Budget Chronicles: Reserve Policy—What’s in it for me?

November 21, 2017

When you live paycheck to paycheck, everything is an emergency.  If you don’t have a rainy day fund and your car breaks down, then you have to either not use your car, or not do something else and get your car fixed. But the money has to come from somewhere.

Part of the reason last year was so difficult is that OUSD does not have a rainy day fund and OUSD’s car broke down (attendance dropped), the water heater quit working (underbudgeted for Special Education), and the fridge went out (overspent the previous year), etc. Everything had to be fixed, and OUSD had no rainy day fund.  

OUSD basically had to look in the couch cushions and hope it had enough.  And it did, but barely.

How big is current OUSD’s rainy day fund?  Not big enough. A Reserve for Economic Uncertainty (Reserve) is just the legal term for rainy day fund. The state education code mandates a 2% reserve, which means about $10-11 million. However, if you use that money then you likely end up in state receivership because that is the state minimum. Plus while it sounds like a lot of money, OUSD spends about $33 million dollars per month.

What should it be? Best practices across all kinds of municipal governments call for a Reserve to cover two-three months of payroll expenses. That is because payroll expenses are the one expense you cannot really change. In Oakland this would mean approximately a $40-50 million dollar reserve.

What is the benefit to that kind of rainy day fund?  Just to address it, the obvious downside is that money in a rainy day fund does not provide direct education services to students. The benefit is stability for the system. Last year was difficult for everybody in the system with the disruption of the programs and plans that impacted both school sites and the central office. It is hard this year for the same reason. There is no savings account.

With a healthy reserve, OUSD could have dipped into its rainy day fund to pay for all or part of the issues it experiences without causing all of the stress, drama, and trauma of last year.  

Last year’s budget problems cost OUSD in many ways, including current OUSD educators who felt disrespected and marginalized as their plans were disrupted, parents who questioned the effectiveness of the system to which they entrusted their children, educators who left OUSD due to the turmoil, not to mention the thousands of hours of debates, meetings, and other energy that was put into crisis management rather than improving literacy rates.

A reserve does not solve the underlying issues that caused last year, but it gives Oakland a cushion to prevent the trauma and stabilize the system while OUSD leaders and the Board of Education figure it out.  

The current plan of not having emergencies or unforeseen events is not working.

What is happening now? In August the Board updated its reserve policy to align to best practices, require board approval to use the reserve, and require a 1-3 year plan to rebuild the reserve if it is used.  

Within the next few week, OUSD staff will bring back options to the board to see how aggressively OUSD should save to build the reserve. It cannot be done in the next year or two. It will be a process.

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