Strengthening and Protecting District Finances by Implementing Reserve Plans

Reserve plans play a major role in supporting a school district’s long term financial planning and secure financial standing. Creating reserve funds is a way to plan ahead and incrementally save money for expected future events. Reserve funds help mitigate the financial impact of major, nonrecurring or unforeseen expenditures of a school district’s operating budget.

Since reserve funds are not governed by Real Property Tax Law §1318 regarding tax collection, all funds allocated to specific reserves are not subject to the four percent limitation on unexpended surplus funds. This allows school districts to maintain these funds without the risk of violating tax levy laws.

Reserve funds, however, are not to solely intended to be a shelter for surplus funds. They are limited by law as to their purpose and use, as well as their creation, funding, and the withdrawal of funds. Violation of these requirements may result in a requirement that the reserve fund monies be returned to the general fund and/or used to offset the tax levy.

The New York State Comptroller’s Office has released guidance and opinions criticizing school districts for failing to establish reserve plans or for having improperly-established plans. Reserve plans outline each reserve fund established by the school district, and should include its purpose, funding sources and levels, and intended uses. School districts have the authority to establish various reserves pursuant to New York State Education Law or General Municipal Law. Some funds may be established and used by a simple board resolution, while others may require voter approval.

In creating reserve plans, school districts must promote open, transparent, and accountable use of public funds. Therefore, each reserve plan must be established with a clear intent or plan for each reserve fund’s purpose, optimal funding level, and use options. Audits by the Comptroller’s Office have found that plans lacking a clear and detailed rationale for each reserve fail to ensure to taxpayers that reserves were properly established, funded, and used. The Comptroller has also been more likely to criticize reserve funding levels where they are not expressly permitted by an established reserve plan. School districts are well advised to develop reserve plans that identify optimal funding levels for each reserve fund and confirm that current funding levels are in line with reserve plan requirements.

Some school districts include requirements for operating reserve funds in their board policies. School districts should review their policies to determine whether they address reserves and, if so, ensure that they align with established reserve plans.

In addition to criticizing school districts’ failure to establish reserve plans, the Comptroller has criticized schools for failing to: (1) approve all appropriations made to fund reserves by board resolutions; and (2) retain all records regarding reserve fund creation, funding, and use of funds, including the retention of clearly identifiable resolutions and propositions.

If you would like assistance in creating reserve plans, revising an existing plan, or with general reserve fund questions, please do not hesitate to contact our office.