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Legislature Passes Budget Trailer Bill with Cap on Reserves

On June 15, 2014, the Legislature passed the State budget.  Part of the budget agreement was a cap on school district reserves, set forth in AB 1463.  (AB 1463 is the trailer bill on K-12 issues.)  Historically, districts have been required to maintain a minimum reserve; the new cap on school district reserves sets a maximum for reserves.  For districts with an ADA under 400,000 (i.e., all districts other than Los Angeles Unified School District), the cap is set at two times the minimum reserve.  (Ed. Code, § 42127.01, subd. (a)(1).)  Since the minimum reserve amount is generally three percent (3%), the maximum will be six percent (6%).  A cap on reserves will be especially significant for small districts with small budgets.

Districts can obtain a short-term waiver of the cap from the County Office of Education.  Waivers are available for a limited term of two (2) consecutive fiscal years within a three (3) year period.  (Ed. Code, § 42127.01, subd. (b).)  Districts that request waivers must provide documentation indicating that extraordinary fiscal circumstances substantiate a need for the waiver.

The cap will not be imposed until a transfer is made to the Public School System Stabilization Account.  (Ed. Code, § 42127.01, subd. (a).)  Ed Source has estimated that this will not occur for approximately seven (7) years.  As a result, the Legislature may revise or repeal the cap.  Moreover, the cap is tied to the passage of Assembly Constitutional Amendment 1, which is on the November 4, 2014 Statewide General Election ballot.  If the Amendment does not pass, then the maximum reserve will not become operative and will be repealed as of January 1, 2015.  (Ed. Code, § 42127.01, subd. (c).)

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