This measure shows how a district’s UCO Fund budget limit reserve UCO Fund budget limit reserve is a district’s unspent UCO Fund budget capacity at fiscal year-end. The UCO Fund includes expenditures related to the acquisition of assets such as land, buildings, equipment, furniture, and vehicles, and supplies required by Arizona law to be purchased from the UCO Fund such as textbooks, library books, and instructional aids.

This reserve does not include other financial resources such as federal grants and aid, donations, or various other monies that a district may have available for general or more specific purposes. Some of these resources, when less restricted in purpose, are included in districts’ general funds and considered in the separate financial position measures in our analysis. has changed over a 1- and 4-year period. Additionally, a district with a negative capital budget reserve overspent its statutory capital budget limit Arizona law requires school districts to spend within prescribed budget limits, including the unrestricted capital outlay budget limit. If a district overspends its budget limit in the UCO Fund, State law requires the Arizona Department of Education to reduce the district’s budget limit over the next 1 or 2 years by the amount of overspending. In some instances, legislative relief has allowed districts that overspent to spread the budget limit reductions over more years, but that relief can also include the requirement that the district be placed into receivership by the Arizona State Board of Education. Receivership is considered in a separate measure in our analysis. in that year and had future years’ budget limits reduced to compensate for the overspending. Substantially declining, negative, or unfunded reserves Unfunded reserves are defined in the "Tell me more about capital budget limit reserve" section below. indicate higher financial risk as less resources remain available for future capital spending needs.

Districts with little or no budget reserves are more financially impacted by unexpected capital spending needs when they arise. Although districts may have the ability to sell bonds or access special funding from the Arizona School Facilities Board ADOA’s division of school facilities provides funding to school districts when they are eligible for new school facilities, emergency capital deficiencies, and building renewal grants. for certain capital needs, those funding sources are not always available or allowed to be used depending on the districts’ capital needs. Often, districts with little or no UCO Fund budget limit reserves need to allocate more of their current-year annual budget capacity to the UCO Fund to meet immediate capital needs. Doing so reduces the district’s resources available for operational spending in that year and may require operational spending cuts if adequate M&O Fund budget reserves are also not available to avoid overspending.

Decreases in a district’s UCO Fund budget limit reserve may result from a district’s long-term spending plan, and therefore represent less financial risk than unplanned reserve decreases. However, planned or unplanned, substantial decreases in budget reserves leave fewer resources available for future needs and therefore increase a district’s financial risk.

In some instances, districts can report positive budget reserves, based on unspent budget capacity, even when they lack the cash to fully support spending that budget capacity (i.e., unfunded reserves). Districts with unfunded reserves may be able to work with their counties to increase future property taxes A.R.S. §15-992(G)(8) and (10) allow applicable 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. , or when unfunded reserves are caused by substantial property taxes owed to the district remaining unpaid, supplemental State aid A.R.S. §15-980 allows districts where the County Treasurer has certified more than 10 percent of the district’s primary property tax revenues will not be received when due to apply to the Arizona Department of Education for supplemental State aid. Districts that receive supplemental State aid will have future State aid reduced when the over-due taxes are received. may be requested to fund the existing budget capacity. A district with a frozen tax rate 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 been 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. cannot increase its tax rate to generate monies for an unfunded reserve, and it only increases its unfunded reserve if it uses legal budgetary increases, such as small school adjustments Arizona Revised Statutes §15-949(A) allows districts with a Kindergarten through 8th grade student count of 125 or less or a 9th through 12th grade student count of 100 or less to increase their budget limits in excess of the State funding formula without voter approval.

Risk related to the loss of a small school budget adjustment and unfunded small school budget adjustments because of frozen tax rates is covered in the Small school budget limit adjustments measure of our analysis. , to set its budget limit beyond the resources it can generate through State and local taxes.

Districts were considered high risk for this measure if any of the following was true:

1. The district overspent its budget limit in the most recently completed fiscal year and in total overspent its operating and capital budget limit by more than .5 percent of the applicable years’ total budget limit.
2. The district’s budget limit reserve decreased by 25 percent or more in the most recent year, or by 50 percent or more over the last 4 years.
3. The district reported an unfunded budget limit reserve When determining districts with unfunded budget limit reserves, we did not consider districts capital budget limits unfunded if their M&O funds had sufficient excess balances to cover the capital deficits. (i.e., budget capacity exceeds available resources at fiscal year-end) of at least 10 percent in the most recently completed fiscal year, has a frozen tax rate, and has a per pupil ending fund balance less than the State-wide average.

The applicable UCO Fund budget limit reserve amounts from the last 5 years were used to calculate the 1- and 4-year change.

Budget limit reserves were obtained from the Arizona Department of Education (ADE), as of December 19, 2022, from BUDG75 reports for each district and fiscal year.

Frozen tax rate data was obtained from the Property Tax Oversight Commission’s report, 2022 Review of School Districts that Exceed the 1 Percent State Constitutional Limit.

Fiscal year 2022 M&O and UCO Fund ending fund balances were obtained from ADE as of December 19, 2022, from district-submitted 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).