Too much of a good thing:
Accumulated surpluses at British Columbia’s school
By Michal Rozworski
Can there be too much of a good thing?
That’s a question British Columbians should
be asking of their school districts every year at budget time when annual operating
budget surpluses are set and the size of the accumulated operating surplus is
decided. School districts can accumulate operating surpluses from year to year
because they are very limited in their ability to raise revenues independently.
Accumulating surpluses thus allows them to build up financial cushions. A
cushion is useful to make up for unexpected shortfalls in provincial funding,
whether due to drops in enrollment or inadequate funding for the services
districts provide. However, these financial cushions can also grow
unnecessarily large (as measured relative to a district’s annual spending),
stripping money from classrooms and further entrenching austerity budgeting,
the understanding that schools will have to make do with too little.
The annual operating surplus is the
difference between what a district receives in funding for operations—everything they need to run existing schools—and what
it spends on operations. The accumulated operating surplus is the running total
of annual operating surpluses over the years. This differs from other
accumulated surpluses in capital accounts that fund spending on long-term
assets such as new schools. This report will focus only
on accumulated operating surpluses and refer to them as “accumulated surpluses.”
School districts are legally mandated to
submit a balanced budget every year and so having an accumulated surplus is the
default financial position for districts. Districts are in the difficult
position of being responsible for providing services without control over how
they are funded—something decided by
the province. When there is a shortfall between the year’s funding and spending,
this “deficit” can be covered with funds from the accumulated surplus. If the
accumulated surplus is not enough to cover a shortage, the Minister of
Education has to personally approve a district budget with an accumulated
deficit and the school board submitting such a budget has to both explain how
the unplanned deficit came about and present a plan to return to an accumulated
surplus financial position.
Of course, some parts of the accumulated
surplus are understandably tied up in ongoing projects, set aside for planned
increases in spending, or come from restricted funding sources that put
constraints on the use of funds. These “internally restricted” portions
generally make up the majority of operating surpluses accumulated by BC school districts.
Even restricted pools of funds, however, should be queried as restrictions can
be undue or excessive. Overall, it is easy to see how policy encourages
districts to accumulate surpluses, even those that can grow too large at the
expense of classroom spending. In a
climate of persistent underfunding of education, excessive transfers into the surpluses are effectively cuts to spending
on services in the classroom.
At the end of 2016–17, the last year for
which Audited Financial Statements are available, British Columbia’s school
districts held a total of $298 million in accumulated operating surpluses. This
is equivalent to 5.7 percent of total operating expenditures by districts
($5.27 billion) in the same year. It is also $51 million more than the total
from the previous year, a substantial 21 percent increase.
There is wide variation between districts
within this provincial figure. Below are tables that list the ten districts with
proportionately the largest surpluses relative to annual spending and by dollar
Disproportionately, smaller districts by
size of annual budget are those with the largest accumulated operating
surpluses as a share of expenditures. These districts may have a harder time
spending periodic increases in funding and they may also lack the financial
expertise to plan with smaller contingencies. In terms of absolute dollar
amounts, the list of the largest accumulated surpluses is unsurprisingly
dominated by big urban districts. Many of these are also sizeable in relative
terms, from five to twelve percent of expenditures.
A more detailed provincial breakdown of
accumulated surpluses into restricted and unrestricted funds is available for
one year prior, 2015–16. The following table has a provincial breakdown of
accumulated surpluses in their restricted and unrestricted portions.
Looking at the 2016–17 school year again,
BC’s sixty school districts also recorded a total of $153 million in operating
surpluses just for the year, a substantial 2.9 percent of expenditure in just
one year, and a red flag. (For comparison, the Greek government being subjected
to suffocating austerity is forced to maintain a surplus of 3.5 percent on its
annual budget.) A majority of this $152 million was, however, redirected into
other funds as the provincial total of accumulated surpluses only grew by $51
million. This is another red flag.
flag: Sharing out surpluses
Transfers from the annual operating surplus
into other accumulated funds are a second, equally important concern next to
the size of accumulated surpluses. When boards end up running large surpluses, then
money that could have been spent in the classroom or on resources often ends up
redirected elsewhere, particularly into various capital funds, often those at
the sole discretion of district administration. With the current chronic
underfunding of K–12 public education in British Columbia, these are harmful and unnecessary
transfers of resources away from the actual teaching of students. And
they understate the extent of operating surpluses being accumulated.
The most prominent, public and problematic example
of such interfund transfers in recent years took place in School District #83,
North Okanagan-Shuswap. In 2016, the minister of education intervened to dismiss
the district’s Board of Education over financial mismanagement. At issue was
the fact that the district had built a new $9 million administration building
and a new $1 million school works building funded by five years’ worth of
transfers from the accumulated operating surplus into the local capital fund.
Rather than seeking dedicated capital funding, district administration and the
school board had allowed sizeable operating surpluses to be diverted away from classrooms—less
funding for teachers, EAs and school resources. (For
comparison, this $10 million in capital spending is equal to one-sixth of the
North Okanagan-Shuswap district’s 2016 operating spending.) The 2016 crisis in
North Okanagan-Shuswap led the Ministry to hire an independent advisor, Watson
Advisory, to produce a report on the governance practices in that district and provide
recommendations to avoid such mismanagement in the future.
This case may be particularly alarming but
it is reflective of a broader trend. Recall that a majority of 2016–17’s annual
operating surpluses were redirected to other funds at the end of the year.
Interfund transfers are sign that annual operating surpluses may be excessive.
With outdated materials, unfunded curriculum change, under-resourced special
education and many other chronic issues, it would be preferable for money
earmarked for the classroom to stay in the classroom.
A natural question arises at this point:
what is a reasonable accumulated surplus? The short answer is that there is no singular
definition or target. The longer answer is that what is reasonable will depend
on circumstances, which include district characteristics (such as size by
enrollment and geography), the design of the education funding formula,
enrollment trends and multi-year operations planning. In particular, changes to
accumulated surpluses will understandably be contingent upon enrollment
projections for upcoming years as well as anticipated changes to both
expenditures and revenues. This does not, however, mean it is impossible to
judge when accumulated surpluses may be becoming excessive or to demand transparency
in how they are set.
The Ministry’s Toolkit for Boards of Education: Accumulated Operating Surplus does
not give school boards any guidance as to the size of accumulated surpluses and
there is no provincial policy, which sets either targets or rules to follow
when planning annual or accumulated surpluses. (A hard target or a prescribed
minimum would in fact be detrimental, reinforcing unwarranted belt-tightening.)
To some degree, however, this guidance
function has been outsourced to consultants. For example, a 2015 report from
the global consultancy Ernst & Young that looked at the Vancouver School
Board’s finances suggested a target of 2 to 3 percent of annual operating
expenditures for the unrestricted
accumulated surplus. This is overly cautious, especially considering that a
district’s funding can only fall by a cumulative 1.5 percent in any given year
as outlined provincial funding formula as well as the fact that enrollment is
projected to rise across most of the province for the next several years. It is
important to remember that reports like this one were commissioned by a
Ministry of Education that often seemed to have an interest in excessive fiscal
Indeed, the VSB disagreed with this high
target and in 2016, the consultancy changed this to a target for the total accumulated operating surplus.
This is a seemingly more reasonable, although still relatively high. Yet even
in light of this cautious target from Ernst & Young, accumulated surpluses
across the province would currently be two to three times too large, as they
totaled 5.7 percent of annual expenditures in 2016–17. Most districts exceed
even the 3 percent upper bound of this target range.
While it bears repeating that accumulated
surpluses are a necessity for districts due to their limited capacities to
raise revenues on their own, they are but one indicator of school district
health and have to be measured against other indicators and goals. Accumulated
surpluses that are excessive, unreasonably growing over time or the source of
large transfers to other funds can negatively impact on a districts ability to
provide a good education to students. All three can be indicators of district
mismanagement or another means of dealing with a situation of chronic
Adequacy of funding, accountability, transparency
Two things are clear. First, BC schools and
students need adequate provincial funding that not only reverses chronic
shortages but fulfills the needs of a modern, inclusive, equitable public
school system. Second, school districts need to be held to a far greater degree
of transparency and accountability in how they plan and manage accumulated
The single biggest change to alleviate the
problem of excessive accumulated surpluses would be for the provincial
government to adequately fund public K–12 education. Both the impulse to
accumulate excessive surpluses and the damage their accumulation does to
classroom conditions would be dramatically reined in with the necessary funding.
Much of the pressure for districts to accumulate excessive surpluses (and cut
operating expenditures to do so) comes, paradoxically perhaps, from the
already-tight budgets they face. Not only is there not enough to cover school
needs today—from classroom supplies and up-to-date
materials to supports for special education—but uncertainty about even greater
insufficiencies in upcoming years often drives further reductions though
accumulated surpluses. The vicious circle is complete because now the baseline
is an even lower level of services.
for improved, stable and adequate funding from the provincial budget can move
the baseline in the other direction. Our public education system has absorbed
an austerity framing of budget issues because it has been subject to austerity
for so long. It is time to reverse course.
To be sure, increased funding on its own
would not solve every issue related to the accumulation of excessive surpluses
by school districts. Budget processes often lack transparency, accountability
and predictability. The Watson report into mismanagement at the North
Okanagan-Shuswap school district included a number of very good recommendations
to increase all three of these around accumulated surpluses. Many of these recommendations
are also taken up nearly verbatim by the Ministry in its Toolkit for Boards of Education: Accumulated Operating Surplus.
Several key governance reforms suggested by
the Watson report would be well-heeded across the province—and some are already in place in some districts:
- A “surplus policy” that
provides guidance for the size of annual operating surpluses and how to
distribute anticipated surpluses between the accumulated surplus, interfund
transfers, and back into current-year spending.
- Formal approval of interfund
transfers through school board discussion and a motion.
- Quarterly reporting of a
district’s financial position and financial projections to allow trustees and
stakeholders to verify whether the size of contingency funds matches
developments in revenues and expenditures.
- Specific identification of
contingencies and reserves built into budgets.
- A clear, process for developing
and approving the local capital budget.
The Ministry in its Toolkit also adds a welcome suggestion that annual operating surpluses
should not be transferred to local capital funds without clear detail of how
these funds will be spent.
Other recommendations are more far-reaching
and require more study, including the idea to move to rolling multi-year
budgets. This would provide more year-to-year flexibility and give districts
more room for long-term planning around contingencies that do not require building
up large accumulated surpluses.
Finally, it is important to note that documents
like the Watson report, on the one hand make good recommendations on process,
while on the other, accept and are indicative of the current austerity mindset.
Describing the budgeting process, the Watson authors write, “With the grant
announcement in March, the District is in a position to understand any
shortfall in funding. Beginning in April, the public consultation process
begins to identify opportunities to balance the budget.” The assumption is that
funding will be inadequate and that the role of trustees and stakeholders is to
find the least painful cuts—here
euphemistically described as “opportunities to balance the budget.” In today’s
world, budgeting magically transforms cuts to children’s education into “opportunities”
for the public. Stakeholders need to push back against such assumptions by
arguing for adequate funding while simultaneously demanding transparent and
Accumulated operating surpluses of British Columbia school districts as of June