School District Budget Challenges and Financial Insolvency

In Washington state, local school districts are the statutory delivery system of public K–12 education. Each local school district is separately governed by a locally elected board of directors that hires a district superintendent. The school district superintendent is accountable to the board for, among other things, carrying out school district policy and maintaining the financial health of the district.

The State's Role

OSPI monitors the financial health of school districts using tools such as a financial health indicators model, monitoring election results, and reviewing budget and financial statements submitted on an annual basis. OSPI’s first choice and preference is for financial challenges to be resolved locally. Local leaders are best situated to make the decisions that impact their students, educators, staff, and families. OSPI’s authority to dictate or approve specific school district financial actions increases as the district’s financial situation worsens. 

Flowchart showing stages of financial oversight for school districts by OSPI, from Financial Solvency (no oversight) to School District Dissolution (full oversight). Stages include Financial Monitoring (Binding Conditions), Financial Insolvency (Financial Oversight), and Enhanced Financial Oversight. OSPI authority increases as financial conditions worsen.

 School Districts on Binding Conditions

Binding Conditions 

OSPI has the authority to require that local school districts achieve certain financial benchmarks through a process known as Binding Conditions as defined in Washington Administrative Code (WAC) 392-123-060. If a school district is unable to produce a balanced budget, then they must request binding conditions from OSPI. It is only when a district is unable to produce a balanced budget and requests binding conditions from the state that OSPI can get involved. 

What is the purpose of binding conditions?

The purpose of binding conditions is to provide the school district with additional oversight and counsel to support the district in returning to a financially healthy position. 

What are examples of binding conditions?

Some examples of binding conditions include, but are not limited to, targets for the district’s fund balance, requirements for more frequent financial reporting to OSPI, regular meetings with OSPI, and counseling districts to maximize state funding by meeting certain requirements of law.

What are non-examples of binding conditions?

While OSPI provides oversight and counsel during the binding conditions process, the school district ultimately is responsible for decision-making regarding their financial actions. The following specific actions are not examples of binding conditions: closing schools, eliminating academic or athletic programs, or reducing full-time equivalent staff. Being placed on binding conditions does not nullify or mandate the renegotiation of existing labor contracts.

What if the district’s financial situation does not improve?

If a district is on binding conditions for two consecutive school years and/or is unable to prepare a satisfactory financial plan, the district may enter Financial Oversight.

Financial Oversight

What is Financial Oversight?

This stage of the process requires the convening of a Financial Oversight Committee. The Committee will review the financial condition of a school district and may recommend that a district enter Enhanced Financial Oversight.

What is the role of the Financial Oversight Committee?

The Financial Oversight Committee is convened when a district is in binding conditions and is unable to put together a viable financial plan or is at risk of being financially insolvent within two years without a viable financial plan. The Committee is made up of school district fiscal experts from around the state who assess the school district’s financial plan and can put together an alternate financial plan. The convening of the Financial Oversight Committee requires a public hearing at which feedback can be provided on the district’s financial plan and/or the alternate plan produced by the Committee.

What type of authority does the Financial Oversight Committee have on local decision-making?

The Financial Oversight Committee may refer the district to participate in Enhanced Financial Oversite, thereby exercising full control over all financial decisions impacting the school district.

What happens if dissolution of a school district is recommended?

School district dissolution occurs when a district has no other option but to be consolidated with one or more neighboring school districts. In the last 25 years, just one Washington school district has gone through the dissolution process.