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Basics of Fund Accounting and the Importance of Fund Balance

Public schools are required to track revenue and expenditures in various funds and funds fall within three different categories.  Saline Area Schools has funds within each of those categories as follows:

Governmental

General Fund – All the primary operational revenue and expenditures are accounted for within this fund. 

Special Revenue Funds – Revenue that must be accounted for separately by law would be accounted for within a Special Revenue Fund.  Saline Area Schools has separate funds for Community Education/CARES, Food Service and Maintenance and Equipment.

Capital Projects Funds – Any projects using revenue from a Bond proposal must be tracked separately in a Capital Projects Fund.  Saline does not currently have any Capital Project Funds.  Typically, Capital Project Funds are used to build new or renovate existing buildings, purchase technology, and purchase buses.  General operating costs cannot be paid from this fund.

Debt Service Fund – The Principal and Interest that is paid on long-term debts must be tracked in a Debt Service Fund.  Saline has two Debt Service Funds for past bond issues.

Sinking Fund – Saline District residents are currently assessed .35 mills for the Sinking Fund.  The use of sinking funds is restricted primarily to large scale building repairs.  General operating costs (including most repairs) cannot be paid from this fund. 

Agency Funds

Student Activity Fund – Saline Area Schools maintains a Student Activity Fund, which encompasses approximately 200 sub-accounts for school clubs, athletic teams, smaller scholarships, school trips (such as Toronto Trip, Washington DC Trip), Class Accounts, etc.  

South West Washtenaw Consortium – Saline Area Schools is the fiduciary for the SWWC, which means that we maintain the accounts for all of their revenues and expenditures.  Their fund is audited and reported to the State through Saline Area Schools.

Fiduciary Funds

Trust Accounts – Saline Area Schools maintains several Trust Accounts within the Trust Fund on behalf of individuals or entities that provide scholarships to our students. 

Fund Accounting and Fund Balance

The Assets, Liabilities, Equity, Revenue and Expenditures of each Fund are accounted for and reported separately and the funds cannot be comingled.  For example, Sinking Fund revenue can only be used for very specific purposes and cannot be used to pay for operational expenses. 

The General Fund is the main fund that garners the most attention.  All of the general operating expenses of a district are paid from the General Fund.  Expenses are tracked by school or department, so within Saline Area Schools, we track the expenses of 7 school locations, Special Education, At Risk, various grants (Title I and II, IDEA, ELL, etc.) and operational departments such as Maintenance, Technology, Transportation, Finance Office, Human Resources, Curriculum, Registration, etc.

District budgets are required by law to be approved prior to July 1st and our 2013-14 budgets were approved at the June 25, 2013 Board Meeting.  Our current General Fund budget projects a surplus of $794,251 and an ending fund balance of $2,596,487, or 5.13% of total expenditures.  Board policy states:

The District will maintain a minimum unassigned fund balance in its General Fund ranging from 5 (five) percent to 20 (twenty) percent of annual expenditures and outgoing transfers. This minimum fund balance is to protect against cash flow shortfalls related to timing of projected revenue receipts and to maintain a budget stabilization commitment.

Our Fund Balance has been below the minimum required 5% of annual expenditures for the last two years (2.32% in 11-12 and projected to be 3.81% in 12-13), due in large part to three different issues:  reduction in state funding, declining enrollment and staff contracts through June 2012.  All staff contracts were renegotiated and two year contracts were signed for the 2012-13 and 2013-14 school years, which aligned costs with our current revenue stream. 

In addition to Board Policy, Goal #5 of the Strategic Framework states:

District shall establish short-term financial stability and long-term fiscal solvency.

              Action Step #4 – Return Fund Balance to 5% and Continue to work toward 10%

With the approval of the 2013-14 budget, we have returned our Fund Balance to 5% and now can work toward increasing that balance.

Why is Fund Balance so Important?

As of June 30, 2014, we are projected to have a Fund Balance of $2,596,487 or 5.13% of annual expenditures.  This is a snapshot of our financial status as of that date and does not mean that we will have a surplus of over $2.5 million each day throughout the year.  It also includes receivables and inventory, so it is not all available cash. 

 

Maintaining an adequate Fund Balance affects us in both the short and long term.   It allows the District to meet our day to day obligations and also allows us to adjust for sudden decreases in revenue or unexpected expenses, without having to make abrupt changes in our programming or services.  In 2010-11, the District balanced the budget by: cutting expenditures (selling Union School/closing Houghton), reducing expenditures (laid off staff, eliminated positions and received contract concessions) and using cash ($1.5 million of available Fund Balance).  The fact that we had a little over 5% fund balance at the end of 2009-10, allowed the District use that three-pronged approach to maintain quality programs throughout the District, while weathering an economic downturn.  If we had not had that Fund Balance available, we would have had to make difficult decisions on what programs or services to eliminate. 

 

To make sure we can meet our day to day expenditures we must prepare a cash flow analysis, which captures when cash flows in (property taxes, state aid payments, grant payments, etc.) and when cash flows out (bi-weekly payrolls, utility bills, bi-weekly accounts payable check runs, etc.)

 

Our primary sources of income are State Aid, Property Tax and grant revenue.

State Aid

The State of Michigan’s fiscal year runs October 1st – September 30th, so they have timed their State Aid payments for public schools to match their fiscal year and to improve their own cash flow position.  State Aid for the 2013-14 fiscal year will be divided into 11 monthly payments, received October 2013 –August 2014 and revenue will be received on the 20th of the month (or the next business day).  There are three problems with this:

1.     Our fiscal year begins on July 1st and we don’t begin receiving State Aid revenue until October 20th – nearly 4 months after the start of the fiscal year.

2.     Although we are still receiving State Aid payments in July and August (for the previous fiscal year), we don’t receive any payment in September.

3.     Revenue is received on the 20th of the month (or the next business day), and there are several months throughout the year where we either have two pay dates that fall prior to receipt of our State Aid that month, or we have three pay dates in a month.

Property Tax Revenue

Saline Area Schools collects all local property tax revenue in the summer (this is the 18.0000 mills collected on non-homestead property).  We receive the majority of the property tax revenue in August and September, and smaller amounts October – June.  The receipt of this revenue early in the fiscal year helps us through the early part of the year, especially in September when we don’t receive any State Aid revenue.  But it also means our cash flow decreases in the later part of our fiscal year. 

Grant and Act 18 Revenue

Our total grant and Act 18 (Special Education reimbursement from the WISD) revenue for the fiscal year is less than $7.0 million.  Requesting grant reimbursement on a monthly basis improves our cash flow position and Act 18 revenue is received in October/December/February/April/June.

As you can see from the chart below, there were several times throughout the 2012-13 fiscal year where our monthly expenses (red) were more than our monthly revenue (blue). 

chart.jpg

There are four basic things we can do to make sure we can meet our monthly expenses at those times:

1.     Speed up the receipt of revenue – unfortunately, we have little to no control over the receipt of most of our revenues.

2.     Slow down the payment of expenditures –

a.      87% of our total expenditures is payroll related and the pay schedule cannot be adjusted

b.     Time payment of invoices so payment is made just prior to incurring late charges/interest charges, which we do as a standard practice.

c.      Hold payments until we have the cash to cover them – risk alienating vendors, incurring late fees/interest charges

3.     Borrow to meet cash flow needs –

a.      We will borrow $3.5 million in fiscal year 2013-14 to make sure we can meet our cash flow needs.

b.     This will cost the District $35,000 – $45,000 in interest and legal fees because interest costs are very low right now.  Interest costs will not always be so low.

4.     Maintain a Fund Balance large enough to meet cash flow needs.

How large would our Fund Balance need to be in order to meet our cash flow needs?

The Michigan School Business Officials Association (MSBO) recommends that Districts maintain a fund balance of 15% of expenditures, giving a cushion of just under 2 months of expenditures.  If a district is saving for a future purchase (such as buses or technology), the Fund Balance could be more.  As of 2010-11, the average fund balance in the State of Michigan was 11.12%, so we are substantially below either the recommended or the average. 

The expenses of one pay period (salary, benefits, taxes) are just under $2.0 million dollars, so our projected Fund Balance as of June 30, 2014, will cover about 1-1/4 pay periods.  Our Strategic Framework suggest a Fund Balance of 10%, which would equate to $5.0 million and would cover the costs of two pay periods (typical for one month) and leave a little room to cover additional expenses.  We would still need to borrow approximately $1.0 million to meet all our cash flow needs, but our interest costs would be substantially less.    To meet the state average, we would need to have a $5.6 million Fund Balance and to meet the recommendation of the MSBO, we would need to have a $7.6 million Fund Balance.

There are always pressing needs in a District and we must balance those needs with the need to make sure we can weather any future economic downturn or unexpected emergency expenditure.  Additionally, having a relatively small Fund Balance affects our credit rating.  We would be considered a higher risk, our credit rating would be hurt and our cost to borrow would increase.  We have been reducing costs and delaying expenditures for several years and we would like to reduce class sizes, update student and staff technology, repair building roofs, heating systems, etc.  But we need to plan for the future as well and make sure we have an adequate Fund Balance to weather the continued uncertain economic conditions.

As Superintendent Graden said at the June 25th Board meeting when the current budget was adopted:

 “While we are in a much better position than in recent memory, we need to be cautious moving forward.  We have weathered the economic downturn and look with confidence to the future. The budget position allows us to address the initial needs of our Strategic Framework which will have a lasting benefit for our students, staff and community. This is the second year in a row we have not issued layoff notices to staff and we have hired 26 teachers during this period. Our students continue to excel in the classroom and academic and athletic competitions.”

 

 

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1 Comment

July 6, 2013 · 4:46 pm