State Board of Education Proposed Rule Changes 12/27/2018 State Board of Education Proposed Rule Changes Jennifer Okes, School Finance Director Kirk Weber, Financial Accounting Technical Advisor October 16, 2014 1

12/27/2018 Rule Changes Meaningful Grouping: Re-group rules related to the food service fund with other financial related rules Clarification on Operating Year: Three months average expenditures is based upon a nine-month year Fund Treatment: Change from Enterprise Fund to Special Revenue Fund Indirect Cost: Remove unnecessary restriction on indirect costs In part due to heightened focus on fiscal matters by the USDA, the department included a more detailed review of activity of the Food Service Fund as part of the last annual audit and financial December data pipeline submission. This review included ensuring compliance with the aforementioned federal regulation and with the State Board Rule 1 CCR 301-3, Rule 206.05. 2

12/27/2018 Meaningful Grouping Existing rules related to the food service fund are located both in the Food and Nutrition Services Rules (1 CCR 301-3) and the Rules for Accounting and Reporting (1CCR 301-11). Propose re-grouping of rules related to the food service fund in a single location under the Rules for Accounting and Reporting, with other rules related to financial matters. Allow the Food and Nutrition Services Rules to be focused on the programmatic regulations, rather than a mixture of programmatic and financial regulations. It may be more efficient and effective to consolidate rules related to the food service fund in a single location under the Rules for Accounting and Reporting, with other rules related to financial matters. This would allow the Food and Nutrition Services Rules to be focused on the programmatic regulations, rather than a mixture of programmatic and financial regulations. 3

12/27/2018 Operating Year Federal regulations (7 CFR 210.14(b)) outline that a school district cannot carry an operating balance greater than three months’ average expenditures in its school food service fund. CDE uses a nine-month operating year for this calculation. The updated CDE-5 clarified the use of a nine-month operating year. The Rules for Accounting and Reporting (1 CCR 301-11) should also be updated to clarify this nine-month operating year. This requirement is meant to ensure that school districts are spending their funds only on school meal operations and are not using federal funds for other purposes. (USDA Policy Memo SP 34-2013). The January 2014 School Meal Program Performance Audit recommended the department define and communicate to school districts a standard timeframe for the number of months in an operating year, for this calculation. The department has clarified as part of the CDE-5 report the use of a nine-month operating year for this calculation. The department proposes adding the following to the State Board of Education Rules for Accounting and Reporting (1 CCR 301-11): Pursuant to federal regulations, net cash resources must be limited to three months average expenditures based upon a nine month operating year. Net cash resources is defined as current assets less current liabilities, except that current assets shall not include the value of USDA donated foods for the purpose of computing net cash resources. Current Operating Resources and Net Cash Resources use the same calculation. 4

12/27/2018 Fund Treatment FPP approved a change to the Food Service Fund from an “Enterprise Fund” to a “Special Revenue Fund” Various reasons considered: State Board Rules and State Statute considerations USDA heightened focus on fiscal matters – Federal Regulations Food Service Fund as a Federal grant program Office of Management & Budget (OMB) guidance Governmental Accounting Standards Board (GASB) considerations Current (Rule 3.06(1)): The Food Service Fund is an Enterprise Fund that shall be used to account for revenues, non-revenue receipts, and expenses for food service transactions funded in part or in whole through the United States Department of Agriculture Programs. 5

Overview of Indirect Costs 12/27/2018 Overview of Indirect Costs CDE develops an indirect cost rate for each school district based upon district expenditures using a standard methodology Indirect costs are used by many federal programs to ensure only allowable costs are charged to the federal program The indirect cost rate provides a simplified mechanism to charge federal programs and maximize federal grant collections Without an indirect cost rate, additional tracking and documentation would be required of school districts 6

What are Indirect Costs? 12/27/2018 What are Indirect Costs? Direct costs can be thought of as programmatic costs (e.g. food service personnel) and indirect costs can be thought of as overhead costs (e.g. human resources personnel) Program Codes: 2300 – Support Services – General Administration 2500 – Support Services – Business 2600 – Operation and Maintenance of Plant Services 2800 – Support Services – Central 2900 – Other Support Services 7

12/27/2018 Current Rule Indirect costs are limited to the approved non-restricted indirect cost rate. Districts can charge indirect costs to the food service fund using the indirect cost rate (a percentage) or using direct coding of expenses. Districts must keep a fund balance reserve of at least 30% in order to charge indirect costs to the food service fund. Real World Example using the Food Service – Indirect Cost Calculator: http://www.cde.state.co.us/nutrition/osnfinancialindirectcosts For each school year, indirect costs may be recovered from the food service fund, but shall be limited to that amount established by the approved nonrestricted indirect cost rate from the prior school year’s financial data as reported to CDE. Current: (1 CCR 301-3 206.05) For each school year, indirect costs may be recovered from the food service fund, but shall be limited to that amount established by the approved nonrestricted indirect cost rate from the prior school year’s financial data as reported to CDE. Under no circumstances may the amount recovered cause the Current Operating Resources to fall below a level of 30 percent of the total operating cost from the prior school year’s financial data as reported to CDE. Current Operating Resources is defined as current assets less current liabilities, except that current assets shall not include the value of USDA donated foods for the purposes of computing Current Operating Resources. Any indirect costs recovered from the food service fund must first be reduced by any amounts directly assessed from the food service fund relating to the indirect cost areas as defined in the indirect cost rate agreement between CDE and the U.S. Department of Education 8

Reason for Current Rule 12/27/2018 Reason for Current Rule Rationale for Current Rule: Federal regulations require that the state provide matching funds. Previously the state did not provide funding for school nutrition program. The 30% fund balance reserve requirement was implemented in lieu of state matching funds. In further researching this rule, the department determined that one of the reasons for implementing this last requirement was that unrecovered indirect costs were the major contributing component to a federal matching requirement. §210.17 Matching Federal funds, provides that for each school year, the amount of State revenues appropriated or used specifically by the State for program purposes shall not be less than 30 percent of the funds received by such State under section 4 of the National School Lunch Act. 9

Reason for Changing Rule 12/27/2018 Reason for Changing Rule Rationale for Changing Rule: Beginning in FY 2001-02, the General Assembly began appropriating funds to comply with the state matching funds requirement pursuant to Section 22-54-123, C.R.S.. Since the match requirement is now funded by the State, it is not necessary for districts to maintain fund balance reserves in the food service fund. Eliminate state imposed restriction on school districts. Allow local control of financial decisions related to the food service fund. The match requirement is now funded by the State. This is no longer the case as state funds for child nutrition programs are sufficient for the federal matching requirement. Given the primary purpose for the limitation on charging indirect costs was the matching component, we question the need to continue to limit the application of indirect costs as outlined in the State Board Rule requirement. HB10-1013 included SECTION 15. 22-54-123 (1), Colorado Revised Statutes, is amended to read: 22-54-123. National school lunch act - appropriation of state matching funds. (1) For the 2001-02 budget year and budget years thereafter, the general assembly shall appropriate by separate line item an amount to comply with the requirements for state matching funds under the federal "National School Lunch Act", 42 U.S.C. sec. 1751 et seq. The department of education shall develop procedures to allocate and disburse the funds among participating school food authorities each year in an equitable manner SO as to comply with the requirements of said act. In any participating school food authority that, prior to the enactment of this section, subsidized school lunch service with moneys from the school food authority's general fund, moneys received by such school food authority pursuant to this section shall be applied in addition to, and not in lieu of, the amount of the school food authority's subsidy. Any moneys received pursuant to this section shall be used only for the provision of the school food authority's school lunch program. 10

12/27/2018 Proposed Rule Keep: Indirect costs are limited to the approved non-restricted indirect cost rate. Clarify: Districts can charge indirect costs to the food service fund using the indirect cost rate (a percentage) or using direct coding of expenses. Eliminate: Districts must keep a fund balance reserve of at least 30% in order to charge indirect costs to the food service fund. As a result, the department proposes changing the rule. (1 CCR 301-11) Proposed Rule: For each school year, indirect costs, including the direct charging of indirect cost pool items may be recovered from the food service fund, but shall be limited to that amount established by the approved non-restricted indirect cost rate as determined annually by CDE under the federal indirect cost rate agreement. 11

Reason for Proposed Rule 12/27/2018 Reason for Proposed Rule Rationale for Propose Change: Maintains and clarifies protection to ensure food service fund is not over charged. Only allowable costs can be charged Indirect costs are capped Provides districts more flexibility in managing the food service fund. Eliminates a unique and outdated state restriction on a federal program. Provides for local control on program funds within federal regulations. 12

Reason for Proposed Rule 12/27/2018 Reason for Proposed Rule Rationale for Propose Change: Reduces complexity of regulations governing food service fund For example, if a district determines it is appropriate to charge indirect costs to the food service fund, they have to meet both a federal regulation with a 33% maximum and a state regulation with a 30% minimum as well as the considerations from paid lunch equity requirements. 13

12/27/2018 Myths Myth: This change would require districts to start charging indirect costs. False: Districts may continue to decide on whether to charge the fund. This is a local decision. Myth: This change would remove an important protection for the food service fund. False: The food service fund will continue to be protected from overcharging . Indirect costs are designed to ensure programs are not overcharged. Indirect costs are allowable costs. Indirect costs will continue to be limited to the allowable non-restricted rates. 14

12/27/2018 Myths (continued) Myth: This change would bankrupt the food service fund. False: The food service fund may only be charged for allowable costs. Indirect cost charges are capped at the allowable rate. State statute prohibits any fund from having a deficit fund balance. Myth: Without this rule, the food service fund could be charged costs without any oversight or approval. False: Local boards of education are required to adopt a budget with planned expenditures and must adjust the budget if expenditures will exceed the planned budget. Local boards of education are required to adopt a resolution if they use a portion of the beginning fund balance. Accreditation Report contains the following: Has the district reported positive or zero unassigned fund balances for all governmental funds and positive or zero unrestricted net assets for all proprietary funds in the basic financial statements of the annual financial report? § 22-44-105(1.5)(a) & (c), C.R.S. A board of education of a school district shall not report any funds which any moneys in excess of the amount appropriated by resolution for a particular fund. § 22-44-115(1), C.R.S. Did your local board of education adopt a resolution for the planned or actual expenditure of any portion of beginning fund balance? § 22-44-105 (1.5)(a) & (c), C.R.S. 15

12/27/2018 Myths (continued) Myth: The food service fund will be reduced to a zero fund balance. False: The current rule does not prevent a district’s food service fund from dropping below a 30% fund balance level. Many districts currently have a fund balance lower than the 30% threshold. Districts should establish appropriate policies and procedures including a targeted fund balance in order to best address the needs of the food service fund including cash flow needs or reserves for operating volatility and/or future planning. 16

Statistics In FY 2012-13, of the 176 districts that are SFAs: 12/27/2018 Statistics In FY 2012-13, of the 176 districts that are SFAs: 120 had general fund transfers into the food service fund. Thus, charging of indirect costs is not applicable. 26 are over the 30% threshold and can charge indirect costs per state rule Only 3 reported indirect costs were charged Thus, this rule is only potentially applicable to 30 districts. 166 did not charge indirect costs to the food service fund 10 reported indirect costs charged to the Food Service Fund. Based on the CDE-5 reporting, none charged the maximum allowable indirect costs to the food service fund. However, based on the Administrative Review process, 2 were identified as charging both indirect and direct charges in excess of the maximum allowable percentage. Of the remaining 46, some may have directed coded indirect costs to the food service fund. 17

12/27/2018 Violations In FY 2012-13, 20 districts failed federal regulation (had excess funds) 11 districts failed state rule (charged indirect costs when below the 30% threshold) 12 districts failed state statute on ongoing deficit fund balance (had year-end deficit) Of the 11 – 8 used indirect cost rate 2 directly charged 1 transferred funds out 8 districts had other issues identified related to food service fund 18

Options Keep the current state rule: 12/27/2018 Options Keep the current state rule: Impact: 11 districts that failed the state rule will need to replenish the food service fund Reduce the threshold in the state rule: Impact: If the threshold were reduced to 18%, the 11 districts would not have to replenish any funds Eliminate the rule: Impact: Allow school boards to manage food service funds locally and set targeted fund balances as appropriate to meet district needs 19

12/27/2018 Questions 20