FINANCIAL MANAGEMENT
This chapter reviews the financial management functions of Morgan Independent School District (MISD) in the following sections:
- A. Financial Management
- Part 1
- Part 2
- B. Purchasing
- C. Asset and Risk Management
A. FINANCIAL MANAGEMENT (PART 2)
FINDING
Board members do not receive regular financial statements in their board agenda packets.
The Friday before board meetings, the superintendent mails an information packet to the board members. The only financial information that MISD includes in this packet is a list of accounts payable checks that the district issued since the last board meeting. The superintendent brings a budget analysis with him to the board meetings to answer any questions regarding the district's current financial status. This report compares revenues and expenditures to date to the budget. The superintendent explained that board members receive a detailed financial analysis of the district's year-end financial reports.
Balance sheets, income statements, cash flow statements, trends or forecasts are not prepared and provided to the board on a monthly or quarterly basis. The accounting system the district uses does not automatically produce financial statements. However, these reports collectively could assist the board members in understanding the current status of the fund balance.
Financial statements provide management and board members with a summary of financial status and operating results. These statements highlight the financial strengths or weaknesses of the district and the gains or losses arising from its transactions. The organized, consistent and timely issuance of these statements provides some indication of the orderliness of a district's underlying accounting system.
Financial statements form the basis for wise administration in that such documents guide future decisions for both prudent and legal reasons. TEA expects board members and district administrators to carefully review these statements to ensure that they have the appropriate information to make informed decisions as to the district's operations. Accuracy and reliability of financial reports are dependent upon sound internal controls, effective underlying systems and periodic external audits.
Exhibit 3-10 lists possible financial reports and indicates which ones that the MISD board receives.
Exhibit 3-10 Source: MISD superintendent.
Financial Reports Received by the MISD Board
Financial Statement Provided to the Board? Yes No Interim financial statements for each fund:
- Comparative balance sheet showing current balances compared with balances in the prior year
- Statements comparing actual revenue to date with actual revenue in the prior year
- Statements of changes in financial position
X Year-end financial statements for funds and accounts groups:
- Balance sheet
- Statement of revenue, expenditures and fund equity
- Statement of changes in financial position
- Combined financial statements
X Analysis of investments: According to the Public Funds Investment Act, at least quarterly, the investment officer should prepare and submit to the governing body a written report of investment transactions for all funds for the preceding reporting period. The district does not currently have any investments but this should be considered when the financial condition of the district improves. X List of checks to be paid this month. X Enrollment growth and trends in the past five years. X School districts that include financial reports in board packets show interim financial reports for each of the budgetary funds (general fund and special revenue funds) using a comparative balance sheet that compares balances of accounts at the balance sheet date with account balances at the end of the prior year. Interim income statements comparing actual results to the budget and the current and projected fund balance are also included.
Recommendation 22:
Generate a complete set of financial statements each month for board members and appropriate administrative staff.
The superintendent should work with the district's accounting firm to develop financial statements that will not only help the board make effective and timely decisions, but also help the board and management better understand the district's fiscal position.
MISD should prepare regular statements that compare actual revenue-to-date with actual revenue in the prior year. A similar statement showing actual revenue, expenditures and encumbrances to budgeted amounts will provide a different view of the information. MISD could also prepare a statement that compares expenditures and encumbrances to-date with appropriations for the current year. An alternative presentation may combine this statement and the previous statement into a statement comparing actual and budgeted revenue and expenditure accounts. MISD should also prepare a statement of changes in financial position for the board and management. This statement shows gross financial resources provided and total school resources applied.
IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent directs the district's accounting firm to develop appropriate financial reports for the district. September 2003 2. The accounting firm prepares monthly financial reports. November 2003 3. The superintendent submits the reports to the board each month. December 2003
and OngoingFISCAL IMPACT
The consulting firm that maintains the district's accounting software would charge $100 an hour to program monthly financial reports to print automatically from its system. The owner of the company estimates that it would take less than eight hours to provide the reports. This would create a one-time cost to MISD of $800 (8 hours programming x $100/hour).
Recommendation 2003-04 2004-05 2005-06 2006-07 2007-08 Generate a complete set of financial statements each month for board members and appropriate administrative staff. ($800) $0 $0 $0 $0 Budget process
Budget preparation and administration are important aspects of overall district operations. Providing adequate resources for programs within the restraints of available funding sources presents administrators with significant challenge. Sound budgeting practices benefit the district by:
- Establishing a documented method for budget development, adoption and administration;
- Providing administrative controls for expenditure of funds within approved allocations; and
- Assuring school and community involvement through a "bottom up" budget approach.
Several legal standards exist that control the budgeting process for a school district including the Texas Education Code (TEC) and guidelines developed by the TEA. Sections 44.002 through 44.006 of the TEC establish the legal basis for budget development in school districts. The following six items summarize the legal requirements from the code:
- The superintendent is the budget officer for the district and prepares or causes the budget to be prepared.
- The district budget must be prepared by a date set by the state board of education, presently August 20 (June 19 if the district uses a July 1 fiscal year start date).
- The president of the Board of Trustees must call a public meeting of the Board of Trustees, giving 10 days public notice in a newspaper, for the adoption of the district budget. Any taxpayer in the district may be present and participate in the meeting.
- No funds may be expended in any manner other than as provided for in the adopted budget. The board does have the authority to amend the budget or adopt a supplementary emergency budget to cover unforeseen expenditures.
- The budget must be prepared in accordance with GAAP and state guidelines.
- The budget must be legally adopted before the adoption of the tax rate. However, if a school district has a July 1st fiscal year start date, then a school district must not adopt a tax rate until after the district receives the certified appraisal roll for the district required by Section 26.01, Tax Code. In addition, a school district must publish a revised notice and hold another public meeting before the district may adopt a tax rate that exceeds the following: (1) The rate proposed in the notice prepared using the estimate; or (2) The district's rollback rate determined by Section 26.08, Tax Code, using the certified appraisal roll.
TEA has developed additional requirements for school district budget preparation. The budget must be adopted by the Board of Trustees, inclusive of amendments, no later than August 31 (June 30 if the district uses a July 1 fiscal year start date). Minutes from district board meetings are used by TEA to record adoption of and amendments to the budget. Budgets for the general fund, the Food Service fund (whether accounted for in the general fund, a special revenue fund or enterprise fund) and the debt service fund, if a district has one, must be included in the official district budget. These budgets must be prepared and approved at least at the fund and function levels to comply with the state's legal level of control mandates.
The officially adopted district budget, as amended, must be filed with TEA through PEIMS by the date prescribed in the annual system guidelines. Revenues, other sources, other uses and fund balances must be reported by fund, object (at the fourth level), fiscal year, and amount. Expenditures must be reported by fund, function, object (at the second level), organization, fiscal year, program intent and amount.
A school district must amend the official budget before exceeding a functional expenditure category, i.e., instruction, in the total district budget. The annual financial and compliance report should reflect the amended budget amounts on the schedule comparing budgeted and actual amounts. The requirement for filing the amended budget with TEA is satisfied when the school district files its Annual Financial and Compliance Report.
In addition to state legal requirements, individual school districts may establish their own requirements for its annual budget process. Local fiscal policies may dictate budgetary requirements that go beyond those required by the TEC and TEA.
FINDING
District staff, teachers and the Site-Based Decision-Making (SBDM) committee are not included in the budget process and the district does not prepare a budget calendar. The superintendent starts evaluating the next year's budget needs in April or May of the current year. First, the superintendent compares the current year's expenditures to the current budget and identifies line items or issues that need to be addressed. The superintendent then begins putting in expected revenue from federal, state and local funding. Next the superintendent reviews staff salaries and considers the purchases of needed fixed asset items. The superintendent also reviews supply and maintenance costs to create a reasonable estimate for the next year. If there is more revenue than expenditures, the superintendent considers what additional items should be bought to enhance the instructional process for the teachers and students. The superintendent also considers what should be done to improve or repair district facilities.
The food service manager and the maintenance manager do not have input into the budget process. If the budget process is started in April or May, this also limits the interaction between the SBDM committee and the ancillary support departments due to end-of-school activities and the summer release.
The district also does not assign personnel to a budget planning committee to assist in developing and analyzing expenditures for the overall benefit of the district. To a large degree, the superintendent is solely responsible for the budget preparation.
Other districts have found that establishing a budget planning committee comprised of key staff, teachers, community members and board members enhances the budget process. These districts reduce misunderstandings because everyone has input into the district's budget. Budget planning committees can also establish long-term budgeting goals for the next few years. Each member of the team is given the opportunity to identify priorities based on the district's overall needs and resources. The budget committee normally creates a budget calendar that is helpful in communicating the budget process to the district.
Recommendation 23:
Establish a Budget Planning Committee and a budget calendar to assist in preparing the budget.
A Budget Planning Committee should be established and meet during the first week of the new school year. The committee should include the superintendent, the school principal, key teachers and staff members and two board members. Preparing a formal budget calendar and providing it to all district employees and community members should be the first step in the annual budget process.
IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent organizes the Budget Planning Committee. September 2003 2. The superintendent prepares a budget calendar with the assistance of the Budget Planning Committee. October 2003 3. The superintendent distributes the budget calendar to all personnel involved in the budget process. December 2003 4. The Budget Planning Committee compiles the budget based on input from district staff and community members. February 2004
and OngoingFISCAL IMPACT
This recommendation can be implemented with existing resources.
FINDING
MISD does not produce a formal budget document. The superintendent provides a budget analysis worksheet to the board to approve the budget. When the superintendent begins working on the budget, the accounting firm prints a budget summary analysis that compares the current year's budget to year-to-date actual expenditures. The analysis has an extra blank column on the right side of the report. The superintendent fills in the blanks with proposed numbers and returns it to the accounting firm. The accounting firm uses these numbers to create a budget summary analysis. The superintendent presents this analysis to the board for approval. If the board revises a budget item before adopting the budget, the superintendent draws a line through it and writes in the new number. The district sends the revised summary back the accounting firm for changes; the accounting firm updates the analysis and returns it to the district.
The budget document does not have an executive summary or overview. It does not have a discussion of district goals, priorities or objectives. The district does not summarize budget numbers to show total revenues, total expenditures or where grant money will hopefully be received to fund specific purchases. In fact, planned purchases are not highlighted in the document.
A school district's budget is most effective when it is useful to both district staff and the community at-large in understanding the district's inner workings. A budget document serves three major purposes: a communications device, a policy document and a financial plan.
The Association of School Business Officials (ASBO) and the Government Finance Officers Association (GFOA) are two national organizations that promote excellence in the form, content and presentation of budget documents. The following is a list of sample criteria for ASBO-certified budget documents:
- table of contents that identifies major budget sections;
- executive summary that presents an overview of key initiatives and financial priorities;
- background and current information about the district;
- the district's mission and goals;
- organization chart;
- overview of the budget process; and
- graphs and charts to facilitate understanding and illustrate key financial information.
ASBO and GFOA certifies and awards organizations that create exceptional budgets based on their criteria. Districts can use their criteria to improve their budget document's content, format and presentation. School districts have an opportunity to "tell their story" when their budgets communicate what is behind and beyond the numbers.
Recommendation 24:
Prepare a formal budget document including an executive summary and other narrative information to support and explain the district's budget.
Although ASBO and GFOA certification would be an ambitious goal based on the district's size and limited resources, MISD should use the standards of these agencies to gradually enhance its budget document. Each year, the district should add a new feature to its budget document to enhance the document's usefulness.
IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent reviews other district's budget documents and identifies available information that MISD could include in its budget to make it more informative and useful. September 2003 2. The superintendent prepares an outline of a proposed budget document. December 2003 3. The superintendent presents the outline to the board for review and approval. February 2004 4. The superintendent prepares the budget using the appropriate budget document and submits it to the board for approval. July 2004
and OngoingFISCAL IMPACT
This recommendation can be implemented with existing resources.
Tax collections
Assessing and collecting school district property taxes is an important function involving different entities with distinct responsibilities. School districts develop and adopt their tax rate while county appraisal districts appraise the value of property within the district. The tax rate that school districts adopt normally consists of two components: (1) a maintenance and operations component for meeting operating costs and (2) a debt service component to cover the costs of indebtedness. The combined rate is applied to the assessed property value to compute the district's total tax levy.
Property values are important determinates of school funding, not only at the local level, but at the state level as well. There is an inverse relationship between local property wealth and state aid. The greater the property wealth of the district, the greater the amount of revenue raised locally, but the lower the amount of state aid.
The state average's property value per student is $234,607 which is almost identical to MISD's at $237,368 for 2001-02.
FINDING
MISD's current tax collection rates are declining and delinquent tax receivable rates have been increasing over the past three years resulting in lower revenue for the district. MISD contracts with Bosque County Central Appraisal District to perform its tax collection duties. Bosque County allocates its total operating budget to all the entities on whose behalf it collects taxes based on each entity's total tax levy. Exhibit 3-11 presents MISD's tax and collection rate information from 1999-2000 through 2001-02.
Exhibit 3-11 Source: MISD Audited Financial Reports, 1999-2000 through 2001-02.
MISD Taxes and Collection Rates
1999-2000 through 2001-02
Category 1999-2000 2000-01 2001-02 Maintenance and operations tax rate $1.40 $1.40 $1.42 Interest and sinking fund N/A N/A N/A Total Tax Rate $1.40 $1.40 $1.42 Total tax levy including adjustments $416,568 $471,430 $515,801 Appraised Value $29,772,056 $33,709,481 $36,414,553 Collection Rate 96.3% 96.7% 95.5% Overall Delinquency Rate 6.6% 7.1% 8.5% Exhibit 3-12 shows MISD's tax collection rates compared to its peer districts. The district's tax collection rate is higher than all of its peer districts except for Cranfills Gap. Although the district also has a lower delinquent tax accounts receivable balance than all the peer districts except Cranfills Gap, its overall delinquency rate is increasing.
Exhibit 3-12 Source: MISD, Cranfills Gap, McDade and Penelope Annual Financial Reports, 2001-02.
Comparison of Delinquent Tax Collection Rates
MISD and Peer Districts
2001-02
Description Cranfills Gap McDade MISD Penelope Percent of Fiscal 2001 Taxes Collected as of August 31, 2002 97.5% 92.7% 95.5% 89.2% Delinquent Tax Accounts Receivable as of August 31, 2002 $24,365 $75,255 $43,887 $42,189 Fiscal Year 2001 Adjusted Tax Levy $511,424 $589,579 $515,081 $182,613 Delinquent Tax Accounts Receivable as a Percent of Adjusted 2001 Tax Levy 4.76% 12.76% 8.5% 23.10%
Note: Data for Prairie Lea and Megargel ISD unavailable.In 1994, the district contracted with a law firm to collect delinquent taxes. According to the superintendent, the law firm only submits progress updates once or twice a year. The Bosque County Tax Assessor Collector reports that three different law firms collect its delinquent taxes.
The district does not have written delinquent tax collection policies or procedures. The district has not conducted a formal review of the contract with the law firm collecting delinquent taxes in almost 10 years. The firm does not provide the district with regularly scheduled updates about progress and problems with collecting delinquent taxes. The district does not have policies that specify the district's position on initiating lawsuits for back taxes or for dealing with the foreclosure and the sale of delinquent properties. The lack of district oversight on the collection progress contributes to the increasing size of the district's delinquent tax accounts receivables.
A common industry standard and indicator 6 of the School FIRST rating is the tax collection rate. The rate is calculated by dividing total collections (current and delinquent) by the current year tax levy, which can result in a percentage greater than 100 percent. As a standard, the School FIRST indicator requires a tax collection rate greater than 96 percent.
Districts with low delinquent tax receivables have policies and procedures in place to guide the tax assessor collector and the law firm in charge of collecting delinquent taxes. The superintendent or his designee regularly reviews the status of the receivables with the team in charge of collecting the taxes to ensure taxes are collected efficiently and effectively.
Some districts use innovative strategies to actively reduce their amount of delinquent taxes. In Aransas County Independent School District the board voted on a policy where the district takes out an ad in the local paper and publishes the names of businesses and individuals that are delinquent on their taxes to the school district. This particular practice greatly improved the district's collection rate just in its first year of implementation.
Recommendation 25:
Aggressively seek to collect current and delinquent taxes and increase revenues.
Quarterly meetings should be established between the law firm, the tax assessor collector and the superintendent to discuss the progress of delinquent tax collections. The tax collector and a representative from the law firm should present an annual plan of action with goals for the upcoming tax levy to the board.
The district should establish written policies that thoroughly address the district's position on seizing and handling the property of delinquent taxpayers, including those that have been obtained by the district in lawsuit judgments. If the policies call for more aggressive collection practices, the district should seek to minimize their impact on poor and elderly homeowners.
IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent or his designee prepares written policies and procedures to be used by the tax collector and the law firm in collecting MISD's taxes. September 2003 2. The superintendent presents the policies and procedures to the board for approval. October 2003 3. The superintendent reviews the approved policies with the tax collector and the law firm responsible for collecting delinquent taxes. November 2003 4. The superintendent establishes recurring meetings with the tax collector and the law firm. January 2004
and Ongoing5. The superintendent monitors the collection process and renegotiates collections contracts annually. January 2004
and OngoingFISCAL IMPACT
The district's 2001 tax levy after adjustments was $515,801. MISD collected 95.5 percent of the levy. The district will receive an additional $10,316 ($515,801 x 2 percent = $10,316) annually by increasing its collection rate by even 2 percent, to Cranfills Gap ISD's collection rate of 97.5 percent in 2001-02. One half of that amount or $5,158 ($10,316 x 1/2) should be possible in the first year.
Recommendation 2003-04 2004-05 2005-06 2006-07 2007-08 Aggressively seek to collect current and delinquent taxes and increase revenues. $5,158 $10,316 $10,316 $10,316 $10,316