Financial position – General Fund operating reserve ratio
For our analysis, we look at 3 different measures to determine a district’s financial position: change in fund balance, operating margin ratio, and operating reserve ratio. Each of the 3 measures analyzes components of a district’s General Fund revenues, expenditures, and ending balances to identify potential risk related to General Fund resources. Although each of these measures looks at similar financial data, they focus on different relationships in that data. We assessed each measure individually to ensure that concerns present in 1 or 2 of the measures were not overlooked based on less concerning results for another measure.
Beginning in FY 2020, districts received COVID-19 federal relief grants with less restricted allowable uses than most other federal or State grants. Some districts’ financial position measures may have improved when they used federal relief monies for allowable spending, including maintaining operations , that might have otherwise been paid from the General Fund, contributing to larger General Fund balances than they likely would have without these federal relief grants. In total, State-wide district General Fund balances continued to increase in FY 2022, increasing 32 percent since FY 2020. In FYs 2020 through 2022, nearly half of Arizona school districts reported using at least some of their federal relief monies for allowable grant purposes in place of available State and local monies (see the District, charter, and ADE COVID-19 spending special report).
What is this measure telling me, and why is it important?
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 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.
Tell me more about operating reserve.
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 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 . Districts with negative operating reserves that do not have frozen tax rates may be able to work with their counties to levy additional taxes .
How were districts identified as high risk for this measure?
All districts with a negative operating reserve ratio in either of the most recent 2 years were considered high risk for this measure.
How was this measure calculated?
|General Fund ending balance||= Operating reserve ratio|
|General Fund total expenditures|
General Fund amounts were obtained from districts' audited financial statements or unaudited annual financial reports (AFR) as indicated below. Districts that are not required by State law to receive an annual audit 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 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.
Districts at high risk for this measure
|District||Among the highest-risk districts||County||FY 2022||FY 2021|
|Antelope UHSD||Yuma County||-5.2%||-8.7%|
|Blue ESD||Greenlee County||-2.6%||16.1%|
|Congress ESD||Yavapai County||-8.8%||-0.1%|
|Double Adobe ESD||
1 of 3
|Elfrida ESD||Cochise County||3.0%||-23.5%|
|Hayden-Winkelman USD||Gila County||-6.6%||42.5%|
1 of 3
|Mobile ESD||Maricopa County||16.1%||-15.9%|
|Nadaburg USD||Maricopa County||-5.2%||-1.3%|
|Owens-Whitney ESD||Mohave County||12.0%||-2.8%|
|San Fernando ESD||Pima County||-130.7%||-105.3%|
|Tonto Basin ESD||Gila County||-6.0%||4.3%|