General Fund Account

Alex, I read an article that stated the School District of Pickens County had a general fund balance of $16 million on June 30. Can that account be tapped to help plug the deficit? No, there isn’t any savings in that account.

The general fund account is sometimes called the general fund reserve and that name is a misnomer. When that name is used, it throws people. It threw me at first, too. I thought it was a savings account filled with idle cash. It is not a reserve of cash, savings or gold bullion.

So let's get the terms right first. The general fund is the district fund or account that operating revenues and expenditures flow in an out of. The general fund balance is the amount of money that is sitting in that account at any one time.

The general fund account is like the school district's checking account. Like your checking account, the general fund account has a balance on any particular day.

Next point, an analogy will help. Let's say I receive $2,000 on the 1st of the month, and I deposit that in my checking account. I then draw money out and spend it steadily through the month, and on the 30th the balance is zero. If my bank sends me a statement dated the middle of each month, the amount shown on the statement date will be $1,000. Can that $1,000 be used to buy a car? No. Is that balance savings? It is not savings, rather it is a sum of money that happens to be sitting in the account the middle of the month that is committed to expenses for the rest of the month.

Month after month the mid-month statement will show the checking account balance of $1,000, so some will wrongly assume $1,000 is just sitting in that account, idle, cash that is ready for use for this or that new expenditure. What that monthly balance does not tell you is over the rest of the month the $1,000 is spent on recurring expenditures and the last day of the month the balance is zero. There is no savings in the account beyond what is needed for the month's expenses.

The district receives about $90 million in state and local revenue. The bulk of it is deposited at the start of the year, and the balance peaks at about $30 million in January or February. Other deposits are made during the year, but after the first quarter the balance declines through the year as money is draw out for expenses. The fiscal year ends June 30, so the account balance is recorded then. The balance that day was $16 million. Withdrawals continued and in November the balance was about to go negative so the district had to borrow $4 million to make payroll until new revenue came in.

The $16 million was not savings, but money that happened to be in the account on June 30 that was needed to get the district through the rest of the year. There is no savings in that account to plug next year's deficit. If more money is drawn from that account to plug the deficit, borrowing will have to be increased to cover it.

Every year on the June 30 statement date, the district has had about $16 million in their general fund account. For those who only look at that annual statements, it appears like $16 million is always there, idle cash, ready to be used for this or that new expenditure. That's an incorrect assumption. That money is needed to get the district through the rest of the year. In fact, last November that account balance went negative and the district had to borrow to get it through to rising tax receipts in December.

In sum, there is no savings in the general fund account. In reality, you can make the case the district's general fund account is underfunded, because toward the end of last year, the district had to borrow to keep it from going negative.

Someone said to me the general fund balance was above the 10% level, so that indicates the district has savings in the general fund account. Alex, what are they taking about?

That figure is calculated by starting with the balance in the general fund account on June 30 and dividing that by the total budget for the general fund. On June 30 the general fund account had a $16 million balance. The budget was about $93 million, so the percentage was 17% on June 30.

That is one of many "liquidity" ratios that is used by Moody's Investor Service to get a sense of an organization's ability to meet future expenditures. They like to see that ratio at 10% or above.

This ratio is sort of like the graduation rate. It tells you something, but is often misread, misused and it leaves out a lot. For example, many of those who talk about the graduation rate, don't know it, but they are truly citing the on-time graduation rate. (In fact, there is no calculation just called the "graduation rate.") The on-time graduation rate is equal to the percentage of students that were in 9th grade 4 years ago, who graduated on time 4 years later. The district's on-time graduation rate is about 71%.

Many who are not familiar with the calculation but just throw the term "graduation rate" around assume the inverse figure or 29% actually drop out. No, the on-time graduation rate is not the drop out rate. That is something different.

Most that have a clue and realize the graduation rate of 71% is actually the on-time graduation rate, may not realize many of the 12th graders who don't graduate on time in June, will take a summer school class and graduate in the summer. Those students aren't included as graduating in that calculation. If a student gets a GED 2 years later, that student isn't included as graduating either in that calculation.

My point is, so many people throw these terms around and don't really know what they are telling you and what they are not telling you. That's what is happening with the general fund, general fund balance and this ratio.

Back to that liquidity ratio. Some assume the school district's 17% ratio means 17% of the general fun account is savings. No, that ratio doesn't measure savings. There is $16 million in the general fund account on June 30. The ratio has no idea all the money is needed to get the district through the rest of the year. The ratio is not an indication of savings. There is no savings in that account. Heck, that account goes negative like I explained.

Two, depending on when the ratio is calculated ratio, you can get a much different result. If instead, the ratio was calculated in January, just after taxes are deposited in the account (the balance could be as high as $30 million), the ratio would be close to 30%. If that ratio was taken in November, when the balance is actually negative because the district had to borrow to plug the shortfall in the account, the ratio would be negative. The ratio doesn't tell you much.

Three, what matters is if the general fund account at its lowest point goes negative or not. If it goes negative then the district has to borrow to meet payroll. That's harmful because the district then has to pay interest. That interest payment has to be taken elsewhere in the budget and it takes money away from some other vital budget need. That’s happening and it indicates that account is not healthily regardless what that ratio indicates about the balance on June 30th.

Finally, hasn't the district borrowed enough money. The last few years the debt obligation (interest and principle) has risen from $38 million to $600 million due to the building program.

If that account doesn’t go negative, you are OK. And the higher the balance is at its lowest point, the better that accounts financial situation would be.

Let's expand on point three above. If the district could borrow at 0% rates, it wouldn't be harmful in the short-term to run the general fund account to a negative balance, because the district could just borrow the money for free or at no cost. The problem with that is when you mix in politics, the government body will become dependent on that cheap money. They'd spend more, run the account deeper into the red. Then what? If rates go up, bam, the interest cost would go through the roof, putting a big dent in your general fund or operations budget.

That is exactly what the US government has done. Because the Federal Reserve has pushed rates down to near zero, the US Treasury has access to cheap borrowing. As a result Congress has turned up the spending and the deficit is growing by leaps and bounds. That hasn't blown up in their face because interest rates are so low and it is easy to finance a $14 trillion debt at 1%, 2% or 3% rates. What happens if rates go to 8% or 10%. Bam! The interest cost will explode, taking a big piece out of the budget. They'll have to cut other parts of the budget left and right, just to cover the interest payments.

Believe me, getting in a habit of borrowing to fund operations is a bad habit to get into when politicians are at the wheel. It is the main reason I don't like that the district's general fund went negative late last year and it was forced to borrow to meet payroll.