By Robin Respaut
(Reuters) - California's watchdog agency recommended on Wednesday that the legislature repeal a new law that caps the size of school district budgets, warning that over 91 percent of the state's districts would have violated the new rules if they had been in place in 2014.
California's Legislative Analyst's Office reported that all but 81 of the state's 944 districts would have broken the new cap rules in the last fiscal year. In mid-size districts, reserves were typically three times higher than the new cap allowed.
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School districts typically save reserves for unexpected costs and large purchases.
"Many district officials we interviewed indicated they would rely on their county offices of education to grant an exemption. Other districts would shift monies to avoid the cap," wrote the LAO. "Other districts would take action to spend down their reserves."
The report recommended repealing the new cap regulations out of fear that local budgeting could become confusing if districts began shifting funds to avoid triggering a cap.
If school districts spend down reserves, they could also be at risk during fiscal emergencies with only a few weeks of payroll on the books, and have less monies available for repairs. Districts with lower reserves face higher borrowing costs and a greater potential for fiscal intervention.
Earlier this month, Fitch Ratings called the cap a credit negative, citing concerns that districts would draw down reserves in order to be compliant with the new rules.
Extra reserves in the general fund are generally used to mitigate volatile funding, fill unexpected budget gaps, save for big purchases, and to earn higher credit ratings. The new cap keeps reserves far below levels generally required to earn a top credit rating, the LAO reported.
Statewide, school districts had increased reserves to about 20 percent of general fund expenditures by 2014, compared to just 15 percent during the recession in 2008. Smaller districts often maintain higher reserves relative to their budgets to better manage unanticipated losses.
The new law varies cap-size depending on the size of the school district; mid-size districts cap reserves at six percent of expenditures.
Districts that request an exemption for maintaining a higher cap must provide justification annually.
For more details, see LAO's report: http://bit.ly/15uj3cF
(Reporting By Robin Respaut; Editing by Chizu Nomiyama)