1. Got Cash? Ron Bennett President & Chief Executive Officer School Services of California Joel Montero Chief Executive Officer Fiscal & Crisis Management Assistance Team (FCMAT) David Pollock Senior Director, Program Development California School Boards Association Presented by The Bottom Line of School Finance

2. 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) 1

3. 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 2

4. 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 3

5. 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) 4

6. 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 5

7. 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 6

8. 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 7

9. 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! 8

10. So How Do Districts Get Into Trouble? 9

11. 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 10

12. 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* 11

13. Overly Optimistic Estimates of State 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 12

14. 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! 13

15. 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 14

16. 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 15

17. Loss of Control of Staffing Levels 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 16

18. 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 17

19. Use of One-time Money for Ongoing 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 18

20. Poor Decisions at the Negotiating 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 19

21. Poor Decisions at the Negotiating 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 20

22. 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 21

23. Failure to Follow Through on Budget 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 22

24. 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 23

25. 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! 24

26. 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 25

27. 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 26

28. Monitoring the Budget 27

29. 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 28

30. Estimating Next Year’s Income Enrollment (ADA) State revenue limit Lottery Special purpose funds Local income Special education 29

31. 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 30

32. 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 31

33. Final Budget: What Should the Board Look For? Is it balanced? Adequate reserves? Programs funded? Comprehensive? Simple to grasp? Other funds? Are salary improvements included? 32

34. 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 33

35. 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 34

36. What Happens if Your District Gets into Financial Trouble? 35

37. Intervention Starts With the County 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 36

38. 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 37

39. 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 38

40. 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 39

41. 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 40

42. 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 41