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Chapter 3
FINANCIAL AND OPERATIONAL MANAGEMENT

This chapter reviews the financial and operational management of Westphalia Independent School District (WISD) in the following sections:

A. Financial Management
Financial Management (Part 1)
Financial Management (Part 2)
B. Asset and Risk Management
C. Purchasing
D. Food Service
E. Facilities

A. FINANCIAL MANAGEMENT (PART 1)

School districts' financial operations must comply with federal, state and local laws and regulations. The Texas Education Agency (TEA) requires districts' financial operations to comply with the guidelines of the Financial Accountability System Resource Guide (FASRG). The FASRG combines requirements for financial management from a variety of sources into one guide for Texas school districts.

Texas school districts receive revenue from three primary sources: local sources, state funding and federal programs. Property taxes provide the primary local source of funds for most school districts. WISD levies property taxes composed of a maintenance and operations (M&O) component, but does not levy an interest and sinking (I&S) component since WISD has no debt service payments.

WISD receives funding from the state based on a formula approved by the Legislature. In general, the funding is based on the number of students in average daily attendance in the district. The funding formula also contains additional funding for programs designed to benefit students with special needs.

WISD receives state funding from the Instructional Facilities Allotment (IFA) to pay a portion of the payments on its lease-purchase of facilities. The IFA is a state program to assist property-poor school districts with facility upgrades and acquisition. WISD's IFA amount is equivalent to 93.4 percent of the annual payment for its lease-purchase of the 2002 facility addition.

One way to judge the effectiveness of a district's financial management is to compare the district with peer districts. WISD selected Gholson, Malone and Mount Calm as its peer districts. Exhibit 3-2 presents a comparison of budgeted revenue by source for WISD, its peer districts, the Regional Education Service Center XII (Region 12) districts and the state. Region 12 is the service center region that serves WISD and its neighboring school districts. All of the peer districts rely on the state for the majority of their budgeted revenues.

Exhibit 3-2
Budgeted Revenues by Source
WISD, Peer Districts, Region 12 and the State
2001-02
Description Gholson WISD Mount
Calm 		Malone Region 12 State
Number of Students 140 122 105 73 136,137 4,146,653
Local Revenue $265,900 $162,650 $199,748 $260,500 $335,152,600 $15,419,040,534
State Revenue $791,355 $658,265 $572,673 $479,010 $536,563,710 $11,754,404,440
Federal Revenue $38,500 $12,600 $28,818 $25,700 $64,623,964 $897,188,748
Total Revenue $1,095,755 $833,515 $801,239 $765,210 $936,340,274 $28,070,633,722
Revenue per Student $7,827 $6,832 $7,631 $10,482 $6,878 $6,769
Source: TEA, Academic Excellence Indicator System (AEIS), 2001-02.

Exhibit 3-3 presents student enrollment, percentage of economically disadvantaged students, property value, property value per student and total tax rate for WISD, its peer districts, Region 12 and the state. While the number of students is comparable, WISD reports a significantly lower percentage of its students as economically disadvantaged. The district also has the lowest property values and tax rate.

Exhibit 3-3
Comparison of Economic Indicators
WISD, Peer Districts, Region 12 and the State
2001-02
District Enrolled
Number of
Students		 Percent of
Economically
Disadvantaged
Students		 Certified
Property
Value		 Property
Value
Per
Student		 Total Tax Rate
Gholson 140 55.0% $17,429,651 $124,498 $1.500
WISD 122 11.5% $9,201,208 $75,420 $1.186
Mount Calm 105 57.1% $13,285,211 $126,526 $1.500
Malone 73 79.5% $13,168,498 $180,390 $1.361
Region 12 136,137 48.4% $19,982,130,925 $147,743 $1.463
State 4,146,653 50.5% $960,394,653,634 $234,607 $1.485
Source: TEA, AEIS, 2001-02.

The FASRGrequires school districts to account for expenditures by the type or object of the expenditure. Exhibit 3-4 presents budgeted expenditure information as a percent of total for WISD, its peer districts, Region 12 and state by object code description for 2001-02. WISD budgets the largest percentage of its expenditures for payroll.

Exhibit 3-4
Budget Allocations by Object Code Description
WISD, Peer Districts, Region 12 and the State
2001-02
Object Code WISD Gholson Mount
Calm 		Malone Region 12 State
Payroll 78.6% 75.1% 66.6% 62.3% 71.7% 73.0%
Contracted Services 11.1% 10.3% 19.9% 17.4% 8.7% 8.3%
Supplies 7.0% 5.8% 7.1% 7.2% 8.0% 6.3%
Other Operating 3.0% 8.3% 3.0% 3.9% 2.8% 1.9%
Debt Service 0.0% 0.0% 2.2% 3.2% 6.8% 8.7%
Capital Outlay 0.4% 0.4% 1.2% 5.9% 2.1% 1.8%
Totals* 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: TEA, AEIS, 2001-02.
*Totals may not add to 100 percent due to rounding.

Chapter 1 of the FASRG also mandates the use of function codes by school districts to track expenditures for different school district operations. Exhibit 3-5 presents budgeted expenditures as a percent of total by function code for WISD, its peer districts, Region 12 and the state. WISD spends a greater percentage of its budget on instruction than any of the peer districts, Region 12 and the state. WISD spends more than 67 cents of every dollar on instruction, while the state average is only 51 cents of every dollar. The remainder of functional expenditures is in line with the peer districts. Compared to the state and Region 12, WISD and the peer districts spend a larger percentage of their budget on central administration. This is because of the small size of the district. In WISD, the central administration budget pays for the superintendent's salary; the clerical staff's salary; board election costs; board travel and training costs; and supplies for the superintendent's office.

Exhibit 3-5
Functional Expenditures as a Percent of Total
WISD, Peer Districts, Region 12 and State
2001-02
Function Code WISD Gholson Mount
Calm 		Malone Region 12 State
Instruction (11,95) 67.4% 55.1% 45.5% 43.6% 50.4% 51.0%
Instructional-Related Services (12,13) 1.8% 0.3% 2.5% 1.6% 3.0% 2.7%
Instructional Leadership (21) 0.0% 0.0% 0.0% 0.0% 1.1% 1.2%
School Leadership (23) 0.4% 12.5% 0.0% 10.4% 5.4% 5.2%
Support Services-Student (31,32,33) 0.7% 1.5% 1.1% 0.4% 3.7% 4.0%
Student Transportation (34) 0.0% 4.0% 5.1% 3.3% 2.5% 2.6%
Food Services (35) 4.5% 7.0% 6.0% 5.9% 4.9% 4.8%
Co-curricular/ Extracurricular Activities (36) 1.6% 0.4% 0.7% 1.7% 3.2% 2.2%
Central Administration (41) 11.7% 6.5% 17.5% 15.3% 4.1% 3.5%
Plant Maintenance and Operations (51) 10.1% 8.3% 13.0% 8.6% 10.7% 10.1%
Security and Monitoring Services (52) 0.0% 0.0% 0.0% 0.0% 0.4% 0.6%
Data Processing Services (53) 1.4% 4.0% 5.2% 0.0% 1.2% 1.1%
Other** 0.4% 0.4% 3.4% 9.1% 9.4% 10.8%
Total Budgeted Expenditures* 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: TEA, PEIMS, 2001-02.
*Totals may not add to 100 percent due to rounding.
**Other includes any operating expenditures not listed above and all non-operational expenditures such as debt services, capital outlay and community and parental involvement services.

Exhibit 3-6 presents the WISD functional expenditures per student for 1998-99 through 2002-03 for the general fund. WISD experienced steady enrollment growth during this period. The district's total per student expenditures grew at a lower rate than student enrollment. Student enrollment grew 20.6 percent between 1998-99 and 2002-03; total expenditures per student increased by 14.9 percent in the same period. The district increased expenditures per student in instruction by 8.5 percent while lowering expenditures per student in central administration by 3.5 percent. During this same period, WISD expanded its athletic programs in grades 7 and 8. This caused the significant increase in expenditures per student in the co-curricular and extracurricular activities category. Guidance and counseling expenditures increased per student due to the hiring of a counselor. Only a portion of the salary for this position, however, is charged to the guidance and counseling activity report.

Exhibit 3-6
WISD Functional Expenditures Per Student
General Fund Only
1998-99 through 2002-03
Function 1998-99
Actual		 1999-2000
Actual		 2000-01
Actual		 2001-02
Budget		 2002-03
Budget		 Percent Change
Between 1998-99
and 2002-03
Students Enrolled 107 118 126 122 129 20.6%
Instruction $3,452 $3,844 $3,976 $3,859 $3,746 8.5%
Instructional Resources $94 $90 $105 $101 $40 (57.5%)
Curriculum and Staff Development $0 $9 $5 $1 $3 *
School Leadership $0 $2 $24 $22 $317 *
Guidance and Counseling $2 $4 $27 $38 $95 4,650.0%
Co-curricular/Extracurricular Activities $23 $38 $42 $93 $116 404.35%
Administration $639 $667 $719 $664 $616 (3.60%)
Plant Maintenance/Operations $542 $555 $589 $576 $570 5.17%
Data Processing Services $78 $73 $79 $82 $116 48.72%
Contracted Instructional Services $58 $102 $95 $123 $93 60.34%
Payments to a Fiscal Agent $219 $196 $168 $159 $153 (30.14%)
Total Per Student $5,107 $5,580 $5,829 $5,718 $5,865 14.84%
Source: WISD audited financial statements, 1998-99 through 2000-01; WISD budget 2001-02 and 2002-03. Note: Totals may not add to 100 percent due to rounding.
*Unable to calculate with zero expenditure in the base year.

The 77th Legislature (2001) enacted SB 218, which requires the implementation of a financial accountability rating system. In compliance with this mandate, TEA established the School Financial Integrity Rating System of Texas (School FIRST). The School FIRST rating system begins a transitional implementation for 2002-03 with preliminary and final paper reports to each district and it's regional education service center. Upon full implementation of the rating system in 2003-04, each board of trustees will publish an annual report describing the financial management performance of the district.

The primary goal of School FIRST is to achieve improved performance in the management of school districts' financial resource. The primary objective of the rating system is to assess the quality of financial management in Texas public schools. A secondary objective is to measure and report the extent to which financial resources in Texas public schools assure the maximum allocation possible for direct instructional purposes. Other objectives reflect the implementation of a rating system that fairly and equitably evaluates the quality of financial management decisions. After full implementation of the rating system, the district's ratings will be openly reported to the public and to other interested persons and entities.

Districts' ratings are based upon the districts' numerical scores expressed as the count of indicators that show "No" answers. The four primary levels of ratings are based upon the count of "No" answers. The rating system contains 21 indicators that are assigned equal points. The ratings and scores are presented in Exhibit 3-7.

Exhibit 3-7
School FIRST
Rating Criteria
Rating Score
(Number of
"No" Answers)
Superior Achievement 0 - 2
Above Standard Achievement 3 - 4
Standard Achievement 5 - 6
Substandard Achievement => 7 OR No to One Default Indicator
Suspended - Data Quality Serious data quality issues
Source: TEA, School FIRST.

In addition to the point score, failure to meet the criteria for any one of three critical indicators or failure to meet the criteria of both of two additional criteria will result in an automatic rating of "Substandard Achievement." Exhibit 3-8 details the five critical indicators.

Exhibit 3-8
School FIRST
Critical Criteria Indicators
Criteria
Number		 Criteria
Description		 Result of a
"No" answer
1 Was total fund balance less reserved fund balance greater that zero in the General Fund? Automatic Substandard Rating
2 Were there NO disclosures in the annual financial report and/or other sources of information concerning default on bonded indebtedness obligations? Automatic Substandard Rating
3 Was the annual financial report filed within one month after the deadline depending on the district's fiscal year end Automatic Substandard Rating
4 Was there an unqualified opinion in the annual financial report 4 AND 5 Automatic Substandard Rating
5 Did the annual financial report NOT disclose any instance(s) of material weakness in internal controls? 4 AND 5
Automatic Substandard Rating
Source: TEA, School FIRST.

Sanctions will be applied to districts that receive a "Substandard Achievement" rating. Additional sanctions could apply if issues arise relating to data quality. Sanctions could result in the assignment of a financial monitor or master by the TEA Accountability Department in accordance with Chapter 39 of the Education Code. Additional sanctions could involve an accreditation investigation that could result in specific requirements for improvements in financial management.

The Texas Education Code (TEC) Section 44.008 requires school districts to undergo an annual external audit performed by a certified public accountant. The scope of the external audit is financial in nature and designed to provide reasonable assurance that the financial statements fairly present the financial condition of the district. Lott, Vernon & Company, PC performed WISD's annual financial and compliance audit for 2001, 2000 and 1999. The audits cover the period between September 1 of the previous calendar year and August 31 of the next year. All of the audit reports stated that the financial statements were a fair representation of the district's financial condition and did not report any material weaknesses in internal controls.

FINDING

The district contracts with Falls County to collect its current and delinquent taxes. The district collected a high percentage, 96.6 percent, of the total tax levied in 2001-02. The county appraisal district appraises all school districts' property. All school districts in the county adopt a tax rate that is applied to the assessed value, minus tax exemptions, to determine the amount of taxes to be levied. Some school districts collect their own taxes and others contract with another entity.

The maintenance and operations (M&O) component of the tax cannot exceed $1.50 per $100 of assessed property value in most Texas school districts. The voters authorize the interest and sinking (I&S) component of the tax when they pass a bond issue and this component is limited to $0.50 per $100 of assessed property value. Since it has no outstanding bonded indebtedness, WISD does not levy or collect an I&S component.

Exhibit 3-9 presents information on the district's taxes for the period between 1998-99 and 2001-02.

Exhibit 3-9
WISD Assessed Value, Tax Rate, Tax Levy and Tax Collections
1998-99 through 2001-02
  1998-99
Actual		 1999-2000
Actual		 2000-01
Actual		 2001-02
Actual
Assessed property value $10,048,418 $10,029,290 $10,682,670 $10,964,530
M&O tax rate $1.186 $1.186 $1.186 $1.186
I&S tax rate $0.000 $0.000 $0.000 $0.000
Tax rate per $100 value $1.186 $1.186 $1.186 $1.186
Tax levy $119,194 $118,965 $124,338 $127,480
Total tax collections $117,881 $116,944 $121,766 $123,201
Percent collected to levy 98.9% 98.3% 97.9% 96.6%
Source: WISD audited financial statements, 1998-99 through 2000-01; WISD superintendent, 2001-02.

The delinquent taxes outstanding at August 31, 2002 of $16,430 represent 12.9 percent of the 2001-02 levy. The district paid one dollar a parcel, or $708, to Falls County to collect its taxes.

Financial Management (Part 2)