Draft FIRST Indicators: Merging FIRST and Solvency Texas Education Agency Discussion About Concepts and Scores

Draft Proposed Categories: First Year Pass Fail Substandard Data Quality—the Annual Financial and Compliance Report (AFR) and the data feed (or Charter School Data Template) was not turned in on time and was not complete for FIRST analysis.

Draft Proposed Categories–Second Year Superior is the highest possible score. – This score recognizes the districts and charters with the highest financial integrity. High Score is a new category – This score indicates the district or charter has a high degree of financial integrity. Above Standard is an existing category – This score indicates that the district or charter has performed significantly above the minimum passing score. Meets Standard is the minimum passing score. – This score indicates that the district or charter meets the minimum passing standard for financial integrity. Substandard, which may result from critical fail indicators or exceptionally low total points awarded. – This score indicates that the district or charter does not have financial integrity. – This will focus TEA attention on districts and charters that need improvement. Substandard Data Quality because the AFR and data feed (or Charter School Data Template) was not turned in on time and was not complete for FIRST analysis. – This score indicates that the district or charter does not have the controls necessary to demonstrate financial integrity within a reasonable timeframe of 150 days.

Draft Comparing 2013 Ratings in the New FIRST and the Old FIRST systems. How the new system will be an improvement: – The new system allows us to identify financially weak school districts or charter schools that previously scored superior. – Several new indicators are more easily recognized and interpreted by both the public and the finance industry. – Several new indicators have a wide, sliding point range to allow a high, medium, or low point award for those indicators. – The superior rating has a higher standard, allowing the TEA to recognize the highest performers.

Draft Comparing 2013 Ratings in the New FIRST and the Old FIRST systems (Continued). School district comparison – Old FIRST system 88.34% had a superior rating 1.36% had a substandard rating – New FIRST system 24.6% had a superior rating 2.2% had a substandard rating Charter school comparison – Old FIRST system 38.58% had a superior rating 13.3% had a substandard rating – New FIRST system 14% had a superior rating 12% had a substandard rating

Expected ISD Performance Based on Historical Data: Second Year

Expected CS Performance Based on Historical Data: Second Year

Draft Critical Indicators Failure to meet the requirements of any critical indicator would cause a failure of FIRST. Indicator 1—Timely Filing of the AFR Indicator 2—Must pass either: – Unmodified Auditor Opinion for the AFR, or – No Material Weakness Noted on the AFR Indicator 3—Monetary Default on Debt Indicator 4—Overdue Payroll Tax

Draft Indicator 1: Filing the AFR and Electronic Data on Time Did the charter school or school district turn in the complete Annual Financial Report (AFR) and data feed (or Charter School Data Template) on time, November 27 or January 28 for fiscal year ending on June 30 or August 31 respectively? Aligns with Texas Education Code (TEC), (d) No 30-day grace period Yes = Pass and No = Fail Source: AFR

Draft Indicator 1: AFR and Electronic Data on Time–Continued TEC, §44.008(d) – The district shall file a copy of the annual audit report, approved by the board of trustees, with the agency no later than the 150th day after the end of the fiscal year for which the audit was made. If the board of trustees declines or refuses to approve its auditor's report, it shall nevertheless file a copy of the audit report with its statement detailing reasons for failure to approve the report with the agency.

Draft Indicator 2: Unmodified Opinion or Material Weakness for AFR Must pass either: – Unmodified Auditor Opinion for AFR, or – No Material Weakness Noted on AFR No = Pass and Yes = Fail Source: AFR

Draft Indicator 2.A: Unmodified Opinion for AFR Did the AFR indicate an unmodified opinion that the financial statements as a whole are free from material misstatements due to errors or fraud. – Unmodified, modified, adverse, or disclaimer of opinion are defined by the American Institute of Certified Public Accountants (AICPA) and determined by your external auditor. No = Pass and Yes = Fail Source: AFR

Draft Indicator 2.B: Material Weakness Noted On AFR Was there any indication on the AFR of material weakness for internal controls related to either local funds, state funds, or federal funds? – A material weakness is defined by the AICPA and determined by the independent external auditor. No = Pass and Yes = Fail Source: AFR

Draft Indicator 3: Default on Debt Was there a monetary default (overdue principle and interest payments) related to a loan, bond, debenture, borrowed money, bond sinking fund, or any other form of debt (excluding payables to vendors where money was not borrowed)? – This indicator is failed on the first year that default is noted in the AFR. – An exemption applies in following years if the entity has a payment plan with the lender and that payment plan is paid on schedule.

Draft Indicator 3: Default on Debt – Technical defaults not related to monetary defaults are also exempted. A technical default is a failure to uphold terms of a debt covenant, contract, or master promissory note even though payments to the lender, trust, or sinking fund are up to date. No = Pass and Yes = Fail Source: AFR

Draft Indicator 4: Overdue Payroll Tax Were payroll taxes that were owed to the Internal Revenue Service (IRS), Teachers Retirement System (TRS), Texas Workforce Commission (TWC), and other government agencies paid on time? – This indicator is failed on the first year that delinquency occurs. – An exemption applies in subsequent years if the entity has a payment plan with the IRS and that payment plan is paid on schedule. No = Pass and Yes = Fail Source: IRS tax data is on the AFR Source: TRS and TWC data is from the comptroller’s office.

Point values for indicators IndicatorPoints Total for all indicators100

Draft Solvency Indicators Each indicator focuses on the solvency of the entity. Indicator 5: Days Cash On Hand – Upper score range has been reduced for both school districts and charter schools Indicator 6: Current Assets to Current Liabilities Ratio – Upper score range has been reduced for both school districts and charter schools Indicator 7: Long-Term Liability to Long-Term Asset Ratio –Score range has changed for both school districts and charter schools since the initial draft.

Draft Solvency Indicators Indicator 8: Expenditure Analysis – No longer percent driven, simple pass/fail – School Districts: Compare General Fund Revenue to Expenditures Less Adjustments – Charter Schools: Total Revenue to Expenses Less Depreciation – If revenues are less than expenditures, a passing score can be achieved if the district or charter school achieves a passing score on Indicator 6 (Days Cash on Hand) Indicator 9: Analysis of Unassigned Fund Balance or Unrestricted Net Assets – School Districts: Unassigned Funds to Expenditure Ratio Excluding Adjustments – Charter Schools: Unrestricted Net Asset to Expense Ratio Excluding Depreciation

Draft Solvency Indicators Indicator 10: Debt Service Coverage Ratio – The upper score range has been reduced for both school districts and charter schools – Verified a high pass rate for this indicator for both school districts and charter schools Indicator 11: Administrative Cost Ratio Indicator 12: Decline of Student to Staff Ratio by 15% or more.

Draft Indicator 5: Days Cash On Hand What was the amount of days cash on hand for the school district or charter school? School districts: – Numerator: Uses Cash & Equivalents and Current Investments as reported in the Balance Sheet (General Fund) on the AFR. – Denominator: Uses expenditures less facilities acquisition and construction as reported in the Statement of Revenues, Expenditures, and Changes in Fund Balance (General Fund) on the AFR. – Multiply the ratio by 365 to produce number of days of cash on hand

Draft Indicator 5: Days Cash On Hand What was the amount of days cash on hand for the school district or charter school? Charter schools – Numerator: Uses Cash & Equivalents and Investments as reported in the Statement of Financial Position. – Denominator: Uses total expenses less depreciation as reported in the Statement of Activities. – Government charter schools that follow GASB 68 will exclude pension expense from total expenses. – Multiply the ratio by 365 to produce the number of days of cash on hand Worth up to 10 points

Draft Indicator 5: Days Cash On Hand (COH) DistrictsCharters 0 points = < 30 days0 points = < 20 days 2 points = 30 to 44 days2 points = 20 to 29 days 4 points = 45 to 59 days4 points = 30 to 39 days 6 points = 60 to 74 days6 points = 40 to 49 days 8 points = 75 to 89 days8 points = 50 to 59 days 10 points = 90+ days10 points = 60+ days

Draft Indicator 6: Current Assets to Current Liabilities What was the value of the current assets to current liabilities for the school district or charter school? – The current assets to current liability ratio indicates the ability to pay current liabilities with current assets in the near future. This differs from days cash on hand because that indicator analyzes how many days of expenses you can pay with cash on hand. – School districts: Use current assets and current liabilities as reported in the Statement of Net Position on the AFR. – Charter schools: Use current assets and current liabilities as reported in the Statement of Financial Position on the AFR.

Draft Indicator 6: Current Assets to Current Liabilities Current assets are divided by current liabilities. The result (current ratio) is a standard ratio used in commercial lending. Worth up to 10 points

Draft Indicator 6: Current Assets to Current Liabilities DistrictsCharters 0 points = < 1 2 points = 1 to points = 1 to points = 1.5 to points = 1.25 to points = 2 to points = 1.5 to points = 2.5 to points = 1.75 to points = 3+10 points = 2+

Draft Indicator 7: Long-Term Liability to Long-Term Asset Ratio What was the value of the long-term liabilities to long-term assets ratio for the school district or charter school? – This measures long-term solvency and leverage. – It measures only the long-term portion of your liabilities (bonds and loans) and assets (school property, buildings, equipment, etc). School districts: Use long-term liabilities and long-term assets as reported in the Statement of Net Position on the AFR (long term = noncurrent). – Long-term liabilities are divided by long-term assets. – When Government Accounting Standards Board (GASB) 68 becomes a reporting item for school districts, we will exclude Net Pension Liability because it is volatile and cannot be controlled by school districts.

Draft Indicator 7: Long Term Liability to Long Term Asset Ratio Charter schools: Use long-term liabilities and long-term assets as reported in the Statement of Financial Position on the AFR (long term = noncurrent). – Data source: Financial statements not Public Education Information Management System (PEIMS) data. – When GASB 68 is a reporting item for government charter schools, we will exclude Net Pension Liability because it is volatile and cannot be controlled by charter schools. Worth up to 10 points

Draft Indicator 7: Long-Term Liability to Long-Term Asset Ratio DistrictsCharters 0 points = > 1 2 points = 1 to points = 0.9 to points = 0.8 to points = 0.7 to points = 0.6 or less

DRAFT Indicator 8: Expenditure Analysis for School Districts Did functional expenditures, less facilities acquisition and construction, exceed revenue? – Excessive spending or unrealistic budgets will cause this to be negative. School districts: – Numerator: Uses total revenue as reported in the Statement of Revenues, Expenditures, and Changes in Fund Balance (General Fund) on the AFR. – Denominator: Uses expenditures less facilities acquisition and construction as reported in the Statement of Revenues, Expenditures, and Changes in Fund Balance (General Fund) on the AFR.

DRAFT Indicator 8: Expenditure Analysis for Charter Schools Charter schools: – Numerator: Uses total revenue as reported in the Statement of Activities on the AFR. – Denominator: Uses expenditures less depreciation as reported in the Statement of Activities and the Statement of Cash Flows on the AFR. Will exclude pension expense for government charter schools only if they follow GASB 68 Worth 10 points if revenues exceed expenditures OR – If revenues are less than expenditures, then check for passing score on Indicator 6: Days cash on hand If yes, then 10 points for this indicator If no, then 0 points for this indicator

Draft Indicator 9: Unassigned Fund Balance to Expenditure Ratio–School Districts What was the value of the unassigned general fund balance relative to expenditures excluding facilities acquisition and construction. – If the school district exceeds 60 days cash on hand then the point earned in that category will also be applied to this category. – This indicator measures what assets are not restricted or assigned in any way to your expenditures. The exception is if your cash days on hand is relatively high. School districts: – Numerator: Uses unassigned fund balance as reported in the Balance Sheet (General Fund) on the AFR. – Denominator: Uses expenditures less facilities acquisition and construction as reported in the Statement of Revenues, Expenditures, and Changes in Fund Balance (General Fund) on the AFR.

Draft Indicator 9: Unrestricted Net Asset to Expense Ratio–Charter Schools Charter schools – Numerator: Uses unrestricted net assets as reported in the Statement of Financial Position on the AFR. – Denominator: Uses total expenses less depreciation in the Statement of Activities and the Statement of Cash Flows on the AFR. – Government charter schools that follow GASB 68 will exclude pension expense as well. Worth up to 10 points

Draft Indicator 9: Unrestricted Net Asset to Expense Ratio DistrictsCharters Use points from days cash on hand if days cash on hand is 60+ Use point from days cash on hand if days cash on hand is points = < points = < points = 0.06 to points = 0.02 to points = 0.07 to points = 0.03 to points = 0.08 to points = 0.04 to points = 0.09 to points = 0.05 to points => points => 0.06

Draft Indicator 10: Debt Service Coverage Ratio What was the value of the debt service coverage ratio for the school district or charter school? – Commercial lending uses debt service coverage ratio as a solvency measure. School districts: – Numerator: Uses revenue less expenditures plus interest on long-term debt and principle on long-term debt as reported in the Statement of Revenues, Expenditures, and Changes in Fund Balance (General Fund) on the AFR. – Denominator: Uses interest on long-term debt and principle on long-term debt. – Does not include bond issuance costs and fees. Worth up to 10 points

Draft Indicator 10: Debt Service Coverage Ratio Charter schools: – Numerator: Uses revenue less expenditures plus interest on long-term debt and principle on long-term debt as reported in the Statement of Activities and Statement of Cash Flows in the AFR. – Denominator: Uses interest on long-term debt and principle on long-term debt. – Charter schools will be required to report payments of long-term interest and principle as specific line items in the AFR Worth up to 10 points

Draft Indicator 10: Debt Service Coverage Ratio–Continued This is a phase-in indicator that will not be applied until the third year of the new FIRST standards. Cut scores will be developed. – First year = no points considered – Second year = up to 5 points – Third year = up to 10 points

Draft Indicator 10: Debt Service Coverage Ratio Districts and Charters 2 nd YearDistricts and Charters 3 rd Year 0 points = < points = 1.00 to points = 1.00 to points = 1.05 to points = 1.05 to points = 1.10 to points = 1.10 to points = 1.15 to points = 1.15 to points = > points = > 1.20

Draft Indicator 11: Administrative Cost Ratio What was the value of the administrative cost ratio for the school district or charter school? – Excessive administrative costs may reflect: Financial inefficiency "Top- heavy” organization – Uses ADA thresholds to determine maximum administrative cost ratios. – Calculation is based on function codes (21+41)/( ) – Only object codes 61XX through 64XX are used School districts: Fund code 199 Charter schools: Fund code 420 Worth 5 points – Less than limit = Pass – More than limit = Fail

Draft Indicator 11: Administrative Cost Ratio DistrictCharter ADA GroupThreshold RatioADA GroupThreshold Ratio = >10, = >10, ,000 to 9, ,000 to 9, ,000 to 4, ,000 to 4, to to Less than Less than Sparse0.3614

Draft Indicator 12: Student to Staff Ratio Did the school district or charter school have a 15 percent or more decline in student to staff ratio over 3 years? (automatic pass if student population has not decreased) – This indicator would not apply to new charters until the fourth year. – The calculation method is very different than the old student to staff ratio. – Yes = Fail and No = Pass – Worth 5 points Source: PEIMS enrollment data

Draft Indicator 12: Student to Staff Ratio– Continued Did the school district or charter school have a 15 percent or more decline in student to staff ratio over 3 years? (automatic pass if student population has not decreased) Example 1—Failed because of a student decrease without staff decrease: – In 2013–2014 fiscal year, the student to staff ratio was 10 (300 students, 30 staff FTEs). – In 2016–2017 fiscal year, the student to staff ratio was 8.5 (255 students, 30 staff FTEs). – (8.5–10) / 10 = or 15% decline – A 15% decline over three years is failing.

Draft Indicator 12: Student to Staff Ratio– Continued Example 2—Passed because of a staff decrease with a decrease in students: – In 2013–2014 fiscal year, the student to staff ratio was 10 (300 students, 30 staff FTEs). – In 2016–2017 fiscal year, the student to staff ratio was 9 (252 students, 28 staff FTEs). – (9–10) / 10 = or 10% decline – A 10% decline over three years is passing.

Draft Financial Competence Indicators Each indicator identifies serious deficiencies in financial management. Indicator 13: Data Quality Indicator 14: Material Noncompliance Noted on AFR Indicator 15: FSP Hardship

Draft Indicator 13: Data Quality Did the comparison of PEIMS data to like information in the charter school’s AFR data feed (or Charter School Data Template) result in an absolute variance of 3% or less? – Financial data will be compared between PEIMS and the AFR. The sum of absolute value of differences, by function, will be compared. If the result (percent variance) exceeds 3%, the PEIMS data is considered inaccurate. Yes = Fail and No = Pass Worth 10 points Source: AFR data feed (or Charter School Data Template) and PEIMS financial data

Draft Indicator 14: Material Noncompliance Noted On AFR Was there any indication on the AFR of material noncompliance for grants, contracts, and laws related to either local funds, state funds, or federal funds? A material noncompliance is defined by the AICPA and determined by the independent external auditor. – Schedules, notes, and comments on the AFR will be read in context for the material noncompliance for grants, contracts, and laws related to local funds, state funds, or federal funds. Yes = Fail and No = Pass Worth up to 10 points Source: AFR

Proposed Indicator 15: FSP Hardship Did the charter school or district receive an adjusted repayment schedule for an overallocation of Foundation School Program (FSP) funds due to a severe financial hardship? Yes = Fail and No = Pass Worth 10 points Source: State Funding Division records of request and approval