Since the beginning of the coronavirus pandemic, districts have been bombarded with unexpected costs: iPads for remote learning, jugs of bleach to disinfect classrooms, Plexiglas for safety dividers, hazard pay for janitors, and PD for remote teaching.
But the public school system’s fiscal infrastructure is infamously rigid, making it almost impossible for administrators to pivot suddenly and spend large chunks of money on anything other than big-ticket items such as teachers, administrators, and curriculum.
So, in order to keep kids learning, staff employed, and school buildings open, chief financial officers in districts around the country have turned to one of the most unregulated and inequitable corners of school finance: their fund balance accounts, more commonly known as “rainy day” funds.
At the end of every year, school districts that can afford it stash away unused cash for emergency scenarios. In most states, there’s no limit on how much they set aside and—unlike most spending accounts—no restrictions on how the money is spent.
What’s resulted is another hidden disparity between property-rich and property-poor districts, playing out in real time this year. As districts move toward fully reopening this spring and summer and attempting to catch up students who have fallen behind academically, some, with millions saved up, will be able to afford the extraordinary costs related to this unusual academic year.
Others will not. Case in point: Greene County Schools, in North Carolina.
In 2011, at the height of the last recession, Greene County’s CFO, confused by the coinciding flood of economic stimulus cash being sent to the district from the federal government and the drastic state cuts being made by North Carolina’s legislature, employed 11 teachers too many.
By the end of the year, the 3,000-student district had overspent its budget by $550,000.
In order to avoid bankrupting the district, the board and Superintendent Patrick Miller ultimately drained almost all of the school system’s emergency savings account. A decade later—at the beginning of a pandemic-induced economic downturn—the district, which spends around $36 million a year, had yet to recover and adequately replenish its rainy day fund. That has cramped Greene County’s ability this year to provide the sort of academic resources needed for its students, more than half of them poor, Black, and Latino.
“It was a $550,000 mistake,” Miller said. “We’ve had to spend down to zero every year. It’s nerve-racking not having a cushion. You sweat right up to the end of the year hoping nothing goes wrong.”
Districts have widely varying ‘cushions against uncertainty’
With many economists predicting that the economy will quickly rebound from the pandemic’s effects, state officials and financial advisers have given districts the green light to raid their fund balance accounts to keep afloat. The hope is that the federal government will eventually reimburse the districts, or that state revenue will shore up the accounts in the coming year.
“They’re basically financial cushions against uncertainty,” said David Arsen, a Michigan State University school finance professor who has examined the amount of money districts have stashed away in these accounts. “And in this COVID setting, you’ve got terrific uncertainty.”
There is no national database that tracks how much districts have saved up, since states have different names for these accounts and different rules regarding their use.
But Education Week examined the fund balance amounts over the last decade of every district in Michigan and North Carolina, two states where that data is readily available.
In both states, districts were on average less prepared for the pandemic-driven economic hit than they were for the Great Recession of 2007 to 2009. In Michigan, more than 100 districts had less than one month’s worth of spending saved as of the 2018-19 school year, the most recent reported data. In North Carolina, about a quarter of the state’s school districts had under a months’ worth of savings as of the 2018-19 school year.
More than a dozen Michigan districts, most of them with a majority of low-income students, had no money in their fund balance accounts, meaning they were on the brink of insolvency and risked not being able to pay employees without taking out high-interest loans. Nine districts in North Carolina were in that position.
Other districts had much more than what financial advisers say districts should set aside. In Michigan, for example, over 160 districts had far more than the recommended 20 percent of their annual spending saved in reserves. And at least 15 districts had over a year’s worth of spending saved up.
Districts struggle to strike a balance on savings
Fiscal analysts have long used fund balance amounts to help determine whether a district is in fiscal distress. But hitting the right target can be tricky.
Save too much and teachers and taxpayers accuse administrators of sitting on piles of cash that can be used in the classroom. Save too little and the district runs the risk of being battered by the next recession or an unexpected cost such as a roof caving in from piles of snow.
School finance experts generally advise districts to have between one to three month’s worth of their entire annual spending reserved in savings.
The accounts can come in handy for a variety of needs, administrators say, such as paying for unexpected special education costs, hiring teachers in the middle of the year to handle an unexpected uptick in enrollment, or fronting costs expected to be reimbursed by the federal or state government. They are also used as down payments for new construction or special academic projects.
After the last recession devastated local and state government coffers, municipalities, city governments and state agencies began putting millions of dollars of surplus cash in saving accounts to prepare for the next downturn.
But school districts often struggled in this effort since federal and state governments failed to keep up with districts’ growing pension, health-care, and special education costs. Districts on average save 10 percent less than cities and counties in these accounts, according to a recent report from Moody’s, the credit-rating and analytics firm.
State legislatures, alarmed at how many districts were on the brink of insolvency by 2010, have since enacted more than 400 laws around the country to restrict how school districts spend and save their money.
Iowa, for example, bans superintendents from emptying their fund balance accounts and has threatened to criminally charge school board members who do so. Arizona removed a cap five years ago that restricted how much districts could save.
In 2015, Michigan’s legislature passed a law that allows for the state to take over a district with a savings account that amounts to less than 2 percent of its annual spending. The state took over five districts in that year alone, making all their fiscal decisions.
Grand Rapids in 2008 had more than $30 million in its savings account. But then the district lost 10,000 of its students to charter schools, putting pressure on the budget for other schools. And the state for several years slashed away at its K-12 aid to districts because of a depletion of tax revenue, said Larry Oberst, the district’s CFO.
The fear is [that] one unexpected event can put you in the negative, and you hope and pray that that doesn’t happen.
As a result, the district began whittling away at its fund balance amount. By the beginning of the 2018-19 school year, it had $12 million in the bank, or 7 percent of its spending. At a meeting earlier last year, as many states were projecting a pandemic-driven collapse of sales tax revenue, the school board voted to get rid of a policy that required the CFO to keep at least 10 percent of the district’s spending in its savings account.
“We don’t have extra money for normal operational expenses such as paying teachers or paying our pension contribution,” Oberst said. “We’re completely at the mercy of the politics of Lansing,” the state capital.
A poor, rural district feels the squeeze
The situation is much the same in Greene County, N.C.
After years of budget cutting, laying off staff, and foregoing purchasing new curriculum, Superintendent Miller started out this school year with $500,000 in his savings account, around 10 percent of his annual budget.
The wish list for Miller and his students is long and includes smaller class sizes, safer buildings, and more ambitious curricula.
This year’s needs are acute and immediate, many of them driven by the pandemic, including the demand for PPE supplies, additional staff to keep students distant during in-person instruction, and new computers for distance learning and online curriculum.
“The fear is [that] one unexpected event can put you in the negative, and you hope and pray that that doesn’t happen,” he said.
Greene County is a mostly rural farming community in the eastern part of the state. Even before the 2011 devastating financial error when it staffed its classrooms with too many teachers, the district had been severely underfunded. As farms were consolidated, people moved out and property values plummeted. The county commission for several years has refused to raise the property tax to bring in more revenue, requiring the district to became more and more reliant on federal and state revenue.
“Because we’re a poor and rural district, one of the things our board tries to do is direct every possible dollar to the classroom,” said Miller, who’s been running the district since 2003. “I feel like because we’re poor and rural, it’s really hard to justify saving an unusual amount of money.”
With little savings, the district has had to hold off on updating its infrastructure. It has more than $30 million worth of maintenance and repairs pending. The 59-year-old high school’s roof is leaking, there are potholes in the parking lots, ceiling tiles have mildewed, and the HVAC system regularly breaks down.
“We patch it up and do the best we can,” Miller said.
The district has also held off on hiring. Class sizes have reached the state’s maximum limit, with an average of 35 students in high school and 18 in elementary and middle schools.
And at the beginning of the year—before the state decided to front some of these costs—Greene County’s administrators feared they couldn’t afford to comply with the state’s school reopening guidance that included buying masses of hand sanitizer, adding bus routes to assure student distancing, and ordering thousands of face masks.
As the state considers its budget for next school year, Miller and the board have already pledged not to touch their savings this spring, since that would risk running out of cash on hand to pay staff and asking the county government for a loan.
That means any cuts would automatically result in layoffs, a fraught process for a tight-knit rural community such as Greene County.
“From my experience, it’s better to make tough decisions right away rather than kicking the can down the road,” he said.
Many of the nation’s districts that did use money from their savings accounts on pandemic-related expenses are holding out for additional federal aid through the American Rescue Plan, the massive COVID-19 aid package recently signed into law that includes nearly $130 billion in relief targeted to states and districts.
But for those heavily reliant on state revenue and with little money saved up, that federal aid could just end up filling holes caused by state budget cuts. Meanwhile, their pandemic-driven needs continue to weigh heavily.
In Greene County, for example, half the district’s students have decided to attend school in-person this year. But Miller knows many of the students that are still remote have disengaged. He wants to spend at least some of his federal aid money on summer school. He estimates it’ll cost around $90,000 just to get the kids to and from school and tens of thousands of dollars to pay teachers and reopen buildings.
Thanks to the federal stimulus aid so far, Miller expects the district for the first time to have saved $500,000 in its rainy day fund. That’s just half what the district had in savings a decade ago, but enough to satisfy auditors who have been hounding the district for years to try to cut and save to better prepare for an emergency.
“I’m cautiously optimistic, that we’re going to be OK,” Miller said.
Data visualizations by Laura Baker
This story was produced with support from the Education Writers Association Reporting Fellowship program.
A version of this article appeared in the April 14, 2021 edition of Education Week as District Savings Are Running Dry Amid COVID-19