Author: Financial Management Resource Bureau
Over the last ten years, many cities and towns have opted to implement a reserve fund for unanticipated costs related to special education (SPED) and certain other school programs under provisions set forth in the Municipal Modernization Act of 2016. Based on numerous inquiries made to the Division of Local Services (DLS), it is evident that an article that clarifies details about this fund would be beneficial to municipalities.
M.G.L. c. 40, § 13E is a local acceptance statute that provides a school district with a mechanism to help cover specific kinds of unexpected costs that could occur during a fiscal year after the adoption of the district’s annual budget. The four types of costs that may be funded through this reserve are special education programs, recovery high school programs, transportation, and out-of-district tuition. The text of the statute refers to this fund as a reserve, and that is the term DLS uses for it as well. However, the Department of Elementary and Secondary Education (DESE) refers to this same account as a stabilization fund. This mismatch in terminology might contribute to some of the confusion that exists about the SPED reserve.
Comparison to a 40:5B Stabilization Fund
Among the General Laws that govern municipal finance procedures in Massachusetts, M.G.L. c. 40, § 5B is the statute that enables a city or town to create one or more stabilization funds. A two-thirds vote of the municipal legislature (town meeting or city council) is necessary to create a general or special purpose stabilization fund, and a majority vote of the same is needed to appropriate money into either of them. Town meeting or city council must vote by two-thirds to appropriate money from a general stabilization fund and by majority vote in the case of a special purpose stabilization fund. There is no statutory limit on the balance that may exist in a general or special purpose stabilization fund (see Information Guideline Release 2024-12).
Below are the ways in which the SPED reserve differs from a stabilization fund:
- The SPED reserve is created pursuant to majority votes of the legislative body and school committee. For a regional school district (RSD), this requires majority votes by the legislative bodies of a majority of the district’s member communities, along with its school committee. Once established, the local or regional school district should create a budget line item for the reserve. Review this prior City & Town article for additional information.
- The SPED reserve is not an available fund for use when developing an annual budget. Stabilization funds come under the category of available funds for budgeting purposes. This means they are nonrecurring funds that may be tapped as a revenue source to appropriate in support the fiscal year budget; ideally, only to pay for nonrecurring costs. In accordance with c. 40, § 13E, the funds in a SPED reserve may be used only for “unanticipated or unbudgeted costs.”
- The local school district or RSD may expend from the SPED reserve without appropriation. Expenditures may occur at any time during a fiscal year subsequent to majority approvals by the local (or regional) school committee and by the local district’s select board or city council or a majority of the RSD’s select board(s) / city council(s).
- Under DESE guidelines, the school committee may transfer excess funds from other school line items into the SPED reserve, something that is not permissible with stabilization funds.
- There is a limit on the balance that may exist in the SPED reserve. It cannot exceed two per cent of the school district’s annual net school spending amount.
As a line item within an RSD’s budget, there is no separate account for the SPED reserve in the general ledgers (GL) of its member communities; it is instead an indistinct part of the RSD’s annual assessment. In a city or town that has adopted 13E for its local school department, the municipal auditor or accountant should create a special revenue fund account for the SPED reserve in the GL. Correspondingly, when the municipal auditor or accountant in community with a 13E account submits year-end reports to DLS, the SPED reserve should be included in the Special Revenue Funds form of the Schedule A and in the Special Revenue Funds worksheet within the Combined Balance Sheet template. It should not be reported to DLS as a special purpose stabilization fund in the Trust Fund sections of the Schedule A or Combined Balance Sheet.
Some cities and towns have created a special purpose stabilization fund under M.G.L. c. 40, § 5B to accumulate monies to be used for special education programs. Any community that has such a fund should continue to report it as a special purpose stabilization fund in the Schedule A and Combined Balance Sheet.
DESE has posted an advisory about the SPED reserve on this webpage, which contains guidance on how the fund’s expenditure activity should be reported in the school district’s End-of-Year report. It also states that a district could consider establishing its own limits on the fund’s maximum balance and allowable annual expenditure amount. The webpage also provides information on how to contact DESE with any questions.
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Editor: Dan Bertrand
Editorial Board: Sean Cronin, Scott Ditto, Janie Dretler, Jessica Ferry, Christopher Ketchen, Paula King, Jen McAllister, Brianna Ortiz, and Tony Rassias
| Date published: | October 15, 2026 |
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