Financial dramas of school districts reflected in comptroller's stress lists

On Board Online • March 2, 2015

By Paul Heiser
Senior Research Analyst

What causes some school districts to be in significant fiscal stress one year but not the next, and vice versa?

If you talk to Tupper Lake Superintendent Seth McGowan, it's all about the fund balance.

Tupper Lake used nearly all of its fund balance in the 2012-13 school year to make up for shortfalls in state aid and the tax levy cap, only to find itself on the comptroller's list of schools under 'significant' fiscal stress. The comptroller flagged the district for - you guessed it - low rainy day funds.

"The district did exactly what Gov. Cuomo had encouraged - use fund balance," McGowan told On Board. "But because we did that, the comptroller labeled us as highly stressed."

Tupper Lake was one of three districts in the state that were labeled as being under significant fiscal stress in 2013 but had major improvements in their fiscal stress scores in 2014. The district replenished much of its fund balance and its rating was upgraded, to a less-dire rating: "susceptible to fiscal stress."

"The year the district was designated as having 'significant stress,' we brought our fund balance down to almost nothing - about $20,000," said McGowan. "That's a dangerous position for a district to be in, as any unexpected expense could play havoc with the budget. For example, if a student with severe disabilities had moved into the district, an individualized education plan requiring intensive services and new staff could have busted the budget."

The state comptroller's Fiscal Stress Monitoring System - initiated in 2013 - is designed as an early warning of fiscal stress for school districts and other local governments. It has two main components: financial indicators, such as year-end fund balances, operating deficits/surpluses, and the use of short-term debt for cash flow; and environmental indicators, such as property values, enrollment, budget vote trends, graduation rate, and poverty, as reflected in participation in free or reduced-price lunch programs.

School districts and municipalities receive a fiscal score and an environmental score. Based on the fiscal score, the system assigns an entity to one of three categories of stress or to the "no designation" category if its score doesn't meet the threshold of stress. The three categories of stress are: (1) significant fiscal stress, (2) moderate fiscal stress and (3) susceptible to fiscal stress.

"The goal is to highlight areas of concern that local officials should focus on as they prepare their annual budgets and long-term financial plans," said Brian Butry, deputy press secretary for state comptroller Thomas DiNapoli.

Of 12 districts that were deemed under significant stress in 2013, only four had the same designation a year later. The 2014 list was shorter - just 10 districts, including six new ones. The reasons for the changes were unique for every district, and sometimes red flags were largely the product of accounting conventions.

For instance, the Peekskill school district in Westchester County went from 'no designation' in 2013 to 'significant stress' in 2014. In Peekskill's case, it was mostly due to about $2.9 million in short-term borrowing in the form of bond anticipation notes to pay for several tax certiorari settlements, which led to the district having a deficit fund balance as of June 30, 2014. Unless the bond anticipation notes are converted to an actual bond by the end of the fiscal period, they are reported as a liability on the district's financial statements.

Peekskill Superintendent Larry Licopoli anticipates the district will move off the stress list as the district converts the bond anticipation note into long-term borrowing.

"We didn't know the impact short-term borrowing would have on the fiscal stress rating calculations," he told On Board. "If we had, we would have converted them earlier."

Licopoli said that Peekskill's bond counsel understands the district's situation, so the district was not negatively impacted by the fiscal stress designation.

On the other hand, the district still has its share of financial headaches. For instance, frozen foundation aid does not account for enrollment increases, and the district saw an enrollment increase of about 350 students in the past four years. These were mostly newly-arrived immigrants who require additional mandated and unfunded educational and English language services, which necessitated the creation of additional classroom sections.

The gap elimination adjustment and the tax levy cap meant the district could not generate revenue fast enough to meet the need. This, in turn, led to spending down reserve funds; an unassigned fund balance that had typically been about $4 million was winnowed down to $2.85 million.

In that respect, the comptroller's lists call attention to issues in funding equity, Licopoli said.

"Educational opportunities and an equal education for all New York State students should not be a function of a community's wealth," he said. "Although it is difficult to generate resources under the present formulas and tax limits necessary to make sure our educational programs are the equal of those of suburban districts, we are committed to insuring that the quality of our programs are competitive with our neighboring suburban districts," he added.

To McGowan in Tupper Lake, the comptroller's lists call attention to how districts are being forced to raid reserve funds, leading to a yo-yo effect in fund balances.

"The purpose of appropriated fund balance should be to help school districts keep tax rates relatively stable so that there aren't large fluctuations from one year to the next," he said. "It shouldn't have to be used for ordinary, everyday expenditures."

McGowan lamented that the fiscal stress system gave the appearance that there was mishandling of funds.

"Even though we were very up-front with voters in appropriating extra fund balance, it still required a lot of conversation to remind folks that's what we did," he said. "In a time where we are limited on resources already, especially in the administrative departments, these conversations took away more valuable time from us in dealing with things that are truly important, such as student success."