InFocus

See all InFocus Postings

1) What is a Fund Balance?

• A fund balance is a financial reserve that plays a vital role in maintaining a school district’s fiscal health.
• It acts as a safety net, providing a cushion to cover unexpected expenses, emergencies, or fluctuations in cash flow.
• Fund balance serves various purposes, such as funding capital projects, making debt service payments, covering one-time expenditures, addressing budget shortfalls, and strategically preparing for anticipated significant cost escalations over the coming years, such as increases in medical insurance and retirement expenses.
• Fund balance is different from the board-approved general operating budget approved each year. The general operating budget is the annual financial plan outlining the District's anticipated revenues (local, state, and federal) and expenditures for day-to-day operations over the specific fiscal period.

2) Where does the money in a Fund Balance typically come from?

• Budgetary Surpluses: Funds from previous budget cycles that were not spent or allocated for specific purposes contribute to the District's fund balance. These surpluses accumulate over time and provide a financial cushion for the district. The yearly budget savings stem from diligent price shopping for District purchases, prudent spending patterns, exploration of more economical alternatives, and increases to predicted revenues.

3) Why would a school district have a budgetary surplus?

• Increased Revenue: If the District has a higher collection rate from real estate taxes than forecasted, receives unanticipated increases in earned income taxes, a bump in state or federal subsidies to offset a general budget expense, and/or the sale of assets or buildings, it can lead to a surplus. Keep in mind school districts in the Commonwealth of Pennsylvania approve their budget before knowing how much money it will receive in subsidy from the state so there are a lot of projections in the approved general operating budget.
• Cost Savings: Efficient management of resources and expenditures can result in lower-than-expected costs. This might include negotiating better contracts with suppliers, implementing energy-saving initiatives, lower than normal healthcare costs, or streamlining administrative processes.
• Prudent Financial Management: Proactive financial planning and conservative budgeting can create buffers against unforeseen expenses or revenue shortfalls, leading to a surplus when actual revenues exceed projected ones or expenses are lower than expected.

4) What are the different types of Fund Balances?

Nonspendable Fund Balance

• Consists of resources that cannot be immediately spent, such as prepaid expenses or inventories.
• Nonspendable fund balance cannot be used to balance the general operating budget of the school district.

Restricted Fund Balance

• Resources are subject to specific legal, contractual, or external restrictions on their use.
• Restricted fund balance cannot be used to balance the general operating budget of the school district.
• Using restricted funds for purposes other than those specified by the restrictions could lead to legal or financial repercussions for the District.

Committed Fund Balance

• Committed fund balances are amounts set aside for specific purposes as designated by the governing body or through legal restrictions.
• While it offers more flexibility than restricted fund balance, committed fund balance is still designated for particular uses and could violate legal restrictions or established financial policies if used to balance the school district's general operating budget.
• In some cases, the utilization of the committed fund balance may be flexible, especially if the governing body has the authority to adjust budget allocations within certain parameters.

Assigned Fund Balance

• Designated for specific purposes by management but does not meet the criteria to be considered restricted or committed.
• Potential risks if used to balance the general operating budget (see question #5 below).

Unassigned Fund Balance

• Unassigned fund balance is available for any lawful purpose.
• Unassigned fund balance can be used to balance the general operating budget.
• Potential risks if used to balance the general operating budget (see question #5 below).
• Maximum allowed is 8% of Budget Revenue. The District currently sits at about 2%.

5) What are the risks of spending Fund Balance on the General Operating Budget?

• Structural Deficits: Structural deficits can emerge when fund balance is utilized to offset RECURRING expenses. This practice can widen the gap between expenditures and revenues, especially when revenue growth is artificially constrained by reliance on fund balance.
• Decreased Financial Flexibility: Depleting fund balance could limit the District's ability to respond to unforeseen emergencies or financial challenges.
• Creditworthiness Concerns: Judicious management of fund balance contributes to a positive credit rating, enabling the district to access favorable financing options and lower interest rates for borrowing. Relying too heavily on fund balance may raise concerns about creditworthiness, potentially leading to increased borrowing expenses for renovation and building projects, thereby imposing a greater financial strain on taxpayers (see question #6 below - Credit Rating).

6) What is the Elizabethtown Area School District Fund Balance composition?

Nonspendable Fund Balance:

• $157,305 divided into $48,005 for prepaid expenses and $109,400 for nonspendable inventories.

Restricted Fund Balance:

• Capital Projects Fund.
• $3,575,874 restricted by legislation.
• $5,034,945 set aside for future capital projects and restricted by debt covenants.

Committed Fund Balance:

• $8,700,000 committed to future facility improvements.

Assigned Fund Balance:

• $2,600,000 assigned for future facility improvements.
• $1,900,000 assigned for health fund / HSA increases.
• $   700,000 assigned for technology improvements/upgrades.
• $   700,000 assigned for cyber/charter school increases.

Unassigned Fund Balance:

• $1,539,322 (2% of budgeted revenues).
• Used for major repairs to equipment and vehicles, pay overtime for major winter storm cleanup, rises in special education costs due to student needs, unanticipated increases above the budget amount for healthcare costs, and unanticipated borrowing due to delays in the state budget being approved.

Credit Rating: Moody’s Investor Services has given the District a rating of Aa3, indicating a strong creditworthiness and a low risk of default. School districts with an Aa3 rating can typically access favorable financing when borrowing money for projects such as building construction or renovation.

Credit STRENGTHS per Moody’s:

• Demonstrated willingness to raise revenues
• Manageable fixed-costs.

Credit CHALLENGES per Moody’s:

• Reserves (fund balance), while stable, fall below category medians.
• Declining enrollment.

Factors that could lead to an UPGRADE per Moody's:

• Material growth in fund balance ratio to above 25% of revenue (i.e., more fund balance). Currently EASD sits at 20% of revenue.
• Positive enrollment trend.

Factors that could lead to a DOWNGRADE per Moody's (more costly to borrow money):

• Material and sustained draws on reserves and liquidity to below 17% of revenue (i.e., less fund balance). Currently EASD sits at 20% of revenue.
• Additional borrowing or pension liability growth to over 300% of revenue.
• Acceleration of negative enrollment trend.

7) Are the Budgetary Reserve and Capital Reserve the same as Fund Balance?

• Budgetary Reserve: No. These are funds typically included within the district's annual general operating budget set aside for emergencies or unforeseen expenses.
• Capital Reserve: No. These are funds typically set aside to finance known capital projects within the school district. When you think of the Capital Reserve, think of annual preventative maintenance, planned renovation or building projects, or large scale emergency building repairs. Capital Reserve Funds are not included in the annual general operating budget. Instead, they are typically funded separately through dedicated revenue streams or transfers from the general fund. Capital Reserve funds cannot be used to balance the school district's general operating budget.