Financial Monitoring and Accountability Ad Hoc Committee. Part 1 Budget Process, Interim Reporting and Financial Monitoring

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1 Financial Monitoring and Accountability Ad Hoc Committee Part 1 May 2007

2 BACKGROUND School jurisdictions and Alberta Education (the Ministry) work closely together to ensure that the children of Alberta have access to one of the best education systems in the world. The Ministry is accountable to the public by fulfilling its role in determining the mandate, goals and standards of the education system and providing the financial resources to achieve these goals and report the results to the public on a regular basis. 1 School boards are held accountable to implement policies and procedures and set direction for the school jurisdiction that follows provincial legislation, regulation, policy, standards and initiatives to deliver education programs to meet the needs of all students and report on results. 2 The budget process at each school jurisdiction is a key part of this process as local decisions are made to allocate resources to schools and programs that are in the best interests of the school jurisdiction s students. School jurisdictions monitor, assess and report the results and are publicly accountable for the use of resources and the results achieved. The Office of the Auditor General (OAG) examined the budgeting process at 13 school jurisdictions to determine if school jurisdictions complied with ministry requirements for reporting and preparing budgets. School jurisdictions were also reviewed to determine if systems are in place to enable them to prepare accurate budgets and to monitor results to stay within that budget. 3 The OAG also reviewed the guidance that Alberta Education provides to school jurisdictions in preparing the budget and the monitoring processes that the Ministry has in place to ensure school jurisdictions operate within the resources that have been allocated. 4 Based upon the review the OAG found that The Ministry should improve the school board budget process and should work with key stakeholder associations to set standards for financial monitoring information provided to school board trustees. 5 The OAG made six specific recommendations to address this finding. In response to these recommendations an ad hoc committee of key stakeholders has been formed by the Association of School Business Officials of Alberta to address the OAG audit findings and recommendations Funding Manual for School Authorities, September 2006, page Funding Manual for School Authorities, September 2006, page 6. 3 Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page 61. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 2 of 20

3 AD HOC COMMITTEE PURPOSE The purpose of the Financial Monitoring and Accountability Ad Hoc Committee is two fold. Part one of the mandate is to review the recommendations contained in the Annual Report of the Auditor General of Alberta as they pertain to audit findings and recommendations relative to school jurisdiction budgeting and financial monitoring. Part two of the mandate is to review the reporting consistency of data reported by school jurisdictions. This report will address part one of the committee mandate which is to develop recommendations for minimum guidelines for budget reporting for school jurisdictions regarding budget assumptions, the reporting and approval of revised budget information and the reporting and effective monitoring of financial results. Recommendations will also be provided to address on-going professional development opportunities for school board trustees to understand the characteristics of strong budgetary control and their financial monitoring responsibilities. STAKEHOLDER REPRESENTATIVES The ad hoc committee is made up of four key education stakeholder groups. There are four representatives from the Association of School Business Officials of Alberta (ASBOA), to ensure that there is representation from Metro, Urban, Rural and Donut 6 school jurisdictions, and one representative each from Alberta Education, Alberta School Boards Association (ASBA), and the College of Alberta School Superintendents (CASS). ASBOA Christine Lee, CA, CSBO (Committee Chair) Director of Finance Lethbridge School District No. 51 ASBOA ASBOA ASBOA Alberta Education ASBA CASS Cheryl Hagen, CMA Director, Financial Services Elk Island Public Schools Joe Henderson, CGA, CSBO Secretary Treasurer Wolf Creek Public Schools Dean Power, CA Treasurer Edmonton Public Schools Dale Fulford, CA Director, Financial Reporting And Accountability Branch Dave van Tamelen, ED.D. (CASS and ASBOA Life Member) Don Falk Superintendent Red Deer Public Schools 6 Donut boards refer to those boards that surround a metro area, and may have both urban and rural populations. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 3 of 20

4 SUMMARY OF KEY RECOMMENDATIONS The committee has made specific responses to the OAG recommendations made in the Annual Report. 1. That Alberta Education provide financial information to school jurisdictions by February 15 th based on information available to the Ministry. The information should be as complete as possible for jurisdictions to prepare budget information that reflects realistic budget assumptions for revenue. 2. That school jurisdiction administration use realistic assumptions in developing their budget. These assumptions would take into consideration the economic environment of the school jurisdiction. Budget assumptions should be clearly disclosed to school board trustees to ensure there is an awareness of key budget issues and the environmental factors that impact the development of the budget. The committee recommends that a signed declaration be added to the Alberta Education Budget Report that is signed by the school board chair that states: The Board has reviewed and approved the budget and underlying assumptions used in development of the budget. 3. That Alberta Education continue to request school jurisdictions to provide a fall Budget Update to reflect changes in Operations, Accumulated Operating Surplus, and Capital reserves after the prior school year audited financial statements have been prepared and the September 30 th student enrolment count has been conducted. The report should be submitted by November 30 th. Trustees should review the revised budget information when there has been a substantial change in revenues, expenditure plans, budget assumptions and financial risks not foreseen when the budget was approved. The committee also recommends that a declaration, signed by the Secretary Treasurer, be added to the Budget Update that states: This information was formally received by the Board of Trustees at the meeting held on [date]. 4. That Alberta Education reassess the process currently used to predict the financial health of school jurisdictions. The Ministry may wish to review the financial monitoring controls in place at school jurisdictions to react to changes in environmental factors and business risk. Alberta Education should provide explicit guidance regarding the minimum amount of Accumulated Operating Surplus that jurisdictions should maintain to mitigate financial and business risk. The Ministry should also provide direction to school boards on Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 4 of 20

5 developing policy on the amount of Accumulated Operating Surplus retention that is appropriate for the school jurisdiction. 5. That school boards develop policy on interim financial reporting that will provide meaningful information to school board trustees and management to assist them in fulfilling their financial oversight duties. The committee recommends that the policy includes reporting that meets the following minimum standards: Interim financial reporting occurs at a minimum three times during the school year. A statement of operations that includes: o Actual period to date information, which includes significant financial accruals. o A forecast of yearly operating results to the end of the school year. o The budget for the school year that represents revised budget information as of September 30 th. o Variances of forecast revenues and expenditures to the annual budget. An explanation of significant variances should be provided. Summary of forecasted changes in operating and capital transactions (changes in Accumulated Operating Surplus, Capital Reserves, and Investment in Capital Assets, and Expended and Unexpended Capital Allocations). 6. That school jurisdictions ensure that school board trustees receive training to understand the budget and financial processes of the school jurisdiction. Each school jurisdiction should be responsible to ensure that this professional development is provided on a regular basis to assist school board trustees in performing their financial oversight responsibilities. The Alberta School Boards Association (ASBA) should provide trustee development opportunities about financial monitoring responsibilities on an annual basis for school board trustees. The Association of School Business Officials of Alberta and Alberta Education could partner with ASBA to assist with developing and delivering the trustee development program. The program content would be based on regularly assessed needs for trustee development that will assist school Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 5 of 20

6 boards in understanding and practicing the characteristics of strong budgetary control and implementing best practices for fulfilling financial monitoring responsibilities. The above recommendations are in summary only. The complete report that follows provides further detail and discussion of the OAG recommendations to provide the context in which the recommendations have been made. SCHOOL JURISDICTION BUDGET PROCESS Recommendation 1 Office of the Auditor General Recommendation That Alberta Education improve the school jurisdiction budget process by providing school jurisdictions as early as possible with the information needed to prepare their budgets. 7 Discussion points School jurisdictions start budget preparations in January or February of the year to ensure that they meet Section 147 requirements of the School Act, which requires a school board to submit to the Ministry on or before May 31 a budget for the following fiscal year beginning on September 1. 8 Budget preparations involve budget assumptions that include estimated enrolments, revenues and expenditures as they relate to planned activities for the school year. In particular, staffing decisions regarding teacher contracts must be made by the end of May. A key component to budget preparations is the grant rate information from the Ministry. In general, this information has not been provided to school jurisdictions until after the Province of Alberta has tabled the provincial budget for the fiscal year which starts on April 1. The Provincial budget has been tabled in March or April in the last few years, which is well after the start of the budget planning cycle for school jurisdictions. In addition to the late announcement of budget information, additional funding that has a significant effect on the operations of school jurisdictions has been announced in July or August. As a result of late funding announcements, school jurisdiction budgets that are prepared in the spring may not be complete or provide reasonable information for the Ministry. The Ministry is apparently unable to disclose details of budget discussions with Treasury until the budget is officially tabled by the Minister of Finance. Therefore, in what manner could the Ministry provide school jurisdictions with meaningful budget information, without violating government protocol? The OAG recommends in its report that the Ministry could provide jurisdictions with an assessment of the reasonability of estimates provided in the previous year business 7 Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page Province of Alberta, School Act, Revised Statutes of Alberta 2000, Chapter S-3. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 6 of 20

7 plan. 9 The Ministry could disclose key grant allocations used in the development of the business plan which would provide school jurisdictions with a starting point to develop reasonable budget assumptions regarding funding resources available. Committee Recommendation The committee recommends that Alberta Education provide financial information to school jurisdictions by February 15 th based on information available to the Ministry. The information should be as complete as possible for jurisdictions to prepare budget information that reflects realistic budget assumptions for revenue. For example, estimates provided to school jurisdictions could be based on the budget assumptions used in development of the Ministry s business plan, if these assumptions are still held to be reasonable. A reasonable estimate of grants should be provided to school jurisdictions in years when the Provincial Government will not table the spring budget until after February. Recommendation 2 Office of the Auditor General Recommendation That Alberta Education improve the school jurisdiction budget process by requiring school jurisdictions to use realistic assumptions for planned activities and their costs and to disclose key budget assumptions to their trustees and the Ministry. 10 Discussion points During the OAG review, it was noted that original school jurisdiction budgets submitted to Alberta Education in spring were not complete because some jurisdictions did not always include all the projected costs that the Board had expected to incur in running the school jurisdiction. Also noted was that the Ministry does not require school jurisdictions to disclose key budget estimates to the Ministry and trustees so that the reasonability of the budget information may be assessed. 11 The budget is an important management and planning tool of a school board and is used to hold school jurisdiction management accountable for the planned activities of the school jurisdiction. The budget process that is followed by each school jurisdiction varies according to the policy that has been developed by and approved by each school 9 Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page 67. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 7 of 20

8 board. The budget development process may take on many different forms and is dependent upon the governance and decision making models by which the school board operates. Governance A policy oriented board will concern itself primarily with planning, determining the overall direction of the school jurisdiction, creating and evaluating major policies, and delegates the responsibility of implementing policies and the management of the school jurisdiction s operations to the Superintendent. The Superintendent in turn will delegate duties to the jurisdiction s employees. The governance board is more concerned with the outcomes and the achievement of results. On the opposite end of the governance continuum is an administrative board that concerns itself with the school jurisdiction s operations as well as planning, setting direction and developing policy. This type of board may be involved in the day to day activities of the school jurisdiction, and may not delegate all responsibilities to the Superintendent. Many school jurisdictions would operate under governance styles that fall in between a completely policy orientated and an administrative board. School boards that are more administrative may have more trustee involvement in the detailed development of the school jurisdiction s budget, including key budget assumptions. A more governance based board would assign the development of key budget assumptions to administration with the board reviewing the budget based on the recommendations of administration, and that the budget has been developed based on policy and direction set by the school board. Decision Making Another factor, along with the governance style of school boards that impacts the development of key budget assumptions is the decision making model that a school jurisdiction uses. There are two primary approaches to decision making that jurisdictions are utilizing. In a centralized decision making model, all operating decisions are determined by central administration versus a site-based decision making whereby operating decisions are made at each program or school site. The decision making model employed at a school jurisdiction could have a significant impact on the budget assumptions used in the development of the budget. For example, a key budget assumption is the estimated cost of teacher salaries. When teacher salary negotiations are underway, a jurisdiction utilizing a centralized model may estimate the potential cost of these negotiations centrally, whereas in the site-based decision making model, the estimated cost of teacher salaries may be left to each site to determine. The impact that a school jurisdiction s governance model and decision making model has on the development of the budget is important in discussing key budget assumptions and the disclosure of these assumptions. It is important that realistic budget assumptions are used in the development of the school jurisdiction budget, as failing to do so would limit the budget s value as an important management tool. Realistic budget assumptions are based on the economic environment that impacts each school jurisdiction. Financial or business risks that face the school jurisdiction must also be assessed when developing the budget. Business risk is the uncertainty that a school jurisdiction operates in when developing the budget Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 8 of 20

9 and the potential that certain objectives may not be achieved. For example a school jurisdiction may not have concluded teacher salary negotiations before the budget is developed and the school jurisdiction would make budget assumptions regarding the outcome of these negotiations to determine the cost of teacher salaries for the development of the budget. There is a business risk to the school jurisdiction that teacher salary negotiations may be settled by the board or an external party for more than the amount estimated in the budget. This may result in an adverse financial consequence for the school jurisdiction. The disclosure of key budget assumptions to school board trustees is important in understanding the basis on which the budget has been prepared and to assess if the assumptions are realistic considering the economic and business risks facing the school jurisdiction. This disclosure would take place based on the school jurisdiction s governance process and policy surrounding the development of the budget. The Ministry requests information on school jurisdictions key budget assumptions and significant business and financial risks to assist with evaluating the financial plan of the school jurisdiction. The Alberta Education Budget Report (BR) currently provides an opportunity for school jurisdictions to disclose this information to the Ministry. Alberta Education may contact jurisdictions if further clarification is required on key budget assumptions used in preparation of the budget. Committee Recommendation The committee recommends that school jurisdiction administration use realistic assumptions in developing their budget. These assumptions would take into consideration the economic environment of the school jurisdiction. Budget assumptions should be clearly disclosed to school board trustees to ensure there is awareness of key budget issues and the environmental factors that impact the development of the budget. The BR provides an opportunity for school jurisdictions to communicate assumptions and significant financial and business risk factors that have guided the development of the budget. To protect the fiscal interests of the school board, confidentiality is required for key budget assumptions regarding property transactions, labour negotiations/personnel management, and litigation. Alberta Education may contact jurisdictions if further clarification is required regarding key budget assumptions used in preparation of the budget. The committee recommends that a signed declaration be added to the BR that is signed by the school board chair that states: The Board has reviewed and approved the budget and underlying assumptions used in development of the budget. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 9 of 20

10 Recommendation 3 Office of the Auditor General Recommendation That Alberta Education improve the school jurisdiction budget process by establishing a date for each school board to give the Ministry a trustee-approved revised budget based on actual enrolment and prior year actual results. 12 Discussion points School jurisdiction budgets are prepared in early spring, before actual September enrolments are known and actual prior year results are reviewed. As a result school jurisdiction budgets may need to be revised for significant changes since the original budget was prepared. The Ministry currently requires school jurisdictions to submit a budget update in October due to the likelihood of changes in key budget assumptions. The OAG found in its review that some school jurisdictions did not provide a meaningful the budget update primarily due to insufficient time and inadequate attention being paid to the document. Additionally, although, not required by the Ministry, of the jurisdictions that prepared revised budgets, only two of the school jurisdictions had revised budget information approved by school board trustees. 13 Alberta Education requires an update of budget information in the fall to assess if there are any significant financial issues facing school jurisdictions that need to be addressed by the Ministry since the submission of the original budget. The October Budget Update has been used to facilitate this review. Although the October Budget Update provides the Ministry with the summarized financial information it needs to assess the changes to the school jurisdiction s net operating position since the original budget was approved, the October Budget Update may not provide adequate information for school board trustees. School jurisdictions prepare budgets in the spring then update budgets in the fall based on September 30 th enrolments and new developments since spring. This is a process that has been necessary in the past few years due to new funding announcements after the original budget has been approved and submitted. The need to prepare updated revised budgets has been highlighted in the past few years by these new funding announcements that have had a significant impact on a school jurisdiction s operations. As the budget is a management tool for a school board to measure and monitor financial results, it is necessary to revise the budget in the fall for significant changes in key budget assumptions, such as enrolment, grant revenues and economic factors. 12 Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page 67. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 10 of 20

11 The governance style of a school jurisdiction will also dictate the level of school trustee involvement in the revision of the school jurisdiction s budget. This involvement is dependent on the policy set by the school board. There are circumstances when changes in budget assumptions are not significant to the overall budget and should be handled by school jurisdiction administration. In other situations where there is a substantial change to the budget, discussion of the revised budget may be required with school board trustees. School board policy should be considered as to the manner and form that this process would take. Committee Recommendation The committee recommends that Alberta Education continue to request school jurisdictions to provide a fall Budget Update to reflect changes in Operations, Accumulated Operating Surplus, and Capital reserves after the prior school year audited financial statements have been prepared and the September 30 th student enrolment count has been conducted. The report should be submitted by November 30 th. Trustees should review the revised budget information when there has been a substantial change in revenues, expenditure plans, budget assumptions and financial risks not foreseen when the budget was approved. Matters that impact the financial health of the school jurisdiction should also be discussed. The committee also recommends that a declaration, signed by the Secretary Treasurer, be added to the Budget Update that states: This information was formally received by the Board of Trustees at the meeting held on [date]. The above statement would communicate to the Ministry that trustees are aware of the change in total operating revenues, expenses and net assets after actual enrolments are known and prior year operating results have been disclosed. Recommendation 4 Office of the Auditor General Recommendation That Alberta Education improve the school jurisdiction budget process by re-assessing when and how the Ministry should take action to prevent a school jurisdiction from incurring an accumulated operating deficit. 14 Discussion points The OAG recommends that the Ministry provide school jurisdictions with better guidance on the level of operating reserves needed for school jurisdictions to react to business risk Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page 65. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 11 of 20

12 The committee felt that, although this is a Ministry issue, the topic of school jurisdiction financial health warrants discussion. Currently the Ministry reviews the financial health of school jurisdictions and related historical trends on an annual basis. However, history is not always a good predictor of future financial health. School jurisdictions are better prepared to react to adverse financial conditions by holding an adequate level of Accumulated Operating Surplus (AOS). The OAG recommends that school jurisdictions maintain an operating surplus equal to a percentage of total expenses in case some of the cost assumptions included in the budget are too low. 16 Currently the Ministry contacts school jurisdictions where there is an AOS of 2.5% or less of total revenues (which approximates total expenses) or where there has been a significant decline in AOS. A sufficient amount of AOS will help a school jurisdiction react to one-time adverse financial conditions, however the appropriate amount of AOS has often been debated amongst stakeholders and the amount will vary between school jurisdictions. The AOS is often a discussion point when a board is involved in collective bargaining. How can Alberta Education react earlier to a jurisdiction s decline or potential for decline in financial health? The factors that may adversely affect a school jurisdiction may be external or internal. Internal factors may be evaluated by the Ministry by understanding what financial monitoring processes are in place at school jurisdictions to react to changes in environmental factors and business risk. Committee Recommendation Although this is a primarily a Ministry issue, the committee recommends that the Ministry reassess the process currently used to predict the financial health of school jurisdictions. The Ministry may wish to review the financial monitoring controls in place at school jurisdictions to react to changes in environmental factors and business risk. Alberta Education should provide explicit guidance regarding the minimum amount of Accumulated Operating Surplus that jurisdictions should maintain to mitigate financial and business risk. The Ministry should also provide direction to school boards on developing policy on the amount of Accumulated Operating Surplus retention that is appropriate for the school jurisdiction. Currently, Alberta Education simply informally suggests that jurisdictions maintain an accumulated operating surplus of at least 2.5% of revenues. 15 Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page 67, Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page 68. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 12 of 20

13 MINIMUM STANDARDS AND BEST PRACTICES FOR INTERIM REPORTING Recommendation 5 Office of the Auditor General Recommendation That Alberta Education work with key stakeholder associations to set minimum standards for the financial monitoring information provided to school jurisdiction trustees. 17 Discussion points The OAG recommends that school board trustees hold management accountable for achieving goals while staying within budget. In order for trustees to hold management accountable they must monitor actual spending against the budget, estimate results for the fiscal year, take action to stay within budget and evaluate the effects of operations on the attainment of goals. 18 The OAG further recommends that this monitoring should be through quarterly interim reporting that presents the actual-to-date results versus budgeted expenses and revenues, and a forecast of remaining annual operating and accumulated operating financial results to the end of the fiscal year. Management should also provide to trustees explanations of variances of projected actual results as compared to the budget. 19 Budget development is an important process in the accountability cycle of a school jurisdiction. School jurisdictions should develop budgets that are based on solid information and that reflect the school board s goals and objectives for the coming school year. Boards are held accountable to stakeholders to ensure that the resources entrusted to them have been managed efficiently and effectively to meet the school board s stated plans and objectives in educating students. In order for there to be accountability for the goals and objectives that the board has set for the jurisdiction, there needs to be an analysis of actual results to the plan and corrective action taken if necessary. Therefore, the manner and form in which financial monitoring occurs should be stated in school board policy, and state the frequency information is to be reported on and level of detailed required for the board to meet its financial monitoring responsibilities. The frequency of reporting would be determined based on the school board s policy for receiving interim financial information. 17 Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page 68. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 13 of 20

14 Factors that affect the reporting of information must be considered in the minimum amount of reporting recommended. A school board approves the budget for the school year in the spring for a fiscal period that begins on September 1. School jurisdictions are funded primarily based on student enrolment, with a count date of September 30 th. Audited Financial Statements for the preceding fiscal year are due by November 30 th. School jurisdictions may revise their budgets based on actual enrolment counts and the prior year financial results, and as such may not have revised budget information until the end of November. Consequently, a comparison of actual to budgeted information for a school board may not be meaningful until the end of November or December. As of March 31, 2007, school jurisdictions are required to complete accrued financial information for Alberta Education in order to consolidate school jurisdiction financial information into the Ministry s year end reporting. School jurisdictions will be required to prepare statements, schedules and information similar to year end reporting requirements. If school jurisdiction management is preparing this information for the Ministry, it would follow that reporting to the school board would also be appropriate at this time period. Although the OAG recommends reporting on a quarterly basis, due to the timing of budget revisions and reporting to the Ministry that does not follow on the same quarter, it would be reasonable to expect school boards to report interim financial information in December and March. Committee Recommendation That school boards develop policy on interim financial reporting that will provide meaningful information to school board trustees and management to assist them in fulfilling their financial oversight duties. The committee recommends that the policy includes reporting that meets the following minimum standards: 1. Interim financial reporting occurs at a minimum three times during the school year. 2. A statement of operations that includes: a. Actual period to date information, which includes significant financial accruals. b. A forecast of yearly operating results to the end of the school year. c. The budget for the school year that represents revised budget information as of September 30 th. d. Variances of forecast revenues and expenditures to the annual budget. An explanation of significant variances should be provided. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 14 of 20

15 3. Summary of forecasted changes in operating and capital transactions (changes in Accumulated Operating Surplus, Capital Reserves, and Investment in Capital Assets, and Expended and Unexpended Capital Allocations). These recommendations constitute a minimum standard. See Appendix One for an illustration of an interim report that would meet the suggested minimum standards. A school board may request management to prepare financial information in a different format that provides more detailed information and/or to prepare interim reports on a more frequent basis. The Alberta School Boards Association is currently preparing a policy advisory to assist school boards in developing policy that addresses the financial monitoring and accountability responsibilities of school board trustees. Recommendation 6 Office of the Auditor General Recommendation That Alberta Education work with key stakeholder associations to provide information to trustees about the characteristics of strong budgetary control systems and best practices for fulfilling financial monitoring responsibilities. 20 Discussion points The OAG commented in the Annual Report that the Ministry had not provided guidance to trustees with respect to best practices for fulfilling financial monitoring responsibilities and the strong characteristics of a strong budgetary control system. 21 Strong budgetary control starts with the policies and procedures that a school board has adopted to prepare and monitor the budget. The school jurisdiction prepares a budget that demonstrates the fiscal plan to achieve the stated goals and objectives of the school board. Board policy should dictate the method of monitoring actual results to the stated budget and receiving information on any variances so that action may be taken to revise the fiscal and education plan if necessary. School board trustees need to be aware of the policies that are in place for developing and monitoring the budget and financial results of the school jurisdiction. Policy may also want to address board orientation and training regarding the board s role in financial oversight. 20 Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page Annual Report of the Auditor General of Alberta, Volume 2 Audits and recommendations, Education, page 70. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 15 of 20

16 School board trustees are elected by members of the public, and as such, individuals who run for the position of a school trustee are not required to have specific experience and education qualifications. In a recent Alberta Venture magazine article, elected school board trustees were compared to an appointed board of directors of a publicly listed resource company in Alberta having similar budgeted revenues. School board trustees may bring different skills to the board table, and as such, some may not have specific experience or training in board governance or financial oversight. As the Alberta Venture article states, trustees are expected to govern very complex, large school jurisdictions and are entrusted to oversee the management of millions of dollars. As such, school board trustees need to know their role, be familiar with the tools they need, and have the diligence to do the job effectively. 22 Further to specific jurisdiction training, trustees should be provided with professional development that enhances their understanding of governance and accountability as it pertains to financial oversight. This professional development needs to be provided on a regular basis and should address key issues such as how to read and understand financial statements, what questions trustees should be asking of management and the school board appointed auditor, principles of internal control and enterprise risk management. A tool that is currently available to school board trustees that addresses some of these key areas is the Financial Statement Readability Tool Kit. 23 Audit committees also assist the board of trustees in practicing oversight in the financial reporting process, systems of internal control over financial reporting, the audit process, and the jurisdiction s compliance with laws and regulations pertaining to financial operations. 24 Audit committees are effective for financial oversight as they generally include public representatives who have financial expertise. However, the use of an Audit committee does not discharge individual trustees from their duty to practice financial oversight. Committee Recommendation The committee recommends that school jurisdictions ensure that school board trustees receive training to understand the budget and financial processes of the school jurisdiction. Each school jurisdiction should be responsible to ensure that this professional development is provided on a regular basis to assist school board trustees in performing their financial oversight responsibilities. The Alberta School Boards Association (ASBA) should provide trustee development opportunities about financial monitoring responsibilities on an annual basis for school board trustees. The Association of School Business Officials of Alberta and Alberta 22 A Deficit of Savvy, Alberta Venture, January 2007, pg Financial Statement Readability Tool Kit, developed in partnership with the Association of School Business Officials of Alberta, Alberta Learning, and the Office of the Auditor General, 24 Association of School Business Officials of Alberta, Sample Audit Committee Proposal, Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 16 of 20

17 Education could partner with ASBA to assist with developing and delivering the trustee development program. The program content would be based on regularly assessed needs for trustee development that will assist school boards in understanding and practicing the characteristics of strong budgetary control and implementing best practices for fulfilling financial monitoring responsibilities. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 17 of 20

18 Appendix One Sample Interim Reports Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 18 of 20

19 Interim Reports to March 31, 2007 (1) STATEMENT OF OPERATIONS (in dollars) A B C D Actual Forecast Annual Budget Variance % To March 31/07 12 months ending Variance to Account Descriptions (Note 1) August 31/07 Total Forecast (Note 4) (Note 3) (Note 2) (Note 5) Revenue REVENUES Government of Alberta $83,969,921 $143,948,000 $152,672,584 ($8,724,584) -5.6% Federal Government and/or First Nations $600,000 $1,029,000 $429,189 $599, % Instruction resource fees $131,038 $225,000 $238,250 ($13,250) 0.0% Transportation fees $450,000 $771,000 $702,318 $68, % Other sales and services $1,015,025 $1,740,000 $1,845,500 ($105,500) -0.1% Investment income $295,000 $506,000 $370,000 $136, % Gifts and donations 0.0% Rentals of facilities $537,001 $921,000 $976,366 ($55,366) 0.0% Net school generated funds $950,000 $1,629,000 $1,300,000 $329, % Gains on disposal of capital assets 0.0% Amortization of capital allocations $2,724,493 $4,671,000 $4,953,623 ($282,623) -0.2% Total Revenues $90,672,478 $155,440,000 $163,487,830 ($8,047,830) -5.2% EXPENSES Certificated salaries $49,389,789 $84,668,000 $89,799,617 $5,131, % Certificated benefits $7,500,000 $12,857,000 $11,133,776 ($1,723,225) -1.1% Uncertificated salaries and wages $11,644,608 $19,962,000 $21,172,015 $1,210, % Uncertificated benefits $3,750,000 $6,429,000 $5,239,424 ($1,189,577) -0.8% Services, contracts and supplies $15,804,660 $27,094,000 $28,735,746 $1,641, % Net school generated funds $950,000 $1,629,000 $1,300,000 ($329,000) -0.2% Capital and debt services Amortization of capital assets Supported $2,724,493 $4,671,000 $4,953,623 $282, % Unsupported $733,669 $1,258,000 $1,333,945 $75, % Interest on capital debt Supported $435,946 $747,000 $792,630 $45, % Unsupported 0.0% Other interest charges 0.0% Losses on disposal of capital assets 0.0% Total Expenses $92,933,166 $159,315,000 $164,460,774 $5,145, % SURPLUS (DEFICIT) FOR THE PERIOD ($2,260,689) ($3,875,000) ($972,945) ($2,902,056) -1.9% (2) SUMMARY OF FORECASTED OPERATING AND CAPITAL TRANSACTIONS UNEXPENDED CAPITAL ALLOCATIONS (DCA) EXPENDED CAPITAL ALLOCATIONS (UCA) UNSUPPORTED INVESTMENTS IN CAPITAL ASSETS (ICA) CAPITAL RESERVES (CR) ACCUMULATED OPERATING SURPLUS/DEFICIT (AOS /AOD) Balances, August 31, 2006 $19,000,000 $211,000,000 $28,000,000 $1,000,000 $6,000,000 Operating Transactions: Surplus (Deficit) for the Period ($3,875,000) Supported Capital Transactions: Restricted Capital Allocations Received $5,000,000 Restricted Capital Allocations Expended (Note 6) ($10,000,000) $10,000,000 Repayment of Supported Debt $2,500,000 Amortization of Supported Capital ($4,671,000) Unsupported Capital Transactions: Board-Funded Capital Additions (Note 7) $1,500,000 ($1,500,000) Repayment of Unsupported Debt $500,000 ($500,000) Amortization of Unsupported Capital ($1,258,000) $1,258,000 Other (Including Transfers) Projected Balances, August 31, 2007 $14,000,000 $218,829,000 $28,742,000 $1,000,000 $1,383,000 Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 19 of 20

20 Notes to explain Interim Reports Note 1 Note 2 Note 3 Note 4 The account descriptions are taken from the AFS and are for illustrative purposes only. Jurisdictions may have different descriptions more familiar to trustees, which may be used. The board-approved (revised) budget for the current year. The forecast takes into account the YTD actual and expected results for the remainder of the year. Significant changes from the 12 month forecast of the previous report should be explained. Per the general ledger, including accruals to the end of the current month. (Note that including a "Previous Year Actual to Date" comparative column may also be useful for trustees.) Note 5 Note 6 Note 7 It is suggested that all variances (favorable or unfavorable) exceeding X% (say 3%) and/or $1 million be explained in notes attached. (The $1 million will vary depending upon the size of the jurisdiction). "Expended" includes paid or payable. It is suggested that a capital expenditures summary be attached, by project, with year to date actual and forecasted expenditures against plan compared to percentage of completion, and an explanation of significant variances, including cost overruns, if any. See also Note 7. Including overruns from supported capital projects to be funded internally. Financial Monitoring and Accountability Ad Hoc Committee May 2007 Page 20 of 20