Thursday, May 15, 2008 | The San Diego Unified School District’s emergency reserve and other special funds are being eyed by the teachers union and an outside policy group as they pore over the budget for ways to avert the pending layoffs of more than 600 educators.

Thus far, San Diego Unified has resisted their calls amid a state budget crisis originally expected to slice $80 million from its annual budget. The cuts are currently being revised after Gov. Arnold Schwarzenegger announced a new spending plan Wednesday that reverses some of the original cuts.

But Superintendent Terry Grier signaled a willingness to dip into some of the district’s unspent reserves when he successfully pleaded with the school board Tuesday night to rescind the layoff notices of nearly 300 educators. Grier didn’t specify which reserves he would target to help fund the restored positions, which are estimated to cost roughly $20 million.

One such reserve, the emergency fund, is considered fiscally sacred by advisers. Financial experts warn that pulling dollars from the emergency fund is a short-term solution that could cost the district later by dragging down its credit rating, thereby inflating the district’s interest rates as it plans to put an estimated $1.51 billion facilities bond before voters this year.

They maintain that the emergency fund is meant to cover the expenses of unforeseen catastrophes such as earthquakes and terrorist attacks, not a predicted financial shortfall. Reserve levels are one of many factors credit rating agencies analyze when assigning ratings to governmental agencies.

“Whether or not you dip into your reserve is a litmus test for financial institutions, and the Taxpayers Association,” said school board president Katherine Nakamura, who voted against using the reserve. “And right now, we don’t want to mess [our credit rating] up.”

The teachers union argues that this year’s fiscal crunch is a genuine emergency that justifies pulling funds from the reserve. Union President Camille Zombro argued that by leaving the emergency funds untouched, San Diego Unified has prioritized its bond rating over its employees.

“The district isn’t willing to take risks when it comes to the numbers,” Zombro said, adding: “Yet they’re making these reckless, risky, destructive decisions about employees.”

Originally faced with plans to lay off more than 900 educators, the teachers union and a local policy group have scoured the budget for unused funds. The teachers union unsuccessfully urged the San Diego Unified school board to ask the state for permission to halve its emergency reserves from 2 percent to 1 percent of its total budget. School trustees have not made the move, which could allow them to pour $11 million into the budget.

Other reserves are also gaining attention. The Center on Policy Initiatives, a left-leaning think tank, is eyeing other funds held by San Diego Unified, including money left unspent by individual schools. In a presentation to the school board on Tuesday, CPI questioned why the school district holds separate reserves of unused school site money, vacancy savings and other funds, which San Diego Unified estimated to total an extra $22 million in its second interim financial report.

“This is the time to open the piggybank,” said Murtaza Baxamusa, director of policy and research for the Center on Policy Initiatives. “If this is not a rainy day, then what is?”

But San Diego Unified Budget Director Gamy Rayburn said those funds can’t be readily plumbed to plug the budget gap. School sites count on leftover money allocated to their individual schools to save up for big purchases such as computers, she said, and would just spend it if the district required schools to pour unspent money back into the general fund.

Like other government agencies, San Diego Unified assumes that it will have a number of open and unfilled positions throughout the year, creating vacancy savings because the district doesn’t need to pay those salaries while the positions are open. In San Diego’s case, it assumes a 2.5 percent vacancy rate. If there are fewer vacancies than expected, San Diego Unified uses the vacancy savings fund to pay the extra salaries. Leftover money from that pot spills back into the general fund and has already been budgeted for in the upcoming school year, Rayburn said.

“These shouldn’t be spent,” Rayburn said. “They aren’t even spendable.”

Yet when Grier pushed San Diego Unified to spare high school English teachers, counselors and librarians from layoffs during Tuesday’s board meeting, he explicitly mentioned reserves as an untapped resource to help pay their salaries. Which reserves he’s eyeing isn’t clear.

Grier also advocated lobbying the state to reduce cuts and streamlining staffing to make San Diego Unified more efficient.

Tapping reserves wouldn’t be a new strategy for San Diego Unified, which was allowed to deplete its emergency fund in 2005 and between January 1999 and July 2003, when California permitted large districts such as San Diego Unified to cut their reserves down to 1 percent.

County offices of education scrutinize school districts’ reserves as one measure of whether districts can pay their bills, said Peggy O’Guin, a California Department of Education official. The department sets minimum reserve recommendations for school districts based on their size. Lower recommendations are in place for large school districts such as San Diego Unified, which is advised to keep a 2 percent reserve, than for smaller school districts.

If a county office decides that a school district isn’t financially stable, the district can lose crucial powers, including the authority to enter into agreements with unions without the county office’s approval, O’Guin said. In light of those risks, fiscal advisors are skeptical of pulling from school district reserves.

Maureen Evans, associate vice president of School Services of California, Inc., which advises California school districts on financial management, said her company doesn’t recommend depleting the emergency fund because repaying the reserve in following years burdens school district budgets. It also cripples districts if unforeseen emergencies occur.

In San Diego, a committee charged with overseeing the district’s finances advised San Diego Unified against spending its emergency reserves, and the county Taxpayers Association insists that the crisis isn’t “a real emergency.”

“Any attempt to use reserves for anything other than a natural disaster, war or a terrorist attack is unacceptable, and without a doubt hurts the district’s credit rating,” said Lani Lutar, Taxpayers Association president.

An expert from Moody’s Investors Service, one of the agencies that rates San Diego Unified, offered a more nuanced analysis. Pulling money from the emergency fund during a budget shortfall doesn’t necessarily torpedo a district’s credit rating, vice president/senior analyst Kevork Khrimian said. Reserves are just one of many factors considered by rating agencies when assessing a government agency’s financial health.

“When the state is facing financial difficulties, draws on reserves will be pretty common [among school districts],” Khrimian said. “They will not all lead to downgrades.”

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