Despite spending millions less overall in its last fiscal year than the year before, the Lawrence school district saw a 20 percent drop in operating cash, according to an annual audit report.

District officials say the drop in cash reserves was done intentionally after budget planning with the Lawrence school board.

“Part of our discussion with the board is that there are some funds with cash balances that we would be purposefully spending down and helping cover some of our costs in areas where the state hasn’t provided additional funding,” said Kathy Johnson, director of finance for the district.

When factoring out its bond construction projects, the district spent about $3.5 million less in the fiscal year ending June 30, 2015, from the previous fiscal year. At the same time, though the district’s overall receipts also decreased, its overall unencumbered cash balance decreased at more than three times the rate.

When factoring out bond funds, the district’s receipts dropped $7.5 million in 2015, or by about 4 percent. The district’s overall unencumbered cash balance dropped about $8 million, or by about 14 percent. In the supplemental general fund in particular, one of the district’s more flexible funds, the unencumbered cash balance dropped $700,000, or by about 20 percent.

Legislative influence

School funding has come under increasing scrutiny in the Kansas Legislature, with some lawmakers criticizing school districts for maintaining large unencumbered cash reserves. In March of 2015, the Legislature repealed the per-pupil school funding formula that had been in place since 1992 and replaced it with block grants until 2017, during which time lawmakers will put together a new funding formula.

Johnson said that the district’s spending down of certain cash balances was done systematically and with those criticisms in mind.

“That’s an area where the state legislative body is saying districts shouldn’t have cash balances basically, so spend them down,” she said.

No matter how intentional, such a significant drop in reserves prompted auditors to recommend that the district adopt a “working capital policy” for managing its operating funds. Johnson said that although the plan to spend down those balances was discussed with the board and the finance advisory committee, the district does not have a practice in writing at this time.

“When they say ‘adopting,’ that’s probably putting something more in policy, so that may be something that we’ll take to the policy committee and have them look at,” she said.

Johnson said there isn’t a specific practice — such as a percent of the budget the district wouldn’t want balances to drop below — in place regarding the total amount of unencumbered cash, as many decisions are instead based off cash flow in certain funds, budgeted depending on when the district receives state funds. Johnson used the special education fund as an example.

“I have to have a high cash balance at June 30 so I can cover all the payrolls up until December, because I don’t get any new money in that fund until then,” she said.

Special restrictions

Even with the money spent over the past year, the district still has about $53 million in its unencumbered cash fund. Much of the fund, however, is tied up in restricted, special-purpose funds, such as special education and employee health care service and retirement contributions.

There were certain funds the district attempted to keep more stable. Particularly important is the district’s contingency reserve fund, which saw a slight increase in its unencumbered cash balance from 2014 to 2015, from about $6.1 million to $6.5 million. Johnson described the fund as the district’s emergency savings account and said it’s the only fund the district has tried not to tap into.

“That’s sort of the last place we would ever go because it’s kind of your savings account,” Johnson said. “So if something really happens or the state can’t give us money, that’s where we would have to go to make sure we can pay people and things like that.”

In addition to the contingency reserve fund, Johnson said the district tried to keep balances stable in capital outlay and special education funds — as those three funds all affect the district’s credit rating, which is important when issuing bonds. Combined, the ending unencumbered cash balances of those three funds fell by $2.2 million, or by about 10 percent.

No ‘grave concerns’

Overall, Johnson said that she thinks the audit did not note any “grave concerns.”

“It was a positive audit, and we’re working to do things the right way,” she said.

Johnson said that the spending down of some cash balances has continued in the current fiscal year under the block grants, and that it will be an expected component of the way school finance looks in Kansas next year.

“With the block grant, where there was no new funding but you had growth, you’ll see a similar kind of thing a year from now,” she said. “The district’s working to manage that in a systematic and purposeful way.”