ELC News - Governor Wipes Out Districts' Rainy Day Funds

With a stroke of the pen, Governor Christopher Christie has wiped out $476 million in funds set aside by school districts to help address looming deficits in next year's (2010-11) district budgets.

Districts put away these "rainy day" funds in surplus and reserve accounts during 2008-09, anticipating less state aid and local revenue in 2010-11. By law, districts must use any surplus funds over 2% to build their budgets in the second year after the funds have been accumulated.

The Governor, by executive order, has decided not to pay $476 million in state aid due to districts to support educational programs in the current (2009-10) school year. Instead, the Governor has directed districts to use their rainy day funds to pay for current year expenses, rather than keeping those funds in reserve to build next year's budget. Over 500 districts are affected by the state aid cut and loss of reserve funds.

Penalizing Fiscal Prudence

By forcing districts to use rainy day funds now, those districts that set aside funds last year in anticipation of a tough budget next year have been penalized for their fiscal prudence and foresight. These districts will not have any reserve funds available next year to cover increased salary, benefits and other costs of necessary educational programs and services. Without these funds, districts will have to address any budget shortfalls through staff and program cuts, by increasing local property taxes, or some combination of both.

For "high needs" districts -- those serving large numbers of poor students and students of color -- the aid cut is especially troubling. Because of their low wealth and high student need, these districts are heavily dependent on state aid to support their educational programs. Many of these districts were counting on rainy day funds to help maintain teachers, staff and other programs next year, particularly Newark, Jersey City, Paterson and other poor urban districts that will not receive any state aid increase under the state's new funding formula.

For middle income and suburban districts, the aid cuts will likely trigger higher property taxes, as districts ask local taxpayers to make up for the loss of the rainy day funds.

The problems with school budgets next year will be compounded for all districts if the Governor ignores the state's funding formula and does not increase state aid in the FY2111 State budget, or even worse, proposes a cut in state formula aid. The Governor announces his proposed FY11 State budget on March 16.

Cutting Federal Stimulus Funds

The Governor's action also affects the use of federal stimulus funds for education -- known as fiscal stabilization funds (FSF) -- provided by Congress to support the state's funding formula in FY2010. Last June, the US Secretary of Education (ED) authorized New Jersey to use almost $900 million in fiscal stabilization funds to bring the State's total level of formula aid to $5.8 billion during 2009-10. In effect, a portion of the Governor's $476 state aid cut consists of these federal stimulus funds, and the cut may bring overall formula aid below the level approved by the federal government. ELC is analyzing whether the aid cut is contrary to commitments made by New Jersey to ED in the stimulus program.

Bypassing the Legislature: A Dangerous Precedent

As noted above, districts' use of rainy day surplus and reserve funds are strictly governed by state law. This law requires such funds be allocated to build district budgets in subsequent years "to reduce the general fund tax levy for the budget year." This means that districts must use these funds to forgo or reduce any increase in property taxes for the particular budget year. The Legislature passed this law for the specific purpose of property tax relief.

Further, any use of rainy day funds to cover expenses in the current school year would require amending existing law. However, instead of asking the Legislature to pass such an amendment, the Governor acted unilaterally by executive order. Given the important public policies at stake, the failure to work with the legislature, and obtain legislative approval, sets a dangerous precedent because it deprives the public of a full, thorough airing of the plan, along with securing buy-in by the co-equal legislative branch of our state government.