Management Report. for. Independent School District No. 281 Robbinsdale, Minnesota June 30, 2006

Transcription

1 Management Report for Independent School District No. 281 Robbinsdale, Minnesota June 30, 2006

2 To the School Board of Independent School District No. 281 Robbinsdale, Minnesota We have prepared this management report in conjunction with our audit of Independent School District No. 281 s (the District) financial records for the year ended June 30, The purpose of this report is to communicate information relevant to the financing of public education in Minnesota and to provide comments resulting from our audit process. We have organized this report into the following sections: Audit Summary Funding Public Education in Minnesota Financial Trends of Your District Accounting and Reporting Updates Legislative Summary We would be pleased to further discuss any of the information contained in this report or any other concerns that you would like us to address. We would also like to express our thanks for the courtesy and assistance extended to us during the course of our audit. November 15, 2006

3 AUDIT SUMMARY We hereby provide you with the following summary of our audit work, key conclusions, and other information that we consider important or that is required to be communicated to the School Board or administration of the District. Understanding the Auditor s Responsibility We performed our audit in accordance with auditing standards generally accepted in the United States of America. The audit is designed to provide reasonable, but not absolute, assurance as to whether the District s financial statements are free of material misstatement. The financial statements are the responsibility of the District s management, while it is our responsibility to express an opinion on the financial statements based on our audit results. Audit Opinion and Findings Based on our audit of the District s financial statements for the year ended June 30, 2006: We have issued an unqualified opinion on the District s annual financial statements. We found no reportable conditions involving the District s internal controls over financial reporting. The results of our testing disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. We have not reported any findings or material weaknesses on internal controls or compliance over federal awards. We found no instances of noncompliance with Minnesota laws and regulations. Significant Accounting Policies The District s accounting policies follow accounting principles generally accepted in the United States of America, as explained in detail in Note 1 of the notes to basic financial statements. During 2006, the District made no significant changes in its accounting policies. Accounting Estimates and Management Judgments General education revenue and certain other revenues are computed by applying an allowance per student to the number of students served by the District. Student attendance is accumulated in a state-wide database MARSS. Because of the complexity of student accounting and because of certain enrollment options, student information is input by other school districts and the MARSS data for fiscal year 2006 is not finalized until well into fiscal year General education revenue and certain other revenues are computed using preliminary information on the number of students served in the resident district and also utilizing some estimates, particularly in the area of enrollment options. Accounts payable and accounts receivable amounts related to tuition billings to other school districts are computed using formulas derived by the Minnesota Department of Education (MDE). Because of the timing of the calculations these billings for fiscal 2006 are not finalized until after the District has closed its financial records for the fiscal periods. The revenues and expenditures related to the billings are calculated using preliminary information available to the District on non-resident students attending the District and resident students attending other districts. The District has recorded a liability in the Statement of Net Assets for accumulated sick leave convertible to early retirement pay for which it is probable the employees will be compensated. The vesting method used by the District to calculate this liability is based on assumptions involving the probability of employees becoming eligible to receive the benefits (vesting), the potential use of accumulated sick leave prior to termination, and the age at which such employees are likely to retire. -1-

4 Management expects any differences between estimates and actual to be insignificant. We reviewed and tested management s procedures and underlying supporting documentation in the areas discussed above. We concluded that the accounting estimates and management judgments appeared to consider all significant factors and resulted in appropriate accounting recognition. Audit Adjustments Our audit was designed to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. In addition, we are obligated by auditing standards generally accepted in the United States of America to inform you of any adjustments arising from the audit that could, in our judgment, either individually or in the aggregate, have a significant effect on the District s financial reporting process. All proposed audit adjustments (whether recorded or uncorrected) were reviewed with management and were determined, individually or in the aggregate, not to have a significant effect on the financial reporting process. In addition, we are obligated by auditing standards generally accepted in the United States of America to inform you about uncorrected misstatements (regardless of whether they have a significant effect on the financial reporting process) aggregated by us during the current engagement, and pertaining to the latest period presented. These adjustments were reviewed with management and were considered to be immaterial, both individually and in the aggregate, to the financial statements taken as a whole. Other Required Communications Auditing standards also require us to consider the following topics as potential areas that might need to be communicated to the appropriate officials or committee: Other information in documents containing audited financial statements Disagreements with management Consultations with other accountants Major issues discussed with management prior to retention as auditors Difficulties encountered in performing the audit During our audit, we did not encounter any circumstances and we are unaware of any items in any of these areas which require discussion with those who have responsibility for oversight of the financial reporting process. Other Comments and Recommendations We found, as we have in the past, the District s financial records to be in excellent condition. This not only provides for an efficient audit at year-end, but should also provide confidence in interim financial data utilized by your district throughout the year. -2-

5 FUNDING PUBLIC EDUCATION IN MINNESOTA Recent improvements in the economy and financial condition of the state have resulted in a number of positive changes in the financing of Minnesota public schools. After two years of flat funding, increases in the formula allowance in 2006 and 2007 are providing additional funding to schools. The state also bought back a portion of the tax shift and restored the aid metering system to the aid payment schedule in 2006; which provided no additional funding, but greatly improved districts cash flow. Coupled with increasing interest rates, this improvement in cash flow has also provided districts an opportunity for enhanced investment revenue. While these improvements were welcome, most Minnesota districts are finding that they are not enough to fully recover from the two previous years of flat funding. Due to its complexity, it would be impossible to fully explain the funding of public education in Minnesota within this report. The last section of this report, which contains a summary of legislative changes affecting school districts, gives an indication of how complicated the funding system is. The following section provides some state-wide funding and financial trend information. BASIC GENERAL EDUCATION REVENUE The largest single funding source for Minnesota school districts is basic general education aid. Each year, the Legislature sets a basic formula allowance. Total basic general education revenue is calculated by multiplying the formula allowance by the number of pupil units for which a district is entitled to aid. Pupil units are calculated using a legislatively determined weighting system applied to average daily membership (ADM). Over the years, various modifications have been made to this calculation, including changes in weighting and special consideration for declining enrollment districts. The table below presents a summary of the formula allowance for the past few years. We have adjusted the percentage change from year to year for non-comparable changes such as referendum reduction and aids that were previously separately funded and subsequently rolled-in or rolled-out to general education revenue. We have also included state-wide General Fund revenue per un-weighted ADM as calculated by the MDE. School Year State Calculated Formula Allowance Revenue per ADM (2) Percent Percent Amount Increase Amount Increase $ 3, % (1) $ 7, % $ 4, % $ 7, % $ 4, % (1) $ 7, % $ 4,601 % $ 7, % $ 4,601 % $ 8, % $ 4, % $ 8,331 (3) 4.1 % (3) $ 4, % $ 8,939 (3) 7.3 % (3) (1) Percentage adjusted to eliminate changes caused by referendum reduction; rolled-in (out) aids which does not affect total district revenue (2) Includes General Fund state aids, tax credits, tax levies, and referendums (3) Estimated In general, the moderate increases shown in the above table have forced districts to continually cut expenditure budgets or increase referendum revenue in order to keep spending within the funding limitations. -3-

6 STATE-WIDE SCHOOL DISTRICT FINANCIAL HEALTH One of the most common and comparable statistics used to evaluate school district financial health is the unreserved operating fund balance as a percentage of operating expenditures. State-Wide Unreserved Operating Fund Balance as a Percentage of Operating Expenditures 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% State-Wide ISD No. 281 Robbinsdale For years prior to 2001, the percentage calculation includes all of the unreserved operating funds and certain particular reserved fund balances. The more recent years reflect only the unreserved fund balance of the General Fund and the corresponding expenditures, which is the same method the state now uses for the calculation of statutory operating debt (SOD). We have also included the comparable percentages for your district starting with Even with limited funding increases, school districts have improved their unreserved fund balances on a state-wide basis from 2000 to This may be the result of districts adapting to the funding restrictions, in some cases community support in the way of operating referendums, and other factors. Another element may be the unreserved fund balances in charter schools which are included in the state-wide numbers. State-wide unreserved fund balances turned towards a downward trend in 2005 and, of course, 2006 is unknown at this time. -4-

7 Once a school district reaches a certain level of financial concern, as determined by state guidelines, it is considered in Statutory Operating Debt (SOD). This requires the District to establish and follow a plan of financial recovery, overseen by the MDE. The following chart shows the number of Minnesota school districts in SOD over the past ten years: Districts in Statutory Operating Debt The table below shows a comparison of total revenue per ADM received by Minnesota school districts and your district. Revenues for all governmental funds are included, except for proceeds from sales of real property and equipment, insurance recoveries, sales of bonds, loans, and interfund transfers. Revenue per Student (ADM) Served Seven-County State-Wide Metro Area ISD No. 281 Robbinsdale Property taxes $ 1,666 $ 1,552 N/A $ 1,991 $ 2,942 $ 2,808 $ 2,215 Food sales N/A Other local sources N/A ,056 1,152 State 7,021 7,218 N/A 7,297 6,726 7,406 8,209 Federal N/A Total revenue $ 10,325 $ 10,333 N/A $ 10,864 $ 11,178 $ 11,953 $ 12,416 ADM served and tuition paid 14,043 13,608 13,636 Source of state-wide and seven-county metro area data: School District Profiles Report published by the MDE N/A Not Available The mix of local and state revenues vary from year to year primarily based on funding formulas and the state s financial condition. The mix of revenue components from district to district varies due to factors such as the strength of property values, mix of property types, operating and bond referendums, enrollment trends, density of population, types of programs offered, and countless other criteria. The District s revenue per ADM increased $463 or 3.9 percent. The state s buy back of a portion of the tax shift increased state aid revenue and decreased property tax revenue in State aid revenue was also higher this year due to the increase in the general education formula allowance discussed earlier. -5-

8 The table below reflects comparative data available from the MDE for all expenditures, excluding building construction: Expenditures per Student (ADM) Served Seven-County State-Wide Metro Area ISD No. 281 Robbinsdale Administration $ 412 $ 362 $ 364 $ 353 $ 351 $ 362 $ 367 District support services Elementary and secondary regular instruction 3,950 4,054 4,103 4,163 3,750 3,917 4,119 Vocational education instruction Special education instruction 1,403 1,533 1,527 1,670 1,462 1,634 1,753 Instructional support services Pupil support services Sites and buildings and other ,063 Total General Fund operating expenditures 7,947 8,251 8,303 8,561 8,331 8,793 9,396 General Fund capital expenditures Food service Community service Debt service * 1, , ,176 1,267 Total expenditures $ 10,379 $ 10,309 $ 10,835 $ 10,743 $ 10,420 $ 11,227 $ 12,117 ADM served and tuition paid 14,043 13,608 13,636 Source of state-wide and seven-county metro area data: School District Profiles Report published by the MDE * State-wide and seven-county amounts for 2004 debt service expenditures include payments on refunded bonds, which are otherwise excluded. Expenditure patterns also vary from district to district for various reasons. For example, one district may pay tuition to a cooperative that provides vocational or special education services for its students, while another may serve those students within the District, or even act as a host for other districts and receive tuition. Other factors affecting the comparison include the growth cycle or maturity of the District, average employee experience, availability of funding, population density, and even methods of allocating costs. The District s General Fund operating expenditures experienced an increase of $603 per ADM or 6.9 percent, while total spending per ADM increased by $890 or 7.9 percent in fiscal The largest General Fund operating increase was in regular instruction, which increased $202 from the prior year. General Fund capital expenditures increased by $122 and sites and buildings costs increased by $118, both due to an increase in repairs and maintenance projects. SUMMARY The funding for and financial position of Minnesota school districts has fluctuated significantly over the past several years due to a number of factors, including those discussed above. This situation has created a challenge for administrators and management of these districts in providing the best education with the limited resources available in a climate of unknown future funding levels. -6-

9 GENERAL FUND FINANCIAL POSITION FINANCIAL TRENDS OF YOUR DISTRICT The following graph displays the District s General Fund trends of financial position and changes in the volume of financial activity. Unreserved fund balance and cash balance are typically used as indicators of financial health or equity, while annual expenditures are often used to measure the size of the operation. General Fund Financial Position Year Ended June 30, $140,000,000 $120,000,000 $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $ Cash and Investments (Net of Borrowing) Unreserved Fund Balance Expenditures The District ended fiscal year 2006 with a General Fund cash balance of $9,459,885, an increase of $5,603,667, while unreserved fund balance totaled $9,092,489, a decrease of $3,618,202. The increase in cash and investments was largely the result of improved timing in the metering of state aid payments and the state buying down a portion of the tax shift, which improved cash flow, but did not impact total revenues. The graph above illustrates spending down of the District s General Fund balance that was necessary to maintain district programs in The following table presents the components of the General Fund balance for the past five years: Years Ended June 30, Reserved fund balance (including reserve account deficits) $ 2,626,533 $ 3,764,525 $ 3,722,077 $ 6,889,390 $ 5,849,585 Unreserved fund balance 4,861,601 7,685,089 12,454,270 12,710,691 9,092,489 Total fund balance $ 7,488,134 $ 11,449,614 $ 16,176,347 $ 19,600,081 $ 14,942,074 Unreserved fund balance as a percentage of expenditures 4.2% 6.3% 10.2% 10.2% 6.7% Unreserved fund balance as a percentage of expenditures is one key measure of a school district s financial health. The resources represented by this fund balance are critical to a district s ability to maintain adequate cash flow throughout the year, to retain its programs, and to cushion against the impact of unexpected costs or funding shortfalls. At June 30, 2006, the unreserved fund balance in the General Fund represented 6.7 percent of annual expenditures, or about 3.5 weeks of operations, assuming level spending throughout the year. -7-

10 The level of cash and investments varies considerably during the year due to the timing of various revenues and expenditures. The following graph summarizes the level of cash and investments over the past three years: $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $ $(5,000,000) $(10,000,000) General Fund Cash Flow Month-End Balances J A S O N D J F M A M J Cash and Investments 2006 Cash and Investments 2005 Cash and Investments 2004 The graph above shows the peaks and valleys of the General Fund cash and investments balance on a monthly basis. The swing between high and low month-end cash balances is about $12.7 million. Changes in funding structure and state aid payment schedules have significantly affected the cash flow of Minnesota school districts in recent years. The payback of part of the tax shift and returning to the aid payment schedule has improved cash flow for Change in ADM and Pupil Units 1.5% 0.5% (0.5%) (1.5%) (2.5%) (3.5%) ADM Pupil Units ADM is a measure of students attending class, which is then converted to pupil units (the base for determining revenue) using a statutory formula. Not only is the original budget based on ADM estimates, the final audited financial statements are based on updated, but still estimated, ADM since the counts are not finalized until around January of the following year. When viewing revenue budget variances, one needs to consider these ADM changes, the impact of the prior year final adjustments which affect this year s revenue, and the final adjustments caused by open enrollment gains and losses. The ADM served by the District for 2006 is estimated to be 13,636, an increase of about 28 ADM or 0.2 percent from the prior year. As displayed in the previous graph, the District had experienced declining enrollment each of the last three years. -8-

11 The following graph summarizes the District s General Fund revenue for 2006: General Fund Revenue Budget and Actual $120,000,000 $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $ Property Taxes State Sources Federal Sources Other Budget Actual Prior Year General Fund revenues for 2006 were $130,206,136, an increase of $6,011,381 from the previous year, and $2,405,080 over budget. General education aid increased by about $10,679,000 due to the higher per student funding formula allowance discussed earlier. The state s buy back of a portion of the tax shift increased state aid revenue and decreased property tax revenue by $7,797,000 in 2006, with no impact on total revenue. Revenue from the state exceeded budget by almost $311,000, mainly in general education and special education aids. Federal revenue was also $742,000 over budget, as the District earned additional federal special education funds. General Fund Expenditures Budget and Actual $80,000,000 $70,000,000 $60,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 $ Salaries Benefits Purchased Services Supplies Capital Other Budget Actual Prior Year General Fund expenditures for 2006 were $135,131,715, which was $10,010,152 higher than last year, and $3,988,711 over budget. Purchased services increased $3,613,130 from the previous year and were about $1,988,000 over budget. The increase was due to increased tuition, transportation, and maintenance costs. Capital expenditures also increased $1,670,693 and were $1,679,150 over budget due to repairs and maintenance projects being more than expected. -9-

12 OTHER GOVERNMENTAL FUNDS The following graph presents fund balances for the District s Food Service Special Revenue, Community Service Special Revenue, and Debt Service Funds. We have excluded the crossover refunding escrow assets previously reported in the Debt Service Fund. Other Operating Funds Total Fund Balances $2,500,000 $2,250,000 $2,000,000 $1,750,000 $1,500,000 $1,250,000 $1,000,000 $750,000 $500,000 $250,000 $ Food Service Special Revenue Community Service Special Revenue General Debt Service FOOD SERVICE SPECIAL REVENUE FUND The Food Service Special Revenue Fund balance decreased $113,664 in 2006, compared to a budgeted fund balance reduction of $294,823. Revenues exceeded budget by $131,944, mainly due to increased state aid and meal sales. Expenditures were $42,615 under budget. This fund has maintained a healthy financial position in recent years, and has also been able to assist in funding a portion of several capital improvements to food service facilities. The 2006 year-end fund balance of $827,199 represents approximately 14.1 percent of annual expenditures. COMMUNITY SERVICE SPECIAL REVENUE FUND The District s Community Service Special Revenue Fund expenditures exceeded revenues by $184,385 for 2006 compared to a budgeted fund balance reduction of $388,088. Community Service Special Revenue Fund revenues were about $55,000 over budget, mostly due to higher interest and other local revenues than projected. Expenditures were about $150,000 under budget, primarily in purchased services costs. It is critical that the Community Service Special Revenue Fund be self-sustaining, so as not to place an additional burden on the General Fund. As the graph above indicates, the District has been successful in maintaining the fiscal health of these two funds in recent years. CAPITAL PROJECTS BUILDING CONSTRUCTION FUND The Capital Projects Building Construction Fund (not shown in graph above) has a fund balance of $16,362,375 at June 30, 2006 reserved for alternative facilities program projects. DEBT SERVICE FUND The funding of debt service is controlled in accordance with each outstanding debt issue s financing plan. As of June 30, 2006, the District also has over $82 million of assets in escrow (not pictured above) to refund three bond issues. -10-

13 DISTRICT-WIDE FINANCIAL STATEMENTS The District s financial statements include fund-based information that focuses on budgetary compliance, and the sufficiency of the District s current assets to finance its current liabilities. The Governmental Accounting Standards Board (GASB) Statement No. 34 reporting model also requires the inclusion of two district-wide financial statements designed to present a clear picture of the District as a single, unified entity. These district-wide statements provide information on the total cost of delivering educational services, including capital assets and long-term liabilities. Theoretically, net assets represent the resources the District has leftover to use for providing services after its debts are settled. However, those resources are not always in expendable form, or there may be restrictions on how some of those resources can be used. Therefore, the statement divides the net assets into three components: net assets invested in capital assets, net of related debt; restricted net assets; and unrestricted net assets. The following table presents a summarized conversion of the District s governmental fund balances (as individually discussed earlier) to net assets and the separate components over the last four years: As of June 30, Total fund balances governmental funds $ 39,549,928 $ 60,575,319 $ 95,029,800 $ 118,062,257 Total capital assets, net of depreciation 169,120, ,073, ,299, ,284,256 Total long-term debt (including related interest) (163,972,105) (206,215,041) (237,129,821) (257,534,170) Other adjustments (999,841) 2,354,990 2,231,640 2,651,389 Total net assets governmental activities $ 43,698,852 $ 52,788,900 $ 66,431,458 $ 73,463,732 Net assets Invested in capital assets, net of related debt $ 43,741,896 $ 42,714,842 $ 52,592,852 $ 61,350,940 Restricted 4,694,452 6,300,737 10,030,573 11,951,418 Unrestricted (4,737,496) 3,773,321 3,808, ,405 Total net assets $ 43,698,852 $ 52,788,900 $ 66,431,458 $ 73,463,763 Some of the District s fund balances translate into restricted net assets by virtue of external restrictions (statutory reserves) or by the nature of the fund they are in (e.g. unreserved Food Service Special Revenue Fund balance can only be spent for food service program costs). The unrestricted net assets category consists mainly of the General Fund unreserved fund balances, offset against non-capital long-term obligations such as vacation or severance payable. Consequently, many Minnesota school districts have accumulated deficits in this component of net assets. The District s total net assets increased $7,032,305 in The District s investment in capital assets, net of related debt, was $8,758,088 higher than last year due to the facilities improvements being made, which were partially financed with tax levies. The restricted portion of net assets was $1,920,845 higher than last year, primarily due to unspent alternative facilities levy dollars remaining unspent at year-end. The unrestricted portion of net assets decreased by $3,646,628 from the prior year, which is a result of the District spending down its unreserved General Fund balance by $3.6 million during the year to maintain programs. -11-

14 ACCOUNTING AND REPORTING UPDATES GASB STATEMENT NO. 43 FINANCIAL REPORTING FOR POST-EMPLOYMENT BENEFIT PLANS OTHER THAN PENSION PLANS AND GASB STATEMENT NO. 45 ACCOUNTING AND FINANCIAL REPORTING BY EMPLOYERS FOR POST-EMPLOYMENT BENEFITS OTHER THAN PENSIONS These related statements provide new guidance on accounting and financial reporting of post-employment benefits accounted for in trust funds included in the financial statements of plan sponsors or employers, and employer accounting and reporting for post-employment benefits other than pensions by employers when the plan is not accounted for in their financial statements. Other post-employment benefits (OPEB) refer to non-pension benefits provided after the termination of employment. One example of this type of benefit is healthcare premiums paid by employers on behalf of former employees. Governmental entities have traditionally accounted for OPEB on a pay-as-you-go basis. Only a few governments have funded these benefits in advance of payment. The guidance in these statements rests on the assumption that OPEB should be accrued as an expense as service is provided by employees. For governments offering OPEB, the cost would be recognized using a three-step approach. The government will be required to project future benefits, discount those benefits to their present value, then use an acceptable actuarial method to allocate costs to individual accounting periods. Once calculated, the difference between the present value of OPEB benefits earned by employees as the result of past service and resources set aside to pay those benefits will be considered the unfunded actuarial liability for OPEB. Every employer will be allowed to start fresh at the time of transition to the new standard. There will be no requirement for an employer to recognize an accounting liability for underfunding prior to the implementation of the new standard. Instead, the unfunded actuarial accrued liability for OPEB at transition would be amortized over 30 years. As long as an employer funds the full amount of required contribution, no asset or liability will be reported on the Statement of Net Assets. However, an employer will need to report an asset or liability if the contributions are less or more than the annual required contribution each year. Nothing in the documents is intended to alter the normal application of modified accrual accounting in the governmental funds of the entity. Thus, OPEB expenditures normally would be recognized when payments are made to the former employees rather than when benefits are earned. The guidance will require that actuarial valuations for OPEB occur at least every two years for plans with 200 or more members, and every three years for plans with fewer than 200 members. A sole employer plan with fewer than 100 plan members has the option to apply a simplified alternative measurement method rather than obtain actuarial valuations. These statements will become effective in three phases based on the same criteria as those defined for the implementation of GASB Statement No. 34. GASB Statement Nos. 43 and 45 will be phased in for districts over a three-year period, starting with category one districts in the fiscal years ending June 30, 2007 and 2008, respectively. GASB STATEMENT NO. 44 ECONOMIC CONDITION REPORTING: THE STATISTICAL SECTION AN AMENDMENT OF NCGA STATEMENT 1 This statement provides guidance for preparation of the statistical section of a comprehensive annual financial report (CAFR) for government entities. The goal of the statement is to improve the understandability and usefulness of the information presented in the statistical section by: improving comparability, focusing on information identified by users as being more useful, providing specific guidance for different types of governments, and incorporating the government-wide data required under the new GASB Statement No. 34 reporting model. While the statement only requires a statistical section to be presented when a government presents their basic financial statements within a CAFR, it will apply to any statistical section that accompanies a government s basic financial statements. Your district implemented this new guidance this year. -12-

15 GASB STATEMENT NO. 47 ACCOUNTING FOR TERMINATION BENEFITS GASB Statement No. 47 provides accounting and reporting guidance for state and local governments that offer benefits such as early retirement incentives or severance to employees that are involuntarily terminated. The statement requires that similar forms of termination benefits be accounted for in the same manner and is intended to enhance both the consistency of reporting for termination benefits and the comparability of financial statements. GASB Statement No. 47 is effective for financial statements for periods beginning after June 15, 2005, or may be implemented simultaneously with GASB Statement No. 45, depending on your circumstances. STATEMENTS ON AUDITING STANDARDS The Auditing Standards Board of the AICPA has issued eight new statements on auditing standards. These statements establish standards and provide guidance concerning the auditor s assessment of the risks of material misstatement (whether caused by error or fraud) in a financial statement audit, and the design and performance of audit procedures whose nature, timing, and extent are responsive to the assessed risks. Additionally, the statements establish standards and provide guidance on planning and supervision, the nature of audit evidence, and evaluating whether the audit evidence obtained affords a reasonable basis for an opinion regarding the financial statements under the audit. The primary objective of these statements is to enhance the auditors application of the audit risk model in practice by specifying, among other things: More in-depth understanding of the entity and its environment, including its internal control, to identify the risks of material misstatement in the financial statements and what the entity is doing to mitigate them. More rigorous assessment of the risks of material misstatement of the financial statements based on that understanding. Improved linkage between the assessed risks and the nature, timing, and extent of audit procedures performed in response to those risks. Essentially, these statements are a continuation of the profession s efforts to reestablish public confidence in the audit process in light of recent major corporate failures. It is anticipated that in most cases, these new standards will add a substantial amount of time to the typical audit, particularly for new engagements or when first implemented on continuing engagements. These statements are effective for school district audits for the fiscal year ending June 30, 2008; however, earlier application is permitted. -13-

16 LEGISLATIVE SUMMARY The following is a brief summary of current legislative changes and issues affecting the funding of Minnesota school districts. More detailed and extensive summaries are available from the MDE. Basic General Education Revenue After being held frozen for three years, the basic general education formula allowance for fiscal year (FY) 2006 was increased by $182 to $4,783 per adjusted marginal cost pupil unit (AMCPU) and will increase to $4,974 in FY 2007 and later. Property Tax and Aid Payment Shifts For FY 2006, the regular portion of the property tax shift is reduced to zero (paid back) and the aid payment schedule is returned to a basis. Gifted and Talented Revenue This is a new component of general education revenue, setting aside $4 per AMCPU in FY 2006, and $9 in FY 2007 and later. This revenue can only be spent on specific costs related to gifted and talented students. Alternative Teacher Compensation Revenue Another new component of general education revenue, for schools which qualify for an alternative teacher professional pay system by October 1 of the current school year. The revenue for FY 2006 was $260 times the previous year s October 1 enrollment, consisting of state aid. In FY 2007 and later the revenue remains at $260, but a portion will be funded with an equalized local levy. Equity Revenue Beginning in FY 2006, districts with referendum revenue per resident marginal cost pupil unit (RMCPU) of less than 10 percent of the state average receives additional state aid revenue to bring them up to 10 percent of that average, but not to exceed $100,000 of funding. This includes districts with no referendum revenue. Beginning in FY 2007, districts with referendum revenue per AMCPU below the regional 95 th percentile will receive additional revenue of $46 times the AMCPU, and those above the 95 th percentile will receive $23 times the AMCPU. Beginning in FY 2006, metro districts equity revenue was increased by 25 percent, excluding the revenue under the $46/$23 provision described above. Transition Revenue This revenue, which was set to expire after FY 2008, is made permanent. Beginning in FY 2006, the revenue was increased by 4 percent of the amount the district received for pre-fy 2004 pre-kindergarten programs. Referendum Cap The standard referendum cap is calculated using a formula based on either a percentage of the formula allowance or a set amount adjusted for an inflation factor, whichever is higher. The limit for FY 2006 is estimated to be $905 per RMCPU and $1,389 for FY The 1994 Grandfather Cap was increased by $200 per RMCPU in FY Referendum Equalization For FY 2007, the first tier of referendum equalization is increased from $500 to $600 per RMCPU and $700 in FY 2008 and later. One-Time Energy Assistance For FY 2006 only, the state provided $3.67 per AMCPU to assist in paying for heating fuel and other energy costs. Building Lease Levy This levy has been restored to the lesser of $100 per AMCPU or actual lease costs (up from $90 or 90 percent). Also, districts which are members of an intermediate district get an increase in their available levy from $22.50 to $25 per AMCPU. Career and Technical Levy The funding for career and technical programs is changed beginning with the tax levy payable in Districts with approved programs may levy the lesser of $80 per ADM in Grades 10 through 12 or 25 percent of approved expenditures. -14-

17 Special Education Tuition Billing The tuition billing procedures and calculations for students served by a nonresident district or charter school were significantly changed for FY Beginning in FY 2007, the MDE is required to calculate the tuition amounts and adjust state aids, instead of having individual districts and charter schools calculate and collect tuition billings. The 2007 legislation further clarified this change and delayed the implementation for intermediate school districts, cooperatives, education districts and fiscal agents until FY Special Education and Related Aids The state total special education excess cost aid increased from $91,811,000 in FY 2005 to $103,600,000 in FY 2006 and will increase to $104,700,000 in FY 2007 and later. The excess cost formula is modified by phasing out the inclusion of referendum revenue in the general revenue amounts used as a deduction in calculating excess cost aid. Two-thirds of the referendum revenue is included for FY 2006, one-third in FY 2007, and none in following years. A provision was made to prevent state total special education regular aid and transition disabled aid from declining in FY 2008 and later years. Deferred Maintenance Revenue Beginning in FY 2008, an equalized deferred maintenance levy is available for smaller districts that do not qualify for the alternative facilities bonding and levy program. Telecommunications/Internet Equity Aid This was a new aid available beginning in FY 2006, which is based on eligible expenditures in the previous year. Various requirements are attached to this new aid. Maximum Effort Debt Service Levy This levy rate is reduced from 32 to 28 percent of adjusted net capacity for loans approved before January 2, 2002, and from 40 to 32 percent for later loans. Surplus Funds Any surplus remaining in a district s Debt Service Fund when the obligations and interest have been fully paid can be used for any general purpose without creating a reduction in state aid or tax levies. Food Service Reimbursements School lunch reimbursement increases from 8 to 10 cents for all students in FY 2006 and to 10.5 cents in FY Reimbursement for the first one-half pint of milk for kindergarten students that do not participate in a breakfast or lunch program increased from 9 to 14 cents in FY Early Childhood Family Education (ECFE) State reimbursement for screening is increased from $40 to $50 per 3-year-old student. The district gets $40 per 4-year-old and $30 per 5 or 6-year-old prior to kindergarten, and $30 per student screened within 30 days after first enrolling in a public kindergarten if the student has not been previously screened. Beginning in FY 2006, ECFE revenue was increased from $96 to $104 times the greater of 150 or the population of students under 5 years old residing in the district. That revenue is increased to $112 in FY Community Education Beginning in FY 2007, the community education revenue allowance is increased from $5.23 to $5.42 times the greater of 1,335 or the population of the district. Also effective for FY 2007, the community education levy rate is reduced from.985 to.9 times the adjusted net tax capacity. Adult Basic Education (ABE) Districts can carryover up to 20 percent of their ABE aid until September of the following year. State aid for ABE is increased by 3 percent for FY 2007 and beyond. Adult Literacy Grants The state appropriated $1.25 million for FY 2007 and FY 2008 for a grant program to meet the English language needs of unanticipated refugees and immigrants. Advanced Placement Grants For FY 2007 only, districts may apply for up to $85 per qualified pupil, in a pre-advanced or advanced placement program. Character Development Education Revenue Pilot Program This one-time appropriation for FY 2007 allows districts to receive $30 per AMCPU for approved character development programs. -15-