Copyright© 2002 by School Services of California, Inc.

Volume 15                   For Publication Date: December 6, 2002             No. 24

Ask SSC . . .

How Much in Reserves is a District Required to Maintain?  

17. We are starting to develop our district’s 2003-04 budget, and I am concerned that our ending reserves may dip below 5%.  Another person in my district insists that 3% is the point at which we should be concerned.  Which is correct?  What happens at that point, and where is the authority for this?

1. In a way, both of you are correct because both thresholds are triggers for the Chancellor’s Office.  The authority comes from the Education Code. 

First, Education Code Section 70901(b)(2) states that the Board of Governors “evaluate and issue annual reports on the fiscal and educational effectiveness of community college districts according to outcome measures cooperatively developed with those districts, and provide assistance when districts encounter severe management difficulties.”   

Education Code Section 84040(c) further specifies that the Board of Governors “…adopt criteria and standards for periodic assessment of the fiscal condition of community college districts…”, and sets forth the following regulations for “…the review and improvement of district fiscal conditions as necessary to encourage sound fiscal management practices…”:  

a.                   Each district’s governing board is to periodically report information to the Board of Governors on the fiscal condition of the district.   

b.                  The Board of Governors is to establish standards for district maintenance of sound fiscal conditions, and if a management review indicates that the district is experiencing financial difficulty, the Board “may recommend appropriate changes in a district’s management practices.”  

c.                   The Board of Governors “shall develop appropriate procedures and actions for districts that fail to achieve fiscal stability or that fail to comply with the Board of Governors’ recommendations.  The procedures and remedies may include the appointment of a special trustee to manage the district.  The Board of Governors shall be authorized to reduce or withhold apportionment to districts to pay for the cost of the special trustee, management review, or other extraordinary costs resulting from the district’s fiscal difficulties and to ensure the stabilization of the district’s financial condition.”  

Title 5 in the California Code of Regulations provides further detail on district budgets, financial reporting, principles for sound fiscal management, and actions and procedures by the Chancellor’s Office to ensure district financial stability.  

Given the above authority, the Chancellor’s Office has developed criteria for further analysis of a district’s financial condition.  A fund balance of 5% of expenditures, referred to as the “prudent level” of reserves, is specified in several of these criteria.  If a district’s fund balance falls below this prudent reserve level, then the district is subject to further review by the Chancellor’s Office, where other criteria are used to determine the financial condition of the district. If the results of this review indicate serious financial issues, then the Chancellor’s Office and Board of Governors can take the necessary action to achieve the fiscal stability of the district.  

A fund balance of 3% of expenditures is referred to as the “minimum level” of reserves.  If a district’s fund balance falls below this level, further review by the Chancellor’s Office is not necessary before taking the necessary actions to ensure the district’s fiscal stability.

            —Sheila G. Bua