Minneapolis Public Schools maintains a portion of its general fund, the fund account for tracking most of its revenue and expenses for district operations, as an unassigned fund balance each year. There are three main purposes for maintaining an unassigned general fund balance. One purpose for the unassigned general fund balance is to act as a cushion for cash flow because of uneven revenue and expenses throughout the fiscal year. In months where expenses exceed revenue, the district can utilize its unassigned general fund balance to pay its expenses. In months when revenue exceeds expenses, the unassigned general fund balance replenishes.
The second purpose for the unassigned general fund balance is emergency reserves the district could utilize in the event of an emergency. One example would be if a school were flooded and unable to be occupied until it was repaired. The unassigned fund balance could be used to reopen one of the district’s currently vacant buildings until the damaged school could be repaired.
The portion of the general fund balance that is designated as unassigned is currently set by board policy. The current board policy specifies that the unassigned general fund balance should be between 8% and 13% of the district’s budgeted annual general fund expenses.
Compared to other large urban school districts in the United States, MPS’ 8% minimum is at the median. The upper quartile of districts, in data from the Council of Great City Schools, had an unassigned general fund balance of 15% in 2018-19, the most recent year that data is available. The lowest performing districts averaged a 5% unassigned general fund balance.
In addition to school board policy, the unassigned general fund balance is also subject to regulations by the state of Minnesota. Under state law, any school district with an unassigned general fund balance less than 2.5% of its annual general fund expenses will be considered in “statutory operating debt” by the state.
When a district is in statutory operating debt, the district must submit a plan to the Minnesota Department of Education showing how the district will increase its unassigned general fund balance above 2.5%. If a district does not submit a plan, or if MDE does not think the plan is adequate, the state of Minnesota can withhold state funding from the district until it submits an adequate plan.
The third function of the unassigned general fund balance is as an indicator of the financial stability of the district. When the district issues bonds for capital projects, the amount of interest the district pays to bondholders depends in part on the district’s financial stability. By maintaining a stable unassigned general fund balance, the district signals to bondholders that the district is unlikely to default on its payments to bondholders.