Monterey County Office of Education. King City Joint Union High School District. Regarding. Fiscal Review. May 16, 2008

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1 Monterey County Office of Education Regarding King City Joint Union High School District Fiscal Review May 16, 2008 Joel D. Montero Chief Executive Officer

2 Fiscal Crisis & Management Assistance Team

3 May 16, 2008 Dr. Nancy Kotowski, Superintendent Monterey County Office of Education 901 Blanco Circle Salinas, California Dear Superintendent Kotowski: In December 2007, the Monterey County Office of Education and the Fiscal Crisis and Management Assistance Team (FCMAT) entered into an agreement to provide a study of the King City Joint Union High School District s fiscal operations. On December 4, 2007, the Monterey County Office of Education declared the King City Joint Union High School District a lack of going concern. In accordance with Education Code (c) (2), the Monterey County Superintendent of Schools requested that FCMAT assist in the review of the fiscal condition of King City Joint Union High School District. The budget analysis conducted by the county office indicates that the district will have a negative fund balance for the current and two subsequent fiscal years. The county office has a fiscal advisor on site as part of the terms and conditions of a $1.2 million interim loan to the district. The district is experiencing static enrollment trends, deficit spending and other issues that will be identified in this report. A recent Public Employee Relations Board (PERB) settlement agreement has magnified the district s fiscal issues. As stated in the study agreement, the county office requested that FCMAT perform the following: Conduct an in depth review of the district s general fund budget and complete a multiyear financial projection for the current and two subsequent fiscal years. The team shall utilize FCMAT s Budget Explorer v.2.0 multiyear financial projection software to complete this component of the work. Recommendations will be provided for revenue enhancements or expenditure reductions, as requested. Complete a review of the district s general fund cash flow statement and make recommendations. Conduct a review of the 3. fiscal impact only of the proposed reorganization of the King City Joint Union High School District and King City Joint FCMAT Joel D. Montero, Chief Executive Officer th Street - CITY CENTRE, Bakersfield, CA Telephone Fax Petaluma Blvd North, Suite. C, Petaluma, CA Telephone: Fax: Administrative Agent: Larry E. Reider - Office of Kern County Superintendent of Schools

4 Union Elementary districts for the following option: (The study does not include the evaluation of the state s nine criteria pursuant to Education Code for either option). The computation of the base revenue limit for the newly organized school districts will be based on the current information available for each affected school district for the second principal apportionment of the fiscal year and will be used for budgetary estimates of ADA, full-time equivalent employees (FTEs), salaries and benefits. None of the school districts is or will in the foreseeable future become a basic aid school district. The attached final report contains the study team s findings and recommendations. We appreciate the opportunity to serve you and on behalf of FCMAT, please extend our thanks to all the staff of the Monterey County Office of Education and the King City Joint Union High School District. Sincerely, Joel D. Montero Deputy Executive Officer Fiscal Crisis & Management Assistance Team

5 TABLE OF CONTENTS i Table of Contents Foreword...iii Introduction... 1 Background...1 Study Guidelines...3 Study Team...3 Executive Summary... 5 Findings and Recommendations... 9 Cash Management...9 Multiyear Financial Projection...15 Internal Controls...35 Shared Administrative and Business Office Staffing...39 Senate Bill 1537 Unification...41 Appendices...49

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7 FOREWORD iii Foreword FCMAT Background The Fiscal Crisis and Management Assistance Team (FCMAT) was created by legislation in accordance with Assembly Bill 1200 in 1992 as a service to assist local educational agencies in complying with fiscal accountability standards. AB 1200 was established from a need to ensure that local educational agencies throughout California were adequately prepared to meet and sustain their financial obligations. AB 1200 is also a statewide plan for county offices of education and school districts to work together on a local level to improve fiscal procedures and accountability standards. The legislation expanded the role of the county office in monitoring school districts under certain fiscal constraints to ensure these districts could meet their financial commitments on a multiyear basis. AB 2756 provides specific responsibilities to FCMAT with regard to districts that have received emergency state loans. These include comprehensive assessments in five major operational areas and periodic reports that identify the district s progress on the improvement plans. Since 1992, FCMAT has been engaged to perform nearly 700 reviews for local educational agencies, including school districts, county offices of education, charter schools and community colleges. Services range from fiscal crisis intervention to management review and assistance. FCMAT also provides professional development training. The Kern County Superintendent of Schools is the administrative agent for FCMAT. The agency is guided under the leadership of Joel D. Montero, Chief Executive Officer, with funding derived through appropriations in the state budget and a modest fee schedule for charges to requesting agencies. Total Number of Studies Total Number of Districts in CA Management Assistance (94.8%) Fiscal Crisis/Emergency (5.2%) Note: Some districts had multiple studies. Districts (7) that have received emergency loans from the state. (Rev. 2/21/08) 80 Study Agreements by Fiscal Year Number of Studies /93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 Projected King City Joint Union High School District

8 Fiscal Crisis & Management Assistance Team

9 INTRODUCTION 1 Introduction Background The King City public schools are located in the Salinas Valley town of King City in Monterey County and consist of two separate school districts: King City Union Elementary District and King City Joint Union High School District. Each district is governed by a separate governing board but has a common administration, with one superintendent as the chief administrator for both districts. The district s schools are ethnically diverse. Approximately 62% of the students are limited English proficient, with Spanish as the primary language. The King City Union Elementary District is comprised of two K-5 elementary schools and one middle school, while the King City Joint Union High School District has two comprehensive high schools and two continuation schools. In December 2007, the Monterey County Office of Education contacted FCMAT to request a study to review specific financial issues concerning the King City Joint Union High School District. In early February, 2008, the county office and FCMAT entered into an agreement for a fiscal review of the district. The study agreement states that FCMAT will do the following: 1. Conduct an in depth review of the district s general fund budget and complete a multi-year financial projection for the current and two subsequent fiscal years. The team shall utilize FCMAT s Budget Explorer v.2.0 multi-year financial projection software to complete this component of the work. Recommendation will be provided for revenue enhancements or expenditures, as requested. 2. Conduct a review of the fiscal impact only of the proposed reorganization of the King City Union Elementary and King City Joint Union High School Districts for the following two options: (The study does not include the evaluation of the state s nine criteria pursuant to Education Code for either option. This component has been provided in a previous study.) The computation of the base revenue limit for the newly organized school districts will be based on the current information available for each affected school district for the second principal apportionment of the fiscal year and will be used for budgetary estimates of ADA, full-time equivalent employees (FTEs), salaries and benefits. None of the school districts is or will in the foreseeable future become a basic aid school district. Methodology FCMAT will obtain the first interim data from reports filed by the districts, and payroll listings for certificated and classified FTEs, salaries and benefits provided by the districts. As described in the following, the computation will be made in accordance with Education Code Section King City Joint Union High School District

10 2 INTRODUCTION Computing the Unified District s Revenue Limit The proposed revenue limit for the new unified district is computed through two steps: (1) a blending of the former elementary and high school districts revenue limit amounts per ADA; and, (2) an adjustment made as a revenue limit add-on for the difference between the average salary and benefit costs between the affected districts. The adjustment for the difference in average salaries and benefits is the only new money that results from unification. The first part of the calculation is revenue neutral a mere blending of the two different revenue limit amounts based on proportional elementary and high school ADA. The second part adds funding per ADA in recognition that a common salary schedule must be adopted with each bargaining unit at the time of unification. Even if common salary schedules are in use at the time of unification, the law allows for an adjustment to be made. The new governing board of the unified district retains the right to negotiate all salary costs up or down, with the exception of classified staff that have a two year right to continued employment at their pay at the time of unification, subject to mutual negotiation. 3. Review, evaluate and project the district s anticipated cash flow needs and prepare an annual cash flow statement for the fiscal year ending June 30, 2008 On December 4, 2007, the Monterey County Office of Education declared the King City Joint Union High School District a lack of going concern. Based on the district s current financial status, it appears that the district will end the fiscal year with a negative fund balance. The county office has a fiscal advisor on site at the district as part of the terms and conditions for the county office providing the district with a $1.2 million interim loan. The district is having difficulty sustaining the general fund recommended reserve requirements because of declining enrollment, deficit spending and other issues identified in this report. Fiscal Crisis & Management Assistance Team

11 INTRODUCTION 3 Study Guidelines FCMAT representatives visited the district in January 2007 to conduct interviews, collect data and review documents. This report is the result of those activities and is divided into the following sections. I. Executive Summary II. Cash Management III. Multiyear Financial Projection IV. Internal Controls V. Administrative and Business Office Shared Staffing VI. Senate Bill 1537 Unification Study Team The FCMAT study team was composed of the following members: Anthony Bridges FCMAT Deputy Executive Officer Atascadero, California John Lotze FCMAT Public Information Specialist Bakersfield, California Deborah Deal FCMAT Fiscal Intervention Specialist San Luis Obispo County, California Eric Smith FCMAT Consultant Templeton, California King City Joint Union High School District

12 Fiscal Crisis & Management Assistance Team

13 EXECUTIVE SUMMARY 5 Executive Summary In accordance with Education Code (c) (2), the Monterey County Superintendent of Schools requested that FCMAT assist in the review of the fiscal condition of King City Joint Union High School District. The Monterey County Office of Education declared the King City Joint Union High School District a lack of going concern on December 4, The district s budget was projected to have a negative fund balance for the current and two subsequent fiscal years. The county office has a fiscal advisor on site at the district as part of the terms and conditions of a $1.2 million interim loan to the district in The state of California s current economic status, including the projected state deficit and the fiscal emergency declared by the governor in January 2008 under Proposition 58, is projected to significantly affect the district s general fund balance. The district is confronted by substantial fiscal challenges that will require difficult decisions to be made and implemented. The board, administration and community will need to identify potential areas of reduction to eliminate deficit spending and sustain the district s fiscal solvency. Symptomatic of school districts that experience continuing deficit spending and static or declining enrollment trends is the depletion of cash resources. This is the projected circumstance for King City Joint Union High School District. The major qualifying criteria for state intervention is whether a district is able to continue making payroll and other financial obligations from its existing cash resources, either internally or externally. The financial situation is serious and will require both short- and long-term solutions. The district will have to strategically manage its cash reserves while concurrently making budget reductions or the district could fall under state receivership for an emergency loan, at which time the Superintendent of Public Instruction or State Administrator could exercise several options under Education Code sections Based on the district s projected budget and levels of deficit spending, FCMAT projects that the district will need to make substantial reductions in the multiyear financial projection (MYFP) or the district may require state intervention in the fiscal year. The district faces potential layoffs for all employee groups, including but not limited to management, certificated and classified staff. In preparation for certificated layoffs, the district exercised education code provisions for March 15, 2008 layoffs. The district provided the legal notification on or before March 15, 2008 that will allow the flexibility to make staffing modifications for the fiscal year. FCMAT identified five (5) certificated full time equivalent positions for reduction in the MYFP. In the legal matter involving the King City High School Teachers Association CTA/ NEA versus King City Joint Union High School District, the district lost its appeal in an attempt to obtain a reversal of the California Public Employee Relations Board (PERB) and the administrative law judge s decisions in favor of the certificated bargaining unit. The district was required to make retroactive payments in the amount of 4.04% and a King City Joint Union High School District

14 6 EXECUTIVE SUMMARY future one-time interest payment of $525,000 due in fiscal year , which have increased the district s financial challenge. When developing and implementing the MYFP, the district s primary objectives are to achieve and sustain a balanced budget, improve academic achievement and maintain local governance. To ready itself to deal with an estimated $4.1 million negative shortfall in the fiscal year, the district must begin now to prepare for a period of fiscal uncertainty and challenging financial times. When attempting to balance the budget, the district will need to make difficult choices about which expenditures, programs and functions deserve continued funding and which are best scaled back, reconfigured or eliminated. In the short term, the district should not hesitate to take immediate actions that will help to ensure solvency over the next two fiscal years. FCMAT s multiyear financial projection reflects that the district will not meet its reserve requirement in the current and two subsequent fiscal years without a detailed plan to increase revenue and/or reduce expenditures and cease deficit spending. The MYFP was developed using FCMAT s Budget Explorer multiyear financial projection software. The general fund projection uses the state budget, the Governor s state budget proposal and the current School Services of California (SSC) Financial Dartboard. The projection does not include any annual cost of living adjustments for employee salaries in the current or two subsequent fiscal years because this item is determined at the local level. To evaluate a multiyear projection, much attention is focused on the bottom line. If the bottom line demonstrates a positive unappropriated fund balance, this amount may be used by the district for enhancements such as improved educational programs or employee compensation. If the unappropriated fund balance is negative, the deficit balance is the amount by which the budget must be reduced to sustain the recommended reserve levels. The general fund summary indicates a negative balance in all three fiscal years. Fiscal Crisis & Management Assistance Team

15 EXECUTIVE SUMMARY 7 Table 1: Unrestricted General Fund Summary: Name Revenues Object Code Base Year Year Year Total Revenues $13,840, $13,428, $13,791, Expenditures Total Expenditures $13,179, $13,507, $13,168, Excess (Deficiency) of Revenues Over Expenditures $661, ($79,298.63) $622, Other Financing Sources\Uses Contributions ($2,303,063.57) ($2,559,172.51) ($2,573,825.51) Total Other Financing Sources\Uses ($2,303,063.57) ($2,559,172.51) ($2,573,825.51) Net Increase (Decrease) in Fund Balance ($1,641,855.65) ($2,638,471.14) ($1,950,870.57) Fund Balance Beginning Fund Balance 9791 $800, ($645,070.68) ($3,283,541.82) Other Restatements 9795 $196, $0.00 $0.00 Adjusted Beginning Fund Balance $996, ($645,070.68) ($3,283,541.82) Ending Fund Balance ($645,070.68) ($3,283,541.82) ($5,234,412.39) Components of Ending Fund Balance Revolving Cash 9711 $6, $6, $6, Prepaid Expenditures 9713 $177, $183, $189, Economic Uncertainties Percentage 3% 3% 3% Designated for Economic Uncertainties 9770 $638, $618, $612, Undesignated/Unappropriated 9790 $0.00 $0.00 $0.00 Negative Shortfall 9790 ($1,466,349.35) ($4,091,274.33) ($6,042,152.90) Because employee salaries and benefits comprise an average of over 86.91% of the unrestricted general fund balance of high school districts throughout California, the district should develop current staffing formulas for all positions and ensure that ratios are within employee contract guidelines, meet students needs and agree with approved district goals and objectives, including the goal of maintaining fiscal solvency. King City has 87.77% of its unrestricted general fund budget committed to salaries and benefits. This is slightly higher than the statewide average and illustrates the relative increase in employee-related expenses compared with non-personnel expenses such as books, supplies, utilities and contracted services. The district s budget condition is due in part to periods of declining or flat enrollment; the district has had to reduce expenditures to remain fiscally solvent while still incurring increases in some areas of the budget. The district s overall expenditure budget has grown, and increases in employee salaries and benefits have simply outpaced other areas of the budget. Increases in health benefit costs have contributed significantly to this growth. Finally, the restricted programs and the contributions between unrestricted and restricted programs continue to increase in each subsequent fiscal year. King City Joint Union High School District

16 8 EXECUTIVE SUMMARY This budget trend of growing personnel expenditures reinforces how important it is for the district to manage their expenditures for personnel-related items to remain fiscally solvent, and explains why districts that must make expenditure reductions find it difficult to avoid affecting personnel. In an effort to maximize unrestricted general fund resources, the district should consider charging the full indirect cost rate legally allowed to all programs and investigate the feasibility of further using the federal, AB 825 and mega-item flexibility transfer options. The district should also review options such as increasing the percentage of average daily attendance (ADA) and reducing the number of different school calendars in an effort to increase revenues and decrease expenditures. The district is contracting with the Monterey County Management Assistance Team (MCMAT) on a part time basis to help fill the current Chief Business Official (CBO) vacancy. This position is essential to the organization and it will be crucial for the district to find an experienced, qualified candidate to fill the position full time. The CBO should be included on the district s negotiating team. Because the CBO is responsible for determining the district s financial condition and the impact negotiation proposals might have on the district s budget, it is important for the CBO to be included at the negotiating table and to be involved in all discussions that relate to negotiations. Fiscal Crisis & Management Assistance Team

17 cash management 9 Findings and Recommendations Cash Management Symptomatic of school districts that experience continuing deficit spending and declining enrollment is the depletion of cash resources. This is the projected circumstance for King City Joint Union High School District. The major qualifying criteria for state intervention is whether a district is able to continue making payroll and other financial obligations from its existing cash resources, either internally or externally. The district s financial situation is serious and will require both short- and long-term solutions. The district will need to strategically manage its cash reserves while concurrently making budget reductions or the district could fall under state receivership for an emergency loan, at which time the Superintendent of Public Instruction or State Administrator could exercise several options under Education Code Based on the district s projected budget and levels of deficit spending, FCMAT found that the district will need to make substantial reductions in the multiyear financial projection (MYFP) or it may require state intervention in the fiscal year. According to FCMAT s assessment of the district s cash flow, the district may need to temporarily borrow funds in the month of June in order to meet its financial obligations. The major cash income of California school districts comes from state revenue limit sources, which are comprised of state aid and local property taxes. The major cash expenditure is for compensation, including salary and benefits. For most school districts, this component of the budget consists of 85% to 90% of total general fund expenditures. For King City Joint Union High School District, expenditure for compensation is 87.77% of the unrestricted general fund. State revenue limit funds are distributed to school districts monthly throughout the fiscal year on four different schedules. However, the majority of property taxes are received in December and April. Payroll for most districts start in July and increases significantly in September when teachers and school support staff return to school. As a result, fluctuations in cash flow occur in November, December, March and April, due to the unequal distribution of property taxes throughout the fiscal year. The advantage for King City Joint Union High School District is that its apportionment schedule is such that the district receives 60% of their revenue limit sources (state aid) in the first four months of the fiscal year. The following apportionment schedule is provided: King City Joint Union High School Apportionment Schedule Education Code (EC) section 14041(a) (7) provides that school districts which in received 39%or more, but less than 75%, of their total revenue limit from local taxes and had less than 5,000 ADA shall receive 15% in July, August, September, and October; zero percent in November and December; and 6% in January, of the amounts certified at the advance apportionment. King City Joint Union High School District

18 10 cash management Warrants in the months of February to May, inclusive, shall be for amounts calculated in accordance with EC section 14041(a) (3) described above. EC section 14041(a) (3) provides that warrants in the months of February to May, inclusive, shall be for amounts equal to one-sixth of the difference between the amounts certified by the Superintendent of Public Instruction (SPI) for school districts and county school service funds for classes maintained by county superintendents of schools and county school tuition funds as the first principal apportionment and the amounts paid as certified by the advance apportionment. Warrants for the month of June shall be for amounts calculated in accordance with EC section 14041(a) (4) described above. EC Section 14041(a) (4) provides that warrants for the month of June shall be for amounts equal to the difference between the amounts certified by the SPI for school districts and county school service funds for classes maintained by county superintendents of schools and county school tuition funds as the second principal apportionment and the amounts paid as certified at the advance and first principal apportionments. Pursuant to subdivision (a) of EC section , commencing with the fiscal year, warrants for the principal apportionments for June shall instead be drawn in July of the same calendar year in accordance with the certification made pursuant to EC section This deferral of cash by the state is continued throughout the cash flow statements developed by FCMAT. July Apportionment Deferral Among the provisions of ABX34, the special session bill to implement mid-year cuts under Proposition 58, is a change in the July 2008 advance apportionment. For only, the measure shifts the $1.1 billion July advance apportionment to September As the state continues to evaluate the scope of the current fiscal crisis and how it will strategically manage this precarious situation, cash is a significant variable in the equation. The state is looking to defer apportionment payments to be able to meet its own cash obligations. Unfortunately, local educational agencies (LEAs) are feeling the effects of this fiscal crisis, and this is exacerbated by the current proposal to shift the advanced apportionment payment from July to September According to specific language in the provisions of ABX34, the deferral of the July apportionment will not apply to the King City Joint Union High School District. This amounts to approximately $1.4 million dollars in July. There are several options to consider as the district outlines specific cash flow strategies. The following options are available to the district, but only if planning takes place prior to an actual cash shortage. Fiscal Crisis & Management Assistance Team

19 cash management 11 Internal Borrowing Internal borrowing between district funds is authorized by Education Code section and allows LEAs to borrow between funds temporarily to address cash flow shortages. According to FCMAT s assessment of the district s cash flow, the district may need to temporarily borrow funds in the month of June to meet its financial obligations. This situation will need to be assessed monthly and will depend upon the district s spending patterns in the last three months of the fiscal year. Internal borrowing is the most common method used by school districts; however, it only works if there is cash available in other funds. The limitations associated with this type of borrowing stipulate that no more than 75% of the money held in any fund during the current fiscal year may be transferred. In addition, funds must be repaid in the same fiscal year (that is, by June 30) if the transfer is completed prior to the last 120 days of the fiscal year. If funds are transferred within the last 120 days of the fiscal year, repayment must be made prior to June 30 of the subsequent year. The district currently has approximately $3.7 million in Fund 35, County School Facilities Fund. This fund is established pursuant to Education Code section to receive apportionments from the 1998 State School Facilities Fund (Proposition 1A), the 2002 State School Facilities Fund (Proposition 47), or the 2004 State School Facilities Fund (Proposition 55) authorized by the State Allocation Board for new school facility construction, modernization projects, and facility hardship grants, as provided in the Leroy F. Greene School Facilities Act of 1998 (Education Code section and following.). While this option is not highly recommended in normal operating circumstances, the district will have to strategically manage and evaluate which funds to use on a temporary basis while making reductions in the district s budget. The existing funds in the County School Facilities Fund are residual dollars from the district s recent financial hardship funding from the Office of Public School Construction for a project that has been completed. According to the Monterey County Management Assistance Team (MCMAT), any remaining funds will need to be returned to the state by August of It is critical that the district make budget reductions concurrent with temporary cash loans so that it is able to meet the prescribed timelines regarding internal borrowing. The following education code section is provided regarding financial hardship project savings: Office of Public School Construction Audit Guide Section Savings: A district may expend the savings not needed for a project on other high priority capital facility needs of the district including the relocation of district facilities necessary as a result of Subdivision (b) of Education Code Section The grants for the projects funded pursuant to Section or Section shall be limited to eligible expenditures, up to the State Apportionment King City Joint Union High School District

20 12 cash management for the project. Savings may be declared by the district in writing to the OPSC any time after the release of all funds for the project. With the exception of savings attributable to a site apportionment made pursuant to Sections or , the State s portion of any savings declared by the district or determined by the OPSC by audit must be used to reduce the SFP financial hardship grant of that project or other financial hardship projects within the district for a period of three years from the date the savings were declared by the district or determined by the OPSC audit. The State s portion of any savings from a new construction project or a Joint- Use Project may be used as a district matching share requirement, only on another new construction project, and the State s share of any savings from a modernization project may be used as a district matching share requirement, only on another modernization project. Any interest earned on a financial hardship project not expended on eligible project expenditures will be treated as savings and will be used to reduce the SFP financial hardship grant for that project. The district also has funds available under this section in Fund 25, Capital Facilities Funds. External Borrowing External borrowing requires additional time because it requires an LEA to go outside its own agency for funds. Options for external borrowing include the following: Borrow from the county office of education in accordance with Education Code Sections and However, this option is dependent upon the county office being willing and able to provide funds. Based on the current economic outlook, this may not be an option because county offices of education are monitoring their own cash for the future as well. However, if this option is considered, a discussion with the county office should take place sooner rather than later. The Monterey County Office of Education has already loaned the district $1,200,000 in the fiscal year. Debt service payments are currently $400,000 per year and are due and payable in August of each fiscal year in the multiyear financial projection. As of July 1, 2008, the district still owes $800,000 from this loan. Education Code Section also allows districts to borrow from the county treasurer. Under Article XVI, Section 6, of the California Constitution the county treasurer must provide funds to an LEA should it not be able to meet its obligations. However, the county treasurer cannot loan districts money after the last Monday in April of the current fiscal year. In addition, the governing board s approval by formal resolution is required for this type of borrowing. The Fiscal Crisis & Management Assistance Team

21 cash management 13 loan cannot exceed 85% of direct taxes levied on behalf of the school district. The advantage to having the county treasurer provide the funds is that the treasurer is able to take repayment directly from property tax receipts prior to any distribution to the LEA. Repayment must be made from the first monies received by the school district before any other obligation is paid. The most common external borrowing mechanism is Tax and Revenue Anticipation Notes (TRANs). This is another form of short-term borrowing that LEAs have used for many years. It is imperative that federal tax law requirements be met regarding this financial instrument to maintain the nontaxable status. The LEA must determine the cash flow needs to size the TRANs appropriately. If an LEA cannot demonstrate a cash shortage in the current year but issued a TRANs, they could be subject to arbitrage rebate. Appropriately sizing the TRANs will minimize the risk of additional penalties levied by the Internal Revenue Service. It is prudent for districts to work with an outside financial consultant to avoid potential problems. The goal is to meet the cash shortage in the short term. Because of the district s negative certification for the budget, the district is not eligible for this type of short term borrowing. Other Expenses The county office provides the district with approximately $1.2 million in special education services annually and charges for these services monthly. Delaying these monthly charges to June of 2009 could help the district s cash balance. Recommendations The district should: 1. Confirm that a request for exemption from the July apportionment payment shift due to a severe fiscal hardship is not applicable. If necessary, request that the county office certify to the California Department of Finance by May 15, 2008 that an emergency apportionment would be necessary if the cash flow shift is imposed. 2. Contact the Monterey County Treasurer s Office in accordance with Article XVI, Section 6, of the California Constitution to establish short term loan strategies on or before April 14, Evaluate all internal funds of the district in accordance with Education Code section to temporarily address cash flow shortages for the months of May and June. King City Joint Union High School District

22 14 cash management 4. Manage the cash position daily for all funds and provide monthly reports with updated actuals to the district board and the county office. 5. Request a meeting with the county office to request a review of the payment schedule for special education billback charges and deferral of the district s $400,000 debt service payment that is due and payable to the COE in August of Fiscal Crisis & Management Assistance Team

23 multiyear financial projection 15 Multiyear Financial Projection To ready itself for an estimated $4.1 million shortfall in the fiscal year, the district must start preparing now for a period of fiscal uncertainty and challenging financial times. When attempting to balance the budget, the district will need to make difficult choices about which expenditures, programs and functions deserve continued funding and which are best scaled back, reconfigured or eliminated. In the short term, the district should not hesitate to take immediate actions that will help ensure solvency during the next two to three years. One of the greatest obstacles for the district will be deciding which areas to reduce among the various operational and program priorities. One first step is to create a list of the costs of providing required and/or essential services. After this list is created and the cost to perform all the required elements is calculated, the district can begin to determine how much money, if any, is left for discretionary uses such as elective classes, additional supplies, capital improvements not funded with state monies, and other items that may improve schools and support the district s mission but do not have a dedicated, ongoing revenue source. This process will also help bring the district s financial status to the front of the public s consciousness and may help to prompt collaborative efforts to find solutions. Multiyear financial projections (MYFPs) are required by AB 1200 and AB 2756 and are a part of the adoption budget and interim reporting process. In June 2004, AB 2756 (Daucher) was passed and signed into law on an urgency basis. This legislation made substantive changes to the financial accountability and oversight processes used to monitor the fiscal position of school districts and county offices of education. Among other things, AB 2756 strengthened the roles of the SPI, county offices of education and FCMAT and their ability to intervene during fiscal crises. The 11 most common predictors of a school district needing intervention, as referenced in AB 2756 and included in recently amended Education Code sections and , are as follows: 1. Governance crisis 2. Absence of communication to education community 3. Lack of interagency cooperation 4. Failure to recognize year-to-year trends 5. Flawed ADA projections 6. Failure to maintain reserves 7. Insufficient consideration of the effects of long-term bargaining agreements 8. Flawed multiyear projections 9. Inaccurate revenue and expenditure projections King City Joint Union High School District

24 16 multiyear financial projection 10. Poor cash flow analysis and reconciliation 11. Bargaining agreements beyond state COLA Conditions in the King City Joint Union High School District match many of the criteria for districts needing assistance from either the county office of education or the state of California. When developing and implementing the MYFP, the district s primary objectives are to achieve and sustain a balanced budget, improve academic achievement and maintain local governance. The MYFP helps identify specific planning milestones that will aid the district in the decision making process. If a district is not able to meet its financial obligations for the current or two subsequent fiscal years, or has a qualified or negative budget certification, the county superintendent of schools must notify the governing board of the district and the SPI. The county office must follow Education Code section when assisting a school district in this situation. Assistance may include assigning a fiscal expert to advise the district on financial issues, conducting a study of the district s financial and budgetary conditions and requiring the district to submit a proposal for addressing its fiscal condition. In the case of a district that does not meet its required reserve levels, the intent of the MYFP is to assist the county and the district in formulating a plan to regain fiscal solvency and restore the required ending fund balance. School districts receive funding from a variety of local, state and federal resources. Some funds are earmarked for specific purposes, such as special education and home-to-school transportation, while most of the funds are used to support the district s general operating expenses. The complex state revenue limit funding calculation provides for funding per average daily attendance (ADA) using a combination of local property taxes and state aid. Regular and frequent budget monitoring is always a sound fiscal practice and must be more of a focus in times of fiscal uncertainty. The district will need to ensure that multiyear forecasts are up to date and that the information they contain is accurate and based on the most current assumptions. Economic indicators will change quickly in this environment, so staying connected to current financial information and support such as that provided by School Services of California will help keep the district informed. The district should run multiple budget scenarios to assess the impacts of the various COLA and deficit reduction proposals. The MYFP developed for this report indicates that the district will not be able to maintain its required reserve of 3% in all three fiscal years without a detailed plan to increase revenue and/or reduce expenditures and cease deficit spending. The district is confronted by substantial fiscal challenges that require difficult decisions to be made and implemented. Fiscal Crisis & Management Assistance Team

25 multiyear financial projection 17 Multiyear Forecast Assumptions California school districts and county offices use many different methods and software products to prepare multiyear financial projections. FCMAT s projections for the district s general fund were prepared using FCMAT s Budget Explorer multiyear projection software, a Web-based forecasting tool that is available at no cost to all California school districts. There are inherent limitations to any forecast of financial data. These limitations include issues such as unanticipated changes in enrollment trends and changing economic conditions at the state, federal and local levels. Therefore, the budget forecasting model should be evaluated as a trend based on certain criteria and assumptions rather than a prediction of exact numbers. Multiyear financial projections help to provide for more informed decision making and the ability to forecast the fiscal impact of current decisions. To maintain the most accurate data, the projection should be updated at least at each interim financial reporting period and before providing increases for salaries and benefits. To evaluate the multiyear projection, much attention is focused on the bottom line, which demonstrates the district s undesignated, unappropriated fund balance. For example, if the bottom line demonstrates a positive unappropriated fund balance, this amount may be used by the board and/or Superintendent to improve educational programs, increase employee compensation or spend in other categories. However, if the unappropriated fund balance is negative, the deficit balance is the amount by which the budget must be reduced to sustain the recommended reserve levels under AB 1200 guidelines. The projection must be viewed comprehensively, and the district must determine what compounding effects using any or all of the unappropriated fund balance will have on the projection in the current and future years. FCMAT reviewed the district s records, interviewed staff members and examined financial reports to gather the information needed for the multiyear financial projection. The initial review included a summary assessment of the district s unaudited actuals, the adopted budget and the first interim report. The review also included a fiscal analysis of the projected revenues, expenditures, transfers and components of the ending fund balance for the general fund. FCMAT s multiyear analysis uses the district s first interim financial report as the baseline for the MYFP. FCMAT reviewed the district s budget assumptions to validate the budget and multiyear financial projections for the two subsequent years. FCMAT s budget assumptions depict conservative economic factors and estimates as addressed in the state budget, the Governor s state budget proposal and the SSC Financial Dartboard. FCMAT s MYFP does not include any increases for salary in the current or projection years, beyond the current negotiated agreement, because those costs are determined at the local level. Included in the projection years are the average cost of step and column movement for all contracted salaries and the associated cost of employer-paid statutory benefits. King City Joint Union High School District

26 18 multiyear financial projection General Fund Unrestricted General Fund FCMAT has focused attention on the unrestricted portion of the district s general fund budget, including the impact of general fund contributions to restricted categorical programs. The MYFP used the following rules for , and It is important to note that the impact of the latest state budget information does not include the impact of the programs operated by the county office. Just as the reduction/cuts from the state are affecting the district s programs, the county office will also be affected, which could negatively affect the district in terms of larger excess cost billings because the district participates in the county office-operated special education programs. Table 2: Multiyear Projection Rules Multiyear Projection Rules Year 1 Year 2 Year Certificated Step/Column % 1.50% 1.50% 1.50% Classified Step % 1.50% 1.50% 1.50% CPI (SSC) 3.2% 2.70% 2.50% Lottery Restricted (SSC) $22.50 $22.50 Lottery Unrestricted (SSC) $ $ Interest (SSC) 4.2% 4.10% 4.80% Revenue Limit Deficit (SSC) 0.00% 6.99% 6.99% Special Education COLA (SSC) 4.53% -6.50% 3.00% State Categorical COLA (SSC) 4.53% -6.50% 3.00% Title I Part A (Basic Grant) Included 3.2% 3.2% Special Education 3310 Included 1.4% 1.4% Title II Part A 4035 Included.70%.70% Federal Program, Title II, Part D (Enhancing Education Through Technology) Included -6.90% -6.90% Title III Language Acquisition Included 4.7% 4.7% Federal Program, Title IV (Safe and Drug Free Schools) Included -15.4% -15.4% Title V, Part A 4110 Included -100% -100% Statutory COLA (SSC) 4.53% 4.94% 3.00% Health and Welfare Increase Included 10.0% 10.0% (SSC) based on School Services of California Financial Dartboard dated 2/19/08 Fiscal Crisis & Management Assistance Team

27 multiyear financial projection 19 Revenues Revenue Limit Sources Revenue limit sources comprise the majority of the district s total general fund income. Revenue limit calculations are primarily based on student ADA levels, cost of living (COLA) and deficit adjustments, if any. FCMAT calculated the district s revenue limit for using the state budget information from the September 2007 California School Finance and Management Conference and the current SSC Financial Dartboard. These factors include the estimated statutory COLA of 4.94% for , 3.0% for , 2.6% for and a revenue limit deficit of 6.99% beginning in and continuing throughout the projection. Federal Revenues Per recent federal regulations, Forest Reserve funds have been eliminated beginning in the fiscal year. Restricted federal revenues were adjusted in based on the prior year carryover and current year allocations as reported by the California Department of Education (CDE) Subsequent year funding was reduced or eliminated in some programs based on the most recent information from the federal government. Projections for include a 15.4% reduction in the Drug Free Education grant, 6.9% reduction in Enhancing Education Through Technology and the elimination of both Innovative Education Strategies funding and Medi-Cal Administrative Activities revenue. Several federal programs are projected to have reductions in the subsequent two fiscal years that could further affect the district s unrestricted general fund; these are reflected in FCMAT s multi-year projection. Preliminary estimates are projected for increases to Title I Part A, but required set-asides under No Child Left Behind may limit how much additional funding will result in increases to current grant levels. State Revenues FCMAT did not budget for mandated cost reimbursement claim funding in the current and projection years because these revenues have not been included in the state s budget. State revenues were calculated with a 6.5% deficit in and a 3% increase in according to the most recent SSC Financial Projection Dartboard dated 2/19/08. Restricted state revenues were adjusted based on the current year allocation as reported by the CDE. For resources that have not yet been posted by the CDE, the prior year allocation was used with estimated adjustments for COLA. Local Revenues Revenue was adjusted based on the district s current receipts and projected annual collections. King City Joint Union High School District

28 20 multiyear financial projection Expenditures Certificated Salaries FCMAT s multiyear projection includes the impact of a 1.50% ongoing cost of step and column movement for contracted salaries in the projection years and no other adjustments for salary enhancements because those are determined at the local level. FCMAT s MYFP reduces the number of certificated teaching staff by 5 FTEs in , based on board action in March 2008 to address the projected decline in student enrollment and the need to balance the budget. Classified Salaries FCMAT included the cost of step movement at 1.50% and no other adjustments for salary enhancements because those are determined at the local level. Employee Benefits Employee benefits are difficult to project because the district pays for the entire health and welfare benefit package. Therefore, increases in subsequent years will have a direct impact on the district s unrestricted budget. FCMAT adjusted statutory benefits in proportion to certificated and classified salary changes and increased the projected cost of employer-paid health and welfare contributions by 5% in and 5% in Books and Supplies FCMAT adjusted the budget for materials and supplies using the consumer price index (CPI) inflation factor from the SSC Dartboard and the projected reduction in student enrollment. Services and other Operating Expenditures The budget was adjusted using the CPI and the projected reduction in student enrollment where appropriate. Capital Outlay No adjustments were made except for the reallocation of the designated fund balance. Other Outgo No adjustments were made to this category. Direct Support/Indirect Costs Adjustments were made to this category where the budgeted indirect costs exceeded the amount allowed by statute. Debt Service Adjustments were made to reflect the one-time interest payment of $525,000 dollars for the PERB settlement. Other Financing Sources/Uses Transfers Out The transfer to deferred maintenance is included in Resource Contributions to Restricted Programs The district is projected to contribute to the following restricted programs in the current and/or projection years: Title I, Reading First; Special education; Workability; Title IV, Drug Free Schools; CAHSEE intervention; Fiscal Crisis & Management Assistance Team

29 multiyear financial projection 21 Home-to-school transportation; Special education transportation; Ongoing and major maintenance. The district s special education billback is included in the budget and is estimated at $1,227,917 for services provided by the Monterey County Office of Education. Enrollment and Average Daily Attendance FCMAT reviewed the district s enrollment and ADA trends for through The review compared the October California Basic Educational Data System (CBEDS) student enrollment count to the April 2007 period two (P-2) ADA actual data. FCMAT has projected a decrease in the district s enrollment in each of the two subsequent years. Proper enrollment tracking and analysis of ADA are essential to providing a solid foundation for budget planning. When enrollment and ADA are flat or declining, the district must exercise extreme caution regarding budgetary issues such as negotiations, staffing and deficit spending to ensure fiscal solvency. Diligent planning will enable the district to better understand its financial objectives and strategies to sustain financial solvency. Methodology The method used to project enrollment for the King City JUHSD is the cohort survival technique, which groups students by grade level upon entry and tracks them through each year that they stay in school. This method evaluates the longitudinal relationship of the number of students passing from one grade to the next in the subsequent year. In doing so, it more closely accounts for retention, dropouts, and in- and out-migration on a grade by grade basis. Although other enrollment forecasting techniques are available, the cohort survival method is usually the best choice for school districts because of its sensitivity to incremental changes in population. Percentages are calculated from the historical enrollment data to determine a reliable percentage of increase or decrease in enrollment between any two grades. For example, if 100 students enrolled in first grade in and increased to104 students in second grade in , the percentage of survival would have been 104%, or a ratio of Such ratios are calculated between each pair of grades or years in the school district over several recent years. The ratios used are the key factors in the reliability of the projections, given the validity of the data at the starting point. The strength of the ratios lies in the fact that each ratio encompasses collectively the variables that could possibly account for an increase or decrease in the size of a grade cohort as it moves on to the next grade. Each ratio represents the cumulative effect of the following factors: 1. Migration patterns in/out of schools 2. Retention in the same grade 3. Changes in school program King City Joint Union High School District

30 22 multiyear financial projection 4. Dropouts, Inter-district transfers, etc. 5. Birth rates 6. Residential housing starts 7. Approval of charter schools Because the district has six elementary districts that feed into it, FCMAT used four years of CBEDS historical enrollment information from each feeder district to project enrollment for the King City Joint Union High School District. Using the cohort survival method, FCMAT projected enrollment for the next two years. The following tables show the historical and projected enrollment for all feeder districts: Table 3: Historical Enrollment Data Elementary (K-6) King City Elementary Bradley San Ardo San Lucas San Antonio Greenfield Middle (7-8) King City Elementary Bradley San Ardo San Lucas San Antonio Greenfield High (9-12) Fiscal Crisis & Management Assistance Team

31 multiyear financial projection 23 Table 4: Projected Enrollment Data Elementary School (K-6) King City Elementary Bradley San Ardo San Lucas San Antonio Greenfield Middle School (7-8) King City Elementary Bradley San Ardo San Lucas San Antonio Greenfield King City High Grade Grade Grade Grade Table 5: Historical and Projected Enrollment King City H.S. Historical and Projected Enrollment ,200 2,180 2,160 2,140 2,120 2,100 2,080 2,060 King City Joint Union High School District

32 24 multiyear financial projection Average Daily Attendance To calculate the district s revenue limit, district apportionments are based on the greater of current or prior year P-2 reports for ADA. Due to the district s historical and projected future trends, this MYFP will use the prior year ADA to model the forecast. For the district to manage and sustain the recommended reserve for economic uncertainty, a significant amount of attention will need to be focused on this ADA projection. The ADA projection is only a snapshot of future years and should be adjusted with each monthly report and all interim reports. Historical and future trends require careful analysis that includes but is not limited to charter schools, community day school (new), county and district special education, nonpublic schools and prior-year adjustments. It appears from the state s P-1 apportionment exhibit for that the district overprojected ADA by 88. The district will need to review the P-1 report and make any necessary adjustments. Fiscal Crisis & Management Assistance Team

33 multiyear financial projection 25 Fund Balance and Reserve Level Net Increase/Decrease in Fund Balance The difference in the budgeted unrestricted revenues and expenditures is ($1,641,855.65), leaving a projected ending fund balance of ($645,070.68). Reserve Level - The FCMAT projection indicates that the district will not be able to meet the required reserve level in fiscal years and Table 6: Projected ending fund balance and reserve levels Ending Fund Balance ($645,070.68) ($3,283,541.82) ($5,234,412.39) Other Components of Ending Fund Balance 183, , , Projected Required Reserve Level $638, $618, $612, Negative Shortfall ($1,466,349.35) ($4,091,274.33) ($6,042,152.90) King City Joint Union High School District Current and Projected Unrestricted General Fund Balance 800,653 1,000, ,000,000-1,466, ,000,000-3,000,000-4,091, ,042, ,000,000-5,000,000-6,000,000-7,000,000 King City Joint Union High School District

34 26 multiyear financial projection The following MYFP prepared by FCMAT identifies the district s projected revenues, expenditures and changes in fund balance for the unrestricted general fund in the current and two subsequent fiscal years. Fiscal Crisis & Management Assistance Team

35 multiyear financial projection 27 Table 7: MYFP, Unrestricted General Fund Name Object Code Base Year Year 1 Year Revenues Revenue Limit Sources $13,122, $12,747, $13,109, Federal Revenues $10, $6, $6, Other State Revenues $586, $567, $572, Other Local Revenues $121, $107, $102, Total Revenues $13,840, $13,428, $13,791, Expenditures Certificated Salaries $6,962, $6,806, $6,933, Classified Salaries $1,363, $1,388, $1,364, Employee Benefits $3,242, $3,163, $3,256, Books and Supplies $275, $282, $282, Services and Other Operating Expenditures $1,086, $1,076, $1,082, Capital Outlay $0.00 $0.00 $0.00 Other Outgo $0.00 $0.00 $0.00 Direct Support/Indirect Cost ($150,757.00) ($150,757.00) ($150,757.00) Debt Service $400, $939, $400, Total Expenditures $13,179, $13,507, $13,168, Excess (Deficiency) of Revenues Over Expenditures $661, ($79,298.63) $622, Other Financing Sources\Uses Interfund Transfers In $0.00 $0.00 $0.00 Interfund Transfers Out $0.00 $0.00 $0.00 All Other Financing Sources $0.00 $0.00 $0.00 All Other Financing Uses $0.00 $0.00 $0.00 Contributions ($2,303,063.57) ($2,559,172.51) ($2,573,825.51) Total Other Financing Sources\Uses ($2,303,063.57) ($2,559,172.51) ($2,573,825.51) Net Increase (Decrease) in Fund Balance ($1,641,855.65) ($2,638,471.14) ($1,950,870.57) Fund Balance Beginning Fund Balance 9791 $800, ($645,070.68) ($3,283,541.82) Audit Adjustments 9793 $0.00 $0.00 $0.00 Other Restatements 9795 $196, $0.00 $0.00 Adjusted Beginning Fund Balance $996, ($645,070.68) ($3,283,541.82) Ending Fund Balance ($645,070.68) ($3,283,541.82) ($5,234,412.39) Components of Ending Fund Balance Reserved Balances 9700 $0.00 $0.00 $0.00 Revolving Cash 9711 $6, $6, $6, Stores 9712 $0.00 $0.00 $0.00 Prepaid Expenditures 9713 $177, $183, $189, Other Prepay 9719 $0.00 $0.00 $0.00 General Reserve 9730 $0.00 $0.00 $0.00 Legally Restricted Balance $0.00 $0.00 $0.00 Economic Uncertainties Percentage 3% 3% 3% Designated for Economic Uncertainties 9770 $638, $618, $612, Designated for the Unrealized Gains of Investments and Cash in County 9775 $0.00 $0.00 $0.00 Treasury Other Designated 9780 $0.00 $0.00 $0.00 Undesignated/Unappropriated 9790 $0.00 $0.00 $0.00 Negative Shortfall 9790 ($1,466,349.35) ($4,091,274.33) ($6,042,152.90) King City Joint Union High School District

36 28 multiyear financial projection The following MYFP prepared by FCMAT identifies the district s projected revenues, expenditures and changes in fund balance for the restricted general fund in the current and two subsequent fiscal years. Fiscal Crisis & Management Assistance Team

37 multiyear financial projection 29 Table 8: MYFP, Restricted General Fund Name Object Code Base Year Year 1 Year Revenues Revenue Limit Sources $521, $557, $596, Federal Revenues $1,220, $1,243, $1,265, Other State Revenues $2,431, $2,253, $2,319, Other Local Revenues $818, $569, $569, Total Revenues $4,991, $4,623, $4,751, Expenditures Certificated Salaries $2,049, $2,089, $2,131, Classified Salaries $1,076, $1,097, $1,118, Employee Benefits $1,336, $1,384, $1,435, Books and Supplies $1,542, $710, $718, Services and Other Operating Expenditures $480, $369, $369, Capital Outlay $158, $11, $11, Other Outgo $1,227, $1,227, $1,227, Direct Support/Indirect Cost $127, $122, $122, Debt Service $0.00 $0.00 $0.00 Total Expenditures $7,999, $7,013, $7,135, Excess (Deficiency) of Revenues Over Expenditures ($3,008,026.53) ($2,389,958.57) ($2,384,375.43) Other Financing Sources\Uses Interfund Transfers In $0.00 $0.00 $0.00 Interfund Transfers Out $96, $97, $97, All Other Financing Sources $0.00 $0.00 $0.00 All Other Financing Uses $0.00 $0.00 $0.00 Contributions $2,303, $2,559, $2,573, Total Other Financing Sources\Uses $2,206, $2,462, $2,476, Net Increase (Decrease) in Fund Balance ($801,732.96) $72, $92, Fund Balance Beginning Fund Balance 9791 $803, $1, $74, Audit Adjustments 9793 $0.00 $0.00 $0.00 Other Restatements 9795 $0.00 $0.00 $0.00 Adjusted Beginning Fund Balance $803, $1, $74, Ending Fund Balance $1, $74, $166, Components of Ending Fund Balance Reserved Balances 9700 $0.00 $0.00 $0.00 Revolving Cash 9711 $0.00 $0.00 $0.00 Stores 9712 $0.00 $0.00 $0.00 Prepaid Expenditures 9713 $0.00 $0.00 $0.00 Other Prepay 9719 $0.00 $0.00 $0.00 General Reserve 9730 $0.00 $0.00 $0.00 Legally Restricted Balance $1, $74, $166, Designated for Economic Uncertainties 9770 $0.00 $0.00 $0.00 Designated for the Unrealized Gains of Investments and Cash in County Treasury 9775 $0.00 $0.00 $0.00 Other Designated 9780 $0.00 $0.00 $0.00 Undesignated/Unappropriated 9790 $0.00 $0.00 $0.00 Negative Shortfall 9790 $0.00 $0.00 $0.00 King City Joint Union High School District

38 30 multiyear financial projection The district should strive to keep the governing board, staffs and communities informed regarding district finances. As always, good communication is one of the keys to operating effectively in uncertain economic times. Because each district has a unique combination of services, programs and mission statements, a one-size-fits-all approach does not work for budget reductions, cost containment strategies or other adjustments. Although there is no definitive list of procedures that all districts should follow when identifying areas to assess and maintain solvency, many of the items identified in this report are common to all. Recommendations The district should: 1. Adopt by board resolution budget reductions or revenue enhancements that adjust the budget and multiyear projections in to eliminate deficit spending and meet the reserve requirement in the current and two subsequent fiscal years. 2. Prepare multiyear projections that provide current data for use in the decisionmaking process as the district continues to recover. Staffing impacts 3. Review all staffing to ensure that staffing formulas, ratios and class sizes (which are often specified in collective bargaining agreements) are being followed according to contract. Seniority lists should be established for all employees/positions in case employee layoff notifications need to be issued for all employees. 4. Freeze hiring for all vacant nonessential management, certificated and classified positions, unless hiring is required by contract. 5. Reduce the use of substitutes when possible, as well as overtime and all staff on special assignments. 6. Reconcile position control data from the human resources department with the amounts budgeted for salaries and benefits, and capture excess dollars where possible. Restricted program dollars and other funds 7. Ensure that categorical restricted resources and other funds are self-supporting to limit general fund contributions. This should include paying for general fund overhead expenses such as direct support, indirect costs, PERS revenue limit reduction, post-retirement benefits and all other costs. Maximize the flexibility options to the full extent possible from categorical dollars, including mega item, AB 825 and federal transfers. Fiscal Crisis & Management Assistance Team

39 multiyear financial projection Expend restricted dollars first whenever possible, and freeze nonessential purchases using unrestricted dollars, such as travel or equipment. Complete an in-depth review of expenditures being charged to unrestricted funding. Review existing encumbrances and liquidate any balances that will not be expended. 9. Maximize the efficient use of all categorical resources and strive to limit carryover in these programs. Budget 10. Identify all one-time sources of revenue and corresponding expenditures in the budget to clarify the district s funding sources. 11. Delay making final decisions on any new ongoing costs, such as collective bargaining negotiations and capital leases, until reliable fiscal information regarding the state budget is available to enable a better understanding of the multiyear impact on the district s budget. Quantify the available dollars that can be prioritized for uses that may include salary increases. Enrollment and ADA 12. Ensure that enrollment and average daily attendance (ADA) projections are up to date and based on current data. Review the state s P-1 apportionment report and make the necessary adjustments to correct the district s over-projection. 13. If the district s enrollment is declining, review the possibility of consolidating school sites or programs to reduce operating costs. Identify the causes of declining enrollment including, but not limited to, inter-district transfer agreements, charter schools and competing academic interests. Review annual student attendance/ enrollment percentages. Create a plan to maximize student attendance. Benefits 14. Review health plan costs for cost containment opportunities such as second opinion requirements and primary physician assignments. Conduct a re-enrollment of employees eligible for health benefits to ensure that employees are not covered after separation from the district and that retiree benefits are not being offered after the contracted age. 15. Review the method used to coordinate Medicare benefits with retiree health plan benefits. 16. Consider negotiating a cap on health benefit plans with the collective bargaining units. King City Joint Union High School District

40 32 multiyear financial projection Contracted services 17. Review contracted services annually to ensure that the district is receiving what it is paying for and that a less expensive vendor is not available. This can include professional services such as auditing or legal services, which can be negotiated by requesting competitive quotes. Facilities 18. Ensure that the 3% administrative charge is being assessed against the developer fee fund as allowed by law. In order to reimburse a school district for the administrative cost of collecting and administering developer fees, Education Code section does the following: (a) (5) authorizes a school district to retain three percent of the fee revenue collected in the current fiscal year. The district is not currently charging the capital facilities fund for administrative costs. The Standardized Account Code Structure (SACS) describes how direct cost should be charged against the capital facilities fund. A debit should be posted to the capital facilities fund, and a credit should be posted to the general fund using object 5750 (interfund services). 19. Ensure that the deferred maintenance match is being transferred through the routine repair and maintenance resource so that it counts toward the 3% requirement in Education Code section Services and leases 20. Monitor copy machine costs. Compare the per-copy cost of leases, materials and agreements on existing copiers at school sites and offices. Using an outside vendor is sometimes more cost effective because maintenance and replacement costs on older machines are very expensive. 21. Ensure that cleaning standards have been established in the operations department. Cleaning standards that include specific tasks and timelines for each custodian can often reduce costs. 22. Ensure that policies and expenditures for the use of cell phones have been reviewed. 23. Review utility costs and alternative programs for potential cost savings. Transportation 24. Consider increasing student nontransportation/walking distances to reduce the number of buses needed and/or the number of driver hours. Fiscal Crisis & Management Assistance Team

41 multiyear financial projection Review staffing ratios to ensure that they are within employee contract guidelines, meet students needs and agree with approved district goals and objectives, including the goal of maintaining fiscal solvency. Reduction in force (RIF) 26. Prepare for a reduction in force (RIF). It is likely that districts with flat or declining enrollment will be required to consider a RIF in fiscal years and The district cannot afford to be overstaffed in this economic environment. King City Joint Union High School District

42 34 Fiscal Crisis & Management Assistance Team

43 internal controls 35 Internal Controls Position Control Internal controls include processes designed to provide reasonable assurance that the operations of the district are effective and efficient; the financial information produced is reliable, and the district is operating in compliance with all applicable laws and regulations. The internal control structure includes the polices and procedures used by district staff, accounting and information systems, the work environment and the professionalism of employees while conducting district work. Expenditures for employee salaries are divided into three separate line items: certificated, classified and management employees. The certificated employees include teachers, nurses, librarians, psychologists and others who provide services that require credentials from the state of California. Management employees include principals, vice principals, instructional leaders and district superintendents. Classified employees include all of the support personnel in the district, such as secretaries, accountants, bus drivers, mechanics, painters and custodial personnel. In addition, health and welfare benefits provided to district employees include expenses for state retirement systems, medical, dental and life insurance plans, and workers compensation benefits. Also included are the costs of health insurance for retired employees. Employee salaries and benefits are the largest component of any district s operating budget comprising an average of 86.9% of the unrestricted budget in the majority of California school districts. In King City Joint Union High School District, 87.77% of the unrestricted general fund budget is committed to salaries and benefits. This is slightly higher than the statewide average and illustrates the relative increase in employee-related expenses as compared with nonpersonnel expenses such as books, supplies, utilities and contracted services. The district s budget is due in part to periods of declining or flat enrollment. The district has had to make expenditure reductions to remain fiscally solvent while still incurring increases in some areas of the budget. The district s overall expenditure budget has grown and increases in employee salaries and benefits have simply outpaced increases in the other areas of the budget. Increases in health benefit costs have contributed significantly to this rise in personnel expenditures. The contributions between unrestricted and restricted programs continue to increase in each subsequent fiscal year. The graph below illustrates the components of the district s unrestricted general fund budget. King City Joint Union High School District

44 36 internal controls Table 9: Unrestricted General Fund Components King City Joint Union High School District Unrestricted General Fund Supplies 2% Other Services 6% Capital Outlay 1% Other Outgo 2% Benefits 23% Certificated 52% Classified 12% This budget trend of increasing personnel expenditures reinforces how important it is for the district to manage its expenditures for personnel-related items in order to remain fiscally solvent and why districts that have to make expenditure reductions find it difficult to avoid affecting personnel. A reliable position control system has board-authorized positions by site or department and prevents overstaffing. The district needs to develop current staffing formulas for all positions and ensure that staffing ratios are within employee contract guidelines, meet students needs and agree with approved district goals and objectives, including the goal of maintaining fiscal solvency. For position control to be effective, the system must be fully integrated with the other financial modules such as the budget development system and payroll. The position control functions must be separated to ensure that there are strong internal controls between departments, creating proper checks and balances. The internal controls should be designed so that only board-authorized positions are entered into the system by the personnel department and paid by the business office. Fiscal Crisis & Management Assistance Team