Unheeded Warning Signs of Financial Distress
In my last post, I discussed Fund Balances and the need to understand available unrestricted funds. In this post I want to talk about metrics used to determine financial health and how these have gone relatively unheeded over many years.
According to state law, a school district cannot issue a check unless there is sufficient money in the treasury AND in the proper fund. (Section 165.021(4), RSMo). Therefore, at minimum, a school district should carry a combined fund balance in the General and Special Revenue funds sufficient to make it through December without going negative on a fund balance basis. School districts have the option of borrowing money be entering into a tax anticipation note which provides operating cash pending receipt of tax revenue.
The two key points are:
1. Expenses can only be paid out of the proper fund. This is the law! You cannot use money from the Debt fund to pay an expense in the General fund.
2. The General and Special Revenue funds must be able to have sufficient funds to make it through December without going negative on a fund balance.
First, I would like to explore negative fund balances. Fiscal year 2024-2025 was not the first year that the unrestricted (General and Special Revenue) fund balance total has been negative. Both in November 2022 and November 2023, the district used funds from Debt Services to pay bills not related to debt services. I am not a lawyer or tax accountant, but I am quite certain that this was not legal. The district should have had to borrow money for those two years as well through a tax anticipation note.
In addition, in the November financial reports I secured from the school district via the Missouri Sunshine Law, ending unrestricted fund balances for November 2019, 2020, and 2021 indicated insufficient funds to pay an additional payroll. Basically, the district was operating “paycheck to paycheck” in fiscal year’s 2019 – 2021. There were basically no emergency or “reserve” funds by the end of November.
[NOTE: The fund balances referred to herein are for November. There may be additional payroll and general operating expenses that become due before the influx of new local tax revenue. Those figures for December are much harder to calculate from the outside looking in, but they would negatively impact fund balances.]
Second, there has been much talk lately about an accounting ratio that looks at the unrestricted General and Special Reserve funds at the end of a fiscal year and divides that by the total expenditures for those two funds. Some discussions have been around 15% being an acceptable (though not ideal) ratio. However, the district had a negative unrestricted fund balances in 2022, 2023 and 2024 with ratios of 15.63%, 16.53%, and 12.48% respectively. It should be clear that 15% is not an adequate number. In addition, ratios of 21.08%, 19.26%, and 15.02% left no available emergency or “reserve” funds for years 2019 – 2022, respectively.
Considering these numbers, I believe that a 25-30% ending unrestricted fund balance ratio is the bare minimum the district needs to ensure financial stability. To my understanding, there are school districts that target a much higher ratio than that (35-70%).
In summary, there are a couple things that are of significant concern to me. First, that the district has borrowed funds from Debt Services to cover November expenditures for the past three years, which, in addition, may be illegal according to my understanding of the law. Second, analysis of the last 6+ years indicates that the district was not operating from a position of financial strength. Unfortunately, there has been little conversation around this topic, until now, when we find ourselves in an extremely difficult place with painful spending cuts in the immediate future.
[NOTE: After the release of the new projected budget for 2024-25 at the February 26, 2024 Board of Education meeting, I am estimating the Unrestricted Ending Fund Balance percentage for the ASBR 2024-2025 report to be around 8.2%.]