Schools need reserve-fund flexibility

State Comptroller Thomas DiNapoli recently completed audits of New York’s 733 public school districts and BOCES. The audits were part of a series of legislation following a scandal in the Roslyn School District in which administrators embezzled $11 million.

The audits uncovered little fraud or abuse, but did make recommendations for improving financial controls and making better use of taxpayer money. Several districts were found to have surplus funds in excess of legal limits. DiNapoli determined that 285 districts across the state were improperly holding $615 million in various reserve accounts.

A majority of the excess funds were found in Employee Benefit Accrued Liability Reserve funds — money set aside to pay accrued sick, personal and vacation days when a district employee retires. Although there is no limit on how much money districts can keep in these funds, the audits made it clear that they were keeping more than was necessary.

The problem is, once money goes into this account, it can be withdrawn only for the intended purpose. Across the state, districts have built balances in these accounts large enough to cover every employee eligible for retirement.

Valley Stream Central High School District Superintendent Dr. Marc Bernstein explained that this theory makes sense — in the private sector. If a company goes out of business, he said, there must be enough money available to pay these separation expenses for all employees.

But school districts don’t go out of business. And it is highly unlikely that every employee in a school district who is eligible for retirement will do so in a given year.

Several districts, on the advice of their auditing firms, have also added money for retirement health insurance costs to their EBALRs, which is an illegal use of the accounts.

Hundreds of districts are now stuck with accounts containing more money than they’ll need in the foreseeable future. That’s why DiNapoli is recommending legislation that would allow them more flexibility in using their liability reserve funds.

They would be able to transfer excess money to their operating funds, or create other post-employment benefits accounts. We support this idea, and encourage state lawmakers to pass such legislation quickly. There is a lot of money that is going unused that could benefit both taxpayers and students.

State aid cuts are highly likely for the 2010-11 school year. Districts are trying to balance their budgets while dealing with rising costs and falling revenues. School board members know their communities won’t support anything more than small tax increases. And most districts are trying to accomplish this without decimating programs.

It is unlikely that any legislation would be passed in time for districts to use their excess EBALR funds in 2010-11, but we urge lawmakers to try. School officials are predicting that next year’s budgeting process will be just as difficult as this year’s, if not more so, so it is essential that districts be able to tap those funds.

Of course, if legislation is passed, districts must use the excess funds responsibly. There will still be the need to keep EBALRs sufficiently funded to cover realistic separation costs in the next few years. Districts should also avoid wiping out the excess all at once and having nothing to fall back on the following year.

DiNapoli’s audits have found many ways for school districts to operate more effectively. They have also shown how districts could better manage their finances if there were changes in legislation. Allowing the transfer of money out of EBALR accounts to general funds or other retirement accounts would be one such helpful change. We hope state lawmakers will seriously consider DiNapoli’s suggestion.