What could Kansas do with an extra $743 million? That’s a question legislators and the governor-elect want answered.

Kansas K-12 schools had $1.567 billion in unencumbered or carryover cash on July 1 and as much as $743 million of it could be made available for discretionary spending by school districts, according to state government research.

Those numbers, released in November, came as a surprise to legislators who were told in April, during final 2011 budget deliberations, that schools’ carryover balances would be $1.156 billion, $411 million lower than they actually were on July 1.

Republican leaders in Topeka want to put some of the carryover money to use.

House Speaker Mike O’Neal (R-Hutchinson) told Kansas Watchdog:

“There’s plenty of money in the system to fund any perceived deficits in the next fiscal year. I don’t know that the schools need to spend all that money. But certainly, using their own argument that we are X dollars underwater, I can tell you that there is X dollars. We can match what the perceived deficits are with the money that they already have if we can just find a way to redistribute it and provide access to it.”

House Speaker Pro Tem Arlen Siegfried (R-Olathe) said, “The question is, how do we get that extra money out of those accounts and into the classrooms. We hear a lot about this being all about the kids yet we have unused funds sitting around while schools are saying they are having to lay off teachers.”

Governor-elect Sam Brownback told KansasReporter.org last week that his education reform plan includes giving school boards greater discretion to move and spend the unencumbered dollars.

The carryover, or unencumbered cash, is money appropriated in previous years but not spent and with no claims against it for unpaid bills or other obligations. Opponents of using the unencumbered cash say most of the distinct funds have restrictions preventing use of the money outside of its intended use.

The Office of Revisor of Statutes has determined which funds are unrestricted and could be used for other purposes under current law and which would require some legislative action before they could be moved. The total for both was $743 million on July 1, 2010. Cash in these funds grew by about $187 million since 2008.

Education officials have said even the unrestricted funds are needed, primarily for cash flow, though no one contacted for this report could identify how much carryover is needed. The unencumbered fund balance has grown every year since at least 2005.

Kevin Yoder (R-Overland Park) introduced a bill in April that would have removed some restrictions on transferring the money within school accounts.

Legislators and government watchdog groups also argued the growing account balances showed no need for a tax increase for education funding.

Deputy Education Commissioner Dale Dennis told the Kansas State Board of Education at their Nov. 2009 meeting that districts didn’t need legislative action to reduce unencumbered balances. “If you wanted to run balances down in funds just don’t transfer money over there.”

Digging for the truth

“When we first uncovered the existence of this money about 18 months ago it was ridiculed by schools and some media. They said the money wasn’t really there or they couldn’t touch it,” said Dave Trabert, president of the Kansas Policy Institute, a sponsor of Kansas Watchdog and Kansas Reporter.

“Some legislators tried to make this cash available last session and were thwarted by the school lobby,” Trabert said. “But now they have the backing of a governor who understands that schools don’t have a revenue problem – they have a resource management problem.”

The amount and nature of the carryover funds has become clearer because of inquiries made by legislators and in spite of misinformation, such as April’s flawed cash balances estimate.

On March 31 O’Neal instructed the Kansas State Department of Education (KSDE), the Kansas Legislative Research Department and the State Revisor of Statutes to collaborate in determining the anticipated ending balances for each of the funds used by school districts and what might prevent districts from accessing those funds.

O’Neal requested a, “Formal written opinion that the Legislature may rely upon identifying which USD funds are truly legally unencumbered.” The letter also said, “This information may be crucial to this session’s state budget deliberations.”

The report, distributed to legislators in late April, estimated that as of July 1, 2010, schools would have $349 million less in unencumbered cash than the previous year but still have a balance of $475 million in accessible funds.

The November reporting of actual unencumbered cash on hand on July 1, 2010, showed districts increased total unencumbered cash by $61 million over 2009 with $743 million accessible.

Dennis, in interviews with KansasWatchdog, said the April report was a, “dumb deal” that amounted to “shooting in the dark.”

“I’d forget that April estimate. I don’t think that’s good data because there’s too many unknowns in there. There’s just too many unknowns.”

Dennis said the $411 million discrepancy was caused by late payments from the state to districts but O’Neal’s instructions for the report said, “For the sake of simplicity, assume that all FY 2010 obligations will be paid in FY 2010 so as to avoid having to estimate which obligations will be paid and which will be encumbered and paid in FY 2011.”

Alan Conroy, director of Legislative Research, told Kansas Watchdog the late payments did not effect the report’s conclusions. His April report to O’Neal said KLRD, “was not in a position to independently verify the individual account information supplied by each school district.”

A examination by Kansas Watchdog of the information submitted by school districts for the April report showed many blanks in the data. Much of the data that was reported provided fund balance estimates far lower than what was actually on hand on July 1.

Accounting practices cause part of the problem

In recent years the state has required school districts to count payments from the state in their year-end accounting even though the money won’t be transferred until after July 1. This allows those dollars to be counted in the state’s ending balance, thus helping maintain the illusion of a “balanced” state budget as required by the Kansas Constitution.

Mark Dick, executive vice president of Allen, Gibbs & Houlik, a Wichita accounting firm that audits many state and local government agencies, said that practice amounts to double counting of funds, something not permitted in private business accounting.

The State Financial Council also authorized a $700 million certificate of indebtedness, another practice used to keep the state budget balanced on paper. According to Dick it’s basically a charge to the state’s own revolving credit account to cover shortages including the past due payments to schools.

A $700 million certificate of indebtedness was also approved at the beginning of FY 2010.

How much carryover is appropriate?

According to Dennis, school boards are nervous about not getting payments from the state and lacking sufficient cash on hand to pay bills. “After Oct. 15, we didn’t pay a bill, any major distribution, on time the rest of the (fiscal) year.”

Dick said, “Theory-wise, as we counsel our government clients, the more volatile your revenue stream is, the higher the reserves need to be. That just makes sense but nobody ever puts numbers on that. I think what’s playing out here is, things are very, very volatile now, compared to what they were so we need higher reserves.”

Mark Tallman, Assistant Executive Director for Advocacy with the Kansas Association of School Boards, told Kansas Watchdog that KASB would consider supporting an agreement that set a cap on unencumbered cash balances if it also required the state to make its payments to school districts on time.

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Related articles on KansasWatchdog.org

Kansas Among Highest in Education Jobs Per K-12 Student

House Panel Recommends Tapping Unencumbered School Funds

Schools Districts Tap Cash Reserves to Increase Spending

Taxpayers Look Beyond Hype to Reality in Education Funding

Unencumbered Funds Like a Mortgage Escrow Account, Maybe

More Questions — and Answers — on School Funding

Carryover Cash and Consolidation Hot Topics Before Kansas Board of Education

Districts Have Funds To Meet Projected $100 Million Shortfall

School Districts Sitting on $1.36 Billion

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Related links

KSDE Unencumbered funds reports

KASB’s Mark Tallman on Unencumbered School Funds (video)

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Unencumbered cash data request 2005-2010 Kansas K-12 Unencumbered cash by fund Revisor reply on unencumbered cash
KLRD reply on unencumbered cash