Idaho Charter Schools Fund Balances Overview

IDAHO CHARTER SCHOOLS & FUND BALANCES Independent research funded by Bluum, and prepared by Matthew Kuzio, Board Chair of Future Public School. Matthew also serves as Chief Operating Officer at Summit Solutions. The views expressed by guest authors do not necessarily reflect those of Bluum.

STATE & EDUCATION FUNDING OVERVIEW

2019 State Revenues by Fund Type 2019 General Fund The general fund is the revenue from the state s income, corporate, sales and product (ex. Liquor) taxes. Budgetary decisions tied to the general fund are more vulnerable to the fluctuations of the tax base. $3,652,700,000 (44%) Dedicated Funds Dedicated funds are funds utilized for an explicit purpose that are often derived from a specific source of revenue. An example of a dedicated fund is the Authorizer fee Charter schools pay. The fee generated roughly $365,000 in 2018 which allowed the Public Charter School Commission to run without dollars from the General Fund. $1,785,600,000 (21%) Federal Funds Federal funds are derived from a variety of Federal agencies and programs that cover things like health care assistance, transportation infrastructure, wildlife protection, and military. $2,886,200,000 (35%) Total $8,324,500,000 (100%) Source: 2018 Idaho Fiscal Facts, a Publication of the Legislative Services Office

2019 K-12 Funding By Source Federal Funds 12% General Fund Federal Funds Dedicated Funds $1,894,611,000 $105,062,300 $264,338,500 $2,264,011,800 General Fund 84% Total Source: 2018 Idaho Fiscal Facts, a Publication of the Legislative Services Office

Education as Percentage of 2019 State Funds Education is the largest expenditure of the state. Over the last 20 years, education spending has averaged 64% of the general fund. The implication of this is important. Between fiscal years 2009 and 2010, the general fund decreased by $450 million and then by another $122 million in 2011. Some of this loss in the tax base was offset by an increase in federal funds, but ultimately forced the legislature to cut education funding. % of General Fund % of Total Funding Total Education Funding Includes all K-12, community colleges, colleges, universities and special programs run by the state. 63% 36% K-12 Funding Includes all K-12 funding. 49% 26%

BUSINESS CYCLES, RECESSIONS & RECOVERY

Business Cycles and The Public Education Stabilization Fund The U.S. economy naturally expands and contracts over time. The role of the Fed is to help stabilize these cycles. The economy is currently in its longest period of expansion but is expected to cool in the next year. The Idaho Economic Forecast published by the Governor s Office places a 30% probability that the economy will contract by 1.6% in 2020. This is consistent with other prominent economic forecasts. This type of business cycle or mild recession should not concern schools too much. The State introduced The Public Education Stabilization Fund in 2004 and uses the fund to help provide budgeting consistency when state revenues decline. Public Education Stabilization Fund by Year $120,000,000 $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $- 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Recessions and Economic Recovery Outside of the standard business cycles, unexpected events can have dramatic affects on the economy. Examples of this include the September 11thterrorist attacks and most recently the collapse of the housing market that caused the Great Recession. The table below shows Idaho s budget and educational spending adjusted for inflation by year. Note that although it took 4 years for the State s total funding to recover, it took 7 years for educational spending to return to pre-recession levels. The shock caused by the recession largely exhausted the Public Education Stabilization Fund in 2009 leaving the state with few options to maintain education budgets in the following years. Inflation Adjusted State, Education and K-12 Funding by Year Years Needed to Return to Pre- Recession Levels Fiscal Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 State Funding 4 $6,880,406,426 $6,969,923,694 $6,505,496,843 $6,708,488,549 $6,893,530,746 $6,999,232,998 $7,181,212,975 $7,474,821,602 $7,994,403,259 Total Education Funding 7 $2,745,032,012 $2,694,899,693 $2,450,427,387 $2,384,889,788 $2,441,079,029 $2,464,022,337 $2,569,512,500 $2,747,179,503 $2,887,200,830 K-12 Fundinig 7 $1,975,990,089 $1,981,937,294 $1,902,940,534 $1,734,360,492 $1,720,596,788 $1,732,846,343 $1,800,306,223 $1,939,846,059 $2,025,787,317

A Charter Example Fiscal Year 2010 2011 2012 2013 2014 2015 2016 Inflation Adjusted K-12 Funding YoY % Change 0% -4% -9% -1% 1% 4% 8% Inflation Adjusted Budget $2,000,000 $1,920,283 -$79,717 $1,750,167 -$249,833 $1,736,278 -$263,722 $1,748,639 -$251,361 $1,816,714 -$183,286 $1,957,525 -$42,475 Deficit The type of unexpected events mentioned previously are the type of events that Charter s should consider when defining their long-term budgeting strategies and setting a policy around fund balances. The example above shows a Charter with an inflation adjusted budget in 2010 and the applied affects of the decrease in state funding in the following years. To maintain the same base of operations in the following seven years, the school would needed to have had $1.1 million in reserves, which equates roughly to 54% of the school s annual budget.

CURRENT BALANCES & FUND STRATEGY

Fund Balances Across Idaho Charters The table highlights fund balance sizes held by Charters in Idaho as a percentage of their general fund. 53% of Charters in Idaho carry fund balances of 25% or more. Fund Balances as % of General Fund 75% to 100% 50% to 74% 25% to 49% 10% to 24% Total Charters % 3 9 6% 18% 29% 29% 18% 100% 15 15 9 51 Idaho Ednews annually releases the fund balances of each district in the state and tend to highlight and question balances of 80% or more. The focus is usually placed on districts who carry high fund balances and have also requested local levies (which is not applicable to charters). 0 to 9% Total Average Median 30.0% 25.7% With that said, Charters should place as much strategic thought about the upper bounds of their fund balances as they do in their considerations of fund balance minimums. Ultimately every dollar should maximize both the long-term viability of the school and student outcomes. Source: https://www.idahoednews.org/news/school-savings-top-275-million/

Fund Balance Strategy For New Charters Budgets for new Charter Schools are tight and based on best-guess estimates. With this consideration, new Charters should target a minimum fund balance of at least 15%. This provides a 5% percent cushion above the 1.1 current asset to current liabilities ratio that the Public Charter State Commission (PCSC) sets as apart of achieving a high pass in the financial section of its report card. Target Fund Balance Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 15% 15% 18% 20% 20% 25% 30% 35% 40% 45% That 1.1 ratio is also important to bankers and bond holders and should be considered sacred for schools interested in facilities financing. For this reason, schools may choose to think of any reserves above 10% as their true rainy day fund. With this type of thinking and balancing unpredictable economic events with operational consistency, new schools should consider developing fund balance targets in the 40% to 45% range (separate from any capital campaign) in their first ten years of operation.