Got Cash? Got Cash?

Ron BennettPresident &

Chief Executive OfficerSchool Services of California

Joel MonteroChief Executive Officer

Fiscal & Crisis Management Assistance Team (FCMAT)

David PollockSenior Director,

Program DevelopmentCalifornia School Boards Association

Presented by

The Bottom Line of School FinanceThe Bottom Line of School Finance

Overview

• Our Definition of “Financially Troubled” (Ron)

• AB 1200 and AB 2756 Oversight Responsibilities (Joel)

• So, How Do Districts Get Into Trouble? (Ron)

• Monitoring the Budget (David)

• What Happens if your District Gets into Financial Trouble (Joel)

• Summary (David)

• Question & Answers (All)

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A Financially Troubled District…

• May have a history of deficit spending

• May have qualified or negative interim reports

• May have its budget disapproved by the county office (COE)

• May not be able to conform to multi-year projection standards

• May not have enough cash to meet its obligations

• Probably has poor oversight and monitoring of its finances

• May have all of the above!...or none of the above

• In short, a district that cannot meet state standards on its own

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District Fortunes and the Economy

• A district is qualified when it is determined that it may not be able to meet its financial obligations in future fiscal years

– The number of qualified districts in the state will grow as the economy weakens—in the current environment as many as 50% of all districts could be technically qualified on the basis of multi-year budget projection

• A district is negative when it is determined that current and future financial obligations won’t be met

– The number of Negative Certification districts will also grow as cash flow issues impact the day to day operations. Negative certifications are specifically related to a lack of adequate cash

The State’s economy is in free fall and education will be impacted

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What is AB 1200?

County Office Review at a Minimum of Three Specific Data Collection Points

• Budget Approval

• First and Second Interim Reporting Periods

– Positive, Qualified and Negative Certifications

– COEs Must Assess Solvency for the Current Plus Two Additional Years (one year if Negative)

• AB 1200 Disclosures

– Collective Bargaining

– Debt (AB 1297)

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AB 1200 Oversight Responsibilities

Possible Actions Under a Qualified Certification

• Fiscal Expert Assignment

• Budget Analysis and New Financial Projections

• Approval of New Debt Issuances

• Longer Period of Review for Collective Bargaining Agreements

• Encumber all Contracts and Other Obligations

• Withhold Compensation from Superintendent and Governing Board

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AB 1200 Oversight Responsibilities

Possible Actions Under a Negative Certification

• All Actions as Under a Qualified Plus:

• Develop and Impose a Budget in Consultation

• Stay or Rescind Any Action of the Board that is Inconsistent with Fiscal Recovery

• In Consultation with the COE Develop a Fiscal Recovery Plan

• Assign a Fiscal Advisor

• May not Abrogate any Provision of the Collective Bargaining Agreement

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What is AB 2756?

• In the Event of Cash Insolvency (Emergency Appropriation)

– Authority Transfer to the California Department of Education

– Assignment of a State Administrator (200% Rule)

– Governing Board Becomes Advisory Only

– Recovery and Assignment of a State Trustee

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AB 2756 Oversight Responsibilities

• FCMAT has an increased role

– Greater support for districts and COEs

– Hands-on assistance to troubled districts

– More training and professional development to avoid crisis

Take this oversight seriously!Take this oversight seriously!

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So How Do Districts So How Do Districts Get Into Trouble?Get Into Trouble?

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Common Causes of Financial Problems

• Overly optimistic estimates of state economics*

• Overly aggressive estimates of enrollment, attendance*

• Declining enrollment

• Failure to document budget assumptions

• Loss of control of staffing levels and costs*

• Underestimating “automatic” cost growth

• Use of one-time money for ongoing expenses

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Common Causes of Financial Problems

• Poor decisions at the negotiating table*

• Failure to consider the multi-year impact of budget decisions

• Failure to follow through on budget decisions*

• Poor budget monitoring by the Superintendent and Board

• Chronic deficit spending*

• Inadequate reserves*

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Overly Optimistic Estimates ofState Economics

• This Year—It’s a Whole New Game

• There Very Likely Will Be Mid or Late Year Cuts

• Watch Closely the Governor’s January Budget And:

– Forego making big budget decisions until after January

– Conserve cash

– Build reserves and fund balance

• Budgets based on optimistic projections must have a fallback position

• The state is a less reliable source of funding

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Overly Aggressive Estimates of Enrollment, Attendance, and ADA

• For most This is the Revenue Engine--Never overestimate ADA!

– Nearly all state funding is based on ADA

– The floor on ADA is last year’s P-2 ADA

– You need a sound basis for a higher estimated ADA

• ADA enrollment ratios usually change slowly

– If you are expecting to improve attendance, prove it before you add revenue to the budget

• If ADA is overestimated, adding staff to serve ADA that never shows up creates an even bigger disaster

• If you make a mistake here there is not enough money anywhere else in the budget to fix the problem!

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Declining Enrollment

• Nearly half of California’s school districts are losing enrollment

• The economics of declining enrollment are awful– Revenues are lost much faster that cost

• Even with a one-year safety net

• Action is required – but often is taken too late

• Plan ahead – you will be cutting the budget every year

• And close schools if you must

Example:

0 1 2 3 4 5 6

Fiscal Years

AD

A/F

undi

ng L

evel

ADA

Funding

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Failure to Document Budget Assumptions

• Budget assumptions are the basic building blocks of the budget

– Write and publicize the assumptions on which the budget is based

• Revenue growth, including COLA

• Enrollment growth or decline

• Benefit cost increases

• Program augmentations

• Post-retirement benefits

• Fuel and utility costs

• Costs to open or close a school

• Test and revise assumptions throughout the budget cycle

• Written assumptions provide linkage to the original budget

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Loss of Control of StaffingLevels and Costs

• Personnel costs represent the lion’s share of the budget – 80%-85%

– Numbers of people are related to the numbers of kids!

– Costs for salary schedule maintenance must be considered

– Pay raises—in this economic environment??

– The cost for district-paid benefits will continue to increase

– If you make a mistake here there is not enough money anywhere else in the budget to fix the problem

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Underestimating “Automatic”Cost Growth

• Automatic cost increases are pervasive to the budget

– Step increases for seniority

– Column increases for professional preparation

– Fuel and utility cost increases

– Health benefit increases

– Workers’ Compensation insurance increases

• All of these – and more – factors lead to “uncontrollable” increases in expenditures

• COLA and growth funding increases must cover all of these increases, as well as any salary schedule increases

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Use of One-time Money forOngoing Expenses

• Don’t spend one-time money on anything that eats

– How will you feed it next year?

• One-time money should be used carefully

– Good dollars for reserves or one-time expenditures

– Equipment, technology upgrades, and other nonrecurring expenditures

• Withdrawals from reserves are one-time revenues – do not use them for ongoing salary or benefit increases

– Sometimes it is appropriate to use reserves for the retroactive portion of a salary settlement

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Poor Decisions at theNegotiating Table

• The negotiations table is a fiscal “danger zone”

• Pressure to give more than you can afford can be tremendous—even now

– “Giving COLA” and finding another way to pay for everything else is a lethal recipe

• Think – and negotiate – based on total compensation

– Consider step and column, employee benefits as part of any basis for salary increase

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Poor Decisions at theNegotiating Table

• Language issues also cause financial problems

– At least one district has negotiated a teaching day that does not meet minimum instructional minutes and must provide extra teachers for supplementary instruction every day

• The CBO needs to be at the negotiating table and should independently cost out each proposal

• Factfinding isn’t fun, but it’s better than a bad agreement

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Failure to Consider the Multiyear Impact of Budget Decisions

• AB 1200 and AB 2756 require districts to consider the budget impact on the current year and two subsequent years

• Multi-year planning does not rely on a crystal ball – it is the mathematical consequences of the actions of today and Must Be Constantly Revised!

• Most major budget failures can be traced to specific events and decisions

• The COE should intervene if your multi-year projections are less than positive

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Failure to Follow Through onBudget Decisions

• Difficult budgets require difficult decisions

– Sometimes the board takes considerable public criticism for making them

– But once those decisions have been made, they must be implemented – but often they are not!

• Positions are not cut

• Expenditures are not reduced

• Failure to follow through, no matter how good the excuse, requires that the board and superintendent re-visit the budget

• Bad news does not get better with age – if the cuts can’t be made, develop a new plan early

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Poor Budget Monitoring by the Superintendent, CBO and Board

• A budget is only a plan and only as good as its last revision

• Tie changes to the original assumptions so the links are clear

• There are at least five required “checkpoints”:

– Budget adoption

– The first interim

– The second interim

– The unaudited actuals

– Receipt of the audited financials

• These events represent a minimum revision level

– Most districts need more frequent revision

• The earlier a problem is identified, the more options to fix it

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Chronic Deficit Spending

• Deficit spending means we are spending more than we take in

• Some deficit spending may be planned when balances have been built up to allow a large one-time expenditure

– Spending against the bank is OK

• Most deficit spending is unplanned and uncontrolled

• Sooner or later you will run out of reserves

• Deficit spending is at the core of every school district bankruptcy—it is the villain of solvency!

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Inadequate Reserves

• There is no such thing as a good budget without a reasonable reserve

• Reserves are a buffer that allows problems to be solved locally instead of turning to the COE or the state for help

• The state-recommended minimum Reserve for Economic Uncertainties is just that – a minimum number

– Most districts need more

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Inadequate Reserves

• Circumstances that call for higher reserves include:

– Declining enrollment

– Rapid enrollment growth

– Opening or closing schools

– Basic Aid districts

– The next three fiscal years!

• There are no circumstances that warrant lower reserves

– Temporary shortfall should be fixed immediately

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Monitoring Monitoring the Budgetthe Budget

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Who is Responsible for Monitoring the Budget?

• The Board – adopts and is ultimately responsible

• Superintendent – accountable for recommendations

• CBO – accountable for quality of information and day-to-day monitoring

• Principals/staff – determine needs

• Community – defines priorities

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Estimating Next Year’s Income

• Enrollment (ADA)

• State revenue limit

• Lottery

• Special purpose funds

• Local income

• Special education

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Planning Next Year’s Expenses

• Actual salary of each employee

• Actual benefits for each employee

• New programs

• Ongoing programs

• Use assumptions to make estimates:

– Utility costs

– Insurance costs

– Capital and equipment

• Legal costs

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Four Concurrent Budget Cycles

• Closing the past budget

• Managing the current-year budget

• Developing the budget for the next year

• Planning and goal setting that is reflected in the budget in two years

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Final Budget: What Should theBoard Look For?

• Is it balanced?

• Adequate reserves?

• Programs funded?

• Comprehensive?

• Simple to grasp?

• Other funds?

• Are salary improvements included?

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Reviewing the Audit

• Read the opinion letter in the front of the audit

• Look at the footnote disclosures

• Read the findings and recommendations

– Compare to prior-year findings

– Are things getting fixed?

• Now look at the numbers fund by fund

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Audit

• Board’s report on the effectiveness of Financial Operations

– Controls

– Fiscal health – last year

– Historical document

– Findings and recommendations

• Only glimpses of the future

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What Happens if Your What Happens if Your District Gets intoDistrict Gets intoFinancial Trouble?Financial Trouble?

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Intervention Starts With theCounty Office of Education

• Intervention is progressive and can be tailored to the severity of the problem

• An adverse interim report or disapproved budget requires the COE determine the level of corrective action

• A fiscal expert may be appointed when a district has a qualified report; this fiscal expert has limited authority

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COE Goal is Assistance with Least Outside Intervention

• The COE can be more helpful when you are candid and get it involved early

• A Budget Review Committee is used to adjudicate disputes between the district and the COE if they do not agree on the problem

• Try to help the COE to help you

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The Role of FCMAT

• FCMAT can help in:

– Determining the extent of the problem

– Providing facts that help resolve disputes

– Developing recovery plans

• FCMAT also advises legislators on the need for state loans

• FCMAT can be a valuable resource before you get into trouble, so ask for help

• If you get into trouble, FCMAT will almost certainly play a role in your recovery

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Responsibilities of the District

• Characteristics of districts that make a successful turnaround:

– Recognize they have a problem

– Don’t mask the problem

– Take advantage of financial expertise available

– Work collaboratively with oversight agencies

– Are part of the solution

• Characteristics of districts that require severe measures:

– Deny they have a problem

– Resist scrutiny from outsiders

– Don’t seek external assistance

– Combative with oversight agencies

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Responsibilities of the District

Cash Is Really King

• Cash Deferrals will Continue to be a Reality

• Actions that Board’s Take Will Have an Impact on Cash Flow

• In This Environment Cash Management is a Everyday Occurrence

• If a District Runs Out of Cash It’s “Game Over”

• Board Members Must Understand the Difference Between Budget and Cash and Act Accordingly

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Summary

• A governing board has legal fiduciary responsibilities

• The vast majority of boards discharge this duty well

• AB 1200 and AB 2756 require fiscal transparency

• A board must simultaneously:

– Review and report past budget performance

– Monitor and revise the current year budget

– Plan and prepare future budgets

• FCMAT is an agency designed to assist boards

• If a board gets into financial trouble, the COE must step in

• The state does not “bail out” board from financial troubles

• A state loan comes with a state trustee or administrator

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