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Why ‘rainy-day’ funds won’t make up for budget cuts

For starters, typically the money is there to help the school district or institution deal with unexpected expenses, delays in receipt of aid and other onetime expenditures.

You heard it said a thousand times during the last legislative session: Given the gravity of the state budget crisis and the impending state shutdown, why shouldn’t school districts, colleges and universities with multimillion-dollar reserve funds be expected to dip into them?

Or how about this: If Jane Q. Public loses her job, she may have to dip into her savings to tide the family over; if she wants to make them last longer, she can always trim expenses.

Isn’t this arguably the kind of rainy day one saves up for?

Sounds so reasonable, right? Wrong. As analogies go those are pretty bad, according to education finance folks.

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A reserve fund isn’t the equivalent of a family savings account for a number of reasons.

Intended for nonrecurring expenses
For starters, typically the money is there to help the district or institution deal with unexpected expenses, delays in receipt of aid and other onetime expenditures that are not recurring or contemplated within the budget.

Tapping a reserve to make up for a shortfall in state funding does nothing to address continuing obligations that are no longer affordable given the smaller budget. And the smaller the budget, the harder it will be to replenish the reserves. The lower the reserves, the more it will cost the institution to borrow.

The Minnesota State Colleges and University system last week announced it had been given permission to use its reserves, $94 million, or about 5 percent of its annual budget of $2 billion, to keep its 32 universities, community and technical colleges open.

Because state funding makes up about half of MnSCU’s budget, even with tuition dollars coming in that means the lights wouldn’t stay on long.

Reserves already tapped in K-12
For K-12, there are additional layers of pain. Most Minnesota school districts have already tapped their reserves to make up for the billions in funding shifts former Gov. Tim Pawlenty used to balance his budgets.

Still more has been drained from the accounts by another financial shift employed by the last administration. In recent years, districts with decent reserves several times saw the state swoop in and take a portion of the money under the terms of a heretofore unused law that says school reserves must be tapped before the state can engage in short-term borrowing.

This means districts that have little or no reserves lose nothing; those that have budgeted the furthest into the black lose the most.

Beyond that, there’s the fact that school districts’ reserves are supposed to help even things out year in and year out. This little history lesson has appeared in this space before, but with the shutdown looming, I’m betting more of you will suffer the details this time around:

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Debt is a moving target
Because it essentially amounts to tuition dollars following students — who, we all know, cannot be counted on to sit still, either literally or metaphorically — the amount the state owes school districts — past tense — is a moving target.

Back in the day, Minnesota dealt with this by paying school districts for 90 percent of what they were owed in a given year in the year in question.

It was generally agreed that holding back the other 10 percent pending final tallies of arcane measures like pupil hours — which is not the number of hours a literal, corporeal pupil is in school, believe it or not — was sensible and fair. The state was good for the money and districts could dip into and replenish their reserve funds.

Somewhere along the line, cash-strapped politicians thought to hold back a little more, 15 percent at first and then 20. As the amount grew, and compounded from year to year, it stopped seeming so sensible and fair. Much in the way that a consumer will never pay off a credit card by making minimum payments, the state never really reimbursed districts.

Reasoning that a shift is better than a cut, districts swallowed hard and asked voters to pass levies not just for big initiatives, as was true in the past, but to keep the lights on.

Shift shifted to 70/30
Finally, Pawlenty began balancing the budget by changing the shift to a 70/30 split — insisting all the while that he was “holding K-12 harmless.” Suddenly, districts were doing things like cramming 40 kids in a classroom and going to four-day weeks to compensate.

Early in his tenure, Gov. Mark Dayton acknowledged that even if he got his tax increase there is no way to come up with a pot of money big enough to settle the state’s debts to school districts. The 70/30 split will have to remain in force for the next biennium.

But in 2014, he proposes to shift it back to 90/10. Even without a return to the Halcyon days of full funding, administrators will know what they are getting, and when they are getting it.

Atop all of that, it’s unclear just how a state shutdown would affect public schools. In 2005, state aid kept flowing after a judge granted Pawlenty’s request to continue most funding. If that doesn’t happen this time, commercial borrowing and those dwindling reserves would be the only options.

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The bottom line: It’s been raining a long, long time.