Education Finance - Feb 21, 2024

The Joint Fiscal Office reviewed the Education Fund stabilization reserve for the House Ways & Means Committee on Wednesday. The reserve is always set at 5% of the prior year’s education spending and is meant to be used if tax revenues miss projections. It also contributes to the bond rating of the state.

Bond rating aside, the fund was described as the “$100 you keep in your checking account just in case a check bounces.” If those funds were used to buy down property tax rates for FY2025, as the Committee is examining, they would then need to be refilled in future years. Representative Canfield wondered if 5% was even enough of a reserve to being or if they should need to add to it.

Mike Pieciak joined the Committee to share some thoughts about the potential bond rating impacts. He shared we have a 5% statutory reserve requirement in the state. It’s not “excessive” but 4-8% is considered AA territory for bond rating agencies, he noted. A considerable portion of what the rating agencies look at are reserves and liquidity. It’s about 1/5 of their grading metric. He believes our bond ratings are dependent on existing reserves.

We don’t have “systematic structural approach” towards when we use reserves. However, these reserves are generally thought of as being for times of economic stress, and by almost any metric the state’s economy and the national economy are “humming along at a pretty good clip.”

It’s hard to know what the rating agencies would do, but it seems likely this would lead to a downgrade. The state issues about $1B in bonds every couple years and the increased interest rates would cost a few million dollars more over the life of those bonds. He noted that even taking $5-10M out of that $41M reserve would be viewed as “pretty significant.”

Lawrence Picus joined the Committee to discuss his 2015 adequacy study. Chairwoman Kornheiser asked him pointedly “what is adequate educational opportunity and spending.” The largest difference he has seen is the increased need for counseling services and social work. The pandemic seemed to add onto the concerns and need for that, but he wasn’t sure if the “world has changed and we now have a larger need… or revealed needs that were already there.”

There was a conversation about whether these services had actually been shifted from other venues and into schools and whether the school was the right place for these services to take place and how to fund them.

The per pupil costs have increased quite quickly in some places, it was noted.

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