Small School Districts Association

1. Small School DistrictsAssociation Avoiding Fiscal Problems On The Path To Better Funding 30th Anniversary Annual Conference April 11, 2013 Presented by: Joel Montero, Chief Executive Officer, FCMAT

2. OVERVIEW • What’s New? • LCFF In Brief • Cash • Contingency Planning • Hot Issues • 13 Most Common Mistakes Made by Troubled Districts • Questions/Answers

3. The Good News California has a growth economy Proposition 30 passed Cash deferrals are less in 2012-13 and 2013-14 The Governor’s January budget is balanced Proposition 98 There is a new funding formula proposal that would help most districts and hold others harmless The public still strongly supports education

4. The Not So Good News Economic growth is very slow Cash management is still a major problem for most Proposition 98 continues to be very volatile There is a new funding formula proposal that would help most districts and hold others harmless but it’s still not an adequacy model A lot of the public believes that P30 solved all of our problems

5. What We Know Right Now The economic crisis will continue The state still has a structural deficit There is a disconnect between the Legislature and the Governor regarding how the LCFF might be implemented It appears that 2013-14 will be a transition year Small and tiny school districts are disproportionally impacted—declining enrollment, escalating costs, sequestration impacts, structural deficits

6. Leftovers of the 2012-13 Budget • Creates a cash crisis January – May 2013 • Gives option to shorten the school year • Creates an ongoing “fair share” cut for basic aids • Flat funds SE, Transportation and shifts child care costs • Establishes a mandated cost block grant (~$28/pupil) • Transitional K required beginning 12-13 (EC 48000b) • Reserve for Economic Uncertainty-must comply by 13-14

7. Local Control Funding Formula Basics Flexibility and Local Decision Making Elimination of categorical programs, revenue limits and COLAs as we know them Base grants and Target grants Supplemental and Concentration grants and small schools Data and CALPADS Equalization Hold harmless Impact on solvency Planning in an uncertain environment

8. Cash Management • You will have less cash in 2012-13 between January and May (right now) than you did in 2011-12 • The approved 2012-13 budget has increased the number of school districts who need to borrow externally • There is no exemption from state takeover for districts who run out of cash due to deferrals • Cash deferrals are proposed to be eliminated by 2015-16!

10. Intra-Year Deferrals rescinded

11. Cross Year Principal Apportionment Deferrals

12. When You Consider Cash Flow Impacts Size (enrollment) and relative wealth RL ratio property taxes to state aid Enrollment projections Entitlement Reduction to RL Assessed valuations RDA tax increment Borrowing options Fund balance (a budget issue?)

13. What Does It Mean To Be Insolvent? You have negative cash flow Your options for borrowing are exhausted You cannot meet your financial obligations for the current plus one year You cannot make payroll You will lose your superintendent and local governance option Most likely in a state takeover your fiscal situation gets worse not better Small and tiny school districts are at higher risk!

14. What Can Districts Do To Avoid Fiscal Problems Related To Cash • Have a system in place to analyze and monitor cash flow—all funds 18 months minimum • Report cash flow status and projection to the board on a regular basis • Conserve cash when possible—all funds • Build Reserves/Fund Balance—all funds • Consider creating spending plans to manage available cash • Consider options for dry period financing (borrowing) • Borrow like a booger! • Don’t run out!

15. Avoid Fiscal Problems By: • Avoiding deficit spending • Managing fund balance • Managing cash • Maintaining staff but not over staffing • Understanding your enrollment trends • Considering how you might be impacted by the LCFF

16. What to do back at home? • Maintain reserves • Preserve cash and avoid the need to get a TRAN. If you don’t have to borrow, don’t • Project enrollment conservatively and don’t create new classes until the students materialize • Communicate accurately and regularly to your constituents and reinforce that P30 simply maintains the status quo • Run multiple fiscal scenarios

17. What to do back at home? Don’t give up furlough days too soon particularly if you are deficit spending Consider carefully the impact of TK and Transportation Maximize the use of the flexibility options Resist the temptation to enter into non-voter approved debt as your general fund cannot bear debt service payments in the future Create your own district Profile!!!

18. Is There Any Real Reason To Feel Positive??? • The economic landscape has changed significantly from just one year ago some things positive • Education polls more strongly than any other issue in California—note the November ballot measure • Districts and County Offices have had to look seriously at what is really important • Most districts have survived • The Local Control Funding Formula has great potential—it’s not perfect but contains many positive aspects that could help small and tiny school districts

19. Some Realities Old School Education Will Get Adequate Funding Solutions Will Come From Sacramento You Can Do More With Less Reacting to Budget Reductions Suggested by Someone Else Averages Applied to Most Districts New School Funding formula change in on the horizon—not if, when Every District Is Different Now in terms of their specific fiscal profile We Must Use Productivity Tools and Advanced Communication Techniques Operating With Increased Efficiency and Effectiveness is a Must Conservation of Staff—the time is now Budget Solutions Are Generated Locally

20. Red Hot Topics • LCFF and the May Revise • State Revenues and growth • Instructional Day/Furlough Day Agreements • Pension Changes • Capital Appreciation Bonds (Debt) • Mandated Cost Block Grants • Sequestration

21. For SuperintendentsIn Particular You must be facile with all aspects of your budget and understand, given the current economy a fund balance hit is likely in 2012-13 The communications challenges Labor and bargaining Leadership makes all the difference

22. QUESTIONS

23. Thirteen Ways Districts Get in Trouble • #1 Estimates of State Economics • Exposure • Significant • Professional Standard • Maintain knowledge of state economics forecast • Anticipate effect on your district • Consider state economics in budget projections and revisions • Definition • State economics determine the allocations to Proposition 98 school funding based upon state revenues

24. Thirteen Ways Districts Get in Trouble • #2 Average Daily Attendance • Exposure • Critical • Professional Standard • The district must have policies and procedures in place to appropriately forecast and track enrollment and ADA • Definition • Enrollment drives costs • ADA drives revenues • ADA is equal to the average number of pupils actually attending classes who reenrolled for at least the minimum school day

25. Thirteen Ways Districts Get in Trouble • #3 Budget Assumptions • Exposure • Critical • Professional Standard • The district budget must be based upon a foundation of verifiable facts, and assumptions must be clearly stated • Definition • Budget assumptions are planning factors that stand in place of facts until those facts are known

26. Thirteen Ways Districts Get in Trouble • #4 Control of Staff Costs • Exposure • Critical • Professional Standard • Maintain staffing discipline within parameters adopted by the Board of Education • Definition • Staffing control means that numbers of people, pay rates, assignments, overtime, etc., are kept within plans and budgets adopted by the Board

27. Thirteen Ways Districts Get in Trouble • #5 Estimating Step and Column • Exposure • Critical • Professional Standard • Districts must have tools and procedures to estimate the annual increase of salary and statutory benefit costs incurred each year as the result of step and column • Definition • Step: Dollar change between salary steps based on years of service • Column: Dollar change between columns based on educational units or accomplishments • Automatic pay raises for employees returning to work from the previous year

28. Thirteen Ways Districts Get in Trouble • #6 Use of One-Time Dollars • Exposure • Significant • Professional Standard • Ongoing expenses must be covered by ongoing revenues • One-time dollars should not be used for ongoing expenses • Definition • One-time dollars include ending balances, audit adjustments, retroactive revenues, and other nonrecurring revenues

29. Thirteen Ways Districts Get in Trouble • #7 Negotiations • Exposure • To be determined by district • Critical – Significant – Minor • Professional Standard • Maintain comparable compensation and working conditions within the district’s ability to pay • Balance compensation needs with student needs • Definition • Collective bargaining is required by the Rodda Act • Must negotiate in good faith

30. Thirteen Ways Districts Get in Trouble • #8 Multiyear Planning • Exposure • Critical • Professional Standard • Multiyear Planning current plus 2 years • Long-term impact must be assessed • Definition • MYP considers the out-year impact of today’s decisions

31. Thirteen Ways Districts Get in Trouble • #9 Execution of the Budget • Exposure • Significant • Professional Standard • The district must adhere to the approved spending • Revisions should be approved before different decisions are implemented • Definition • Execution of the budget means sticking to the spending plan adopted by the Board

32. Thirteen Ways Districts Get in Trouble • #10 Budget Monitoring • Exposure • Critical • Professional Standard • AB 1200 requires districts to monitor and perform self-assessment • The budget should be revised when necessary • Definition • Budget monitoring means actual results are compared with planned results and adjustments are made

33. Thirteen Ways Districts Get in Trouble • #11 Deficit Spending • Exposure • Critical • Professional Standard • The budget should be balanced • Any deficit spending should be visible and explained • Definition • Deficit spending means the district is spending beyond its means

34. Thirteen Ways Districts Get in Trouble • #12 Estimating the Ending Fund Balance (EFB) • Exposure • Critical • Professional Standard • A district must have the ability to accurately reflect its net ending balance throughout the budget monitoring process. The first and second interim reports should provide valid updates of the district’s projected net ending balance. The district should have tools and procedures that ensure an early warning of any discrepancies between the budgeted and actual revenues and expenses • Definition • When all is said and done and the books have been closed, it is the amount of money remaining in the fund, net of any designations in the restricted and unrestricted accounts. Budget to actuals

35. Thirteen Ways Districts Get in Trouble • #13 Management of Cash • Exposure • Critical • Professional Standard • All districts must project cash balances on a weekly basis and prepare appropriate cash flow documents in order to assess the need for short term borrowing and the potential of cash insolvency. • Definition • Cash is not budget and understanding the difference between these two things is critical for boards, superintendents and staff. Cash position represents the actual available dollars at any given time held in the county treasury.