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TODAY'S PAPER

LI schools' cash reserves hit $2.4B high

Lorna Lewis, superintendent of the Plainview-Old Bethpage school district, in the auditorium of Stratford Road Elementary School in Plainview on Aug. 10, with construction underway on the air-conditioning and sound systems. New seating also was installed. Photo Credit: Corey Sipkin

Cash reserves stockpiled by Long Island school districts are at a record high of nearly $2.44 billion, which officials said will help strengthen school security this year, carry out building improvements and repairs, and serve as a hedge against future economic challenges.

The accumulation of funds, however, has infuriated critics who contend that districts should apply more of their surplus...

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Cash reserves stockpiled by Long Island school districts are at a record high of nearly $2.44 billion, which officials said will help strengthen school security this year, carry out building improvements and repairs, and serve as a hedge against future economic challenges.  

The accumulation of funds, however, has infuriated critics who contend that districts should apply more of their surplus money to provide relief for the Island's homeowners, whose tax bills are among the nation's highest.

State Comptroller Thomas P. DiNapoli said in a statement the accumulation means that increasing numbers of districts exceed the state's legal limit. The agency reports abuses, but is not empowered to penalize offenders.

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Cash reserves, officially designated as fund balances, raise issues that have been argued locally and in Albany for more than a decade. The cash concentrations have grown more than 80 percent in Nassau and Suffolk counties during the past 10 years, increasing from $1.33 billion in the 2007-08 school year to almost $2.44 billion in 2017-18, a Newsday review of state data shows.

Fund balances statewide, meanwhile, rose more than 90 percent to a total of nearly $7.72 billion. The increase in reserves is especially striking when contrasted with predictions made by school leaders six or seven years ago that their districts might soon exhaust such funds. 

In fact, the state figures show that reserves generally rose during that period. The growth consistently outpaced inflation in the metropolitan area, which increased 16 percent from 2007-08 to 2017-18, Newsday's review shows.

School spending and taxation together represent a major economic and political issue on Long Island, where such levies account for two-thirds of property owners' tax bills. A recent analysis by ATTOM Data Solutions, a real-estate information firm, concluded that Nassau County was one of nine large counties across the United States where homeowners pay more than $10,000 a year in property taxes, and that Suffolk County was close behind at $9,333.

The fiscal accumulations include money in districts' unrestricted fund balances — used for emergencies and sometimes known as "rainy day" funds — as well as money pulled from other reserves in anticipation of expenses and then rolled over to subsequent years when expenses were less than estimated. Some districts on the Island have used the latter practice year after year.

Since January 2014, the state comptroller's office has issued 29 separate audits criticizing individual districts in Nassau and Suffolk counties for fattening reserves through improper accounting practices. The watchdog agency also reported that a growing number of systems are amassing "rainy day" deposits larger than that allowed under state law — in effect, overtaxing residents. 

To put the overall number into perspective, reserve deposits held by districts in the two-county region equal nearly 20 percent of total annual spending Islandwide of about $12.5 billion.

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Education leaders across the Island defended the buildup in reserves as essential to provide financial stability in uncertain times. They cited examples of past setbacks, such as the big losses in state aid that schools took because of the Great Recession, along with potential fiscal pressures stemming from recent changes in federal tax policy.

Their representatives in Albany, meanwhile, are pushing for legislation that would allow districts to create additional, separate reserve funds, specifically to cover costs of teacher pensions. 

"We can't predict the future; we can't predict the instability of state aid or federal mandates that may come at us," said Lorna Lewis, superintendent of Plainview-Old Bethpage schools. "Having reserves allows us to respond swiftly without placing that additional burden on our taxpayers." Lewis also serves as president of the New York State Council of School Superintendents, representing more than 800 key administrators statewide. 

Such arguments don't go down well with tax activists.

Fred Gorman, chairman of the Nesconset-Sachem Civic Association and a longtime advocate for curbs on taxation, called school districts' buildup of reserve funds "ridiculous."

"It's taxpayer money," Gorman said. "I think they should give it back." 

Newsday tracked growth in school funds by drawing on Property Tax Report Cards from 2007-08 through 2017-18, submitted annually by local districts to the state Education Department. The report cards break reserves into three categories:

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  • Restricted Fund Balance, the largest category, encompasses money earmarked for specific purposes, such as school construction and renovation, employee benefits and unemployment compensation. Such funds grew 97 percent from 2007-08 through 2017-18 to a total of $1.59 billion Islandwide.
  • Unrestricted Fund Balance, commonly referred to as "rainy day" money, which can be spent by districts as they choose, especially to cover emergencies such as storm damage. Under law, these funds are not supposed to exceed the equivalent of 4 percent of districts' annual operating budgets. Such funds increased 91 percent during the 10-year period to $542 million Islandwide. 
  • Appropriated Fund Balance, which is money drawn from reserves each year and is intended to meet budgeted expenses. These are dollars that, in effect, can provide tax relief by lessening the amounts raised through higher property taxes. Such funds rose 24.5 percent over the 10-year span to $303 million as many districts rolled over unexpended money year after year.

Tax report cards are issued in May of each year, shortly before local residents vote on district budgets, and are meant to provide greater transparency. On the Island, report cards are provided by 121 school systems, except by the tiny East End districts of New Suffolk, Sagaponack and Wainscott.

Some education analysts question the accuracy of the Property Tax Report Card numbers, noting they are estimates made before the end of each school year on June 30. More precise figures on district reserves are provided in state budget forms after the closeout of each year, analysts said. The figures, entered on those ST-3 forms, are collected from the school systems in September, four months after the budget vote and board elections. 

Under law, districts have included reserve figures in their report cards since 2007-08, when state lawmakers began raising the statutory limit on districts' unrestricted reserves. This year, the reporting requirement ratcheted up another notch, with new mandates that districts also report the amount of fund-balance money they intend to spend during the coming year on specific items such as surveillance cameras, roof repairs and teacher liability insurance. 

Over the past five years, rates of increase in spending and taxation have slowed dramatically — largely as a result of state-imposed property-tax caps on school districts and municipalities statewide starting in 2012-13. Gov. Andrew M. Cuomo has pointed to the caps as a signature legislative accomplishment.

School reserve funds, nonetheless, continued to swell, albeit at a slower pace than before the tax caps went into effect. Between 2012-13 and 2017-18, reserves Islandwide increased nearly 16 percent — more than double the 7 percent inflation rate. That included all fund balances — restricted, unrestricted and appropriated. 

DiNapoli, in his statement, described growth in excess reserves as a statewide problem.

"Most school districts keep their unrestricted fund balance below the statutory limit, but in recent years the number of districts that are accumulating excess funds has increased," the comptroller said. "Across the state, my auditors have revealed that when school officials consistently overestimate their expenses or underestimate their revenues, the results are generally the same — the district's fund balance is likely larger than allowed by law, they often have unneeded reserves and they may have levied more taxes than necessary."

Veteran school leaders cited multiple examples of how cash surpluses serve as a bulwark against unforeseen emergencies.

Many, including Lewis, said they were able to draw on reserves to bolster school security through installation of protective vestibules at school entrances, hiring extra security guards and the like. Such steps were demanded by parents in many Island communities after the February mass shooting at Marjory Stoneman Douglas High School in Parkland, Florida.

Other administrators pointed out that reserve funds serve as a financial backup when districts are struck by cutbacks in federal and state aid. They recalled their experiences in 2010-11 and 2011-12, when state lawmakers cut assistance to public schools by hundreds of millions of dollars in the aftermath of the recession. 

"While our business is education, we need to run this as a healthy business. And everybody knows that, to be healthy, a business needs to have savings to draw from," said Kenneth Bossert, Elwood's schools chief and president of the Suffolk County School Superintendents Association.

Michael Borges, executive director of the New York Association of School Business Officials, said districts' credit ratings tend to improve when their reserve accounts expand, making it easier to borrow money for construction and renovation. 

"A good credit rating from Moody's is essential for districts to borrow money at low interest rates, which saves money for school districts and their taxpayers," said Borges. 

One development that has local educators worried is the new federal tax law that caps taxpayers' deductibility of state and local taxes at $10,000.

Many school officials fear that homeowners may grow more resistant to increases in property taxes if they find that the higher amounts cannot be deducted from their federal taxes.

School budgets and taxes provide a target when the public becomes upset over taxation issues. School officials said some districts may propose in next year's budgets that they spend down reserves, rather than raise taxes and risk a revolt by voters. 

"The school budget is the only municipal budget you get to vote on," said  Robert Vecchio, president of the William Floyd school board, who also sits on the executive committee of the New York State School Boards Association. "School budgets are the only place where people can take their anger out."  

Another concern among school administrators is that any future cuts in federal Medicare funding could put pressure on states to make up the difference, leaving less money available for public education.

"The only way to be prepared for that is to have the reserves as healthy as possible now," said Joseph Dragone, assistant superintendent for business and administration in the Roslyn school system. 

If districts do reduce their cash stockpiles next year, it would mark only the second time in 11 years that such reductions have occurred. Total reserves in the Nassau-Suffolk region dropped slightly in 2015-16 — by 1.52 percent — but then bounced back, with a 7.34 percent increase the following year.

School surpluses are growing, in part, because some districts never actually spend the appropriated fund balances that appear in their budgets — ostensibly, to be used as revenues. Instead, those districts employ accounting practices that result in unspent cash surpluses being rolled over, year after year.

In addition, Newsday's review found that 26 of the districts in the Nassau-Suffolk region had unrestricted fund balances at the end of 2017-18 exceeding the state's 4 percent statutory limit. Twenty-two districts topped 4 percent in 2007-08, though comparisons are inexact, because the state's limit then was 3 percent.

Ninety-five districts reported staying within limits this past year. 

School systems with some of the largest cash deposits in 2017-18 included tiny Oysterponds on the North Fork, with unrestricted reserves equivalent to 16.5 percent of its annual budget; Merrick, with 12.74 percent; Seaford, with 10.64 percent; and Connetquot, with 10.28 percent.

Merrick's superintendent, Dominick Palma, confirmed the 12.74 percent figure while noting that his district has reduced its unrestricted reserves from higher levels in the past. This year, he added, Merrick plans to spend $1.5 million in reserves for security improvements, plus $500,000 to replace heating and air conditioning that recently broke down at the district's Birch Elementary School. 

Palma defended the need for an unrestricted fund cache beyond the state's 4 percent limit. 

"Our response now, and it always has been, that they need to raise the limit," the schools chief said.

DiNapoli's office noted that the 4 percent limit is a statutory requirement.

Between April 1, 2010, and March 31, 2017, the state comptroller's office completed 862 audits of educational systems across the state — mostly school districts, but also including a number of BOCES and charter schools. Inflated reserves were found in 289 cases, the office said.

One recent audit found that the Mount Sinai system, over a three-year period, overestimated expenditures by more than $7.5 million and underestimated revenues by $1.7 million. State auditors reported that this caused the district's reserves to balloon from $12.4 million in 2014-15 to $16.6 million in 2016-17. 

Mount Sinai generated operating surpluses in each of those years, which resulted in appropriated fund balances never being spent, the auditors concluded in a report released in June. That caused overtaxation of local property owners, they wrote.

District officials responded by pledging to reorganize reserves to make sure they complied with state law. The officials asserted, however, that their buildup of reserves allowed them to hire armed security guards in a timely manner to provide students and staff with greater protection.

State auditors are not the only ones suggesting that many districts overtax residents. 

Nick Pennacchio, 71, a retired budgeting and financial specialist who lives in Mineola, is among many individual taxpayers who believe that districts are piling up excessive reserves. 

Pennacchio said he has observed firsthand the impact of high tax rates, having served as board president at the Corpus Christi Catholic School, which closed in 2010. 

"Parents just couldn't afford to keep paying for Catholic education when they were paying taxes for public schools, too," Pennacchio said. "Maybe they could raise taxes at a lower rate if they applied the reserves. And that's something we never see discussed."

Elsewhere, some school administrators said they've done their best to hold unrestricted reserves within the state's 4 percent limit, even when results have been financially painful.

North Bellmore, for example, cut 10 teaching positions from its payroll this year, after determining that reserves had dipped to the point where the district could no longer fall back on such funds to maintain its full workforce. The district estimates that in 2018-19 its unrestricted fund balance will drop to the equivalent of 2.6 percent of operating expenses. 

"We're kind of proud that we've always stayed within the limits of what the law allows us to do," said Mark Schissler, the district's assistant superintendent for business.  

Across the Island, many districts detailed plans in their tax report cards to spend millions of reserve dollars on purposes ranging from teacher retirement incentives and unemployment claims, to renovations of school auditoriums, science labs, gyms and ballfields. The planned expenditures are similar to those budgeted in the past, when there was no state reporting requirement.     

Huntington and Long Beach are installing protective vestibules at school entrances, for example. Hauppauge and Port Jefferson have scheduled roof repairs. Locust Valley is building a new playground at a primary school, while North Babylon is installing theatrical lighting at its high school. 

James W. Polansky, Huntington's superintendent, said extensive renovations in his district are being funded through capital reserves accumulated gradually over the years, rather than through special bond issues. Projects include replacement of roofs, boilers, doors and bathroom tile, as well as the security vestibule. 

"It saves the taxpayers money," Polansky said of the avoidance of bond borrowing.  

Some tax activists living in other districts complained that the newly itemized tax report cards seemed sketchy at best. Dozens of entry lines provided for listing use of reserves were left blank, or with such notations as "no use planned."

"It just seems very vague," said Steve Boder, a retired business executive who lives in Plainview and has publicly criticized a buildup of reserves in his own district.

At the national level, some fiscal experts have concluded that local governments, including school districts, need far more unrestricted reserves than the 4 percent allowed in New York. 

The Government Finance Officers Association, a national group based in Chicago, recommends that school districts maintain unrestricted balances equivalent to no less than two months' operating expenses. That works out to about 16 percent. 

Under state rules, school systems can put aside restricted reserves for 15 specific purposes. The creation of some of those accounts — for example, money to cover capital construction — requires voter approval. Other restricted funds, such as reserves for insurance, unemployment and workers' compensation, can be created at school boards' discretion. 

Superintendents across the state have pushed over the past two years for a new category of restricted reserve that would partly cover costs of pensions for teachers, librarians and other professional school employees.  

Legislation introduced in Albany, but not yet adopted, would allow districts to gradually lay aside money in these accounts, up to an amount equivalent to 10 percent of payrolls. Over time, that could add up to hundreds of millions of dollars.

Conservative analyst E.J. McMahon, of the Albany-based Empire Center for Public Policy, objected to the idea of a separate fund to cover retirements, saying it avoids dealing with the broader issue of public pension costs. 

"This is a way of baking in the cost of teacher pensions rather than addressing the underlying problem," said McMahon, the nonprofit think tank's founder and research director. 

McMahon asserted that pensions for public employees should be handled more like 401(k) systems in the private sector, which save money by not guaranteeing a specific level of benefits upon retirement. 

But Robert Lowry, who represents school superintendents in Albany, said the creation of pension reserves would help protect districts in times of economic instability.

"It's part of trying to create a more sustainable financial future," said Lowry, deputy director of the New York State Council of School Superintendents.