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Texas School Performance Review
Houston Independent School District

Chapter 7:
Financial Management

Chapter Contents:
Part I
Part II
A. Financial Management Organization
B. Financial Systems
C. Budget and Planning
D. Revenue Management
E. Disbursement Management



The Office of Budgeting and Financial Planning has the primary responsibility for building the annual budgets by coordinating the efforts of everyone involved in the budget process. The annual budget consists of school budgets and the district's administrative budgets. The actual budget process and its relationship to strategic planning is addressed in the District Organization and Management chapter of this report.

Seven budget analysts located in the central office work closely with school personnel to develop the school budgets. An additional budget analyst works with central office departments. The budget analysts follow a step-by-step interview process to confirm that all aspects of the budget process are covered with the school personnel. The analysts then assist the school personnel in allocating their discretionary funds to various functions.

Another primary role of the analyst is to ensure compliance. Funds have regulatory restrictions and guidelines that must be followed and HISD must follow state law or public school district budgeting procedures. The analysts make sure the schools are budgeting at least the minimum amounts in the proper categories. These rules are available in the Budget Development Manuals distributed yearly to all personnel involved in the budgeting process. Despite this publication, schools still rely heavily on the budget analysts to explain and apply the regulations.

HISD's general ledger contains 1.6 million account/cost center combinations. The average number of transactions posted to the general ledger for all cost centers on an annual basis is over two million records. Based on interviews with participants in the budgeting process, the review team found that often it is difficult for school-level personnel to effectively develop their budgets due to the complexity of the accounting code structure and the nature of school finance and fund accounting.


Due to unexpected revenue received by HISD, the district has fund balances higher than recommended by the TEA. The largest one-time unexpected revenues are from the following sources:

  • Property Value Study Appeal: $27 million;
  • Senate Bill 1 Funding Allocation Change: $28.1 million;
  • Over-65 Freeze-Loss Evaluation: $13.5 million.

Fund balances are maintained to accommodate contingencies and unexpected variations in cash flow. According to a TEA article entitled Fund Balances, More Than Idle Cash in Bank, a formula can be applied to a district's balance sheet to determine an optimal level of fund balances. A worksheet is provided that takes the district step-by-step through calculating the optimal fund balance. HISD used this worksheet (Exhibit 7-19) and published the following results.

Exhibit 7-19
HISD Optimum Fund Balance Calculation

($ million)
($ million)
1. Total General Fund Balance as of 8/31/95   1.   $  183.0
2. Reserved Fund Balances - General Fund $   6.5  
A. Inventories
B. Prepaid Items
$ 10.5  
C. Outstanding Encumbrances
$   6.0  
D. School Operations
E. Self-Funded Insurance
F. Other Long -Term Receivables
Total Reserved Balance (A+B+C+D+E+F)
  2.    $   23.0
3. Designated Unreserved Fund Balances - General Fund    
A. Construction, Repairs, Renovation
B. Claims and Judgments
C. Expected Fiscal 1995 Model 401 Cash Flow
D. Capital Expenditures-Equipment
$  17.4  
E. Self Funded-Insurance
$  14.5  
**F. Other Designations
$  53.5  
Total Designated Unreserved Fund Balance (A+B+C+D+E+F)
  3.    $   85.4
Estimated Avg. Monthly Cash Disbursements GF Fiscal 1996   4.    $   72.0
General Fund Optimum Fund Balance (Lines 2+3+4)   5.    $ 180.4
Excess Net Undesignated Unreserved Gen. Fund Balance (line 1 - line 5)   6.    $     3.5

Source: HISD Comprehensive Annual Financial Report 1995

The district also uses two other funds, the Designated for Operations Fund and the Permanent Fund, whose purposes may be similar to the Undesignated Unreserved Fund. The Designated for Operations Fund was created by the board as a minimum fund balance the district should maintain. In addition to the Designated for Operations Fund, the board created a Permanent Fund that is earnings and excess collected delinquent tax revenues that exceed budgeted revenues. The district uses the Permanent Fund primarily for non-recurring needs. The board can appropriate these designated funds at any time. An example of the type of expenditures from the Permanent Fund is the building of the new Bertha Alyce pre-kindergarten center. No plans have been made for these funds for fiscal 1997. The board also can use the Undesignated Unreserved Fund in the same manner. For fiscal 1995, the Permanent Fund had a budgeted balance of $12,864,000, the Undesignated Unreserved Fund had a balance of $75,504,175, and the Designated for Operations fund had a balance of $40 million. Exhibit 7-20 shows all of the fund balances for fiscal 1995.

Exhibit 7-20
Equity Portion of the Fiscal 1995 Balance Sheet

Equity and Other Credits
(Balance millions)
Fund Balances:  
Reserved for Encumbrances $  10.5
Reserved for Endowments and Projects $    0.0
Reserved for School Carryover $    6.0
Reserved for Investment in Inventories $    6.5
Unreserved Designated:  
Designated for Arbitrage Rebate
$    0.5
Designated for Athletics
$    0.1
Designated for Authorized Construction
$    0.0
Designated for Capital Acquisition
$  17.4
Designated for Debt Retirement
$    0.0
Designated for Permanent Fund
$  12.9
Designated for Insurance Programs
$  14.5
Designated for Operations
$  40.0
Undesignated Unreserved $  75.5
Source: HISD Comprehensive Annual Financial Report 1995

The TEA worksheet (Exhibit 7-19) shows that HISD has $3.5 million in excess Undesignated Unreserved funds to be used as a cushion for cash flow variations throughout the year. The $75.5 million balance is reasonable based on the concept of keeping a month's worth of operating costs in reserve. However, since the Permanent Fund and the Designated for Operations Fund can be used in essentially the same manner as the Undesignated Unreserved Fund, all three of them should be grouped together for the optimum fund balance calculation.

When those three funds are grouped together, the calculation shown in Exhibit 7-21 produces an excess fund balance of $56.4 million. District administrators told the review team that they planned to use these excess funds for controlling tax rate expansion, although no supporting documentation for this plan was supplied.

Exhibit 7-21
Alternate Calculation of Optimum Fund Balance

($ millions)
($ million)
1. Total General Fund Balance $183.9 $183.9
2. Total Reserved Balance $ 23.0 $ 23.0
3. Total Designated Unreserved Fund Balance $ 85.4 $ 32.5
4. Estimated Avg. Monthly Cash Disbursements $ 72.0 $ 72.0
5. General Fund Optimum Fund Balance $180.4 $127.5
6. Excess Net Undesig. Unres. Gen. Fund Balance $ 3.5 $ 56.4

Source: HISD Comprehensive Annual Financial Report 1995, Team Analysis


Designate excess fund balances to fund prioritized facility expansions and renovations.

The district will be left with a prudent reserve of more than $100 million to handle cash flow fluctuations and unexpected expenses, all without the need to raise taxes.

The Facilities Management chapter of this report recommends prioritization of facility needs and the planned renovation or expansion of facilities according to a planned schedule.


1. The board approves the use of these funds for prioritized projects.

January 1997


Designating the excess funds for facility renovation and expansion can address the critical facility needs of the district without accessing external funding sources.


The budget analysts spend about 40 percent of their workdays approving and performing budget transfers for schools. Schools often put excess budget funds in a general supplies category. Later in the year, when they have specific requirements, transfers are made from the general supplies category to the appropriate spending category.

For example, general supplies are coded as GF1-11-6399 for the fund, function, and object. The GF1 stands for general fund. The 11 is the function code for instructional type expenditures. The 6399 is the object code for general supplies. If the school finds that it needs additional funds to purchase an item for the principal's office, it must transfer funds to code GF1-23-6399. The 23 in this code is the function for school administration expenditures. To affect this transfer, the school must fill out a budget transfer form and send it to the budget analyst who works with their school. The analysts must confirm that the category requested by the school complies with district and government regulations. In this example, a transfer is made from one function to another, so this request also requires board approval, regardless of the amount of the transfer. According to state law, interfunction budget transfers require board approval . Transfers within a function do not need approval.

Exhibit 7-22 shows the number dollar amounts of transfers for the last three years. It is inefficient to request and analysts to perform transfers for small-dollar amounts, yet more than 3,000 transfers per year are for less than $100.

Exhibit 7-22
Number of Funds Transfers by Amount
1993-94 to 1995-96

Amount of Transfer ($)
$0.01 to $10.00 951 1,220 697
$10.01 to $50.00 1,539 1,750 1,403
$50.01 to $100.00 1,703 1,884 1,355
$100.01 to $200.00 2,657 2,709 2,066
$200.01 to $500.00 5,404 4,888 4,002
$500.01 to $1,000.00 3,981 3,675 2,970
over $1,000.00 13,000 8,152 8,526
Total 29,235 24,278 21,019
1 Through May 15, 1996
Source: HISD Department of Budgeting and Planning

If the category requested by the school does not yet exist because it was not originally funded in the approved budget, that category must be setup in the accounting system. These accounts are setup during a batch run on the MSA system that occurs on most, but not all, weekends. The result is a delay in the transfer, and a delay in the school's ability to purchase the supplies or services. School principals cannot submit a purchase order until they have a valid account code. These new codes also must be ratified by the board. The board reviews these budget items quarterly.

A PEER Review study recommended that HISD should allow the roll-up of budget codes as one way of reducing the number and frequency of transfers. For example, codes 6301, 6302, up to 6399 would be budgeted under 6300.


Reduce the number of budget transfers required throughout the year by discontinuing the use of holding or clearing accounts in the budget.

Use allocation formulas to direct funds to categories of historical use. Then as funds are used they can be posted to the correct account without the need for transfers.

Allow schools to make purchases within a functional category if the expenditure object code will differ from the budget object code. The variance between object code budgets and expenditures can then be used to produce more accurate budgets in the future. The variance can also indicate whether the district is moving away from its strategic financial plans as a result of these changes to the budgeted amounts.


1. The assistant superintendent of Budgeting and Planning forms and leads a committee to review current procedures, investigate legal constraints, and draft a proposal for the board. January 1997
2. The district allows the roll-up of budget codes as recommended by the PEER Review committee. January 1997
3. Appropriate district personnel receive inservice training in existing class offerings. Ongoing


This recommendation can be implemented at no cost to the district.


Annual budgets are built based on previous budgets, instead of actual prior-year expenditures. The district starts developing the budget when it is only halfway through the current year, making it impossible to use prior-year actual expenditures as a starting point. This process may be misleading since end-of-year actual expenditures may vary significantly from original budget numbers. Using HISD's reported data for 1994-95 as an example co-curricular activities had actual expenditures 23.71 percent higher than budgeted (See Exhibit 7-23).

Exhibit 7-23
Budget vs. Actual Comparison
(General Fund)
1994 - 95

Expenditure Functions
(General Fund Only)
1995 Budget
1995 Actual
Instruction $508,007,560 $489,492,923 -3.64%
Instructional Administration $13,687,602 $14,253,375 4.13%
Instructional Resources and Media Services $14,351,491 $15,758,600 9.80%
School Administration $60,112,278 $60,147,661 0.06%
Curriculum and Personnel Development $8,995,275 $6,724,548 -25.24%
Communication and Dissemination $2,865,804 $2,866,736 0.03%
Guidance and Counseling $26,693,441 $27,591,027 3.36%
Attendance and Social Work Services $1,469,061 $1,949,781 32.72%
Health Services $12,679,458 $10,700,846 -15.60%
Pupil Transportation $25,140,943 $33,407,710 32.88%
Co-Curricular Activities $5,783,174 $7,154,250 23.71%
Food Service $381,648 $579,842 51.93%
General Administration $23,665,490 $23,831,750 0.70%
Debt Service $6,233,970 $1,152,250 -81.52%
Plant Maintenance and Operations $109,338,233 $118,769,748 8.63%
Facilities Acquisition and Construction $10,093 $99,878 889.58%
Data Processing Services $11,374,119 $13,413,957 17.93%
Community Services $961,616 $949,678 -1.24%
Total $831,751,256 $828,844,560 -0.35%
Source: HISD 1995-96 School Budget page 26, HISD Comprehensive Annual Financial Report Fiscal 1995 page 56

General fund variances shown in Exhibit 7-23 reveal 11 out of 18 categories have an actual expenditure varying 8.5 percent or more from the budgeted amount. When general funds and all other funds are considered in Exhibit 7-24, only five of the 18 categories have expenditures varying by 8.5 percent or more. This indicates that revenues from special and other funds are used to remedy variances in spending.

Exhibit 7-24
Budget vs. Actual Comparison
(All Funds)
1994 - 95
Expenditure Functions (All Funds)
1995 Budget
1995 Actual
Instruction $561,336,707 $538,265,592 -4.11%
Instructional Administration $17,492,218 $17,566,740 0.43%
Instructional Resources and Media Services $16,415,899 $16,034,563 -2.32%
School Administration $60,747,897 $60,481,272 -0.44%
Curriculum and Personnel Development $11,959,055 $10,810,704 -9.60%
Communication and Dissemination $2,904,814 $2,866,736 -1.31%
Guidance and Counseling $30,853,843 $31,653,940 2.59%
Attendance and Social Work Services $3,836,468 $4,721,334 23.06%
Health Services $13,274,868 $10,959,438 -17.44%
Pupil Transportation $33,730,383 $34,247,097 1.53%
Co-Curricular Activities $7,016,128 $7,164,322 2.11%
Food Service $60,711,636 $61,249,168 0.01%
General Administration $24,104,543 $23,831,750 -1.13%
Debt Service $53,026,421 $53,038,998 0.02%
Plant Maintenance and Operations $112,237,656 $119,650,910 6.60%
Facilities Acquisition and Construction $9,505,693 $45,014,209 373.55%
Data Processing Services $12,817,454 $13,413,957 4.65%
Community Services $1,118,080 $1,107,128 -0.98%
Total $1,033,089,763 $1,052,077,849 1.84%
Source: HISD 1995-96 School Budget page 17, HISD Comprehensive Annual Financial Report Fiscal 1995 page 27, 89

HISD officials have declared their intent to enact certain programs that promote HISD's Declaration of Beliefs and Visions. These priorities are listed in the Recommended 1995-96 School Budget that states:

The 1995-96 adopted budget builds on this decentralization effort and puts more emphasis on the School Board's Declaration of Beliefs and Visions than any previous budget. The additions are completely focused on the needs of the school and decentralization. The allocations are intended to improve the decentralization effort by allocating funds to the district offices for their schools and supporting the relationship between the teacher and the student.

The Recommended 1995-96 School Budget lists the district's priorities, primary, focuses and costs (where identified) as follows:

  • Raises and performance pay to most district personnel ($36.6 million);
  • Increased staffing allocations ($5.5 million);
  • A $20 per student allocation to district offices to address special staffing needs and decentralization ($4 million);
  • Improving student achievement using multi-year school improvement plans,
  • Plan, develop, and require core curriculum for all students;
  • Increase graduation rate and reduce dropout rate;
  • Improve quality of staff by attracting, retaining, and training/developing all staff, and ensure that staff at all levels treat each other, students, and parents with sensitivity and respect;
  • Increase parental and community involvement by creating partnerships;
  • Implement decentralization and shared decision-making by elimination or waiver of unnecessary rules and regulations;
  • Increase access to learning for students and employees through technology, increase employee productivity through technology and reduction of paperwork and bureaucracy;
  • Improve school climate and facilities by providing clean, safe, and secure facilities ($4.3 million);
  • Improve student discipline by providing a discipline management program; and
  • Prepare all students with relevant career and life skills.

Other priorities for the district that were not funded are:

  • Academic and enrichment programs (second phase);
  • Deferred maintenance and repairs;
  • Partnerships (after-school child care);
  • Safety/Security needs (long-term);
  • Facility needs;
  • Elementary ancillary and counselor staffing and discretionary funding (increased/weighted formulas) (Phase 2);
  • Secondary staffing (increased/weighted formulas) (Phase 2);
  • Middle school staffing (by formula);
  • Clerical assistance in schools;
  • Elementary financial clerks; and
  • SASI coordinators.

To see the extent to which these priorities are addressed, a comparison of both budgeted and actual amounts reported to TEA and recorded in PEIMS shows how funds are shifted to meet these goals.

For purposes of this analysis PEIMS data is used because it is the officially reported budget and actual numbers for school districts and because the numbers reported by the district in the HISD Comprehensive Annual Financial Report Fiscal 1995 and various other HISD publications do not agree.

For example, The HISD Comprehensive Annual Financial Report Fiscal 1995 reports the budgeted amount for facilities acquisition and construction was over $125 million. The HISD 1995-96 School Budget reports this amount as $9.5 million. And PEIMS data shows this amount as $102.1 million. All of these figures include all funds.

Exhibit 7-25
Comparison of Changes in the Budget vs. Changes in Actual Spending

Function Description
Budget 94
Actual 94
% Change
Budget 95
Actual 95
Instruction $535.3 $511.4 -4% $560.4 $538.3 -4%
Instruct. Admin. $16.9 $16.6 -2% $16.8 $17.6 5%
Instruct. Res. / Media Svs. $7.2 $15.4 114% $17.7 $16.0 -10%
School Administration $59.4 $58.8 -1% $62.0 $60.5 -2%
Curriculum and Per. Dev. $9.6 $9.6 0% $13.5 $10.8 -20%
Communication and Dissem. $3.2 $2.7 -16% $3.2 $2.9 -9%
Guidance and Counseling $32.0 $30.9 -3% $32.2 $31.7 -2%
Attendance and Social Work $4.6 $4.4 -4% $4.7 $4.7 0%
Health Services $9.5 $9.2 -3% $12.5 $11.0 -12%
Pupil Transportation $34.1 $30.6 -10% $36.9 $34.2 -7%
Co-Curricular Activities $8.0 $7.0 -13% $7.8 $7.2 -8%
Food Service $60.0 $60.4 1% $60.9 $61.2 0%
General Administration $23.0 $22.5 -2% $24.9 $23.8 -4%
Debt Service $50.4 $49.7 -1% $53.1 $53.0 0%
Plant Maint. and Operations $116.6 $109.4 -6% $117.5 $119.7 2%
Facilities Acq. and Cons. $120.0 $58.9 -51% $102.1 $45.0 -56%
Data Processing Services $11.1 $8.0 -28% $16.7 $13.0 -22%
Community Services $0.9 $0.9 0% $1.1 $1.1 0%
    $1,101.8 $1,006.4 -9% $1,144.0 $1,051.7 -8%

Source: PEIMS data

HISD officials are quick to note that they regularly come in under budget in almost every category. Yet the practice of overbudgeting by 8 or 9 percent, as shown in Exhibit 7-25, raises questions about HISD's revenue and expenditure projections. Deviations of this amount could translate to lower taxes, the renovation of schools, or the dedication of monies to other educational priorities.


Use the budget as a cost containment tool linked directly to the district's strategic goals.

Comparing actual expenditures to budget numbers gives the district a reality check to ensure that the budget is used as a cost containment tool.


1. The board or a standing committee of the board should oversee budget development and maintenance. Ongoing
2. The Budget and Financial Planning department gathers actual spending data and develops a report to use for the new budget. October 1997
3. The adopted budget is amended using actual data to produce a more reliable budget. November 1997


This recommendation can be implemented at no cost to the district.


The budget department holds formal inservice training twice a year. Attendance is not required. Although attendance lists are kept, no attempt is made to track attendance patterns versus the ability of the schools to develop sound budgets. Personnel are free to call or come to the budget department for help at any time.


Require school principals, financial clerks, and secretaries involved in the budgeting process to attend the budgeting department inservice training that is already offered.

This recommendation will reduce time spent during the year on budget transfers, mis-coded requisitions, and problem resolution. Even though the budget department has produced a high quality, comprehensive budget process manual for use by the entire district, direct instruction is needed for complete understanding of the process.


1. The superintendent should establish a policy requiring inservice training attendance for principals and financial clerks. January 1997
2. Principals and financial clerks attend existing budgeting inservices. Ongoing


This recommendation should improve the financial management efforts at no additional cost to the district since inservice training is are already offered.


School-level budgets are prepared manually. Each school receives a package by mail containing three spreadsheets. The spreadsheets represent the General Fund (GF1), the Capital Projects Fund (GF4), and the Special Projects Fund (SR1). The Budget Department develops the spreadsheets based on allocation formulas and shows minimum amounts that must be maintained in certain categories. An additional sheet displays funds that are available for schools to allocate within given constraints.

The Budget Department is testing a new budgeting software system for the network. The financial systems RFP also specifies budgeting functions. The Budget Department is just beginning to share spreadsheets electronically with the schools, rather than relying on campus mail and direct meetings to complete the budgets.


Create a single on-line budget development system.

Coordinating this project is necessary because it is likely that the new financial system will have a budget development module that allows remote access. Therefore, work underway on an automated budgeting system may be obsolete within a year.


1. The Budget and Financial Planning department reviews the appropriate functions of the new financial system. January 1997
2. The Budget and Financial Planning department coordinates with the Accounting department to decide whether to develop an on-line budgeting system or wait for the new financial system to come on-line. January 1997


There is no fiscal impact from this recommendation.


Final amendments to the school budgets are completed in early November. Although the fiscal year runs from September 1 through August 31, the school-level budgets are not stable until the enrollment figures are final. After the final enrollment numbers are recorded in late October, budget analysts meet with the school personnel to confirm the actual budget amounts for that year.

Difficulty arises when attempting to reconcile budget figures with previous budget publications and the other financial statements such as HISD's Comprehensive Annual Financial Report (CAFR). Due to the timing of publications throughout the year, the timing of receipts and expenditures, the overlap of fiscal year with the school year and special project fiscal years, and the terminology used to describe budget numbers, the numbers stated as the budgeted amount for a given year will vary from publication to publication. Exhibit 7-26 illustrates this.

Exhibit 7-26
1994-95 General Fund Budget Amounts in Three Different District Publications

Expenditure Functions
(General Funds) (Million)
1994-95 Adopted Budget1
1994-95 Recommended Budget2
Annual Financial Report3
Instruction $ 508.00 $505.61 $512.35
Instructional Administration $ 13.69 $ 13.69 $ 14.62
Instructional Resources and Media Services $ 14.35 $ 14.35 $ 17.22
School Administration $ 60.11 $ 60.11 $ 62.36
Curriculum and Personnel Development $ 9.00 $ 9.00 $ 9.17
Communication and Dissemination $ 2.87 $ 2.87 $ 3.17
Guidance and Counseling $ 26.69 $ 26.69 $ 27.78
Attendance and Social Work Services $ 1.47 $ 1.47 $ 2.10
Health Services $ 12.68 $ 12.68 $ 11.92
Pupil Transportation $ 25.14 $ 25.14 $ 40.22
Co-Curricular Activities $ 5.78 $ 5.78 $ 8.07
Food Service $ 0.38 $ 0.38 $ 0.63
General Administration $ 23.67 $ 23.67 $ 24.93
Debt Service $ 6.23 $ 6.23 $ 1.24
Plant Maintenance and Operations $109.34 $109.34 $122.47
Facilities Acquisition and Construction $ 0.10 $ 0.10 $ 0.18
Data Processing Services $ 11.37 $ 11.37 $ 21.65
Community Services $ 0.96 $ 0.96 $ 1.00
Total $831.75 $829.35 $881.11
Source: 1. HISD Adopted 1995-96 School Budget for Fiscal Year September 1, 1995 - August 31, 1996, page 26; 2. HISD Recommended 1994-95 School Budget for Fiscal Year September 1, 1994 - August 31, 1995, page 37; 3. HISD Comprehensive Annual Financial Report For the Fiscal Year Ended August 31, 1995, page 28

Exhibit 7-26 above shows that most functional categories are consistent between the two budget publications, but there is considerable difference when compared to the Comprehensive Annual Financial Report.


When district publications use the terms "recommended budget," "adopted budget," and "budget," they should be clear about the date and progress in the budgeting process that the figures represent.

The district should be clear about the publication dates associated with the various versions of the budget.


1. The Budget and Financial Planning department defines the dates on which financial data will be official and clearly notes these dates when any relevant financial data, such as the budget or the annual financial report, is published.


There is no fiscal impact from this recommendation.

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