Long Island school districts' cash reserves top $3.1B, with officials looking to put more away for 'rainy day'

Long Island school districts, with cash reserves topping a combined $3.1 billion, are pushing for a change in state law that would allow districts to double the share now being set aside for "rainy day" financial emergencies.

State law bars districts from accumulating these "unrestricted" reserves equivalent to more than 4% of their annual budgets, but many school officials want the figure boosted to 8% or even 10%, as a hedge against a potential slowdown in school-aid payments from Albany.

Meanwhile, homeowner advocates said surplus cash should be applied to tax relief, not reserves. 

Some local school districts regularly exceed state limits on use of unrestricted funds, without risk of penalty. A Newsday review found that 18 districts of a total 124 Islandwide closed the 2022-23 school year with unrestricted reserves beyond legal limits. Several of those districts reported cash stockpiles over 20% of their 2022-23 budget.

Local education leaders said the need for greater flexibility was underscored June 9, when Gov. Kathy Hochul's administration issued a report projecting state budget deficits totaling $36 billion over the next three years. This could result in smaller increases in state-aid payments to schools. 

In anticipation of a budget crunch, Hochul's administration has begun building unrestricted reserves equivalent to 15% of the state's direct spending on operations. On the Island, school representatives point to this as evidence that the 4% limit applied to their operations is too small.

"We would urge the governor and the legislature to allow school districts to employ the same fiscal practice that the state allows for themselves," said Bob Vecchio, executive director of the Nassau-Suffolk School Boards Association. The group represents more than 100 boards of education Islandwide. 

Another point raised by the Island's educators is that municipal governments — counties, towns, villages — are not held to the same funding limitations as school districts. 

"It's time for the state to realize the need for school districts to be treated like other municipalities and be granted a more flexible limit on their unrestricted reserve of at least 10%," said Joseph Dragone, a longtime school business official now serving as an adjunct professor at Hofstra University.

At the national level, fiscal experts have concluded that school districts need far more than the 4% in unrestricted reserves allowed in New York. The Government Finance Officers Association, a national group based in Chicago, recommends that districts maintain cash balances of no less than two months' operating expenses, or about 16%. 

State groups supporting higher "rainy day" funding limits, at least on a temporary basis, include both the New York State School Boards Association and the New York State Council of School Superintendents.

Robert Lowry, deputy director of the superintendents' group, said the need for funding cushions became more acute in 2021, when state lawmakers imposed higher income taxes on millionaires as a means of boosting school aid.

Lowry explained that state revenue becomes "more unpredictable" as it increasingly relies on taxes paid by relatively small numbers of the wealthy, on earnings such as Wall Street bonuses.

For some, 'difficult to justify'

Still, the idea of greater flexibility in school reserve funds remains a tough sell. Proposed legal amendments meant to provide flexibility were introduced in the State Legislature during fiscal 2021-22 but never adopted. 

Local taxpayer representatives contend that many districts already have more surplus funds than generally recognized. They point to dozens of district audits issued in recent years by the State Comptroller's Office, which conclude that funds ostensibly earmarked to meet annual expenses are actually rolled over from one year to the next on a regular basis. That agency is responsible for reporting abuses but does not have the power to penalize districts that exceed statutory funding limits. 

"Districts have got plenty of money already," said Andrea Vecchio of East Islip, a longtime advocate of lower taxes on the Island. "All you have to do is look at state audits, and it's right in front of you." 

One union group opposing the idea in 2021 was New York State United Teachers, a statewide organization representing more than 600,000 working and retired educators.   

In a statement distributed to members, NYSUT contended that funding in the form of federal and state aid should be used to safely operate schools and recover from the pandemic "as opposed to being put into reserves for some theoretical future use." 

An NYSUT representative told Newsday on Friday that he could not comment further on the issue.

Another argument against expanded "rainy day" funds was advanced by an Albany-based fiscal expert, Ken Girardin, who noted that schools already have extensive authority to set up reserve funds restricted to specific uses such as school construction and renovation.

"It's difficult to justify doubling the amount of cash they can essentially keep in their checking account," Girardin said. He is an analyst at the Empire Center for Public Policy, a fiscally conservative think tank based in Albany.

More than doubled since' 08

On the Island, overall school reserves have more than doubled in recent years, from $1.33 billion in 2007-08 to $3.13 billion in the school year that just ended in June.

The bulk of 2022-23 funds were in the form of restricted reserves, which are used for specific purposes and which totaled nearly $2.2 billion.

Another $300 million-plus were in the "appropriated" category, meaning they were supposed to be spent during that budget year. Dozens of state audits have revealed, however, that such funds are often rolled over from one year to the next. 

The third category, unrestricted reserves, accounted for more than $600 million. They are used to cover purposes of the district’s choice, including emergency situations.

Reserves do not include federal funds for COVID relief, which are meant to provide short-term support.

Many districts that exceeded their limits are small ones in the eastern part of the Island. They include Sagaponack, with unrestricted funds equal to 29.7% of its budget; Oysterponds, with 25.6%, and East Quogue, 25.2%. 

Michael Miller, the East Quogue superintendent, said in a statement that the district's unrestricted fund balance reflected money left over, in part, from federal pandemic-relief support. Miller added that some of the money would be used to lighten property taxes. 

Other districts with oversized "rainy day" funds were larger and located farther west. Among them were Lawrence, 14.8%; Freeport, a little over 9%, and Island Park, 8.75%. 

Island Park Superintendent Vincent Randazzo said in a statement that excess reserves there resulted from a glitch created when the district received a $9 million legal settlement from LIPA and had no other way to categorize the money. 

Ann Pedersen, the Lawrence superintendent, also issued a statement that "adequate" reserve funding "allows us to continually advance the academic experience for students and faculty with little-to-no impact on our taxpayers." She did not say why 14.8% funding was deemed adequate. 

In a phone interview, Freeport's superintendent, Kishore Kuncham, said high reserve balances can help districts win good fiscal ratings. Kuncham added that his district's fiscal approach produced small property-tax reductions for eight of the past nine years. 

Kuncham added, "It's good to be prepared for economic challenges and to preserve the programs and services for our students, and everyone in the financial world — the rating companies, Moody's, Standard & Poor's — they all look at these reserves, including the higher unrestricted reserves, as very healthy."