The politics of reserves
One thing I've learned to do in trying to understand school finance is watch out for big pools of capital. Wherever there are pools of capital, there are possibilities, power, and struggle. One example is pools of municipal revenue from taxes on property, sales, and income. The more a state can generate there, the more it can do. Another are teachers pensions, which are huge pools of capital that invest in all manner of things we might not associate with nice old retired teachers getting their pension checks (like Israel bonds, eg).
But another interesting pool of capital is the school district reserve, which can sometimes be called the "rainy day fund." These reserves get political quickly when people in and around schools hear that a district has millions or sometimes billions of dollars in reserves while at the same time hear that the district doesn't have enough money for a paraprofessionals, teachers, a new playground, curricular changes, etc.
While it's true that school districts have money in reserves, it's not always true that they can use this money for whatever purpose whenever it wants. But it's also true that it has the power to designate certain funds in reserves in ways that make them able to spend it in ways that communities demand.
Designations
The key distinctions in reserve balance designations are assigned reserves (for a specific purpose), unassigned (for whatever the district decides), restricted (can't be touched for whatever reason). These distinctions are stipulated in a Government Accountability Office (GAO) note. The district gets to decide these designations, which then becomes a political question of accounting: which money can be used for what purposes?
I wrote about a spicy PA case where reserves got very contentious. A high profile lawyer in one of the wealthiest Philadelphia suburbs sued the school district when it got a waiver to raise its property taxes above the state's threshold. The lawyer channeled anger in the big and small bourgeoisie of the area about paying more tax revenue to the district, which claimed, in its defense, that it was putting money away for things that schools might need if there are future crises--which are admittedly increasing in quality and frequency. The lawyer actually won, courts finding that the district had illegally designated certain funds. Now it has to send checks to its property owners.
Committed?
But Los Angeles is another interesting case. In the lead up to a powerful three-day strike by the UTLA, Jacobin published a piece looking at the politics of the district's "budget crisis" from the perspective of its reserves:
LAUSD has a staggering almost $5 billion in reserves, over $3 billion of which are unrestricted. The state of California requires LAUSD to keep just $2 million in reserves. This means that LAUSD could spend $3 billion tomorrow on whatever they wanted to spend it on.
So the hot button, ideological issue is whether and how a school district designates its reserves. Why does the district designate its reserves as assigned or unassigned? What is it saving for? Why might a district make the decision to amass these reserves? Does it have plans? What are these plans? Can unions and communities pressure it to change these plans and designate its reserves differently?
There are quirks though. Crises aren't negligible and make things super wonky. A 2020 report on CA local district reserves included the observation that
Due to accounting conventions, districts may need to record that they received funds before the cash actually becomes available for use. For example, during the Great Recession, reserve levels increased in most districts, despite large funding declines. Because the state had deferred revenue payments to districts, the level of reserve funds increased.
So districts sometimes report higher reserves than they typically do in anticipation of the reception of certain funds. But they don't actually have those funds. Indeed, the LAUSD responded to demands about its reserves with a very explicit statement: "we can't use this money."
Our reserves have little flexibility. This has been confirmed by an independent auditor (January 24, 2023). These reserves are intended to support critical student services that increase equitable access to learning. Many of these reserves are one-time funds from COVID relief.
These dollars are:
State and federal dollars that, legally, can only be used for student services such as after school programming and learning recovery
Funding to support the District’s highest need schools and students, per District policies and priorities
State required General Fund reserves (2% of total budget)
Inventory of prepaid items such as school supplies
The District is doing everything within its power to support our invaluable staff while being fiscally responsible.
They even included a graph with all their different reserve designations, leaving only $140 million in "undesignated" funds, where the lion's share, $2.3 billion, as "committed."
But whenever someone says "listen, I can't do anything about this naturally true, objectively settled and immutable budgetary reality" we can keep looking and lift our eyebrows. I'd actually written before about the projects a district like LAUSD might commit reserves to, like updating their cybersecurity software in the wake of a debilitating cyberattack on the district. The question for organizers becomes: how can we shift the mostly internal decisions around the projects that get funded with reserve funds?
Understudied
A superintendent wrote to me on twitter once and told me a wild story. He said his district budget office actually invests their reserve funds to make returns from the stock and bond markets. They use the pool of reserve money to invest and make profits, which then go back into the budget to pay for stuff. I'd never heard of anything like that and wondered, is there research on this?
As a parting thought, I've found very few studies on school district reserves. When I search scholarly archives all I find are specific school district reports on their own reserves over time. Has anyone done systematic research on school district reserves? These are big pools of capital with interesting politics and budgeting protocols and big stakes for districts, particularly as COVID relief money dries up in the next year. The National Education Finance Academy publishes a "state of the states" report looking at each state's financial status, and the entries cover reserves, which could be a place to start.
If you know of other research, or reports, or whatever, let me know!