UpClose Meeting Presentation Budget and Finance Overview

1. UpClose Meeting PresentationBudget and Finance Overview Nicole Conley-Abram, CFO November 8, 2012

2. AISD Has Strong Financial Accountability & Management 1 • The second lowest overall property tax rates in Central Texas for school districts. • Aaadebt rating from Moody’s Investors Service; AA+ from Standard & Poor’s; and AA from Fitch Ratings, all among the highest ratings available by these agencies to Texas public schools, resulting in millions of dollars of savings for the District’s bond program and Austin taxpayers. • School FIRST (Financial Integrity Rating System of Texas) rating of Superior Achievement for nine consecutive years. • The Texas Comptroller of Public Accounts awarded AISD with a Leadership Circle Award for budget transparency, for the last three years. • The Government Finance Officers Association (GFOA) Distinguished Budget Presentation Award for nine years in a row. Also received GFOA Certificate of Achievement for Excellence in Financial Reporting for last two years. • The Association of School Business Officials International (ASBO) Meritorious Budget Award for excellence in the preparation and issuance of its school system budget for three years in a row. Also received ASBO Certificate of Excellence in Financial Reporting for last two years.

3. Strong Financial Accountability & Management Cont. A strong fund balance of approximately $177M which exceeds Board policy that requires at least 14% of the General Fund budget. Only school district with a Commercial Paper Program that has allowed the district to take advantage of the economic environment and save in borrowing costs. Good ROI as AISD outperforms national counterparts according to results from the National Assessment of Educational Progress (NAEP), also known as the Nation’s Report Card, despite having one of the lowest per pupil spend rates. Saved over $13M in health care costs of the last two years with plan changes that provided more coverage and transitioning from being fully-insured to becoming self insured.

4. The State Budget & School Finance

5. Foundation School Program Funding (All Funds)* • When looking at just the funding level for the FSP (Operations and Facilities), the 2012-13 amount totals $35.4 billion,a $1.8 billion decrease compared to 2010-11biennium • However, this amount is $4 billion below what is required to fund Current Law formulas *Takes into account the $800 million FSP adjustment in Article IX and the August payment delay

6. The Truth of the Matter on School Funding for the 2012-13 Biennium • For the first time in 60 years, the Legislature failed to finance current law • Foundation Program current services state aid was decreased by $4 billion • Special Program financing was decreased by $1.3 billion • The total decrease was $5.3 billion when the cost of enrollment growth, property value decline, and other factors are taken into account

7. Impact of State Cuts and Federal Revenue Losses on AISD • State revenue loss of $35.6 million in FY2011-12 • Additional loss of $25.1 million in FY2012-13 for a total of $60.7 million loss in State funding • Loss of over $60 million in Federal ARRA funding • Outyear challenges will get worse with legislative actions taken under SB 1 which eliminates Additional State Aid For Tax Relief (ASATR) by 2018, which translates into a revenue losses of $150 million for AISD

8. AISD-Three Years of Austerity Planning and Cutting-$77 M

9. AISD Austerity Planning: FY2010 thru FY2012 • FY2010 eliminated 18 central office positions which saved just over $700k. • FY2010 central office hiring freeze saved district over $1.5M. • FY2011 reductions included the elimination of 117 central office positions that saved the district an estimated $5M. • FY2012 implemented a Reduction in Force which eliminated 1,153 positions in addition to increasing employee health contributions, obtaining fixed pricing for fuel, implementing a 4 day/10 hour work week, restructuring transportation, and various other programmatic reductions to programs like athletics, summer school and Turnaround initiatives.

10. FY2013-14 Budget Development: Situational Analysis • Staff compensation was frozen for the last two years, exacerbating already low teaching salaries (when FICA is excluded, teacher salaries are 11.3% behind Texas Urban peers and 3.6% behind Local peers. • AISD used reserves to fund a one-time 3% salary adjustment for all employees but will need a permanent revenue source to sustain it so AISD is currently operating with a $20+ million deficit • Commitment to stabilize staffing for the next few years and keep pace with surrounding peers • Need to consider funding for inflation, Strategic Priorities and M&O impact of future bond costs • AISD has implemented and exhausted several budget balancing solutions and savings options to address previous budget shortfalls

11. The Basics: Budget Structure and Education Finance

12. Education Finance Characteristics School finances are highly categorical in nature Taxes are a primary source of revenue Often times include complex formulas to allocate resources in efforts to maintain “equity” (state or local) School districts are highly regulated Finances are administered publicly Political issues have high relevance in financial and operational management

13. AISD Enrollment Growth Source: AEIS/PEIMS (2012)

14. AISD Student Body Composition Source: AEIS/PEIMS (2012)

15. Economically Disadvantaged Students Source: AEIS/PEIMS (2012)

16. Limited English Proficient Students Source: AEIS/PEIMS (2012)

17. Homeless Population AISD Homeless Coordinator Records

18. Mobility • Over 30% of AISD students are mobile • 18.6% are residentially mobile * • 17.2% are campus mobile** • 6% are both campus and residentially mobile) • 65% of student campus mobility is attributable to student who are enrolled less than 145 days at AISD • 39% of AISD PreK and Kinder students moved 2 or more times before starting school at AISD * Residential mobility is a change of residence during the school year measured via address tracking in the student information system, parent self-report ** Campus mobility is means a student is enrolled on more than one campus during school year, or is enrolled fewer than 145 days of school year (83%) at the same campus

19. Challenges Mobility Presents • Students who are residentially mobile are TWICE as likely as non-mobile students to be absent from school more than 10% of the days that they are enrolled • Students who are campus mobile are THREE times as likely as non-mobile students to be absent from school more than 10% of the days they are enrolled

20. FY2013 Budgeted Expenditures by Type (Including Chapter 41)

21. FY2013 Budgeted Expenditures by Type (Excluding Chapter 41)

22. General Fund Per Pupil Expense by Year Source: AEIS/PEIMS 2012 Operating Costs per Pupil

23. Revenue per WADA - History *FY2012 revenue per WADA remained the same, but WADA itself was reduced by 4.28% Source: TEA Summary of Finance

24. Comparison Total Staff to Average Enrollment Per AISD Annual Financial Reports/AEIS Reports

25. The Importance of Maintaining Adequate Reserves 24 • AISD is one of a handful (7) of Districts with the highest rating in Texas. • Affects our overall credit worthiness which determines borrowing costs. • It is estimated we saved approx. $10.5M in our most recent bond issue as a result of our increase in rating • If the district experiences a “Ratings Downgrade” it would erode investor confidence and the district would incur higher interest costs. • Other Internal Benefits: • Reserves can provide for cash flow needs until major revenues are received, reducing or eliminating the need for short term borrowing which has excessive costs; property tax collections lag until due date making it tougher to float payroll thru December • cover unforeseen expenditure needs, revenue shortfalls and emergencies; • provide funds to leverage state or federal grants (float); and, • meet new TEA Financial Accountability requirements and local School Board policies. • Other External Benefits: • Reserves tend to be viewed favorably by investors, rating agencies, and local banks impacting ratings, investor confidence and ability to access to potential lines of credit; and, • Demonstrates financial stability.

26. 10 Year Fund Balance Activity Optimal Cash requirements for 2.5 months 25 Source: AISD Financial Reports

27. Cash Flow by Month

28. The Impact of Recapture • In FY2012, AISD will submit $135.2 million to the State under the recapture system. • Nearly 45% of the M&O revenue generated beyond the 1.06 tax rate is sent to the State under the recapture system. • Recapture represents nearly 20% of all M&O revenue collected. • AISD is the single largest payer of recapture representing nearly 12% of the recapture revenue that the State collects. • Of those collections, nearly 20% of the recapture revenue that the State collects comes from the Austin regional area.

29. AISD Has Paid $1.4 Billion to State in Chapter 41 Payments Since 2003

30. The Impact of Social Security • Of 1000+ Districts in Texas, Austin is one of less than 20 Districts participating in social security. • $33 million in total cost to AISD. • No cost to most other Districts. • Provides additional support to teachers; viewed favorably by teachers with more experience. • Also comes out of teacher paychecks; viewed as a negative by teachers with less experience.

31. Simple View of State’s Funding Formula • The majority of money each school district is entitled to every year is determined by two “layered” systems: • Formulas in the Foundation School Program • “Target Revenue” system implemented in 2006 when school district M&O rates were compressed • Increased costs are borne by the district (unless the formulas increase) • The benefit of increased values goes to the state budget (less GR needed to fund the existing formulas) • Formula based on outdated weights and indexes that haven’t been updated in over 20 years

33. How We Got Here: Target Revenue The last Supreme Court ruling (West Orange Cove II, 2005) found that the school finance system violated the Texas Constitution because it established a de facto statewide property tax. As a result, the legislature was forced to make changes to the system. Instead of addressing any or all of the historic problems with the structure of the system, the legislature instead (via HB 1 2006) enacted a “hold harmless” of district funding levels, at the same time it compressed property tax rates (from $1.50 to $1.00). Freezing all districts at their 2005-06 funding levels also froze all of the inequities that already existed in the system and made them more apparent.

34. State Revenue: Target Revenue 33 • Target Revenue provides funding to school districts for tax revenue lost to rate compression (2006) • Maintains a revenue per WADA (Weighted Average Daily Attendance) equivalent to FY2006/2007 levels which means no revenue growth • Target revenue causes inverse relationship between tax collections and state aid • Increase in tax collections creates a decrease in state aid and an increase in recapture • Decrease in tax collections creates more state aid and a decrease in recapture • Overall state aid/tax collections increase only if student enrollment grows

35. State Revenue: Terminology ADA = Average Daily Attendance (the number of students that attend a school district) WADA = Weighted Average Daily Attendance (the number of students the district is funded for, after considerations are made for more costly students) Statewide Average ADA:WADA Ratio is 1:1.34

36. AISD Historical Enrollment, ADA and Growth 35

37. Tax Rate & Debt Overview

38. Property Taxes Every school district in Texas has the authority to levy two local property taxes: Maintenance and Operations (M&O): pays for the day-to-day operations of the districts. The maximum M&O tax rate is $1.17 for each $100 in property value. A district must hold a Tax Ratification Election (TRE) to raise the rate above $1.04. Interest and Sinking (I&S): pays the money due on bonds issued by the districts to construct facilities. The maximum I&S rate is $.50 for each $100 in property value (note: no recapture on I&S revenue).

39. Property Taxable Valueson the Rise Again (in Billions) Even though property taxes are rising, the District receives nominal benefit due to the State’s Target Revenue system which essentially caps the District’s revenue at 2005-06 levels. Source: Travis Central Appraisal District

40. Change in AISD Market Values 39

41. Austin Taxpayers Authorized $1.50 M&O Tax Rate Before State Law Change …a 28% reduction in the M&O Tax Rate since 2002-03 Source: Travis County Tax Assessors Office

42. Tax Rate Comparison to Surrounding ISDs(FY 2011)

43. Tax Rate Limitations • Under tax code, school district M&O tax rates may not exceed the rate equal to the sum of $0.17 and the product of the state compression multiplied by $1.50. • The state compression percentage is currently 66.67 percent, so the M&O rate limit for most school districts is $1.17. • A school district also may adopt a rate up to $0.50 for “new” debt plus a rate for “old” debt. • “New” debt is debt authorized after April 1, 1991, and issued after September 1, 1992; “old” debt is debt authorized prior to those dates.

44. Maintenance & Operations Tax Rate 43 $1.00 = Compressed rate 0.04 = Golden pennies • no voter approval required • not subject to recapture 0.02 = Silver Pennies • voter approval required • not subject to recapture 0.11 = Copper pennies • voter approval required • subject to recapture $1.17 Max. Rate Allowed

45. M&O: Tax Ratification Elections (TRE) • For 25 years, school districts were only required to hold rollback elections if the Board-adopted tax rate exceeded the calculated rollback tax rate. The district’s calculated rollback rate typically represented a small increase as it is intended to maintain existing revenue levels. • May 2006, the Texas Legislature passed House Bill 1 (HB 1), creating a target revenue system for funding school districts and adjusting the tax rate calculation process, as well. The state requires districts to compress maintenance tax rates at 1.00 and gives them the option of approving up to four cents of additional tax. • To increase local property tax rates further, school boards need to adopt a higher rate and then submit the rate for voter approval at a tax ratification election (TRE). • Failure to pass a TRE leaves school districts with the same tax rate as the prior year, not a slightly higher rate as was the case with the former rollback process. • AISD successfully passed a TRE in 2008 to increase its tax rate by 3.9 cents.

46. Historical Tax Burden of AISD Tax Rate

47. Recent Election History

48. Election Planning Bond Election • Citizens’ Bond Advisory Committee is comprised of various community members who make the recommendation to the Board on the Scope of Work for the potential bond • Board of Trustees must approve the order calling the election, the legal document that formalizes the scope of work for the bond program at least 60 days prior to the election • Groundwork for a May 2013 election is expected to commence in January 2012 Tax Ratification Election (TRE) • Intrinsically tied to the budget development process (Sept.- Aug) • Board adopts tax rate at proposed higher rate and then takes action to call for the election (June/Aug.)

49. Additional Revenue from Increased M&O Tax Rate *Based on certified values from TCAD. These numbers are subject to change when TCAD releases the preliminary values in May 2013. DRAFT—For discussion purposes only.

50. QUESTIONS 49