the past decade: the 2004 mill levy override ($38.5 million) and the 2012 mill levy override ($39 million). Since the 2004 override passed, the district has worked to grow the rainy day fund. The reserve build-up policy has continued with the $39 million in added revenues during 2013.
After the passage of the 2004 mill levy override, only a portion of the new property tax revenues received were appropriated the following year. During the subsequent three-year period (2006-2008), the ongoing revenues were appropriated, but a large share continued to be budgeted to reserves. This action resulted in a reserve balance of 20 percent of general fund revenues during 2009-2010. In official documents, administrators advocated the decision to tuck away some override dollars as “strategically stretching the voter approved revenues.”
From 2005 to 2008, as much as $10 million or more annually was intentionally used to build up the rainy day fund. By 2009, due to changing economic conditions, the district began spending down the reserves.
The 2012 mill levy override funds have followed the same path. The district received about $37.5 million by June 30, 2013. The entire amount was left unappropriated in the budget process, and therefore was available to direct to the rainy day fund. The district received about $9.7 million of new revenue from state aid and increases in vehicle (ownership) taxes. Out of the combined $47.2 million, the district made less than $10 million in supplemental appropriations for the following one-time project expenditures.
By the end of 2013, the district received another $2 million from the 3A override. Combining all sources, the district’s revenue was bolstered by nearly $49 million, as demonstrated below.
If the district’s plan for the 2012 override revenues is similar to the 2004 plan, at least $10 million of ongoing revenues will be “strategically” used to build up the rainy day fund. Such a rainy day fund policy would conflict directly with campaign promises from the past two override elections. Jefferson County voters approved the following objectives that they were told the new override funding was intended to support:
The 2004 Mill Levy Override TABOR Disclosure:
Reduce and maintain class size and student-teacher ratios to ensure that students are academically prepared.
Meet the increased costs incurred by the district to continue the district’s commitment to academic excellence and to provide an educational program of the highest quality.
Maintain high school electives such as music, art and world languages while implementing the new college entrance requirements.
Attract & retain high-quality teachers and support staff.
The 2012 Mill Levy Override TABOR Disclosure:
Reinstate instructional days.
Maintain reasonable class sizes by recruiting and retaining highly qualified teachers and instructional staff.
Maintain current educational programs such as music, libraries, counseling, teacher training, and technology.
Maintain healthy and safe learning environments.
Maintain an educational program of the highest quality and standards.
Continue the commitment to academic excellence and accountability.
Pay the increased costs of utilities and fuel.
Because these objectives are generally stated, it is difficult for the average voter to pinpoint where their tax money actually goes. The main explanation the public receives is that voting “no” on the mill levy override would lead to continued general fund cutbacks. District leaders did not expressly disclose the reserve build-up policy to voters either in 2004 or 2012. Even in the failed 2008 mill levy override campaign, no such disclosure occurred.
Backers of 3A told homeowners that the 2012 override would be used only to maintain the financial condition of the district. Surely, most homeowners expected these revenues to be used for educational program improvements, smaller class sizes, and new teacher recruitment. The district’s decision to isolate the mill levy override revenues, and then to classify them as unappropriated resources to the rainy day fund, shows that taxpayers were duped.
Leaders ought to disclose the rainy day fund objectives more clearly to voters during the election process. In this way, the district could be held more accountable for the new revenue sources.
But there’s a further problem, as well. Jeffco’s pattern of build-up and spend-down of reserves as a way of balancing the general fund is inconsistent with improving the district’s bond ratings and fiscal health. At least one rating agency confirms that a key element of improving ratings is to post balanced operations without the use of reserves. Instead, the district has put its finances on a risky roller coaster ride.
In August 2011, the State Auditor’s office targeted Jeffco in its annual Colorado School District Fiscal Health Analysis. The study issued two key reserve ratio warnings from three years of operations. Although these were negative indicators, the warnings directly resulted from the district’s strategically planned spending of the rainy day fund. The decline in the reserves, although planned by the district, represented a deterioration of the general fund and impacted Bond ratings by Standard & Poor’s (S&P) and Moody’s. Such downgrades make future borrowing more expensive. The problem identified by rating agencies is not the rainy day fund itself; rather, it is the direct use of the fund as a way to correct deficits in the general fund. Clearly, the rainy day fund is not being deployed for short-term emergencies. The message being sent by rating agencies suggests balancing the revenues and expenditures over the longer term first (meaning more than one reporting period), before using the rainy day fund.
Given budgeted expenditures, the rainy day fund should annually be comprised of about $23-$24 million of the general fund. As shown in our tables, the June 30, 2012, rainy day fund balance fell far below the district’s own 4 percent requirement due to the spend-down. Taxpayers should see only about 4 percent of budgeted revenues in the rainy day fund, and that is all.
District leaders would be prudent to retain the rainy day fund. Most taxpayers can agree a reserve to offset short-term emergencies is an acceptable approach that may reflect best practices in the administration of taxpayer resources. The rainy day fund balance should annually reflect the district’s 4 percent of budgeted expenditures policy. The fund should not be built up beyond this amount, unless the policy is revised and disclosed to the public. Taxpayers may object upon learning that the build-up and spend-down pattern from the 2004 mill levy override continues with the 2012 override.
The district has a budgeting process through the year that allows for extra appropriation. Not all the resources need to be stashed away. Taxpayers have the power to consult with the Board of Education and insist that the 2012 override revenues be spent on the promised objectives.
It’s time for Jeffco to come clean with taxpayers and to adopt a more consistent and sensible fiscal policy.
Patrick Sullivan, CMI, is a principal of NewValue, Ltd., a provider of tax consulting, appeal representation and compliance services to businesses and commercial property taxpayers. He is a CMI designate of the Institute for Professionals in Taxation and a resident of Jefferson County.