The number of schools districts penalized for having too much money on hand has dropped drastically in the past several years, but Gov. Mike Rounds said districts can still do better.

In his annual budget address last week, Rounds criticized districts for not spending down reserves like the state has done.

He noted that school districts have $181 million in general fund reserves, compared with the state's total $47.9 million in reserves. He said the districts had $138 million in 2005; the state had $134 million.

"You have been dipping into your cash reserves while the school districts have been able to maintain or increase their cash reserves at the same time," Rounds said to legislators.

But Brian Aust of the Associated School Boards of South Dakota said the comparison is unfair. He said the governor chooses not to use the same definition as the Legislature does of what reserves are. He said the governor looks at the total cash on hand in a school district as of June 30 and labels that a reserve.

"It's not just a reserve, it's a general fund balance," Aust said. "There's a difference, and it's an important distinction."

Because school districts receive revenue from property taxes, which come from counties twice a year, they have higher "fund balances" at certain times during the year because they have to make that money last until the next property tax payment.

"When Gov. Rounds compares state reserve levels and school district reserve levels, he passes over the fact that a school's 'fund balance' serves as the district's checking account and its reserve. The state has a checking account and two separate, additional reserves," Aust said in an e-mail. "Schools are following the law and are left defending themselves against criticisms from a boss who takes a peek at their checking account at a time when the balance is close to its highest point."

Aust said the number of school districts penalized by the state for keeping too much money in reserves has declined, from 86 in 2002 to only four last year: Elk Mountain (rural Dewey), Flandreau, Greater Scott (rural Union County) and Newell.

He said districts have been following new rules put in place by the Legislature in 2007, when they were required to start reducing the amount of money allowed in their reserves. The graduated system requires a district to reduce reserves to 25 percent of its annual budget by 2012.

Tim McCann, superintendent of the Newell School District, one of the four penalized last year, said it is frustrating for schools to bear the burden of increased costs but not be able to save and budget accordingly.

"I try to maintain enough cash on hand to pay the bills," he said, "and I guess that one year, I missed it."

The districts that are penalized are required to pay back the state the exact amount of money they were over the percent requirement.

McCann said the Newell district currently has $401,000 in reserves but will have to pull out $160,000 of that to balance the 2009-10 budget, which is about $2.8 million.

"If we receive less money next year, it's only going to be two years, and our reserves will be gone," he said.

The Rapid City school district has found itself in the same spot. The district has been well below the 25 percent requirement, according to Dave Janak, but school officials began spending down reserves two years ago, anyway. The reserves are now at about $7.9 million, or about 10 percent of the total budget. The district is in its second year of multi-million dollar cuts.

School district fund reserves vary greatly. Todd County had 3.63 percent in reserves in 2008. Edgemont, which has a $1.2 million budget, had 84.7 percent in the general fund reserves in 2008. Sioux Falls was at 17 percent, and Pierre was at 13.75 percent.

At Rapid City's school board meeting Thursday, board members heard from auditor Mark Lyons with Casey Peterson & Associates, who said 10 percent is a healthy reserve fund.

"Once you're over 10 percent, you're doing extremely well; and under that 10 percent, and things are less flexible," he said.

McCann said his district's budget is anything but flexible. Newell is one of the 25 "sparse" school districts that could suffer from payment cuts if the governor's proposal goes through. They could also lose money if the Legislature goes ahead with the governor's proposal to do away with payments to districts with declining enrollments.

"The majority of schools are losing enrollment," he said. "My school building isn't any smaller; I still have to heat it. My district isn't shrinking; I still have to send buses out."

McCann said the Newell school district will be looking at cuts soon if things don't change.

"Realistically, what districts need to do to save money is cut positions and cut programs," he said. He said increasing school district funding won't fix all of their problems, "but it will be a step to help eliminate problems, because one problem is the rising cost of educating students today."

Contact Kayla Gahagan at 394-8410 or kayla.gahagan@rapidcityjournal.com