Determinants of School District Fund Balance

• In Event: Governmental Financial Reporting

Abstract

The objective of this exploratory study is to gain a further understanding of school-district fund balance by examining school-board governance sophistication and auditor diversification. Fund balance represents amounts previously taxed to the school-district community, but not yet appropriated for expenditures. The fund balance includes an amount designated for future budgets, which serves as a smoothing device for increases in property taxes. According to data provided by the New York State (NYS) Comptroller’s Office, Long Island School districts, which represent 20% of all NYS school districts, reported a total fund balance of $2.2 billion as of June 30, 2011. Fund balance has grown a staggering 103.3 % in just six years.

At June 30, 2011 only 17.9% of total fund balance was appropriated to reduce the tax levy. The remaining 82.1% of fund balance represents pre-taxed amounts that school districts had not yet expended for operating purposes, suggesting that funds initially set aside for tax-levy reductions may be being used for other purposes.

NYS law limits the ability of school districts to set up “reserves”, although it is the only mechanism that districts have to legally save for future spending needs. Reserve funds provide a degree of financial stability and in uncertain economic times, provide a budgetary option that mitigates the need to raise the tax levy for the annual-operating budget. NYS requires that specific reserve funds be established with a clear intent regarding their future use and replenishment, if necessary. Specifically, reserve funds cannot be used as a “parking lot” for over-budgeted expenditures or under-budgeted revenues, which are practices that could overburden taxpayers especially in uncertain economic conditions. However, given the recently enacted 2% tax-levy cap, school districts are pressed to use reserves for purposes other than intended.

This study examines factors that impact the change in fund balance of school districts. The factors examined include the budget surplus created by under-budgeted revenues and over-budgeted expenditures, governance structures of the school district, and external-auditor tenure. The governance structures include use of budget committees, audit-committee structure and board-of-education expertise. The results show that over-budgeted expenditures increase fund balance. Governance characteristics, such as the use of budget committees, CPAs on the board of education, and outside members on the audit committee impact the change in fund balance. Tenure of the business superintendent and a change in external auditor are both associated with increases in fund balance.

Authors

• Nina T Dorata, St John's University

• Cynthia R. Phillips, St John's University