PORTLAND – City officials are questioning a proposal in next year’s school budget to use $1.3 million in surplus to offset potential increases in costs and decreases in state revenue.

City councilors are concerned about the school department’s plan to draw down Portland’s “unassigned general fund balance” while the city is poised to ask voters in November to borrow $40 million to renovate its elementary schools.

“I am concerned about using fund balance because that’s really supposed to be used for emergency situations,” said Councilor David Marshall, who serves on the council’s Finance Committee.

The city has made a concerted effort to build up its reserve account in recent years, since it is a major factor in determining the interest rate the city pays to borrow money.

Justin Costa, who leads the school board’s Finance Committee, said he expects the proposal to use surplus to be in the budget that the board will consider on Tuesday.

If the budget is approved by the board, it will be forwarded to the council’s Finance Committee, which sets the bottom line on school spending but does not have line-item control.

The school department is proposing a $98 million budget, which could eliminate 50 positions in the year that starts July 1.

The budget would absorb an anticipated decrease in state revenue due to Portland students who will attend charter schools.

It also accounts for a LePage administration proposal to shift teachers’ pension costs to school districts. And it funds $1.7 million in salary increases for teachers, who were promised a 5 percent raise in 2013-14, the third and final year of their contract after two years with no base salary increases.

Costa said using surplus is a way to “balance competing interests” of residents who don’t want property tax increases and parents who don’t want deep cuts to schools.

“My sense is that there is not an appetite for the level of cuts or the level of tax increase that would be required if that (surplus) was removed from the budget,” he said.

The city has been rebuilding its fund balance since surplus was used to help bail out the school district’s $2 million budget deficit in 2007.

When that happened, the city’s surplus dropped to between 6 and 7 percent of its expenses, said Ellen Sanborn, the city’s finance director.

The current surplus is $29.7 million, 12.1 percent of the city’s $245 million budget.

In 2010, Portland adopted a policy to have a surplus of 12.5 percent of its overall expenses by 2015. To achieve that, the city is increasing the amount it puts into the account as the budget grows.

The policy is meant to protect the city’s credit rating.

Sanborn said she doesn’t expect the credit rating to be downgraded because of the school budget proposal, as long as the city ends the fiscal year June 30 with enough surplus to keep its fund balance at 12.1 percent.

Sanborn said she has not finished her year-end projections.

If the rating were to go down, she said, the city’s interest rate on borrowing could increase by 1 percentage point, meaning taxpayers would have to pay an additional $400,000 a year over 20 years if voters approved the $40 million elementary school bond in November.

She said that if LePage’s budget proposals, particularly for teachers’ pensions, are approved by the Legislature, they will become an ongoing annual expense.

Rather than covering an annual expense with one-time revenue such as surplus, it’s wiser to raise property taxes, she said.

“It’s not a one-time event,” she said. “You’re either postponing a bad thing for the following year, or gambling that something else is going to happen.”

Costa, however, said the district needs more time to plan to absorb the governor’s budget changes, should they be approved.

“These are unanticipated expenses and certainly, in the first year, those are things that can’t be planned for,” Costa said.

Randy Billings can be contacted at 791-6346 or at:

rbillings@pressherald.com

Twitter: @randybillings