Got Cash? Got Cash?
Ron BennettPresident &
Chief Executive OfficerSchool Services of California
Joel MonteroChief Executive Officer
Fiscal & Crisis Management Assistance Team (FCMAT)
David PollockSenior Director,
Program DevelopmentCalifornia School Boards Association
Presented by
The Bottom Line of School FinanceThe Bottom Line of School Finance
Overview
• Our Definition of “Financially Troubled” (Ron)
• AB 1200 and AB 2756 Oversight Responsibilities (Joel)
• So, How Do Districts Get Into Trouble? (Ron)
• Monitoring the Budget (David)
• What Happens if your District Gets into Financial Trouble (Joel)
• Summary (David)
• Question & Answers (All)
2
A Financially Troubled District…
• May have a history of deficit spending
• May have qualified or negative interim reports
• May have its budget disapproved by the county office (COE)
• May not be able to conform to multi-year projection standards
• May not have enough cash to meet its obligations
• Probably has poor oversight and monitoring of its finances
• May have all of the above!...or none of the above
• In short, a district that cannot meet state standards on its own
3
District Fortunes and the Economy
• A district is qualified when it is determined that it may not be able to meet its financial obligations in future fiscal years
– The number of qualified districts in the state will grow as the economy weakens—in the current environment as many as 50% of all districts could be technically qualified on the basis of multi-year budget projection
• A district is negative when it is determined that current and future financial obligations won’t be met
– The number of Negative Certification districts will also grow as cash flow issues impact the day to day operations. Negative certifications are specifically related to a lack of adequate cash
The State’s economy is in free fall and education will be impacted
4
What is AB 1200?
County Office Review at a Minimum of Three Specific Data Collection Points
• Budget Approval
• First and Second Interim Reporting Periods
– Positive, Qualified and Negative Certifications
– COEs Must Assess Solvency for the Current Plus Two Additional Years (one year if Negative)
• AB 1200 Disclosures
– Collective Bargaining
– Debt (AB 1297)
5
AB 1200 Oversight Responsibilities
Possible Actions Under a Qualified Certification
• Fiscal Expert Assignment
• Budget Analysis and New Financial Projections
• Approval of New Debt Issuances
• Longer Period of Review for Collective Bargaining Agreements
• Encumber all Contracts and Other Obligations
• Withhold Compensation from Superintendent and Governing Board
6
AB 1200 Oversight Responsibilities
Possible Actions Under a Negative Certification
• All Actions as Under a Qualified Plus:
• Develop and Impose a Budget in Consultation
• Stay or Rescind Any Action of the Board that is Inconsistent with Fiscal Recovery
• In Consultation with the COE Develop a Fiscal Recovery Plan
• Assign a Fiscal Advisor
• May not Abrogate any Provision of the Collective Bargaining Agreement
7
What is AB 2756?
• In the Event of Cash Insolvency (Emergency Appropriation)
– Authority Transfer to the California Department of Education
– Assignment of a State Administrator (200% Rule)
– Governing Board Becomes Advisory Only
– Recovery and Assignment of a State Trustee
8
AB 2756 Oversight Responsibilities
• FCMAT has an increased role
– Greater support for districts and COEs
– Hands-on assistance to troubled districts
– More training and professional development to avoid crisis
Take this oversight seriously!Take this oversight seriously!
9
So How Do Districts So How Do Districts Get Into Trouble?Get Into Trouble?
10
Common Causes of Financial Problems
• Overly optimistic estimates of state economics*
• Overly aggressive estimates of enrollment, attendance*
• Declining enrollment
• Failure to document budget assumptions
• Loss of control of staffing levels and costs*
• Underestimating “automatic” cost growth
• Use of one-time money for ongoing expenses
11
Common Causes of Financial Problems
• Poor decisions at the negotiating table*
• Failure to consider the multi-year impact of budget decisions
• Failure to follow through on budget decisions*
• Poor budget monitoring by the Superintendent and Board
• Chronic deficit spending*
• Inadequate reserves*
12
Overly Optimistic Estimates ofState Economics
• This Year—It’s a Whole New Game
• There Very Likely Will Be Mid or Late Year Cuts
• Watch Closely the Governor’s January Budget And:
– Forego making big budget decisions until after January
– Conserve cash
– Build reserves and fund balance
• Budgets based on optimistic projections must have a fallback position
• The state is a less reliable source of funding
13
Overly Aggressive Estimates of Enrollment, Attendance, and ADA
• For most This is the Revenue Engine--Never overestimate ADA!
– Nearly all state funding is based on ADA
– The floor on ADA is last year’s P-2 ADA
– You need a sound basis for a higher estimated ADA
• ADA enrollment ratios usually change slowly
– If you are expecting to improve attendance, prove it before you add revenue to the budget
• If ADA is overestimated, adding staff to serve ADA that never shows up creates an even bigger disaster
• If you make a mistake here there is not enough money anywhere else in the budget to fix the problem!
14
Declining Enrollment
• Nearly half of California’s school districts are losing enrollment
• The economics of declining enrollment are awful– Revenues are lost much faster that cost
• Even with a one-year safety net
• Action is required – but often is taken too late
• Plan ahead – you will be cutting the budget every year
• And close schools if you must
Example:
0 1 2 3 4 5 6
Fiscal Years
AD
A/F
undi
ng L
evel
ADA
Funding
15
Failure to Document Budget Assumptions
• Budget assumptions are the basic building blocks of the budget
– Write and publicize the assumptions on which the budget is based
• Revenue growth, including COLA
• Enrollment growth or decline
• Benefit cost increases
• Program augmentations
• Post-retirement benefits
• Fuel and utility costs
• Costs to open or close a school
• Test and revise assumptions throughout the budget cycle
• Written assumptions provide linkage to the original budget
16
Loss of Control of StaffingLevels and Costs
• Personnel costs represent the lion’s share of the budget – 80%-85%
– Numbers of people are related to the numbers of kids!
– Costs for salary schedule maintenance must be considered
– Pay raises—in this economic environment??
– The cost for district-paid benefits will continue to increase
– If you make a mistake here there is not enough money anywhere else in the budget to fix the problem
17
Underestimating “Automatic”Cost Growth
• Automatic cost increases are pervasive to the budget
– Step increases for seniority
– Column increases for professional preparation
– Fuel and utility cost increases
– Health benefit increases
– Workers’ Compensation insurance increases
• All of these – and more – factors lead to “uncontrollable” increases in expenditures
• COLA and growth funding increases must cover all of these increases, as well as any salary schedule increases
18
Use of One-time Money forOngoing Expenses
• Don’t spend one-time money on anything that eats
– How will you feed it next year?
• One-time money should be used carefully
– Good dollars for reserves or one-time expenditures
– Equipment, technology upgrades, and other nonrecurring expenditures
• Withdrawals from reserves are one-time revenues – do not use them for ongoing salary or benefit increases
– Sometimes it is appropriate to use reserves for the retroactive portion of a salary settlement
19
Poor Decisions at theNegotiating Table
• The negotiations table is a fiscal “danger zone”
• Pressure to give more than you can afford can be tremendous—even now
– “Giving COLA” and finding another way to pay for everything else is a lethal recipe
• Think – and negotiate – based on total compensation
– Consider step and column, employee benefits as part of any basis for salary increase
20
Poor Decisions at theNegotiating Table
• Language issues also cause financial problems
– At least one district has negotiated a teaching day that does not meet minimum instructional minutes and must provide extra teachers for supplementary instruction every day
• The CBO needs to be at the negotiating table and should independently cost out each proposal
• Factfinding isn’t fun, but it’s better than a bad agreement
21
Failure to Consider the Multiyear Impact of Budget Decisions
• AB 1200 and AB 2756 require districts to consider the budget impact on the current year and two subsequent years
• Multi-year planning does not rely on a crystal ball – it is the mathematical consequences of the actions of today and Must Be Constantly Revised!
• Most major budget failures can be traced to specific events and decisions
• The COE should intervene if your multi-year projections are less than positive
22
Failure to Follow Through onBudget Decisions
• Difficult budgets require difficult decisions
– Sometimes the board takes considerable public criticism for making them
– But once those decisions have been made, they must be implemented – but often they are not!
• Positions are not cut
• Expenditures are not reduced
• Failure to follow through, no matter how good the excuse, requires that the board and superintendent re-visit the budget
• Bad news does not get better with age – if the cuts can’t be made, develop a new plan early
23
Poor Budget Monitoring by the Superintendent, CBO and Board
• A budget is only a plan and only as good as its last revision
• Tie changes to the original assumptions so the links are clear
• There are at least five required “checkpoints”:
– Budget adoption
– The first interim
– The second interim
– The unaudited actuals
– Receipt of the audited financials
• These events represent a minimum revision level
– Most districts need more frequent revision
• The earlier a problem is identified, the more options to fix it
24
Chronic Deficit Spending
• Deficit spending means we are spending more than we take in
• Some deficit spending may be planned when balances have been built up to allow a large one-time expenditure
– Spending against the bank is OK
• Most deficit spending is unplanned and uncontrolled
• Sooner or later you will run out of reserves
• Deficit spending is at the core of every school district bankruptcy—it is the villain of solvency!
25
Inadequate Reserves
• There is no such thing as a good budget without a reasonable reserve
• Reserves are a buffer that allows problems to be solved locally instead of turning to the COE or the state for help
• The state-recommended minimum Reserve for Economic Uncertainties is just that – a minimum number
– Most districts need more
26
Inadequate Reserves
• Circumstances that call for higher reserves include:
– Declining enrollment
– Rapid enrollment growth
– Opening or closing schools
– Basic Aid districts
– The next three fiscal years!
• There are no circumstances that warrant lower reserves
– Temporary shortfall should be fixed immediately
27
Monitoring Monitoring the Budgetthe Budget
28
Who is Responsible for Monitoring the Budget?
• The Board – adopts and is ultimately responsible
• Superintendent – accountable for recommendations
• CBO – accountable for quality of information and day-to-day monitoring
• Principals/staff – determine needs
• Community – defines priorities
29
Estimating Next Year’s Income
• Enrollment (ADA)
• State revenue limit
• Lottery
• Special purpose funds
• Local income
• Special education
30
Planning Next Year’s Expenses
• Actual salary of each employee
• Actual benefits for each employee
• New programs
• Ongoing programs
• Use assumptions to make estimates:
– Utility costs
– Insurance costs
– Capital and equipment
• Legal costs
31
Four Concurrent Budget Cycles
• Closing the past budget
• Managing the current-year budget
• Developing the budget for the next year
• Planning and goal setting that is reflected in the budget in two years
32
Final Budget: What Should theBoard Look For?
• Is it balanced?
• Adequate reserves?
• Programs funded?
• Comprehensive?
• Simple to grasp?
• Other funds?
• Are salary improvements included?
33
Reviewing the Audit
• Read the opinion letter in the front of the audit
• Look at the footnote disclosures
• Read the findings and recommendations
– Compare to prior-year findings
– Are things getting fixed?
• Now look at the numbers fund by fund
34
Audit
• Board’s report on the effectiveness of Financial Operations
– Controls
– Fiscal health – last year
– Historical document
– Findings and recommendations
• Only glimpses of the future
35
What Happens if Your What Happens if Your District Gets intoDistrict Gets intoFinancial Trouble?Financial Trouble?
36
Intervention Starts With theCounty Office of Education
• Intervention is progressive and can be tailored to the severity of the problem
• An adverse interim report or disapproved budget requires the COE determine the level of corrective action
• A fiscal expert may be appointed when a district has a qualified report; this fiscal expert has limited authority
37
COE Goal is Assistance with Least Outside Intervention
• The COE can be more helpful when you are candid and get it involved early
• A Budget Review Committee is used to adjudicate disputes between the district and the COE if they do not agree on the problem
• Try to help the COE to help you
38
The Role of FCMAT
• FCMAT can help in:
– Determining the extent of the problem
– Providing facts that help resolve disputes
– Developing recovery plans
• FCMAT also advises legislators on the need for state loans
• FCMAT can be a valuable resource before you get into trouble, so ask for help
• If you get into trouble, FCMAT will almost certainly play a role in your recovery
39
Responsibilities of the District
• Characteristics of districts that make a successful turnaround:
– Recognize they have a problem
– Don’t mask the problem
– Take advantage of financial expertise available
– Work collaboratively with oversight agencies
– Are part of the solution
• Characteristics of districts that require severe measures:
– Deny they have a problem
– Resist scrutiny from outsiders
– Don’t seek external assistance
– Combative with oversight agencies
40
Responsibilities of the District
Cash Is Really King
• Cash Deferrals will Continue to be a Reality
• Actions that Board’s Take Will Have an Impact on Cash Flow
• In This Environment Cash Management is a Everyday Occurrence
• If a District Runs Out of Cash It’s “Game Over”
• Board Members Must Understand the Difference Between Budget and Cash and Act Accordingly
41
Summary
• A governing board has legal fiduciary responsibilities
• The vast majority of boards discharge this duty well
• AB 1200 and AB 2756 require fiscal transparency
• A board must simultaneously:
– Review and report past budget performance
– Monitor and revise the current year budget
– Plan and prepare future budgets
• FCMAT is an agency designed to assist boards
• If a board gets into financial trouble, the COE must step in
• The state does not “bail out” board from financial troubles
• A state loan comes with a state trustee or administrator
42
Top Related