Webster Central School District Strategic Plan for Use of Reserves 2022-23
Overview The establishment and funding of reserves is an important consideration in the maintenance of a sound financial plan for any school district. While strict adherence to state law is required to ensure reserves are both legal and appropriate, adequately funded reserves are vital to the long- term health and stability of the school district. This concept is recognized by the New York State Comptroller: Saving for future projects, acquisitions, and other allowable purposes is an important planning consideration for local governments and school districts. Reserve funds provide a mechanism for legally saving money to finance all or part of future infrastructure, equipment, and other requirements. Reserve funds can also provide a degree of financial stability by reducing reliance on indebtedness to finance capital projects and acquisitions. In uncertain economic times, reserve funds can also provide officials with a welcomed budgetary option that can help mitigate the need to cut services or to raise taxes. In good times, money not needed for current purposes can often be set aside in reserves for future use. (Office of the New York State Comptroller – Local Government Management Guide – Reserve Funds, Pg. 1) The Webster Central School District believes that the judicious use of reserves greatly reduces long term borrowing costs, smoothes large fluctuations in tax rates and minimizes the effect of mid-year budget cuts which would have a direct impact on students. It believes it is in the best interest of both the students and taxpayers to prudently establish and use reserves to weather the financial storms and uncertainties that will occur. Again, the Comptroller notes: The practice of planning ahead and systematically saving for capital acquisitions and other contingencies is considered prudent management. Saving for future capital needs can reduce or eliminate interest and other costs associated with debt issuances. Similarly, certain reserve funds can be utilized to help protect the budget against known risks (a potential lawsuit) or unknown risks (a major ice storm). (Office of the New York State Comptroller – Local Government Management Guide – Reserve Funds, Pg. 2) This quote reflects the two purposes for the establishment of reserves: 1. Saving money for a large, one time future expenditure. A capital reserve for the replacement of a roof is an example. 2. Protecting the district against a large, currently unknown risk. An insurance liability reserve is an example of this type.
Since New York State law mandates that expenditures can be no greater than the budget approved by the voters in May, the Webster Central School District budgets conservatively to ensure that unanticipated expenditures do not result in mid-year budget cuts which would have an immediate impact on students. This practice has allowed the district to weather mid year sales tax reductions, state aid holdbacks and significant energy cost fluctuations without impacting instructional programs. However, conservative budgeting can also result in budget surpluses at year-end. The Board of Education reviews any budget surpluses and determines the best use of these surpluses including transfers to voter or board of education approved reserves or to a reduction in the ensuing year’s tax levy (appropriated fund balance). This budgeting practice has been endorsed by the S&P Global, which has rated Webster’s bonds as AA with a stable outlook. S&P issued the following commentary on the district budgeting/financial practices: “We consider the district's financial management practices standard under our Financial Management Assessment methodology, indicating the finance department maintains adequate policies in some, but not all, key areas. Management uses conservative accounting when preparing the budget. It analyzes three years to five years of historical data for revenue and expenditures. Management consistently monitors the budget and makes quarterly reports on budget-to-actual results to the school board. For future financial needs, the district maintains long-term financial and capital plans. The financial plan includes a five-year forecast management updates and shares with the board annually. The capital plan includes a state-required five-year building-conditions survey management updates every five years. The district does not currently have formal debt-management or reserve policies. It, however, has a formal investment-management policy that reflects state guidelines and holdings with monthly management reports on earnings to the board.” S&P also noted the following while assigning a AA rating: • • •
Stable and diverse economy, supported by its strong wealth and income levels, and its participation in the Rochester metropolitan statistical area. Very strong total fund balance; and Low overall net debt coupled with rapid amortization.
Moody’s Investor Services in October of 2022 reaffirmed the district's AA rating. Legally established reserves can provide many benefits to the school district and its taxpayers. However, these reserves can also cause confusion when their purpose is not clearly understood by the community. The purpose of this document is to detail Webster Central School District’s plan for use and maintenance of reserves. Unassigned Fund Balance will be maintained at or close to the 4% allowed by law to provide the District with financial stability and a margin of safety to fund unanticipated contingent expenditures that may occur unexpectedly during the fiscal year. The Unassigned Fund Balance also provides the cash flow necessary to fund school activities from July 1st through mid September when property taxes start to be received.
Webster Central School District Five Year Reserve History
Reserves
2016-17
Liability Reserve
2017-18
2018-19
2019-20
2020-21
2021-22
$44,977
$294,997
$298,424
$801,027
$1,802,121
$3,302,826
Employee Benefit Accrued Liability Reserve
$1,004,804
$1,005,787
$937,489
$1,027,072
$1,028,474
$1,028,877
Retirement Contribution Reserve
$7,094,192
$7,106,551
$7,189,708
$7,252,433
$7,762,459
$8,765,494
TRS Sub Fund
$-
$-
$308,604
$1,060,922
$1,812,251
$2,812,959
$2,899,827
$2,843,886
$3,126,200
$3,403,103
$3,657,751
$4,159,181
$-
$-
$-
$-
$-
$-
Workers Compensation Reserve
$1,001,764
$1,003,776
$1,015,870
$1,524,733
$3,026,815
$4,027,999
Capital Reserve
$4,761,608
$5,021,116
$5,080,243
$5,124,564
$6,631,563
$10,633,958
Repair Reserve
$57,857
$57,880
$-
$-
$-
$-
Unemployment Insurance Reserve
$940,617
$941,284
$952,850
$961,163
$1,212,475
$1,212,950
Sub Total
$17,805,646
$18,275,277
$18,909,388
$21,155,017
$26,933,909
$35,944,244
Debt Service Reserve
$1,878,327
$1,918,679
$2,106,246
$2,313,394
$3,155,965
$3,516,567
Total
$19,683,973
$20,193,956
$21,015,634
$23,468,411
$30,089,874
$39,460,811
Tax Certiorari Reserve Insurance Reserve
The purpose of this reserve fund is to pay for compensation benefits and other expenses authorized by the Workers' Compensation Law, and for payment of expenses for administering this self-insurance program. The reserve may be established by board action and is funded by budgetary appropriations and such other funds as may be legally appropriated. (General Municipal Law, §6j). Balance June 30, 2021: Balance June 30, 2022:
$3,026,815 $4,027,999
Three year’s worth of payments, which average over $1,200,000 per year, plus adequate coverage of the Webster CSD share of the potential yearly deficits that the Rochester Area School Worker’s Compensation Consortium has historically had. Total targeted balance is estimated to be $4.5 million dollars. Discussion: Webster Central School District participates in the Rochester Area School Worker’s Compensation Consortium. Claims can remain open for years so this reserve protects against both the cumulative effect of lagging claims and an abnormally large payout for a settled claim. In recent history, the consortium has run structural deficits, with Webster’s liability for the deficit averaging $500,000. The district also has seen year to year costs in premium payments increase by 103% since the 2008-09 fiscal year, to about $1.3 million dollars annually. Additionally, recent NYS Workers Compensation law changes have increased employer costs significantly.
This reserve fund is used to pay the cost of reimbursement to the State Unemployment Insurance Fund for payments made to claimants. The reserve may be established by board action and funded by budgetary appropriations or other funds as may be legally appropriated (General Municipal Law, §6-m). Balance June 30, 2021: Balance June 30, 2022:
$1,212,475 $1,212,950
Approximately 3% of payroll or $2,000,000. This would support up to 20 employees’ unemployment claims if extended benefit periods are enacted as they were in the prior recession. With the recent financial withholdings from NYS, it may be wise to revisit adding additional funds to this reserve to offset future claims. Discussion: Additionally funding was added because of state aid withholdings that began with the fiscal year 2019-20 and were expected to continue into 2020-21 and future fiscal years. However, the likelihood of job cuts that were staved off with federal stimulus. However, economic forecast trends point to a recession and this reserve may need to be funded additionally to prepare for that possibility.
EMPLOYEE’S RETIREMENT CONTRIBUTION RESERVE Authority: The governing board of a school district, by resolution, may establish a reserve for the purpose of financing retirement contributions made to the NY State and Local Employees’ Retirement System. Establishing or expending the reserve does not require voter approval. Expenditures may only be made pursuant to a board resolution and must be used to finance retirement contributions (General Municipal Law, §6-l). Balance June 30, 2021: Balance June 30, 2022:
$7,762,459 $8,765,494
The expected long term contribution rate for the Employees Retirement System is up to 13.1% for next year. We had anticipated the rate to be around 12% for projection purposes. The State Comptroller continues to be aggressive in lowering the rate of return and life expectancy assumption while the market is making gains. The target balance would be able to cover 3 years worth of payments, at an estimated $3,000,000 per year for a total of nine million a year. Discussion: The purpose of this reserve is to set aside available surplus to provide a source of funds to limit the property tax impact of increases in employer contribution rates for the Employees Retirement System. This reserve was authorized by the state legislature in reaction to the significant increases in retirement contribution rates that municipalities and school districts were facing.
TRS SUB FUND Authority: The 2019-20 New York State budget includes language authorizing school districts to have reserve funds for contributions to the New York State Teachers' Retirement System (TRS). It amends Section 6-r of the General Municipal Law, which currently authorizes reserve funds for contributions to the New York State Employees' Retirement System (ERS). The Governor signed the bill into law on April 12, 2019 as Chapter 59 of the Laws of 2019 and was made effective retroactive to April 1, 2019. Balance June 30, 2021: Balance June 30, 2022:
$1,812,251 $2,812,959
The TRS Reserve was established in June of 2019, with the following limits; not to exceed 2% of teacher salaries in the prior year and to not exceed 10% of the total teacher salaries at any one time. It should be noted that the salaries are to include anyone that is a member of the New York State Teachers Retirement System (Administrators, Teaching Assistants) for the calculation. It is estimated that 2% of salaries would allow for an estimated TRS reserve funding year to year of $1,553,909, with a cap of $7,769,544 for the entire reserve for the district. Discussion: The Teacher’s Retirement Pension System has had stable rates the past few years. A majority of the returns come from investment incomes and stock market gains have helped mitigate rate increases.
The governing board of any school district, by resolution, may establish a reserve to refund taxes of the current year in tax certiorari proceedings. Establishing or expending the reserve does not require voter approval. Amounts not necessary to refund taxes must be returned to the unreserved fund balance of the general fund by the first day of the fourth fiscal year following the year for which the reserve was created. (Education Law §3651, Sub.1a, 3a) Balance June 30, 2021: Balance June 30, 2022:
$3,657,751 $4,159,181
100% of open cases, plus future predictions. An estimated $5,000,000 would be an appropriate target to recommend. Discussion: Ideally this reserve should be adequate to cover 100% of the outstanding tax certiorari cases. It is not unusual for a lawsuit to cover multiple years of assessment for large taxpayers so potential judgments may be significant. There are currently 22 open challenges against the district for an estimated $2.5 million total exposure. Industry that has been impacted by shutdowns has increased their challenges, and it is expected to continue. In addition, it is predicted that as the workforce continues to work from home, that commercial real estate will see an uptick in challenges from unleashed or for sale properties that once housed office space. In addition, the presence of a large corporation with a history of property tax litigation with large settlements creates an even greater need. The COVID pandemic has caused an increase in businesses that were shut down to file tax proceedings as well for this fiscal year increasing potential district liabilities.
EMPLOYEE BENEFIT ACCRUED LIABILITY RESERVE Authority: The governing board of any school district, by resolution, may establish a reserve for the purpose of funding the monetary value of accrued but unused sick leave, personal leave, vacation time, and any other forms of payment of accrued but unliquidated time earned by employees that may be due upon termination of the employee’s service. Establishing or expending the reserve does not require voter approval. Expenditures may only be made for allowed cash payments earned by employees due upon their termination of employment (General Municipal Law, §6-p). Balance June 30, 2021: Balance June 30, 2022: Targeted Balance:
$1,028,474 $1,028,877 fully fund entitlements due employees upon leaving employment.
This reserve is for contractual benefit entitlements that will be paid directly upon an employee’s termination. It does not include post-employment health benefits under GASB 45. New York State has not yet developed a method to fund that multi-million dollar liability. Webster is fully funded in this reserve.
The Repair Reserve Fund is used to pay the cost of repairs to capital improvements or equipment, which repairs are of a type not recurring annually. Voter approval is required to fund this reserve. Expenditures from this reserve may be made only after a public hearing has been held, except in emergency situations. If no hearing is held, the amount expended must be repaid to the reserve fund over the next two subsequent fiscal years (General Municipal Law, §6- d). Balance June 30, 2021: Balance June 30, 2022:
$0 $0
Projected costs of future repairs on non-instructional buildings. Discussion: Webster Central School District has not maintained large amounts in this reserve because no state aid is paid for expenditures from this reserve. Since school renovations tend to generate building aid it is more advantageous to fund from capital reserves. The district is also utilizing the $100,000 capital outlay program that a repair reserve would typically be used to cover the items in those projects. All funds were transferred from this reserve to the TRS sub reserve.
The Capital Reserve Fund is used to pay the cost of any object or purpose for which bonds may be issued. Voter authorization is required for both the establishment of the reserve and for payments from the reserve. The form of the required legal notice for the vote on establishing the reserve and the form of the proposition to be placed on the ballot are set forth in§3651 of the Education Law. Balance June 30, 2021: Balance June 30, 2022:
$6,631,563 $10,633,958
may not exceed the voter authorized limit of $15 million dollars, plus accumulated interest earnings over the next ten years (renewal in May of 2026). The balance of $3,257,794 transferred into the newly authorized reserve in 2016, $1,500,000 in 2017, and $250,000 in 2018, no additional funds were added in fiscal years 2019 and 2020 except interest, $1.5 million in 2021, and $4,002,395 in 2022 leaves $4,366,042 in funds to be added to the account over the remaining 3 year period. Discussion: The Webster Central School District has used capital reserves to its advantage for many years. A capital reserve allows the District to save money in anticipation of a renovation or addition to a building. Using saved cash, rather than borrowing, for building projects offers the district two advantages: 1. The use of cash financing avoids the interest charges and debt issuance costs associated with borrowing to accomplish the same result. 2. The current building aid formula provides state aid to the District for cash
expenditures as if it had borrowed. That is, state aid is provided on interest expenses, even though those expenses were avoided. This provides a future revenue stream. In short, the use of cash financing through capital reserves is prudent financial planning, avoids the expense of bond interest, and increases state aid available to the district.
The Mandatory Reserve for Debt Service Fund is used to hold the proceeds of a bond issuance in excess of the capital expenditures funded by the bonds. A Board of Education resolution is required for the establishment of the reserve and payments can only be made for debt service or retirement of outstanding bond obligations. The legal basis of this reserve is set forth in §6-1 of General Municipal Law. Balance June 30, 2021: Balance June 30, 2022:
$3,155,965 $3,516,567
any bond proceeds not fully expended for its targeted capital expenditure must be placed in this reserve. There is no exact dollar amount to target for this reserve. Discussion: The Webster Central School District issued bonds to fund projects throughout the years. An example of one would be the roof renovations at ten buildings in 2014. At the completion of the project $35,000 of borrowed funds had not been expended. Therefore, these funds, plus accumulated interest, must be kept in reserve and used to fund debt service for the bonds issued for this project. Overtime, the same scenario played out for many of the borrowings the district undertook and the balance has accumulated over time. A large increase for 2021 was based on the finalization of the 2016 $43.5 project.
This reserve fund is used to pay judgments, claims, incidental costs and professional services connected with the investigation and settlement of claims. The reserve is funded by budgetary appropriations or any other permissive referendum. The amount that can be paid into the reserve during each fiscal year is limited to 5% of the annual budget. There is, however, no limit upon the amount which may be accumulated in the fund (General Municipal Law, §6-n). Balance June 30, 2021: Balance June 30, 2022:
$0 $0
approximately 5% of the annual budget would provide protection against large deductibles and sharp premium increases. Discussion: Webster buildings are valued at over $260 million. This reserve would help fund insurance deductibles and also is an excellent tool to mitigate against sharp premium increases that occasionally happen in the insurance markets. Currently this reserve is not utilized but funding may be considered in the future. It may be prudent to look at the establishment of an
insurance reserve with a specific purpose for cybersecurity risk. It is becoming increasingly expensive and difficult to find insurance that is comprehensive in both coverage and cost effectiveness. Creating an insurance reserve for this specific purpose would help the district should a worst case scenario hit it.
This reserve fund is used to pay for property loss and liability claims incurred. Separate funds for property loss and liability claims are required and these reserves may not in total exceed 3% of the annual budget or $15,000 whichever is greater. (Education Law, §1709, Subdivision 8-c). Balance June 30, 2021: Balance June 30, 2022: Targeted Balance:
$1,802,121 $3,302,826 3% of the annual budget or $5,874,404
This reserve is not intended for use on an ongoing basis; rather, it protects the District in the case of a catastrophic event. Webster carries $10 million of liability insurance but would be responsible for any judgments in excess of this amount. However, there are growing instances where there is district liability for expenditures that are not covered under liability insurance. For example, state administrative judgements for student placements is the largest liability area for the district. In addition, Child Victims Act Lawsuits from 60 years ago do not have insurance coverage. It is recommended that the district continues to fund this reserve towards the maximum amount.
Governmental Accounting Standards Board (GASB) requires the district to recognize purchase commitments that will be expended in a future period. The Reserve for Encumbrances is the amount of purchase commitments made at year-end where the goods won’t be received until the following fiscal year. Balance June 30, 2021: Balance June 30, 2022:
$686,121 $539,254
This reserve must equal the value of outstanding purchase obligations to be satisfied. Discussion: This required reserve recognizes that purchase commitments were made from a current budget but the goods will not be received until a future period. This ensures that funds used to pay for purchases are aligned with their intended funding sources (budget year or identified capital project). The reserve sets aside the funds for these commitments. Under GASB 54 there is no longer a reserve for encumbrances but rather these commitments are identified in “Assigned” fund balance.
BOCES CAPITAL PROJECT FUND (9950.900) Authority: The Board of Education approved a capital project for Monroe 1 BOCES in March of 2019 along with the other component districts. Webster’s share of the project will total $4,276,259. Balance June 30, 2021: Balance June 30, 2022:
$1,500,000 $0
This reserve should equal the district share after aid which is $1,428,271. Discussion: This reserve will be utilized by the district to make the yearly payments beginning in the 2020-21 fiscal year and concluding in the 2022-23 fiscal year. The project will generate $2,847,988 in capital BOCES aid. The project payments have concluded and the reserve will no longer be needed moving forward.
Planned reduction in fund balance to reduce the property tax levy necessary to support the current budget. Balance June 30, 2021: Balance June 30, 2022:
$5,500,000 $5,500,000
An appropriation of fund balance represents a non-recurring revenue that cannot be anticipated to be available in the ensuing year’s budget. Overuse can cause the depletion of available fund balance, ultimately leading to spikes in the property tax rate. Therefore, there should be a consistent use rather than large variation in application. As the Property Tax Cap continues there will be ongoing budget reductions so it is believed that the amounts available for appropriated fund balance will be constrained over the upcoming years.
Used to fund expenditures from July through September of the ensuing year prior to the inflow of property tax receipts. Also provides a source of funds for unanticipated increases in expenditures, decreases in revenue and interruptions in cash flow. Balance June 30, 2021: Balance June 30, 2022:
$5,983,258 (3.17%) $6,251,482 (3.19%)
by law, the unassigned fund balance is limited to 4% of the ensuing year’s budget. This is generally considered to be the ideal balance.