Monday, February 25, 2013

On Reserve Funds and Fund Balances

At the candidates forum I asked if the candidates supported Warrant Article 5, which creates a reserve fund, and if so, how would they decide how much of the unexpended fund balance to retain to add to the fund every year. The fund maxes out at 2.5% of "net assessment" whatever that is. I've been calling the article "permission to take a million dollars out of taxpayers pockets," but Chairman Barth informs me it's closer to $770,000.
Kenny Rotner and Tom Newkirk made apple-pie statements supporting the fund. Carl Piedmont declined to answer. Both Tom and Kenny parroted the board's line that if we had had the fund for this year, we could have used it to lessen the impact of the looming 4.6% FY14 tax increase.  (YouTube of Meet The Candidates Night, article 5 question.)

I like and support Tom and Kenny, and the board as a whole, but I think in this case they're misunderstanding what's going on. Inflation and cost-shifting from the government is only part of the reason your taxes are going up more than usual. The other part is that we've been using our fund balance like a reserve fund, spending it down to shave about 1.7% off your tax bill annually for the last three years.  That well has just about run dry.

No one answered the second part of the question, which was how the board should decide how much of the fund balance to give back to taxpayers versus how much to keep for the district in the reserve fund.   It's an important question because your taxes will directly increase by the amount the board decides to retain.  The only way a reserve fund can be used to lower your taxes is if they're raised first.

What's a fund balance?

Every year the taxpayers vote on the warrant to raise and appropriate money for schools.   The warrant only authorizes spending for the current year, and what's left unspent is called the fund balance.   Since there has been no reserve fund, the practice is to budget extra money just in case, which hopefully remains largely unspent.  This unspent money, the fund balance, is returned to the taxpayers, lowering next year's taxes. 

Currently our fund balance plays much the same role as a reserve fund would.  In fact it can be much larger than $770,000.  It was $2.2 million in June, 2010.  For the last three years we've been spending down our fund balance at the rate of about $650,000 (1.7% of the budget) per year.

In other words, the taxpayers of 2009 paid a total of 4 points (4% of the one-year budget) in extra taxes so the taxpayers from 2010 to 2013 could pay less.

Why was the fund balance so high in 2010?  Because the FY10 budget was overly conservative, overestimating expenses.  I saw a comment that the mistake came from overestimating insurance costs, but I'm not really sure.   Why did we gradually reduce the balance instead of doing it all in one year?  Beats me.  But presumably we could budget for a large fund balance on purpose if we like.

I dug out the fund balance numbers from the MS-26 forms the district files annually.

You can see how we've steadily been spending down our fund balance, and how that, even without the reduction in money from the federal and state governments, our taxes would go up more without that 1.7% wind at our backs.

The same thing happens with the reserve fund. If we spent it down and get another shock the next year, it obviously can't help. That's where we are now. If the goal is to smooth tax rates the fund should only be filled when rates are projected to be low. None of the candidates answered the question about when they thought the fund should be replenished.

I understand the need for the schools to have a rainy day fund. I'm just irked by the argument that I need to hand over taxes to the district now so that at some future date they can spend the money to "smooth out" my tax rate. I'd just as soon hang on to my money, thank you very much, and deal with the bumps as they come.

At this point I'm planning to vote YES on article 5, but I'm not all that happy about it.

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