More than a reserve

City stabilization funds are often compared to a family’s rainy day fund, intended for unforeseen expenses. An actual savings account has more flexibility. If a family is saving for a new car and an unexpected medical expense comes up, they can still access their funds. City stabilization funds have restrictions on what the money can be spent on and any spending must be confirmed with a vote. 

The reality is, for a family or the city, most unforeseen expenses exceed the amount in the funds. Stabilization funds are about more than saving for a future need.

Northampton uses stabilization funds as a wealth accumulation tools that increases credit and bond ratings. This saves the city money on loans. Money is diverted from the city’s operating budget and vital services like education.

The Special Education Stabilization Fund was implemented in 2024. The establishment of this fund gave the City Council control over spending decisions previously managed by the School Committee.  At that time, instead of directly allocating $800,000 to the school budget, it was diverted to seed the new fund. 

Using potential Medicaid reimbursements to replenish the fund removed recurring revenue away from the school budget. 

Under Massachusetts state law, a municipality cannot spend more than 2% of its net school spending from this specific fund in a single year. Rerouting Medicaid reimbursements through this stabilization fund, limits how much money can be released to the schools for unplanned or non-budgeted expenses. The city is legally restricted from giving schools their full Medicaid money if it exceeds that 2%. 

It is a good idea to have reserves to fund unintended or unexpected expenses for special education. But that is not exactly how this fund has been used since its implementation. It also hasn’t decreased the need for mid year appropriations or reduced the needs of our students. 

In early 2025 the school district found itself in an operational crisis. The City Council had to past a contentious mid-year compromise appropriation of $295,000 just to stave off immediate cuts. 

For the recently passed FY2027 budget, the mayor’s office used $235,311 from  the Special Education Stabilization Fund just to reach a level services budget. While leaving the School Committee’s actual prioritized $53.3 million “Strong Budget” heavily underfunded. 

By diverting recurring funds into a stabilization account, The Special Education Stabilization fund allows Medicaid reimbursements to substitute for city operating dollars rather than increasing the total resources available to schools. It could be said the schools received the same budget in the end (with or without the fund). This is still a financial decision that has impacts we should examine. The city isn’t including the appropriate allocation of operating funds for the actual needs of the school district.

I have many questions.

What are the broader implications for when recurring operating revenue is placed into a restricted reserve instead of remaining in the operating budget?

• Why are Medicaid reimbursements treated differently from other sources of school revenue? 
• Does the use of Medicaid reimbursements in the special education stabilization fund, impact tracking the costs and revenue associated with special education services? 
• How does the fund’s legal caps restrict our ability to respond to rising special education costs? 
• Do people find this makes special education funding easier or harder to understand? 
• Does placing the funds in a stabilization fund improve long term planning or does it make annual school budgeting less predictable? 

It is noteworthy that there are Massachusetts state senators working on these questions. Massachusetts Senate Bill S.862 (An Act relative to MassHealth reimbursement for schools) modifies the law by changing the term local government agency to local educational agency (LEA), and mandates that local educational agencies (LEA) use Medicaid reimbursements specifically to fund and expand school based health and behavioral services. It ensures these funds supplement rather than replace existing school health budgets. This bill has not been passed yet.  

Part of this post are adapted from this post from July 2024