Where’s the money, Dave?

During the April 2023 FCC document, question 4 asked:

Q: Over the summer the district received a windfall of $15.7 million in additional funding above what was expected. That funding is intended by the state to be used for students and staff. In the interest of transparency, can you please provide a detailed accounting of how the district intends to use those specific funds? A: This information has been communicated in the first and second interim reports. Here is the information from the Second Interim Report. It is important to note that while PUSD did see increased new funding in the LCFF it also has seen increased costs in salaries, pension(STRS and PERS), special education, utilities, insurance, and textbook adoptions. The District deficit spent last year and is projected to deficit spend about $4.2M in the unrestricted General Fund in the current fiscal year. Without the additional new funding, the District would have needed to make significant cuts and reductions which have now been avoided.

The response was not what we wanted to hear, but it was in fact true. According to the mentioned budget, a deficit of $4.2 million in unrestricted funds is shown. However, this number is amazingly misleading. The total fund balance is not a deficit, it is an excess of just over $5 million. This is because there is an excess of $9.3 million in the restricted fund.

When the initial budget was presented, in June of 2022, before the new “windfall” of money was introduced, the PUSD budget was going to be in an overall deficit. Because of this, a money transfer was proposed of $31,190,606 from the unrestricted fund to the restricted fund in order to pay for programs, such as Special Education and Routine Repair, both items that can be paid for with restricted monies. After this transfer was proposed, it would have led to a deficit of $7.4 million in the unrestricted funds and an excess of $283 thousand in the restricted fund. This excess is practically zero, so it made sense at the time to transfer those funds.

However, now that the new money has been received, the transfer did not need to be so substantial. In fact, a transfer of just under $22 million would have sufficed. This would have prevented having such a large surplus in restricted funds and instead would have left that surplus in the unrestricted funds, which typically is a better strategy for holding money, as it allows flexibility to use that money where necessary. So why would they still have gone ahead with that transfer?

Possibility Number 1 They already said they would be transferring that sum, so they have to do it.

I don’t think this one is true for a few reasons. Reason number 1. The amount that would be transferred decreased slightly from the initial report to the Second Interim. From $31,190,606 to $30,989,335. This tells me that the budget was not already “fixed,” and therefore could have been adjusted more substantially to better fit our needs.

Second, money doesn’t actually “transfer,” they simply write on paper what is happening with the money, where it comes from, and what is being paid for. The budget isn’t finalized until August 2023 when they write the final 22-23 report. Also, according to the 11/21/2022 SACS report, the “Actuals to Date” column on page 3 indicates that none of the money intended to be transferred between the two accounts has actually been moved (this report is after management was aware of the extra monies). So if the money has not yet been moved, there is still time to change the plan for how money should be allocated.

This policy of maintaining transfer obligations seems to be fairly universal, well at least within the tri-valley. Both LVJUSD and DUSD had similar situations, an expected deficit in the restricted funds that was corrected by a transfer from unrestricted. In both cases, the amount transferred was relatively similar, although in both of these districts the number increased (not decreased like PUSD). DUSD predicted a small deficit in the restricted funds due to this transfer, but are now sitting on a substantial excess. LVJUSD predicted a medium deficit in the restricted funds, and they seemed the best at being able to unofficially project the new incoming money because their unrestricted balance is now only a slight excess (or maybe they just got lucky). In either case, I suppose all we can glean from this is it seems standard to maintain the transfer as predicted.

So historically what has this looked like for PUSD? Similar. Over the last 4 years, contributions have always been made to make up for the deficit in the restricted fund. The amount transferred has been consistent from the estimated budget to the official budget. However, in the previous years, a new large “windfall” was not received, so there was no substantial change between what was predicted and received. Feel free to view this comparison here, but it isn’t that interesting in this form, but more on this later. I am not an expert in budgeting, I only look for patterns in numbers, so I’m really not sure what to make of this and the requirements that districts must follow when calculating their budget.

Estimated and Actual budget totals for PUSD, LVJUSD, and DUSD for the 22-23 school year. The “Contributions” rows (blue) are transfers from unrestricted to restricted accounts. Notice the change in the restricted Net Increase (yellow to red). See spreadsheet for additional details

Possibility Number 2 If we transfer that money, we can prevent teachers from getting their grubby little hands on it.

This is malicious budgeting. They are standing behind a statement that they don’t have the money to give us a raise when they know full well that this transfer occurred, and once it is written in stone (August 2023), then that money is untouchable. Moving forward, this will give PUSD a surplus of almost $21 million specifically in the restricted funds, while having a surplus of just over $12 million in unrestricted funds.

Possibility Number 3 We said we were going to move that money, so we are going to do that.

No explanation for this section.

What are you doing with your hoard, Dave?

So I guess the next reasonable question is, now that it is established that the district still has that money, or at least a portion of it, what are they going to do with it, and where is it now? Currently PUSD is sitting on an excess of $32,961,064, or roughly 15% of our annual operating budget. The state requires that we hold in reserves 3%, as we are a district with between 1,001 and 30,000 average daily attendance. In our case, this is $6.5 million. Our board designated an additional $1.5 million for economic uncertainties (0.5%). Based on what we have seen in the past, I will call this fair. So where is the rest of the money going? Well, we have this giant pocket of money called “Legally Restricted Balances” of almost $21 million. This is that Restricted fund excess that came about from the contributions transfer mentioned earlier. We also have another pocket called Undesignated/Unappropriated for $3.5 million; this is just extra money that they can’t decide anything to do with.

So here is where it gets interesting. California Ed Code EDC § 42127.01 states:

(a) In a fiscal year immediately after a fiscal year in which the amount of moneys in the Public School System Stabilization Account is equal to or exceeds 3 percent of the combined total of General Fund revenues appropriated for school districts pursuant to subdivision (c) of Section 41202 and allocated local proceeds of taxes pursuant to subdivision (g) of Section 41202 for that fiscal year, a school district budget that is adopted or revised pursuant to Section 42127 shall not contain a combined assigned or unassigned ending general fund balance that is in excess of 10 percent of those funds.

So we are sitting on a reserve of almost 15% yet we are not allowed to have an excess of 10%? This says in combined assigned/unassigned. Those restricted funds are still part of our general fund, and they alone constitute a 9.6% reserve. So what happens when they don’t use these reserves? I don’t know. PUSD can apply for a special circumstance for up to 2 years in a 3 year period, but part of this application requires proof of a rationale for why they are hoarding Scrooge McDuck levels of money. This reserve is enough to fill Haglund's office knee high with silver coins (assuming his office is about 100 sq ft, not really sure how big it is. Also I picked silver instead of gold because it fills more volume). So to summarize this. 9.6% in the restricted funds, a required 3% for economic uncertainty, an additional 0.5% as requested by the board, and 1.5% of unassigned. This totals around 15% as mentioned above, and with the large restricted fund plus the 3% unrestricted requirement, that alone exceeds the 10% cap.

The district budget (Second Interim Report) indicates that our total reserve is only $11.5 million or 5.32% of our operating budget. They do not include the $21 million restricted money in this calculation, and I don’t know why, or if, they are allowed to do this. Both unrestricted and restricted funds are part of our General Fund.

So is this the first year that we have had a surplus over 10%. Nope. 21-22 school year had an ending balance of $16.4 million in unrestricted, $11.5 million in restricted, a total of $27.9 million, which is 14%, and in 20-21 school year this excess was 17.1% (in this year, just the unrestricted fund was 11.47% reserve, so either way this year failed the 10% benchmark).

Let’s compare to our surrounding districts: In the 20-21 school year, LVJUSD had on reserve 10.1% and in 21-22 school year 10.5%. Possibly they were saving money for their new gym. This year their surplus is 8.97%, below the threshold. In the 20-21 school year, DUSD had on reserve a whopping 31.4%, but they are currently building a highschool, so maybe they have reason to have that excess. In the 21-22 school year, this number dropped to 28%. Still high, but still building. This year, the excess is 19.2%, again, very high. DUSD is in a similar situation to PUSD, where their excess restricted funds is outrageous: $25.6 million. See some aggregate data here for the most recent years. If you want more, go search for the unaudited actual reports from various years for each school district.

Why these districts are hoarding such large quantities in their restricted funds is a mystery to me. Every year, districts “contribute” to the restricted funds by transferring money out of the unrestricted funds, and the restricted fund balance just continues to grow.

Let’s look at the size of the restricted fund in PUSD. Every year, management estimates the budget for both the restricted and unrestricted fund and utilize a “contribution” transfer to move money from unrestricted to restricted to fill in any gaps. Historically, this estimate is to fill a deficit in the restricted fund and set to minimize the year end surplus within that restricted fund. Looking at chart 5 below, you can see in red the estimated net year end for each fiscal year. However, over the last 4 years, they have underestimated the incoming funding for restricted funds and thus overestimated the net restricted fund balance (in blue) with the 22-23 school year being the most extreme. So they keep transferring money into this restricted fund and never use it, so this fund just continues to grow. Over the last 4 years, $105 million has been transferred from unrestricted to restricted; obviously a large portion of that transfer was necessary, well we know that percentage: 85%. The rest simply bolstered an already bloated account, preventing us from getting necessary, cost-of-living raises.

Actual (blue) vs Estimated (red) net change in restricted funds.

If we look at the total reserve in the restricted fund, below in chart 6, we can see an almost linear increase over the last four years. Every year, this account seems to be growing by almost $5 million. At this rate, in just 10 more years, we will have double our needed restricted budget in reserve. Again, why do they keep transferring money into this account that is already overflowing? Maybe because it is a place they can store money away from possible teacher salary increases.

Restricted Reserve Fund totals for each fiscal year. What we see is a trend of increasing surplus of roughly $5 million per year. This data is from the year end Unaudited Actuals SACS reports. Find the compilation of this data here.