The end of the 2019-20 school year brought uncertainty and new realities for schools across the nation. As the country shut down, school leaders wrestled with maintaining education programming in a new environment, while reimagining what the future of reopening school would look like. Uncertainty surrounding school funding and the economic impact the pandemic would have on finances created many unknowns for school leaders.
As we begin the 2020-21 school year, there are still many unknowns, especially in relation to school funding. This makes the role of the school business official more critical than ever. One question you may be asking yourself is, “How can I successfully position our school district for what the future may bring?” While financial forecasting can be difficult in any financial environment, the COVID-19 crisis has added a whole new layer of complexity.
The State of Ohio did not dip into its “rainy day” fund in 2019-20. However, funding reductions were made across all local government entities, with $330M reduced from public education funding at the state level. For 2020-21, although there are significant unknowns at this point, most recent indications from state revenue data (sales and income) are pointing toward a bottoming of the downturn.
To help your district navigate this financial uncertainty:
- Prepare monthly cash flow projections and know that you can meet payroll
- Model various stresses on your district’s forecast and share the visual scenarios with stakeholders
- Monitor cash balance reserves relative to key performance indicators
Review your district’s projected monthly cash balance to assess vulnerabilities. Delays in property tax collections, as well as reduced income tax and state revenue, could put additional strain on your district’s cash balance. In the example below, the district’s cash balance is precariously low in January of FY 2021 and FY 2022.
Delays in revenue, such as a delay in local property tax collection, could cause negative cash balances. Use your monthly cashflow estimates to explore different cashflow borrowing options with your bond council and fiscal advisors. To avoid cashflow issues, monitor and update your budget throughout the year as new information becomes available.
In addition to monthly cashflow projections, forecast scenario comparisons can be a useful tool for communicating with your board about different forecast assumptions. By visually seeing the impact of different state funding assumptions, a CFO can communicate results more clearly. The graphic below depicts end-of-year cash balances resulting from three state funding scenarios—current reductions, two-times the current reductions, and three-times the current reductions. The graphic reveals that the district was trending toward negative cash balances even before the COVID-19 crisis.
Finally, look to your available fund balance and reserves relative to key performance indicators. The graphic below reflects key benchmarks to assess cash balance adequacy. Applying one-time fund balances to offset revenue shortfalls is not sustainable, especially if you are not simultaneously making reductions to costs. Assess the strength of your reserves to determine how long appropriating them as a revenue source can be sustained.
The COVID-19 era will impact school district operations beyond the current crisis. Some ongoing operating costs will be unavoidable. The future holds many unknowns for school districts, but by acting now you can avoid adverse surprises. Use the information you have available to better position your district and explore various financial scenarios in your forecasts. Take a look at how past financial crises impacted the district and how those compare to the current situation. Determine whether your current resources are enough to sustain future revenue shortfalls and whether expenditure reductions are necessary. As new information becomes available, update your projections and monitor them throughout the year.
Ernie Strawser is Senior Vice President at Forecast5 Analytics, Inc., a Past President of OASBO, and Retired Treasurer.
Email: estrawser@forecast5analytics.com.
#BudgetingandForecasting#FinanceandAccounting