As they consider the possibility of tapping into their fund balance to make up for shortfalls in state funding, districts will need to keep in mind some basic accounting requirements.
As school districts wrap up their external audits and the Texas legislative session kicks into gear, future state funding for education is a hot topic. Although the state’s budget situation may not be as dire as previously expected, legislators have sometimes eyed district fund balances as one way to cover deficits in state education spending.
There’s another reason school districts are taking a hard look at their fund balances. Until December 31, 2020, state funding for school districts was based on pre-pandemic attendance numbers. But most, if not all, Texas districts have seen a drop in their average daily attendance (ADA) as a result of the pandemic. Unless relief is extended or funding rules change, this reduced attendance could significantly impact state funding, and many districts will look to fill the gaps with fund balance so they don’t have to cut teachers.
More Than One Kind of Balance
As they consider the possibility of tapping into their fund balance to make up for shortfalls in state funding, districts will need to keep in mind some basic accounting requirements. The Governmental Accounting Standards Board, or GASB, has established these five categories for fund balance in GASB 54:
Nonspendable balances are not expendable or are legally or contractually required to be maintained intact. This includes nonexpendable areas like inventory and prepaids as well as balances that are legally or contractually required to be maintained intact. The corpus of a permanent fund is an example.
Restricted balances can be spent only for the specific purposes stipulated by the Texas constitution, external resource providers or enabling legislation. These restrictions are external, as opposed to committed balances, which a district constrains by its own choice.
Fund balance should be reported as restricted when constraints placed on the use of resources are either:
- Externally imposed by creditors, grantors, contributors, or laws or regulations of other governments; or
- Imposed by law through constitutional provisions or enabling legislation.
This includes restrictions for the retirement of debt, federal and state financial assistance, and donations or contributions. Transfers from one fund to another fund for a specific purpose does not constitute restricted fund balance.
It is important to remember that restrictions are defined by external factors and those restrictions can be overlooked. For example, the general fund can hold a restricted fund balance for items like the retirement of note payables and leases. This detail is often forgotten.
Committed balances include amounts that can be used only for the specific purposes determined by a formal action of the government’s highest level of decision-making authority.
According to GASB 54, Paragraph 12: “The formal action of the government‘s highest level of decision-making authority that commits fund balance to a specific purpose should occur prior to the end of the reporting period, but the amount, if any, which will be subject to the constraint, may be determined in the subsequent period.”
For school districts, this formal action will be a resolution by the Board of Trustees. The resolution can include a range of information, which can be as broad as commitments for capital projects to specific campus activity funds. Commitments must occur prior to fiscal year end, and the same formal action is required to establish, modify, or rescind the commitment. If commitments are not modified or rescinded, they remain until the funds are used for the specified purpose.
Assigned balances are amounts intended to be used by the government for specific purposes but which do not meet the criteria to be classified as restricted or committed.
Assigned fund balance can be expressed by a body, such as a Budget or Finance Committee, or by an official to whom the governing body has delegated the authority to assign amounts to be used for specific purposes. This classification often includes projected budget deficit for subsequent years, encumbrances, insurance deductibles, or reserves for future capital improvements.
Unassigned fund balance is the residual classification for the government’s general fund and includes all spendable amounts not contained in the other classifications.
What Principles Should Guide Policy?
As you revisit your district’s fund balance policies, don’t forget that GASB 54 requires that a policy addresses certain areas. All districts should be sure to address each of the five fund balance categories in their formal fund balance policies. The policies should:
- For committed balances, identify the body with the highest level of decision-making authority as well as the formal action required, such as a board resolution approved by vote.
- Define the body or official authorized to assign amounts.
- Address the district’s policy on minimum fund balance, often expressed as a multiple or a percentage of prior year revenues.
GASB doesn’t require the categories to be outlined in the policies, but internally, districts should track fund balance by category. This information is useful for the Board of Trustees in reviewing the fund, and your auditor will request it each year.
For more information about school district fund balances, see TASBO’s recent report “Explaining Fund Balances.”