One way to close the budget gap, which has been floated publicly by several people and discussed during our most recent work session with the County Council, is to increase projections for investment income, leverage unassigned fund balance, and tap the health fund balance. It has been stated that these three mechanisms alone would reduce the remaining gap. Unfortunately, this is not possible, nor is it recommended. Here is more information about what it would look like and the associated risks we would be assuming if we went that route.
One way to close the budget gap, which has been floated publicly by several people and discussed during our most recent work session with the County Council, is to increase projections for investment income, leverage unassigned fund balance, and tap the health fund balance. It has been stated that these three mechanisms alone would reduce the remaining gap. Unfortunately, this is not possible, nor is it recommended. Here is more information about what it would look like and the associated risks we would be assuming if we went that route.
Investment Income
The Board’s Requested Budget currently includes $2 million dollars for investment income, which is less than we have realized in recent years but higher than historic averages. At the time the budget was being built, all indications were that interest rates were going to continue to decline, resulting in lower investment earnings. Recent changes to federal monetary policy now seem to indicate that interest rates could stay elevated through part or all of FY 2026.
Given this new information, staff recommend increasing the estimate for investment income to $4.5 million dollars, which would reduce our budget gap by $2.5 million dollars. It should be noted that the school system has very little control over this revenue stream, so it is important to not be overly aggressive with this estimate.
Unassigned Fund Balance
The latest projection is to end the year with approximately $6.9 million dollars in available unassigned fund balance. However, given the uncertainty with federal and state funding and potential expenditure impacts, it would be wise for the school system to maintain at least a modest reserve to avoid mid-year disruptions. While Board Policy 4070 dictates a one percent, or approximately $12 million dollars, fund balance for FY 2026, the Board could choose to draw this down further and staff felt comfortable recommending the use of $2 million dollars in unrestricted fund balance to help balance the budget.
Health Fund Balance
As of June 30, 2024, the audited health fund balance was approximately $17.9 million dollars. While we anticipate a modest increase by the end of FY 2025, the balance is projected to remain well below the reserve levels recommended by our actuarial consultant—Gallagher—and the targets outlined in Board Policy 4070 of at least $30 million.
Additionally, approximately $9 million dollars is reserved for claims that have been Incurred But Not Reported. These costs are real and will be paid, particularly as current medical cost trends suggest an increase in these levels. Also, Gallagher recently projected FY 2026 claims expenses to be $5.6 million dollars higher than originally estimated in the Board’s Requested Budget.
But understanding the nature of this year’s budget, and the public commitment of the County to provide security in the case of overrunning the health fund, staff recommended not exceeding the use of $3 million dollars from the health fund balance.
Overall, when we consider these three approaches, to completely drain our unassigned and health fund balances, and make aggressive estimates for investment income, are not responsible approaches to budgeting and will put our system at significant risk. However, staff do believe we can reasonably and responsibly leverage these three areas to reduce the budget gap by $7.5 million dollars.