Audit of Reserves

  • Reserves may be established by the board in accordance with applicable laws to provide financing for specific purposes. Money set aside in reserves must be used only in compliance with statutory provisions which determine how reserves are established and how they may be funded, expended and discontinued. Generally, school districts are not limited as to how much money can be held in reserves; however, reserve balances should be reasonable. It is important that the board adopt a written policy that communicates why the money is being set aside, the board’s financial objectives for the reserves, optimal funding levels and conditions under which the assets will be used. Ideally, amounts to be placed in reserve funds should be included in the annual budget. By making provisions to raise resources for reserve funds explicit in the proposed budget, the board gives voters and residents an opportunity to know the board’s plan for funding its reserves. The board should also periodically analyze the reasonableness of the balances in its reserves.

    A debt service reserve must be established if unexpended bond proceeds remain on a capital improvement financed with debt, or if state or federal aid is received for a capital improvement for which there is outstanding debt. The balance as well as any interest income earned on this money must be used to help finance related debt service costs. This money must be set aside and accounted for in the debt service fund. There is no other authority for a school district to establish or fund a reserve to pay for debt service.