This measure shows the percent of monies held in reserve for future spending (i.e., fund balance), compared to total spending from the prior year. A negative operating reserve ratio indicates a negative fund balance, which means the district must use monies received in the following year to cover prior-year spending. This results in higher financial risk as districts with negative fund balances may incur borrowing costs to continue spending or may need to make spending cuts to operate within available resources. Delaying necessary spending cuts when revenues begin to decline can require larger spending cuts later unless revenues increase. Districts with frozen tax rates The Arizona Constitution limits tax rates on residential property and the Arizona Department of Revenue, Property Tax Oversight Commission, notifies school districts when their tax rates have frozen due to both the district’s tax rate exceeding 150 percent of the statutory qualifying tax rate and the total tax rate for at least 50 percent of the district’s area exceeding the Constitutional limit. Risk related to frozen tax rates is covered in a separate measure in our analysis. have even greater financial risk from negative operating reserves as they may not be able to generate enough revenues to bring reserves back to a positive position without substantial spending cuts.

If a district’s operating reserve ratio is 16 percent, the district has enough reserve in its General Fund to continue typical spending for approximately 2 months 1 month = 100%/12 or 8.33%. with no additional revenues, or the district could afford an urgent necessary expenditure equal to about 16 percent of the prior year’s General Fund spending. For example, a district will have a higher ratio if its fund balance reflects prepayment of future expenditures or planned savings for anticipated or unanticipated spending in future years. Likewise, a district will have a lower ratio when it intentionally or unexpectedly uses up prepaid balances from prior years or spends monies saved in prior years for current operations.

A district’s General Fund balance could be negative due to misallocation of State or local tax revenues between funds or budgetary overspending Budgetary overspending is spending beyond statutory budget limits and may or may not cause districts to have negative fund balances. Districts can spend from certain funds, such as the Maintenance and Operation Fund, based on statutory budget capacity even when cash is not available. However, when a district spends beyond its budgetary spending capacity, it often spends beyond its available cash and reports a negative fund balance. Spending within budget limits is covered in the 2 Budget limit reserves measures: Operating and Capital budget limit reserves. . Districts with negative operating reserves that do not have frozen tax rates may be able to work with their counties to levy additional taxes A.R.S. §15-992(G)(8) and (10) allow districts’ levies to be adjusted to compensate for understated ADM in a prior year or identified cash deficits from prior years when recommended by the County School Superintendent and approved by the County Board of Supervisors. .

All districts with a negative operating reserve ratio in either of the most recent 2 years were considered high risk for this measure.

General Fund amounts were obtained from districts' audited financial statements or unaudited annual financial reports A.R.S. §15-904 requires all districts to annually prepare an AFR, including beginning and ending balances, revenues, expenditures, and other financing sources and uses, including transfers, by fund along with other financial information. Districts are required to submit these unaudited AFRs to the Arizona Department of Education (ADE) by October 15 each year, and ADE publishes them on its website at http://www.ade.az.gov/Budget/EntitySelection.asp to provide district financial information to stakeholders. (AFR) as indicated below. Districts that are not required by State law to receive an annual audit A.R.S. §15-914 requires a school district with a Maintenance and Operation Fund adopted expenditure budget of $700,000 or more to contract for an annual or biennial financial statement audit. Biennial audits are audits of 2 fiscal years performed after the second year. Audited financial statements are due March 31 each year as applicable, 9 months after the June 30 fiscal year-end. generally do not prepare annual financial statements. However, all school districts are required to prepare AFRs each year. To analyze similar data when AFR data was used, we looked at the funds most commonly included The funds most commonly reported as being included in districts’ general funds in their financial statements include the Maintenance and Operation, Auxiliary Operations, Indirect Costs, Impact Aid, and School Opening Funds. Some districts may include additional funds in their General Fund for financial statement reporting based on Governmental Accounting Standards Board requirements. in districts’ general funds in financial statements. However, financial statement and AFR amounts may not be consistent for the same funds if auditors identify adjustments that are reflected in financial statement amounts to correct errors or meet governmental financial statement reporting requirements. To avoid distorting the measure ratios based on reporting inconsistencies between unaudited AFR data and audited financial statement data, we did not compare data across those sources.

• Fiscal year 2022: Amounts were obtained from unaudited district AFRs submitted to ADE as of December 19, 2022.
• Fiscal year 2021: Amounts were obtained from district-submitted audited financial statements, if available. Otherwise, amounts were obtained from district AFRs submitted to ADE as of December 19, 2022.