Facing a budget deficit of $86 million, administrators of Cobb County schools worked to preserve the district’s savings account, which they thought should be kept for a rainy day. Board members thought that rainy day had arrived.
The savings account seemed to offer a quick solution to the budget shortfall. Without it, Cobb schools faced drastic cuts that would affect teachers, students and parents.
After two months of debates, the board decided last month to pull $45 million from its savings account of about $100 million. That’s about twice what the administration originally recommended. Administrators predict at the end of next year, the account will have a balance of $71 million — barely enough to pay the district’s salaries and utilities for a month in the case of an emergency.
As metro Atlanta districts finalize their 2013-14 school year budgets this month, amid state austerity cuts and several years of declining property tax revenue, board members are using their savings accounts — known as fund balance reserves — to preserve popular programs and small class sizes.
But experts say that money should be kept available for unexpected drops in funding.
Records show over the past 15 years, school board members around the metro area have pulled hundreds of millions of dollars from savings to stave off severe cuts. It’s a trend that worsened after the recession began in 2007, when foreclosures and falling property values cut into property tax revenue districts rely on.
Some districts, such as DeKalb, now have no savings left. Cobb, Fulton and Gwinnett are down to just enough for a month’s worth of their districts’ main expenses, according to budget records from 5 metro counties obtained by The Atlanta Journal-Constitution.
Each school district builds its fund balance reserve with money left over at the end of every budget cycle. That extra money sometimes comes when property tax revenue was higher than expected, or the school district’s costs were lower than anticipated.
School board members have tried to avoid tax hikes during the tough economic times by turning to their fund reserve to pad their budgets.
That strategy pleases parents.
“I support dipping into reserves in a situation like this,” said Meghan Ritchie Wohlfarth, who founded FACE It Cobb, a parent organization that helps parents understand the district’s financial health. “I don’t mean completely deplete it but they should dip into it to take the pressure off. That’s what the money is there for. I feel like class sizes are a tipping point. … It’s not going to get any better unless we do something.”
However, it could hurt taxpayers later. Experts and district administrators warn that haphazardly pulling from the savings accounts could lead to districts running deficits that will take years to pay off and having to pull out high interest-rate loans taxpayers will eventually have to pay.
“It’s like using a credit card,” said Brad Johnson, the Cobb school district’s chief financial officer. “At some point, you’re going to have to pay it back.”
DeKalb now has tens of millions of dollars in debt. Last month, Moody’s Investors Service warned that it will review DeKalb, the state’s third-largest school district, and possibly downgrade its bond rating. That could lead to higher interest rates on future loans.
Unlike several other states, Georgia doesn’t have a law requiring school systems to keep a certain amount of money in their fund reserves, although several districts have policies that advise how much they should keep. Cobb’s policy advises that the district “strive to maintain” at least 30 to 55 days’ worth of contingency funds.
Auditors and government financial associations usually advise two to three months’ of expenses be kept in savings, or 15 percent of the overall general budget. The Georgia School Boards Association stopped advising its board members to keep at least a month’s worth of spending in 2007 when the housing market collapsed and the state started cutting millions of dollars in funding.
“As the funding shifts more to local dollars, local systems will either need to cut expenditures, raise taxes or use reserve funds,” said Justin Pauly, a GSBA spokesman. “Most systems maintain there is no fat left in their budgets so teachers and programs will be eliminated. Several systems are at or near the 20-mill cap and cannot raise taxes. Many systems report they have little or no reserves left.”
Pulling from the savings account makes deficits go away only temporarily, district administrators say. By paying recurring costs with one-time funding, it automatically leaves a hole in future budgets.
School district officials use the money for a variety of reasons, for instance while awaiting property tax revenue or reimbursement from federal grants.
Districts also use the money in the case of midyear state budget cuts. In 2010, state officials told Cobb administrators that they wouldn’t be able to give them $43.5 million they originally promised to give them.
Records show districts’ savings accounts have suffered dramatically in recent years. Some districts, such as Fulton County, have just half the amount of money they had just five years ago kept in savings.
In Cobb, after reaching a peak of $114 million in 2007, the district’s savings account has wavered between one to two months’ worth of spending. With last month’s budget cuts, Johnson, the district’s chief financial officer, anticipates the district will have a little more than 8 percent of its money kept in savings by the end of next year.
“That’s too close to the line,” said Superintendent Michael Hinojosa, who is partly evaluated based on the district’s financial health.
Board members and administrators across the metro area seem hopeful as property tax revenue begins to climb and economists start to see signs of recovery. After finding an extra $27 million in revenue, DeKalb plans to rebuild its savings account with $12.7 million by the end of next school year.
Meanwhile, Cobb’s board is expected to start out with a $65 million deficit for the 2014-15 budget year, said Johnson. It’s unclear how much will be in the district’s savings account by then.
“We acknowledge that the ship is taking on water and acknowledge that we don’t have enough money to keep bailing us out,” board chair Randy Scamihorn said. “I hope we can use the money we have to stave off the ship from sinking, but we always want to be financially sound and we want to work toward that.”