CFBISD Board of Trustees Funding Operating Deficits by Depleting General Fund is Bad Financial Managment!

Why using the General Fund Balance to fund Ongoing Operations is Simply Bad Financial Management.

In H.B 3, the Texas State Legislature required Texas Education Agency (TEA) to include an alert in the new Financial Solvency Review when a school district has significant reductions in its general fund balance. There several reasons for this:

1. By depleting significantly the general fund balance to fund budget deficits, a board of trustees of a school district is avoiding the underlying problem --expenses are growing at faster rate than revenues. For example, the Carrollton Farmers Branch Independent School Board of Trustees approved a budget resolution for the 2007-2008 school year with a deficit of $6 million. And, in 2008-2009, the Board of Trustees approved a deficit of $13.5 million. These deficits were to funded by depleting the general fund balance. Because the underlying budget issues were not addressed, the district faces the prospect of a tax rate increase of almost 9% to fund the budget for 2009-2010 school year .
2. By depleting the general fund balance, a Board of Trustees of a School district is increasing future budget deficits. General fund balances are invested and return revenue in the form interest. This interest income stream is lost from future budgets. The depletion of the general fund has the affect on future budgets as if the district borrowed the money, and is paying an interest rate equal to the interest rate the district would have received if funds remained in the general fund. Depleting general funds to cover operating expenses is single one-time fix. However, operating expenses are continuous and tend to increase. Deficits occur when expenses increase at faster rate than revenues. Funding operating expenses from the general fund does not increase future revenues nor decrease future expenses. It is not surprising the Carrollton Farmers Branch School District Board of Trustees found, it self dealing with larger deficit for 2008-2009 school year than in 2007-2008. By depleting the general fund to address the 2007-2008 deficit, the board did not address the issue of the increasing disparity between the growth of the district's expenses and revenue.
3. By depleting the general fund balance, a Board of Trustees of School district may create future cash flow difficulties, or even insolvency for a school district. The timing and speed in which a district receives cash from revenues is dramatically different from timing and speed in which a district spends cash to cover expenses. Balances in the general fund are used to manage these cash flow differences. As operating budgets continue to grow rapidly, it becomes necessary to districts to maintain larger general fund balances to manage its cash flow needs. In period of time, when school districts find it difficult to balance operating budgets, it becomes all but impossible for a district to increase balance of its general fund. One proposal 2009 state legislative session would have required that a district maintain minimum general fund balances equal to at least two months of the district's operating budget. The Carrollton Farmers Branch ISD operating budget will exceed $300 million dollars for 2009-2010 school year. Based on two month requirement, the district should maintain a general fund balances of about $50 million. For fiscal year ending in August 2008, the district reported general fund balances of $60 million. The Board budgeted a deficit of $13.5 million for 2008-2009 school year to be funded from the general fund. If the budget is accurate, the current general fund balance is approximately $47.5 million; well below the $50 million level.