School districts are required by law to create an annual budget that is considered balanced. That means that a district’s total expenditures cannot exceed its total revenues plus the fund balance expected at the beginning of the year.
What happens in situations where that is not the case? Can a district create and adopt a budget where budgeted expenditures exceed budgeted revenues and fund balance? The answer is yes, but there are special rules and regulations surrounding these situations.
Budgeting Receivables and Binding Conditions
As outlined in RCW 28A.505.110, when a district’s budgeted expenditures (or projected expenditures) will exceed available resources, the district must petition the Office of Superintendent of Public Instruction (OSPI) to budget receivables in future year(s), providing enough resources to balance the budget. The petition must be done in writing at least 20 days before the budget or budget extension is scheduled for adoption.
Should OSPI grant permission to budget future receivables, it will contain conditions to improve the district’s financial condition. These conditions become binding on the part of the district as a part of the plan, which is where the term “binding conditions” comes from. If a district attempts to pass a budget or budget extension where the total expenditures exceed available resources and does not petition OSPI for permission to budget receivables in future years, it will not be considered a valid budget or budget extension and is considered null and void.
It needs to be mentioned that binding conditions only occur if the district’s expenditures will exceed all available resources. Merely having expenditures that are in excess of revenues does not, by itself, trigger binding conditions. As long as the district’s ending fund balance is greater than zero – and assuming the district isn’t already on binding conditions – then the district won’t have to budget receivables.
What Exactly Are Binding Conditions?
There is no single definition of what constitutes binding conditions. The goal of binding conditions is to get the district back into a place of financial stability, so the exact conditions will be customized for each individual district.
Examples of Binding Conditions
- By November 30, 202X, the district’s actual general fund balance must be greater than a negative $5,000,000.
- General fund revenue projections must exceed $35,000,000 throughout the school year.
- By January 31, 202X, the district’s projected year-end general fund balance must be greater than $0.
These examples demonstrate that binding conditions only indicate the benchmarks that the district must achieve. How the district gets to and meets those benchmarks is entirely up to the school board and the district leadership.
OSPI and the district’s Educational Service District (ESD) will also appoint an administrator for the binding conditions. This is usually the ESD’s fiscal officer. The administrator only has a limited authority to ensure compliance with binding conditions – their primary role is to act as a financial consultant to the district. The fiscal officer will help analyze the district’s finances and proposed changes and may make recommendations or propose ideas on how the district will meet the benchmarks necessary to exit binding conditions.
Additionally, the district may be required to submit monthly budget status reports to the ESD and OSPI after they have been presented to the school board. The district may also be required to have quarterly meetings with the ESD and OSPI to review progress toward exiting binding conditions.
Benefits of Binding Conditions
While it may seem that going on binding conditions is bad for the district, there are some benefits. First, it lets the district borrow against future state apportionment payments. This allows the district to meet its short-term financial goals and ensure that all employees and vendors get paid on time. Binding conditions also provide a path towards financial improvement and stability. By meeting the benchmarks identified, the district can start working on improving its financial condition and getting back to a place of normal
operations without additional oversight.
Another benefit is that all the decisions about what steps to take to leave binding conditions are under local control. As mentioned above, the appointed administrator only has limited authority to ensure compliance. They aren’t in a position where they can dictate the terms and specify what cuts might need to be made. They only provide the destination – the route to be taken is up to the district’s leadership to decide.
It must be said, however, that if a district is under binding conditions and fails to comply with any of the restrictions issued by OSPI, the district runs a risk of having state apportionment funding withheld pending an investigation into the cause of the noncompliance.
Leaving Binding Conditions
To leave binding conditions, the district must prepare a financial plan on how to not only reach the benchmarks that have been established, but also hopefully prevent the district from being in the same position in the future. The plan is agreed to by OSPI and the district. Once the plan is agreed and all benchmarks have been met, the district will exit from binding conditions.
Beyond Binding Conditions
Generally, most districts will exit binding conditions in one year, although sometimes it may take two years or more to meet all the benchmarks and get an approved financial plan. In these cases, more steps can be taken to get the district back on solid footing.
If a district has been on binding conditions for two consecutive fiscal years (September through August), and there has been no satisfactory financial plan developed, a financial oversight committee may be appointed. The district’s school board also has the ability to request the appointment of a financial oversight committee. This committee would be made up of two representatives from OSPI, one representative from an ESD outside of the one the district is located in, and a non- voting member from the ESD in which the district is located.
The financial oversight committee reviews the district’s current financial situation and evaluates all proposed financial plans. The committee shall also hold a public hearing to review the
proposals. The committee, once convened, generally has two options. The first is to place the district under enhanced financial oversight, and the second is to consider dissolution of the district. Discussion of these options is done at a public hearing.
Enhanced Financial Oversight
Similar to binding conditions, there is no single set definition of what enhanced financial oversight actually entails. There are some items that can be considered, and they are noticeably stricter than those under regular binding conditions.
The first option is the appointment of a special administrator. This person is appointed by OSPI and is authorized to oversee and carry out the financial conditions that are imposed upon the district. This person does not report to the school district or the school board; instead, they report directly to the financial oversight committee.
The second option is a limitation in the district’s authority to enter into new contracts. No new contracts could be entered into, or revisions made to existing contracts, without prior written approval from the district’s ESD. Any existing contracts, including union bargaining agreements, remain in place and are unaffected by this requirement. The ESD may require that new or modified contracts have a reasonably reliable source of funds to pay for any costs related to the new contract.
A third option is that actions relating to personnel shall require final approval of the financial oversight committee. This includes items such as contract buyouts, hiring new administrators or reassigning them.
A fourth option is allowing for the liquidation or disposition of fixed assets or contractual liabilities by any reasonable method.
Dissolution
In cases where enhanced financial oversight either has not or will not result in the district becoming financially stable, the financial oversight committee may recommend to OSPI that the district be dissolved. In this extreme case, OSPI files a petition with the district’s ESD to dissolve the district. The insolvent district and any contiguous districts may then enter into negotiations to work on annexation of territory of the insolvent district and any distribution of assets and liabilities of the insolvent district.
How Often do Districts go on Binding Conditions?
These procedures have been in place for many years, but there haven’t been many situations that required them. In the 10 years prior to the 2023-2024 school years, fewer than 15 districts had been placed on binding conditions, with one ending in dissolution. The Vader School District became insolvent and was dissolved at the end of the 2006-2007 school year.
For the 2023-2024 school year, a total of five districts have been placed on binding conditions. This is the highest number of districts on binding conditions at any point in recent years. There is no one single reason for this high number, as each case is unique to the individual circumstances of the districts themselves. Some reasons could include voters’ rejection of a levy or losing one-time funding without reducing program improvements that were made with that funding.
In the past, most districts have exited binding conditions in a short time – the districts made the changes necessary to address the shortfalls and were able to get back on solid financial ground. It remains to be seen if that trend continues and if the higher-than-usual number of districts on binding conditions this year is a one-time event or indicative of larger systemic problems.