Office of School Finance Update Texas Education Agency Great Expectations for New School Finance Legislation 22 nd Annual Public School Finance Conference Education Service Center X June 11, 2015 Office of School Finance 1 Texas Education Agency
Rule Regarding Audit Firm Office of School Finance 2 Texas Education Agency
Rule Regarding Audit Firm EXTERNAL AUDITORS • 19 Texas Administrative Code § 109.23 • The district or other educational entity must hire at its own expense an independent auditor to conduct an independent audit of its financial statements and provide an opinion on its annual financial report. • The independent auditor must: – Be associated with a certified public accountancy (CPA) firm that has a current valid license issued by the Texas State Board of Public Accountancy (TSBPA) – Be a CPA with a current valid license issued by the TSBPA as required under the Texas Education Code, § 44.008; and – Adhere to the generally accepted auditing standards (GAAS), adopted by the American Institute of CPAs (AICPA), as amended, and the generally accepted government auditing standards (GAGAS), adopted by the US Government Accountability Office, as amended. Office of School Finance 3 Texas Education Agency
Rule Regarding Audit Firm EXTERNAL AUDITORS • The CPA firm must: – Be a member of the AICPA Governmental Audit Quality Center (GAQC); – Adhere to GAQC's membership requirements; and – Collectively have the knowledge, skills, and experience to be competent for the audit being conducted, including thorough knowledge of the government auditing requirements and: • Texas public school district environment; or • Public sector; or • Nonprofit sector. Office of School Finance 4 Texas Education Agency
Rule Regarding Audit Firm UPDATES TO THE TEXAS ADMINISTRATIVE CODE (TAC) EXTERNAL AUDITORS • If at any time the TEA division responsible for financial compliance reviews an audit firm's working papers and finds that the firm or the quality of the work does not meet the required standards, the division may require the district or other educational entity to change its audit firm. • There is NO requirement for mandatory rotation. Office of School Finance 5 Texas Education Agency
Special Allotment Reviews Office of School Finance 6 Texas Education Agency
Special Allotment Reviews • TEC Chapter 42, Subchapter C, Special Allotments: – Special Education – Compensatory Education – Bilingual Education – Career and Technology Education – Gifted and Talented – High School Office of School Finance 7 Texas Education Agency
Special Allotment Reviews • Risk Assessment based on: – 3 consecutive years of financial data reported in the FSP (revenue) and PEIMS systems (expenditures) – Findings in the Annual Financial Report (AFR) – Findings in a Legislative Budget Board Management and Performance Review – Concerns raised by program areas or complaints Office of School Finance 8 Texas Education Agency
Special Allotment Reviews • Types of reviews: – Desk or on-site review (in-depth review) triggered by risk assessment – Audit Follow-Up and Financial Management Reviews – Student Attendance Compliance Reviews – transaction testing for accuracy in coding, allowability, and timeliness. – AFR reviews – CPA workpaper reviews Office of School Finance 9 Texas Education Agency
Special Allotment Reviews • Some areas we will look at: – Compliance with direct expenditure requirements – Appropriate expenditures on direct services • For example, bilingual funds may be spent on a stipend but may not be used to fund a teacher’s entire salary – Compliance with the requirement to prioritize state compensatory education spending on students who failed end-of-course exams Office of School Finance 10 Texas Education Agency
Special Allotment Reviews • Potential results: – Letter directing the district or charter to take required actions. – Requirement to submit corrective action plans – Potential loss of state funds Office of School Finance 11 Texas Education Agency
Financial Integrity Rating System of Texas (FIRST) Office of School Finance 12 Texas Education Agency
Proposed FIRST • 19 Texas Administrative Code (TAC) §109.1001 • School FIRST or Charter FIRST • Legislative mandate to combine FIRST and Financial Solvency into one system • Proposed seven indicators for the rating year 2014 – 2015 based on financial data of 2014 (30 points) • Proposed fifteen indicators for rating years 2015 – 2016 and 2016 – 2017 (phase in of passing standard) • Open for public comment May 22, 2015 - June 22, 2015 • Public hearing: June 17, 2015, 9 am – 12 noon at Travis Building, Room 1-104 • Web address: http://tea.texas.gov/About_TEA/Laws_and_Rules/Commissioner_Rules_(TAC) /Proposed_Commissioner_of_Education_Rules/ Office of School Finance 13 Texas Education Agency
Proposed FIRST – 2014 – 2015 • Indicator 1: – Was the complete annual financial report (AFR) and ISD or charter school financial data submitted to TEA within 30 days of the November 27 or January 28 deadline depending on the ISD or charter school’s fiscal year end date of June 30 or August 31, respectively? – Critical Indicator – Source: AFR Office of School Finance 14 Texas Education Agency
Proposed FIRST – 2014 – 2015 • Indicator 2: – Was there an unmodified opinion in the AFR on the financial statements as a whole? The American Institute of Certified Public Accountants (AICPA) defines unmodified opinion. The external independent auditor determines if there was an unmodified opinion – Critical Indicator – Source: AFR Office of School Finance 15 Texas Education Agency
Proposed FIRST – 2014 – 2015 • Indicator 3: – Was the ISD or charter school in compliance with the payment terms of all debt agreements at fiscal year end? – Critical Indicator – Source: AFR Office of School Finance 16 Texas Education Agency
Proposed FIRST – 2014 – 2015 • Indicator 4: – ISD - Was the total unrestricted net asset balance (Net of the accretion of interest for capital appreciation bonds) in the governmental activities column in the Statement of Net Assets greater than zero? • (If the district's 5 year percent change in students in membership was 10 percent or more, then the district passes this indicator). – Charter School - Was the total net asset balance in the Statement of Financial Position for the charter school greater than zero? • (If the charter school’s membership of students increased by 10 percent or more over the past 5 years, then the charter school passes this indicator). – Critical Indicator – Source: AFR and PEIMS Office of School Finance 17 Texas Education Agency
Proposed FIRST – 2014 – 2015 • Indicator 5: – Was the ISD or charter school administrative cost ratio equal to or less than the threshold ratio? – 10 point scale – Source: AFR and FSP Office of School Finance 18 Texas Education Agency
Proposed FIRST – 2014 – 2015 • Indicator 5: ISD CHARTER ADA Threshold 10 8 6 4 2 10,000 0.046 0.053 0.061 0.069 0.076 ADA 5,000 0.05 0.066 0.083 0.099 0.116 Threshold 10 8 6 4 2 1,000 0.068 0.079 0.091 0.102 0.126 1,000 0.087 0.142 0.191 0.239 0.288 500 0.079 0.093 0.107 0.121 0.135 Less than 500 0.090 0.152 0.214 0.276 0.330 500 0.108 0.139 0.169 0.199 0.23 0 0.094 0.163 0.238 0.314 0.390 Sparse 0.153 0.191 0.229 0.268 0.306 Office of School Finance 19 Texas Education Agency
Proposed FIRST – 2014 – 2015 • Indicator 6: – Did the comparison of Public Education Information Management System (PEIMS) data to like information in the district’s AFR result in an aggregate variance of less than 3 percent of all expenditures per fund type? – 0 or 10 points – Source: AFR and PEIMS Office of School Finance 20 Texas Education Agency
Proposed FIRST – 2014 – 2015 • Indicator 7: – Was the AFR free of any instance(s) of material weaknesses in internal controls over financial reporting and compliance for local, state, or federal funds? The AICPA defines material weakness. The external independent auditor determines if there are any instances of material weakness. – 0 or 10 points – Source: AFR Office of School Finance 21 Texas Education Agency
Proposed FIRST – Future years • Proposed future indicators – Make timely payments of payroll taxes to TRS, TWC, IRS • (Critical) – Days cash on hand, General Fund • ISDs = 90+ • Charters = 60+ – Current assets to current liabilities • ISDs = 3+ • Charters = 2+ – Long-term liability to long-term asset ratio • ISDs and charters = 0.6 – Revenues >= expenses (General Fund) or 60 days cash on hand Office of School Finance 22 Texas Education Agency
Proposed FIRST – 2014 – 2015 • Proposed future indicators – Debt service coverage • Measures ability of district or charter to meet debt requirements • Ratio for ISDs and charters = 1.2 – Student to total staff ratio • Based on prior three years of enrollment • If no decline in enrollment over past three years = automatic pass • If enrollment declines by 15% or more, ratio should be maintained (through reduction in staff) or lose 10 points – FSP adjustment based on a financial hardship • No hardship adjustment = 10 points • Hardship adjustment = 0 points Office of School Finance 23 Texas Education Agency
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