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Grissom: People often misunderstand fund balances

Q: How is the school systemís fund balance generated? Why does the school system need a fund balance?
A: A school systemís fund balance is created when revenues exceed expenditures. This can be a combination of collections/revenues being higher than budget and actual expenditures being lower than budget. The fund balance consists of three different parts:
1. Reserved
2. Designated
3. Undesignated
The ěreservedî part of the fund balance is just what it says ó reserved by state statute and cannot be used.
The ědesignatedî part of the fund balance is the amount that has been allocated in the current budget.
The ěundesignatedî fund balance reflects expendable, available financial resources.
The part that is usually discussed or referred to as ěthe fund balanceî is the undesignated fund balance. The school systemís undesignated fund balance is the equivalent of a personal savings account and is typically used for emergency situations requiring cash flow and funding one-time costs not included in the annual budget.
It is never good money management to use fund balance for recurring expenditures (items that will need to be paid every year, such as salaries) because eventually the funds will be depleted.
It is not good money management on the part of the school system to not have a fund balance.
Requirements for the State Public School Fund and the Federal Allotments Fund prohibit a fund balance from residing in either of these funds. Sometimes, certain categories in state and federal funds will allow for ěcarry-overî allotments into the next fiscal year, but not a fund balance. With over 100 revenue accounts and even more categories, fluctuating between anticipated cost and actual cost sometimes happens. Federal grants allow school systems to charge an ěindirect costî to the grant, which can be used for other purposes when implementing the grant. These indirect costs from the grants can contribute to the fund balance.
Flexibility to ěmoveî costs between state, local and federal budgets allows school systems to maximize the use of their funds. Therefore, often state and federal budgets are not completely spent. Since unspent state and federal budgets cannot be left in state and federal budgets, they may then be captured in the local fund balance.
Therefore, the local fund balance is a combination of funds from:
Grants
State funds
Federal funds
Local funds.
The fund balance is not only unused local funds.
There is always discussion and often disagreement about how much of an unreserved undesignated fund balance is necessary for a school system. The Rowan-Salisbury School Systemís present fund balance is 4 percent of the total operating budget. In North Carolina, the unreserved undesignated fund balances vary depending on the school system, ranging from 2 percent of total funding to 27 percent of total funding.
The Rowan-Salisbury School Systemís undesignated fund balance has indeed grown over the last few years. At the end of 2008, the undesignated fund balance was $5,298,908; in 2009, the balance was $6,043,354; and in 2010, the fund balance is now $7,129.172. The school system will not be adding to the fund balance this year.
The main reasons for fund balance growth are:
Good fiscal management
Freezing expenditures in areas such as travel during the school year
Freezing local positions
Working four 10-hour days during the summer months
Additional grant funding indirect costs, and
Hiring ěless expensiveî personnel
The school system has deliberately and systematically ěgrownî the fund balance because of huge anticipated cuts for the 2011-2012 and the 2012-2013 school years, as well as the elimination of the federal stimulus funds this school year and the federal jobs funding next school year.
The school system staff should be commended for monitoring expenditures and cutting expenses in order to save funds for anticipated cuts.

Dr. Judy Grissom is superintendent of the Rowan-Salisbury School System.

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