The impact of state-imposed fund balance limits on school districts: Evidence from New York state

This paper examines the role of state-imposed fund balance limitation on school district budgetary behavior in New York State between 1997 and 2004. The findings suggest that imperfect state limitations may lead to imperfect results. Compliance among New York state school districts with the two percent limit in the examined period is low. While the constraint does not limit unreserved unappropriated fund balances to two percent, it does influence the way districts form estimates of revenues and expenditures. Recent changes in the limitation (to four percent) do not fully address the flaws of the original rule (lax enforcement, applied on the budgeted level, and generous rules on reserves), thus no significant change in budget behavior is expected.