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TWO INTERFUND TRANSFER RULES ARE SET TO EXPIRE ON JUNE 30, 2020, POTENTIALLY LIMITING FINANCIAL FLEXIBILITY AT THE WORST POSSIBLE TIME

 

May 11, 2020

           

As Fiscal Year 2020 (FY20) winds down and school districts begin forecasting and modeling financial projections for FY21 during a time of incredible fiscal uncertainty, we highlight two flexible fund transfer mechanisms currently available in the School Code that are set to expire on June 30, 2020. With the Illinois Legislature not currently in session, and a timetable for reconvening unknown, it is very possible that these transfer mechanisms may sunset with a significant passing of time before they are brought back…even if there is a political appetite to bring them back.

 

Operating Fund Transfers

 

            Under Section 17-2A of the School Code, districts are allowed to transfer assets between the Education, Operations & Maintenance (O & M), and Transportation funds, and also from the Tort fund to the O & M fund, provided certain procedural steps are honored. Those steps include: (1) a published notice of hearing at least seven days and no more than 30 days before a public hearing; (2) that public hearing taking place; and (3) a formal board resolution authorizing the transfer to the fund the Board determines is most in need. Until June 30, 2020 there is no requirement that the transfer meet any kind of substantive condition thanks to a long running legislative waiver that allows school districts to ignore the following rule: that these transfers be made “solely for the purpose of meeting one-time, non-recurring expenses.”

 

            The waiver that allows districts to ignore the “one-time, non-recurring expense” requirement has been typically extended by the Legislature in two or three-year increments. With that waiver set to expire next month, it remains to be seen if and when the Legislature will extend the waiver. Because the Legislature is not currently meeting due to the COVID-19 shutdown, it is becoming a real possibility that the waiver sunset will not be extended in time for the start of FY21.

 

Fire Prevention and Safety Fund Transfer

 

            A similar transfer flexibility rule in Section 17-2.11 of the School Code is also set to expire on June 30, 2020 without legislative action.  Currently, Section 17-2.11 allows the transfer of “surplus” monies in the Fire Prevention and Safety Fund (“Safety Fund”) to the O & M fund for building repair work, provided similar procedural steps are taken, including: (1) notice of a public hearing concerning the transfer published and posted between seven and 30 days prior to the hearing; (2) a public hearing; and (3) an authorizing board resolution. If not extended by legislative action, the ability to make a transfer of such surplus Safety Fund assets to the O & M Fund will lapse.

 

Uncertain Revenue and Cost Forecast for FY21 May Necessitate Action Now

 

            With the economic downturn delivered by the COVID-19 pandemic, many financial experts are forecasting revenue shortfalls for the State of Illinois in FY21. With Illinois having precarious financial footing long before the challenges brought on by the pandemic, we may see one or more of the following adverse economic scenarios for school districts soon happening: (1) reductions in evidence-based funding (“EBF”) due to insufficient appropriations; (2) decreased property values; (3) flat or near-flat CPI, limiting levy increases in PTELL counties; (4) a drop in property tax collections; (5) a property tax freeze to bring relief to struggling taxpayers; and/or (6) the long-looming teachers’ pension cost shift to school districts. On top of these potential budget wreckers, school districts may also have to allocate funds for atypical expenditures brought on by the pandemic, including possible contingency plans for re-opening schools in the fall or continuing with remote learning.

 

            Even if the Legislature re-convenes within the coming weeks, there is no guarantee that the June 30 sunsets in Sections 17-2A and 17-2.11 of the School Code will be extended. In fact, the only bill pending on these issues at the time of the mid-March State shutdown, HB1627, would put the transfer restrictions back in place beginning July 1, 2020. With the possibility that the fund transfer options explained above may lapse come June 30, 2020, school business officials may want to review the prudence of possibly making such transfers before the end of FY20. If you would like assistance with making these transfers, we will be ready to work with you.

 

Tags: OPERATIONS - Finance