The Fund Balance Explained

Folks,

Here is an essay by Dan VandeWater explaining the proper use of the Fund Balance. I am in complete agreement with him on its judicious use.

Maria

Updated: 5/27/2008 4:32:01 PM

Fund balance school safety net

By Daniel Van De Water
A letter to Voice of the People on May 16 raised questions related to the school district's "fund balance." The "fund balance" of an organization is simply the difference between its assets and liabilities. The primary component of the school district's fund balance is its designation for working capital. Working capital is used to cover the timing difference between when the school district receives its revenue and when it has to pay its bills. Fund balance is increased when revenues exceed expenditures in a given fiscal period.

The Department of Public Instruction suggests that a school district's fund balance be "an amount sufficient that short-term borrowing for cash flow could be avoided and would also allow the district to set aside sufficient assets to realize its longer range goals."

The school district's fund balance has grown from $9,215,079 on June 30, 2000 to $19,656,931 as of June 30, 2007. Even at the current level, the fund balance is not sufficient to avoid short-term cash-flow borrowing. Short-term borrowing for the 2007-08 school year is $6,250,000. The loan runs from Oct. 9, 2007, through Aug. 29, 2008. The net interest rate is 3.42 percent. The interest expense that will be booked this year will be $227,755.24.

In addition to avoiding short-term borrowing and the associated interest costs, a school district with an appropriate fund balance can:

- Accumulate sufficient assets to cover unforeseen expenditure needs.

- Demonstrate financial stability to preserve or enhance its bond rating, thereby lowering debt issuance costs.

As a good steward of the taxpayer dollars entrusted to the school district, all available funds are invested to earn interest. The safety of principal is always the first criteria in selecting an investment opportunity. The school district earned $734,527.02 in interest income during the 2006-07 school year. The school district also has to pay interest on the money it borrows short term. The school district paid $371,328.67 in interest expense during the 2006-07 school year.

The school district takes its fiduciary responsibilities seriously. The Finance Department maintains detailed records of all monies received and expended. Annual cash-flow projections are made and presented to the Board of Education in open session. The board takes action on all short-term borrowing at which time the term of the loan, the interest rate and the successful bidder are explained. Anyone interested in seeing the day-to-day activities and daily cash balances for the 2006-07 budget, or for any other period of time for that matter, is invited to contact the school district's Finance Department.

Van De Water is executive director of business services for the Eau Claire school district.