Fiscal Review. December 3, Prepared By: Sheila Vickers Vice President. Lewis Wiley, Jr. Director, Management Consulting Services

Transcription

1 San Marino School District Fiscal Review December 3, 2008 Prepared By: Sheila Vickers Vice President Lewis Wiley, Jr. Director, Management Consulting Services Kathleen O Sullivan Consulting Coordinator

2 San Marino School District Fiscal Review December 3, 2008 Prepared By: Sheila Vickers Vice President Lewis Wiley, Jr. Director, Management Consulting Services Kathleen O Sullivan Consulting Coordinator Copyright 2008 by School Services of California, Inc L Street, Suite 1060 Sacramento, CA (916) FAX (916) All rights reserved. These materials may not be duplicated in any way without the expressed written consent of School Services of California, Inc., except in the form of brief excerpts or quotations or as a teaching guide to employees of the school agency or organization that contracted for this report. Making copies of this report or any portion for any purpose other than your own or as noted above, is a violation of United States copyright laws.

3 December 3, L Street Suite 1060 Sacramento California TEL: FAX: An Employee-Owned Company Ms. Julie Boucher Assistant Superintendent of Business Services San Marino School District 1665 West Drive San Marino, CA Dear Ms. Boucher: Thank you for allowing School Services of California to assist the San Marino School District (District) in a follow-up Fiscal Review. We are pleased to provide you with the following report. The review was divided into two sections: a detailed review of the budget, multiyear projections, and cash flow projections; and a comparative analysis of the District s revenues and expenditures measured against a group of comparable districts to be included in the final draft report. These comparisons are based on data from , the latest fiscal year for which reporting is complete and certified by the California Department of Education. Also, we will be reporting on the status and progress the District has made in implementing the recommendations from the May 2007 Fiscal Review. The attached report contains information that we believe will help the Superintendent, staff, and Board of Education to effectively plan for and manage the District s fiscal solvency in the current year and the years to come. Please let us know if we can be of service in providing any additional clarification regarding our Fiscal Review. We thank you for the confidence you have placed in School Services of California. Sincerely, LEWIS WILEY, JR. SHEILA VICKERS KATHLEEN O SULLIVAN Director, Management Vice President Consulting Coordinator Consulting Services

4 i TABLE OF CONTENTS EXECUTIVE SUMMARY... 1 SCOPE AND METHODOLOGY... 4 Comparative Districts...5 The Fiscal Review...6 Budget Development... 6 Standards and Analysis...6 Contingencies Standards and Analysis...12 BUDGETED REVENUES Revenue Limit Sources Standards and Analysis...16 Federal Revenue Sources Standards and Analysis...19 Other State Revenue Sources Standards and Analysis...21 Other Local Revenue Sources Standards and Analysis...25 BUDGETED EXPENDITURES Salaries and Benefits Standards and Analysis...29 Other Expenditures Standards and Findings...32 Other Programs and Funds Standards and Findings...34 COMPARATIVE ANALYSIS OF BUDGETED REVENUES Characteristics of the District s Enrollment Average Daily Attendance Revenue Limit Federal Revenue Other State Revenues Other Local Income and Prior-Year Revenue Other Local Income and Prior-Year Revenue Certificated Salary Expense per ADA Certificated Nonmanagement Salary Expense Per ADA Workload and Cost Measures Administrator Salary Expense Classified Salary Expense... 74

5 ii Employee Benefits Expense Books and Supplies Services and Other Operating Expenses District Reserves and Ending Balance... 84

6 1 Executive Summary This Fiscal Review is divided into two broad sections: a review of the San Marino School District s (District) current budget and a comparative analysis of prior-year revenues and expenditures. In addition, we expanded the review of the current budget to include a follow-up on the status and progress the District has made in implementing the recommendations from the 2007 Fiscal Review. These two approaches provide a comprehensive picture of the District s financial condition. While this effort does not constitute a fiscal audit, it nevertheless presents a fair analysis of the major components of the District s budget. This review found that the District has faced a challenge in coping with the effects of declining enrollment, and continued decreases in enrollment and average daily attendance (ADA) are projected in future years. To date, minor reductions in staffing have been implemented through attrition. The District is in the planning stages for making major reductions for and due to drastic changes in the state s economy affecting the funding of education, as well as internal factors requiring changes in the District s expenditures. At the time of this report, the State Budget shortfall is estimated to be $28 billion over the next year and half, resulting in a proposed cut of $4 billion to K-14 education. The District is unique in that it serves less than 1% free and reduced-priced meals versus the statewide average of 51% for unified school districts. These free and reduced-priced meal counts are the criteria used by many federal categorical programs to determine funding eligibility. As a result, the District does not receive as much federal revenue as other districts, such as Title I. The District has maintained the state-required minimum 3% reserve level for the last three years, and the fund balance has increased by $907,366 over the past three years, according to the most recent annual financial report dated June 30, The District projects its combined ending fund balance to decrease by $1,251,755 in , and expects to deficit spend by $33,173 and $32,217 in the unrestricted General Fund in and respectively. The District needs to be cognizant of its deficit spending due to the fact that a portion of the revenues is from one-time funding. This estimate is based on the most current information available as of the revised budget presented to the Board on October 10, The District s budget has historically been developed in a conservative manner. Revenues are projected throughout the year based on projected and actual enrollment and ADA numbers. The District uses statewide guidelines to develop and confirm revenue estimates. Expenditures are initially budgeted at the highest level anticipated for the year, and as the year progresses, the District makes adjustments to the expenditure budget as more becomes known during the fiscal year about conditions such as vacancies in personnel positions and carryovers in program and

7 2 department budgets. By the Second Interim reporting period (January 31), the most material of these adjustments will have been made. The District projects a slowdown in its enrollment growth in the future, and budget reductions will have to be made to curb deficit spending and maintain an adequate level of reserves. This would include investigating restricted programs that require a contribution from the unrestricted portion of the General Fund, such as special education, to determine methods to reduce the contribution required. This also includes reviewing restricted programs that require a contribution by statute to ensure that the contribution from the unrestricted portion of the General Fund is not in excess of the required contribution amount. It is critical that the District be diligent in addressing its budget gap due to the reductions in state funding and increasing costs by strengthening internal controls and maintaining adequate reserves by using its multiyear projections to help identify and implement expenditure reductions proactively. The District s latest multiyear projections, as prepared for the revised current budget, indicate that the District will make more than $223,000 in budget reductions. As of the date of this report, the reductions have not yet been formally identified nor have they been enacted by the Board. Approximately 91% of the District s unrestricted General Fund expenditures are for the services of District employees salaries and benefits because people are necessary to provide children with a quality education. With the significant expenditure reductions that the District needs to make, the lion s share of the budget staffing will need to be reduced. The District s identification of the reductions is critical for the budget year and should involve management, staff, and all other stakeholders. The reductions will be impacted by the actions of the Legislature and the Governor during the ongoing special sessions aimed at closing the state s Budget gap. The District is in the process of studying areas for reductions, and the Board of Education is committed to making reductions to the budget and beyond, to maintain the District s positive certification status. With the District s slowdown in enrollment growth, the investment required to accomplish its need for continued student achievement, and the tenuous nature of the State Budget, the District needs to determine its overall strategy for collective bargaining with these things in mind. This is to help ensure that the outcomes from the collective bargaining process are financially prudent and support the District s goals. Governmental Accounting Standards Board (GASB) Statements 43 and 45 require that public agencies recognize the liability for postemployment benefits (such as health benefits for retirees) in the agencies financial statements. The District is required to implement this provision beginning with , so the District should execute its plan to prefund the retiree health benefits liability over an appropriate period of time. Not doing so will have an effect on the

8 3 District s ability to issue debt or voter-approved measures, such as Tax and Revenue Anticipation Notes (TRANs) or general obligation bonds. This means that the District should use the actuarial study of its postemployment benefits and work with its external auditors to book the entry to recognize the liability as the District closes its books in The other funds operated by the District especially the Cafeteria Fund need to continually be monitored to ensure that they are self sufficient. In the past, some of these funds have required a contribution from the unrestricted portion of the General Fund, but all funds are currently bearing their full share of direct and indirect costs. The District has taken some steps toward fiscal solvency and improving the reserves in these funds, and we recommend that the District continue along that path and ensure that all of the funds are self sufficient.

9 4 Scope and Methodology The District requested School Services of California, Inc., (SSC) to perform a follow-up study to the May 2007 Fiscal Review, which involved analyzing each major revenue and expenditure category for the General Fund and ancillary funds (to the extent those funds have a fiscal impact on the General Fund). The follow-up review is designed to provide the Board of Education, Superintendent, and staff with a fair and independent assessment of current and projected District finances, after consideration of the recommendations made in our May 2007 Fiscal Review for the District, the changes in the District s financial picture, and the state s fiscal outlook since that time. The review of revenues and expenditures includes the following, in light of the findings and recommendations in the May 2007 Fiscal Review and the changes since then: A review of the District s budget and budget development process A review of the District s reserves, revenue limit assumptions, and ADA projections An assessment of other revenue sources, including federal funds, state categorical aid, other local income, and prior-year revenues An examination of the budgeted salary and benefit expenditures, as well as other budgeted costs A review of other postemployment benefits and associated long-term obligations A review of budget assumptions used for cash flow projections A review of budget assumptions for the expenditures of supplies, operational costs, and capital outlay A review of budget assumptions used for multiyear projections A review of fund balances and potential sources of funding A comparative analysis of District revenues, including revenue limit, federal funds, and other revenue sources measured against the resources of selected other comparative school districts A comparative analysis of District expenditures, including salaries and benefits, books and supplies, services, and equipment

10 5 An examination of various workload measures, including enrollment per certificated employee and certificated salary expense per ADA A review of the District s fund balances compared to the other school districts in the comparison group The Fiscal Review involves a review of the May 2007 findings and recommendations, as well as a detailed examination of the District budget, multiyear projections, and cash flow projections. The review was performed by reviewing detailed data from numerous District documents. In addition, our review team analyzed the District s ADA, revenues, and expenditures data that was reported to the state for the fiscal year. This information is collected through Standardized Account Code Structure (SACS) financial, J-90 Teacher Salaries and Benefits, and California Basic Education Data System (CBEDS) reports. After analyzing other unified school districts in the area, ten districts were selected for purposes of the comparative analysis. The districts were selected based on characteristics they have in common with the District. The comparative districts are located in Los Angeles County and are relatively close to the District s size in terms of the number of students. This list differs from the list of comparative districts used in the May 2007 Fiscal Review, in that Palos Verdes Peninsula USD was added for this comparative review because the District regularly includes it when it does other types of comparative reviews. The list below presents the comparative districts for this review. COMPARATIVE DISTRICTS Arcadia School District Beverly Hills School District El Segundo School District La Cañada School District Manhattan Beach School District Monrovia School District Palos Verdes Peninsula School District San Gabriel School District South Pasadena School District Temple City School District

11 6 THE FISCAL REVIEW Our detailed review of the budget involved analyzing each major revenue and expenditure category for the General Fund and ancillary funds. This report contains, for each area analyzed, SSC s standards, along with findings and recommendations for improvement that were included in the May 2007 Fiscal Review. Any findings or recommendations made in May 2007 that are still valid as a result of this follow-up review remain included in this report. Any additional or revised findings and recommendations, as a result of this follow-up review, have been added in italics. This follow-up review, like the original Fiscal Review, is not an audit, but is designed to give the District a fair and independent assessment of the projected budget information. Budget Development STANDARDS AND ANALYSIS Budget development is a dynamic process that integrates the educational goals of the District with a finite source of revenues. The budget is a policy document as well as a fiscal document that allocates limited and valuable resources to best meet these goals. The budget establishes the expenditure practices of the District and provides the road map for management and staff to follow during the course of the year. Once a sound budget has been developed, the document and resulting actions that follow should reflect the District s educational philosophy, priorities, and its financial strengths and needs. In order to be a useful management tool, the budget must be based on: Accurate data Budget guidelines that embody the educational and financial goals and plans of the District Assumptions that reflect the best information available A formal system that realigns the budget during the year to be consistent with actual revenues and expenditures While the District is able to exercise only limited control over revenues, it has much more control over expenditures. Decisions as to expenditure levels, including salaries and employee benefits and any pay raises or other contractual obligations to employee organizations, largely determine the relative priorities of different school districts. As the Superintendent, the staff, and the Board of Education construct the budget, each priority must be considered in light of the services that the Board perceives students need most. In the end, decisions by the Board,

12 7 including those made at the bargaining table, shape the budget into a unique statement of the priorities of this particular district at this particular time in its history. Our Fiscal Review involved a review of the District s budgets, interim financial reports, audited financial statements, and supporting annual documents. Our review s focus was directed toward how the budget assumptions and calculations were prepared. As reported in our May 2007 Fiscal Review and according to the California Department of Education s (CDE) annual CBEDS reports, the District s enrollment has declined in each of the past five years, from 3,301 in to 3,196 in a loss of 3% of the District s student population. This has been due to the fact that, as the students in the upper grades move up and graduate, they are replaced with smaller groups of students from the lower grades. And, as the District has been able to accept interdistrict transfers to help offset declining enrollment, these transfers have declined as surrounding districts have tightened up their policies on allowing transfers out. Overall, the District s enrollment is projected to continue to decline in the future at an increasing rate as the smaller numbers at the lower grade levels move up through the upper grades. This declining enrollment trend places continuous pressure on the District to reduce expenditures each year. Typically, a district with declining enrollment is unable to reduce expenditures quickly enough to keep pace with the drop in revenues based on enrollment and ADA. This is why districts have the choice of using current-year or prior-year ADA for their revenue limit funding, which in essence provides an additional year for a district declining in enrollment (and ADA) to adjust expenditures downward. Even with this one-year abeyance of revenue reduction, it is still extremely challenging for districts in a declining enrollment situation to ratchet down expenditures because enrollment declines are typically spread throughout the district. Reducing staffing levels and eliminating expenditures can only occur when enough of a decline in enrollment occurs at a particular location, grade, or in a specific program.

13 8 The District has a history of maintaining the minimum required reserve level. It has been deficit spending in recent years and is projected to continue deficit spending on the unrestricted side of the General Fund in the current year and in the subsequent two years of the multiyear projection as follows: Unrestricted General Fund Unaudited Actuals Budget Projected Projected Total Revenues $23,966,405 $23,926,951 $23,031,227 $23,058,893 Total Expenditures ($20,863,448) ($20,484,491) ($19,410,892) ($19,228,004) Total Transfers In/(Out) and Contributions to Restricted Programs Increase/(Decrease) in Fund Balance ($3,385,541) ($3,475,633) ($3,652,462) ($3,838,462) ($282,494) ($ 33,173) ($32,217) ($7,573) Source: SACS reports, unaudited actuals, budget reports, and multiyear projection reports prepared by the District The projections result in the District barely able to maintain the required reserve level of 3% of expenditures in each of the years; however, the projections include items identified as Potential Budget Reductions of over $223,000 in , over $2.5 million in , and over $400,000 in The reductions for have not yet been formally identified nor have they been enacted by the Board. The reductions for and have not been specifically identified but are largely related to the recent one-time donated funds being used to fund ongoing staff positions these reductions would also require Board action to implement them. The concern is that the current-year Budget and the multiyear projections rely upon unspecified or not-yet-enacted Budget reductions in order to maintain the District s minimum level of reserves. This will result in the Los Angeles County Office of Education (LACOE) taking a series of actions to ensure the District has a formal plan to meet the reserve requirements. On October 10, 2008, the Board adopted budget revisions to reflect various adjustments to revenues and expenditures, some of which were to reflect the signing of the State Budget in late September. This latest budget indicates that the District is carrying a $223,000 deficit on the unrestricted side of the General Fund, while holding in reserve the unplanned 0.68% cost-ofliving adjustment (COLA) that was included in the final State Budget. As of the writing of this report, the Governor had just called a special session of the Legislature to address the state s current economic and Budget Crisis, and he has indicated that education funding may be reduced by as much as $4 billion. It is too soon to tell what the outcome of the special session will be and the impact on the District s local budget, but it is expected that there will be midyear cuts in education funding. If midyear cuts were enacted beyond elimination of the 0.68% COLA for , the District could be faced with a loss of revenue limit funding of $300,000 to $1 million in the current year. Staffing has already been set for the year, statutory deadlines for

14 9 noticing certificated staff have passed, and books and supplies have been purchased, so there is little opportunity to reduce expenditures in the current year. The District s contributions to restricted programs, specifically to its special education programs, have increased significantly in recent years. Not withstanding the one year that included a retroactive pay increase, the District s multiyear projections assume comparatively smaller increases in contributions for the current and subsequent two fiscal years. Various documents that the District provided for our review mention the Board s goal of a 5% reserve level and the intent to increase its current reserves by 0.5% each year until that goal is achieved. As mentioned above, the District is planning to deficit spend in the current and two subsequent years, barely maintaining the state-required reserve level of 3% and not reflecting a building up of the fund balance to the stated goal of a more prudent 5% level. May 2007 Recommendations: 1. The District should update its multiyear projections to reflect an appropriate level of declining ADA. Status of Recommendation: This recommendation has been implemented. The District has revised its multiyear projections to reflect the expected decline in student enrollment and ADA, along with the impact of that decline on its projected revenues. 2. In addition, while the District s staffing expenditures for a given year of declining enrollment should reflect its projected enrollment and ADA for that year, its revenue assumption should be based upon prior-year ADA. If more students enroll than was projected in that year, then the District s expenditures need to increase to provide additional staffing to serve those students, but its revenues will not change because they are based on prior-year ADA. To mitigate this risk, we recommend that the District include a staffing reserve a designated portion of its ending fund balance to be used for providing additional staffing in the next year if it is determined to be needed once school starts. Then, after school starts and staffing levels are finalized, any balance left in the staffing reserve that is not needed to provide current-year staffing can be released to the fund balance or used for other one-time expenditures that the District determines are necessary. Status of Recommendation: This recommendation has been partially implemented. The District included in its budget a staffing reserve to fund one teacher, which was needed in the summer for increased

15 10 enrollment at a primary school level. Although this is a step in the right direction, it would not have been enough to cover the staffing needs if the almost 100-student decline projected for was not as significant as expected. Starting with its budget and multiyear projections, the District should build a staffing reserve sufficient enough to fund the level of staffing needed if a significant portion of the projected decline in students does not occur. 3. The District should review the assumptions for the contributions to restricted programs in the future years of the multiyear projection and verify whether these assumptions are realistic, given the trend of increasing contributions during prior years. Status of Recommendation: This recommendation has been partially implemented, as there are some increases in contributions built into the budget and multiyear projections. We recommend that the District focus specifically on the special education program, as the student numbers are not declining like the overall population and the occurrence of more severe disabilities has been increasing. A determination should be made as to whether the District s actions to modify student program delivery methods will be sufficient to justify not increasing the expected contributions to this program for the current and two subsequent years. 4. Overall, for its current-year budget and multiyear projections, the District should be diligent in stemming the deficit-spending cycle by addressing its declining enrollment and increasing costs proactively so that the District can maintain fiscal stability. Status of Recommendation: This recommendation has not been implemented. The District is still expecting to deficit spend on the unrestricted side of the General Fund, even after taking into account reductions in each year of the projection that have not been acted upon by the Board or implemented. (See the Other Local Revenue Sources section of this report for additional findings and recommendations.) 5. The District should determine whether it intends to pursue the goal of a 5% reserve level, and, if so, it should be specified in a formal Board policy. Then, with each iteration of the budget, the District should verify that the budget is supporting attainment of that goal. Status of Recommendation: This recommendation has not been implemented.

16 11 Current Recommendations: 1. Given that the District is counting on $223,000 in savings from cuts that have not yet been made in the current-year budget, and given the possibility of midyear cuts in state funding to education, in order to ensure that it maximizes its reserves at the close of this year, we recommend that the District immediately: a. Implement a hiring freeze review all vacancies as they occur to determine whether the position can be left vacant for the remainder of the year or even eliminated completely. b. Implement a spending freeze review all expenditures, especially travel and conferences, District funded field trips, independent contractor agreements, supplies, services, capital expenses, and the like, to determine whether these expenses are critical or required and whether they can be delayed. This spending freeze should apply to all funding sources. This is because all funding sources may be a source of flexibility and because the District needs to do what it can to improve its cash flow. (See the Contingencies section for more findings and recommendations on cash.) c. Immediately adopt and implement $223,000 in budget cuts in , plus additional cuts wherever possible in preparation for possible midyear cuts and reductions in funding in By the time these are enacted, only a portion of the savings will be recognized this year. They should be made as soon as possible to maximize the savings in the current year and to achieve the full annual savings in subsequent years. d. Plan for layoffs of both certificated and classified staff for and While the particular positions affected may not yet be identified, the District should immediately prepare seniority listings to be ready once positions are identified for elimination. e. Start the process of identifying reductions for the budget year, including engaging the Superintendent s cabinet, principals, assistant principals, directors, and other stakeholders as appropriate. The District has already identified that significant reductions are necessary to be made in its multiyear projections, and it is likely that the special session of the Legislature and the Governor s January Proposal for will significantly increase the magnitude of the cuts that need to be made.

17 12 Contingencies STANDARDS AND ANALYSIS A fiscally healthy school district is able to successfully manage in times of financial crisis by having contingency plans and by taking quick and decisive action. Sometimes events occur that may not appear to be a fiscal crisis initially but quickly escalate into a crisis if not immediately addressed. Examples include: Labor negotiations Declining enrollment Negative regulatory audits Deficit spending and declining fund balance Cash reserves A fiscally healthy district must be able to recognize these indicators and take prompt corrective action to avert a major fiscal crisis. The District s actual enrollment for fiscal year is 3,196, a slight reduction from the prior year. Of the 3,196 students, 8.3% are the result of interdistrict transfers from neighboring school districts such as Alhambra, Temple City, and Los Angeles. More than half of the school districts in the state are facing enrollment losses. According to the latest statistics from the Department of Finance, Los Angeles County is projected to experience a decrease in K-12 student enrollment of 14.5% through the year As a result, school districts are continuing to restrict their interdistrict transfer policies and modify them to retain students. The effect of this change in policy by the school districts mentioned, if all interdistrict transfers were lost, would decrease the District s revenue limit by up to $1.5 million and its projected deficit to as much as $4 million in The District s declining enrollment causes a reduction in the amount of resources that would otherwise be available for programs and necessitates a look at the staffing budget. While the loss in students doesn t typically happen in tidy packages by grade level or by site, there is still a need to make staffing reductions and reduce program offerings commensurate with the loss of students wherever possible. The District has experienced a loss of more than 100 students over the last four years and is expected to lose another 70+ going into next year. The District has built into its multiyear projections an estimated amount for expenditure reductions, including the

18 13 elimination of staff positions, but has not yet specifically identified the reductions. The District would be deficit spending by a significant amount each year and would not be able to maintain the required state minimum reserve level of 3% each year were it not for the reductions already built into the projection reductions that are as of yet not specifically identified or acted upon by the Board. Labor negotiations are another factor that can negatively impact the District s fiscal stability. The District is currently negotiating with the classified bargaining unit. The District and its certificated bargaining unit have reached a settlement through for salaries and benefits. For , the District will continue to pay the portion of the premium increases that it has been contractually obligated for in the prior year. In the certificated settlement for the and years, the employees will fund 10% of single major medical costs and 30% of two-party and family of major medical costs. In terms of salary compensation for and , the District will increase salary compensation by the net funded COLA less 1%. The District has historically enjoyed relatively stable relations with its employees and their representatives. The District offered two different early retirement incentives for one for classified employees and one for certificated employees. Eight certificated employees accepted the incentive and retired, but no classified employees accepted the offer. Early retirement incentives are most effective when they are not offered back-to-back rather, when there is at least three to five years in between. That s because the incentive that was just offered was to attract employees who may not have considered retiring for another year or two or three so offering another incentive during that time frame typically serves as a severance package to those that would have retired anyway, and the District has just lost additional savings that it usually counts on from natural attrition. The District has been deficit spending in recent years and by the end of reduced its reserves down to barely above the state-required minimum of 3% of expenditures. In the previous section of this report we have made recommendations for the District to address its deficit spending now and for the future. The lower reserve level also impacts the District s cash flow. This year, the state, in order to help address its own cash flow issues, has enacted additional delays in sending cash payments to school districts. A significant portion of the District s state funding that would normally be received in February 2009 will now be delayed until April, and the June apportionment will be delayed until possibly late July. In addition, the District receives the bulk of its donated funds which are a significant portion of its budget after it has paid for the expenses related to those funds. (See the Other Local Revenue Sources section of this report.) All of these conditions serve to deplete the District s cash reserves, increase the local borrowing necessary to meet its cash requirements, and reduce the District s revenues from interest earnings. The District borrows for cash flow purposes through the issuance of TRANs. For the first time in ten years,

19 14 the District had to borrow funds in July, whereas normally there is sufficient cash for operations through mid-december. Without proper cash flow management, the District could find itself in a position of having to borrow additional funds at a higher cost or having to request a loan from the county or an emergency apportionment from the state, which results in state control of the District. May 2007 Recommendations: 1. Once the District has adjusted its multiyear projections to reflect the current projections for declining enrollment, we recommend that the District identify and adopt the necessary reductions to curb the District s deficit spending in the Unrestricted General Fund. Actions taken early can prevent more significant cuts from having to be made in a later year. Once the reductions are adopted, the District will need to continue to be diligent in following them through to ensure implementation. Status of Recommendation: This recommendation has not been implemented. While expenditure reductions have been built into the District s current-year budget and multiyear projections, they have not yet been acted upon by the Board, and for the next two years have not yet been identified. (See further recommendations in the previous section.) The District has received and applied one-time donations to fund ongoing staffing costs, particularly in certificated salaries. 2. In the future, the District should avoid deficit spending of unrestricted funds except in the case of acute and immediate District needs. Furthermore, any deficit spending should only be made pursuant to a formal plan that provides for measures to mitigate the need for future deficit spending and to replace the reserves used. Status of Recommendation: This recommendation has not been implemented (see above). 3. If the District were to consider an early retirement incentive program again in the future, there are several aspects of the cost/benefit analysis that need to be carefully considered. First, for any certificated staff hired to replace retirees, the salary assumption should reflect the actual salary at which new staff are hired in, which is not necessarily the bottom of the salary schedule. Second, the savings from natural attrition are already counted in the budget each year, so this savings should not be double-counted as a cost reduction in the analysis for the early retirement incentive program. Third, the savings from natural attrition that are counted on in the budget each year will be reduced in the years immediately following the offering of an early retirement incentive program, since some of the retirees will have decided to retire a year or more earlier than planned. Lastly, keep in mind that the incentive is being paid to everyone who retires, even those who would have retired that year anyway,

20 15 so a minimum threshold number of retirees who take the early retirement option must be established to ensure that the program at least pays for itself. Status of Recommendation: This recommendation has been partially implemented. The District has since offered early retirement incentives to its employees for and is currently calculating the actual cost/benefit results of the program. The District should complete these calculations and reflect the results in the current-year budget and the multiyear projections, including the effect on natural retirement attrition savings. We recommend that the District not offer an incentive for at least another three to five years in order to maximize the impact and the savings from such an incentive (see above). 4. With the District s declining enrollment and current deficit spending, its needs for continued student achievement and the investment required in programs, and the tenuous nature of the State Budget, we recommend that the District determine its overall strategy for bargaining unit negotiations with these things in mind. This will help to ensure that the results in each budget cycle continue to be deliberate and financially prudent for the District, its students, and its community. Status of Recommendation: This recommendation has been partially implemented. The District has continued to provide compensation increases in ; an increase of 0.54% for certificated staff in exchange for increasing the work year from 184 to 185 days to include an additional staff development day; and increases in contributions to benefit plans since the time of our last review. The District has settled with the certificated bargaining unit for years through Negotiations are continuing with the classified bargaining unit. The District has not yet made the additional cuts necessary to balance its budget for the current year or projections for the subsequent years. Current Recommendations: 1. The District should ensure that it receives locally donated funds in advance of paying the related expenses. (See the Other Local Revenue Sources section.) 2. During each budget year, the District should monitor its cash on at least a monthly basis, updating its cash flow projections for the actuals-to-date and update its projections for the rest of the year based upon the latest District budget. As the District is developing its preliminary budget for in the spring, a cash flow projection should be prepared with enough lead time to avail the District of all of its local borrowing options transfers from other funds, TRANs, county treasury, etc. This projection should incorporate the changes in

21 16 timing of cash flows from the state and should help the District to determine the least costly method to cover its cash needs for next year. Budgeted Revenues Revenue Limit Sources STANDARDS AND ANALYSIS The Governing Board and management of a fiscally healthy school district understand how the district s revenue limit funding level impacts expenditure patterns and management decisions. Accordingly, a fiscally prudent district takes opportunities to increase revenue limit funding by: Devising incentives for sites to accurately report and, as appropriate, increase apportionment attendance Verifying that minimum-day and longer-day requirements are met Using the proper cost-of-living and deficit factors Charging categorical programs their share of the Public Employees Retirement System (PERS) revenue limit reduction Revenue limits are the prime component of every school district s budget. The dollar amounts per pupil vary between districts, but, in , are approximately $5,861 for the average unified school district. These dollar amounts, described as the base revenue limit amount, have a series of add-ons for specific features of school district services, but, for ease of description, they come close to the dollar amount noted above. The Business Office provides the revenue limit calculations for the District. These calculations should be updated periodically throughout the fiscal year for the original Adopted Budget, First and Second Interim Financial Reports, and Unaudited Actuals. School districts are the only public agencies in California that are funded based upon the population they serve. Cities, counties, and special districts do not receive more or less income because of a change in their population; only schools have a variable in total funding based upon population. As a consequence, a district with growth in enrollment will have growth in its total revenue limit income from one fiscal year to the next. A district that declines in population, however, will see a decline in its overall revenue sources. The District s total revenue limit is the calculation of the base revenue limit multiplied by ADA and represents an entitlement that will be funded by a combination of local property tax income

22 17 and state aid. The education share of local property tax income is subtracted from the revenue limit entitlement, and the state of California funds the entire balance of the revenue limit. As a consequence, local agencies receive the dollar amounts authorized by their total revenue limit income, regardless of their local property tax wealth. An agency that collects only a small amount of property tax income, because of low assessed value in its community s properties, will receive a high level of state aid. The reverse is also true: a community with a very high assessed valuation, due to either industry or high values of residential property, will have a smaller allocation of state income. In either event, however, the state is able to establish an equal opportunity for California s students by ensuring that the dollar amounts generated for educational services do not directly relate to the property tax wealth of the community. A school district that receives local property taxes in a significant enough amount that exceeds its revenue limit entitlement is allowed to retain the additional property taxes. The district becomes what is referred to as a basic aid district meaning that the district receives only a small basic amount of aid from the state, which is included in the state categorical funds that it receives. Districts that are declining in enrollment at the same time that property taxes are stable, growing, or are not declining as fast, can find themselves becoming basic aid. We understand that, while the District is approximately 20 years away from becoming basic aid, it has been declining in enrollment. The Board has directed staff to review its financial status on an annual basis in order to be prepared for possible basic aid status. Each year, school district revenue limit entitlements may be increased by a COLA that is established in accordance with the requirements of state law. The COLA for school districts is based upon a calculation of governmental expenditure price increases from one year to the next, and this percentage of the COLA increase is multiplied by the average state revenue limit for each district type. In fiscal year , although the COLA has been calculated to be 5.66% $329 per ADA school districts are only receiving 0.68% or $40 per ADA. The difference between the statutory COLA and the amount actually provided is tracked by a deficit factor, which has historically been restored in subsequent years but has never been made retroactive. Given the state s current historic economic and Budget Crisis, restoration of the deficit factor is not expected to be funded in the near future. In fact, it is expected that the COLA for currently estimated to be 5.6% will not be funded. Note that the dollar amount of the COLA for school districts is not necessarily a percentage increase on that district s revenue limit income it is based on the COLA percentage times the prior-year statewide average revenue limit per ADA. For example, for a unified school district with a high base revenue limit, the $40 increase may be only a 0.63% increase, while for a unified school district with a below-average base revenue limit, it may represent a 0.73% increase. The District s percentage increase was slightly higher than the 0.68% because its revenue limit is lower than the statewide average.

23 18 Upon our review of the District s latest update to its revenue limit calculations, we find that the assumptions used are reasonable based upon the final State Budget for and the currently estimated projections (subject to change) for future years provided to all school districts. The latest news from PERS is that the PERS reduction from the revenue limit may be reduced significantly or eliminated in because of an expected increase in the PERS employer rate. This will affect the revenue limit calculation and the PERS-related expenditures charged to categorical programs. Since the information is very preliminary at this time and cannot reasonably be estimated, we recommend that the District stay informed on this issue and make modifications in its multiyear projections when recommended to do so by the state. Revenue limit funding is generated based on actual student attendance. Each day a student is not in school, a portion of ADA is lost. ADA translates into dollars and is the largest source of revenue for the District. The District has calculated that, for , each student attendance day is equivalent to $35 in revenue limit funding. Tight controls must be in place to ensure that the attendance data reported by school sites is timely and accurate. The District s ratio of ADAto-enrollment indicates that there are good attendance programs in place throughout the District. The District should continue to look for ways to increase its ADA-to-enrollment percentage in an effort to increase its revenue. May 2007 Recommendations: 1. The District should continue to be diligent in maintaining its high attendance ratio, as well as ensuring that the attendance processes and documentation are audit-proof in order to prevent audit findings which can result in a loss of revenue limit income. Status of Recommendation: This recommendation has been implemented, and this area should continue to be closely monitored to ensure continued implementation. 2. We recommend that the District continue to calculate the revenue limit periodically throughout the fiscal year, and be particularly diligent in updating its calculations to reflect the most recent actual attendance figures available. At a minimum, the recalculation should occur for the Adopted Budget, First and Second Interim Financial Reports, and Unaudited Actuals. If the District were not experiencing declining enrollment, these updates would ensure that the budget is up-to-date for the revenue that is anticipated to be reduced/increased for the District during the fiscal year. However, since the District s enrollment is declining and prior-year ADA is used for calculating the current-year revenue limit, these updates would ensure that the information for the next budget year continues to be current.

24 19 Status of Recommendation: This recommendation has been implemented. 3. Just this past week, the revenue limit COLA for was finalized and will be 4.53%. The District should update its projections for to reflect this change in the revenue limit funding increase. Status of Recommendation: This recommendation has been implemented. For , the District updated its revenue limit calculation and submitted a revised budget to the Board after the State Budget was finalized. The 0.68% COLA was included in the latest revision and has been reserved in the ending balance in anticipation of additional cuts in state funding. Current Recommendations: 1. The District should use updated budget assumptions when preparing its Interim Financial Reports and the multiyear projections to ensure that revenue limit rates and calculations are based on the most current information available. Most notably, the 4.83% COLA that was estimated for for all school districts as they adopted their budgets should be removed from the multiyear projections. Federal Revenue Sources STANDARDS AND ANALYSIS Special education and No Child Left Behind (NCLB) funding are the largest federal funding sources for the District. The amounts budgeted for federal funding are reasonable. The District receives special education Individuals with Disabilities Education Act (IDEA) PL funding. Typically, school agencies charge instructional aides to the PL program in order to save the PERS revenue limit reduction amount as a benefit for the district. The amount charged should be the combination of both the salaries and benefits for instructional aides subject to PERS, up to the award amount for a particular fiscal year. As noted in the prior section of this report, it is expected that the PERS reduction from the revenue limit will change significantly in , but it cannot be reasonably estimated at this time. When implemented, it will increase the cost of PERS employees being charged to all federal programs.