BILL ANALYSIS                                                                                                                                                                                                    Ó






                         SENATE COMMITTEE ON EDUCATION
                             Alan Lowenthal, Chair
                           2011-2012 Regular Session
                                        

          BILL NO:       AB 751
          AUTHOR:        Furutani
          AMENDED:       April 26, 2011
          FISCAL COMM:   Yes            HEARING DATE:  June 22, 2011
          URGENCY:       No             CONSULTANT:    Daniel Alvarez

           SUBJECT  :  Education Finance.
          
           SUMMARY  

          Provides for a modified fiscal oversight process for school 
          districts and county offices of education (COEs) where a 
          "qualified" certification status is assigned based on the 
          review of the second fiscal year following the current 
          fiscal year, and provides for additional information on and 
          a potential waiver of related actions.

           BACKGROUND  

           Current law  :

             1)   Provides for external financial oversight of COEs 
               by the Superintendent of Public Instruction (SPI), and 
               of school districts by county superintendents.

             2)   Requires local educational agency's (LEAs) to adopt 
               a budget prior to July 1 of each year, and requires 
               that budget to be approved by the county 
               superintendent (for districts) or the SPI (for COEs) 
               by October 8; also requires specified oversight and 
               interventions if the budget is not approved by that 
               date. 
               (Education Code § 42127)

             3)   Requires LEAs to provide two interim reports each 
               fiscal year by specified due dates, and requires each 
               LEA to self-certify as to whether the LEA will meet or 
               may not meet its financial obligations for the current 
               and two subsequent fiscal years, or will be unable to 
               do so for the current and one subsequent year; also 
               requires specified oversight and interventions if a 




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               LEA may not meet or will be unable to meet its 
               financial obligations. (Education Code § 42130 et. 
               seq.)

           ANALYSIS
           
           This bill  provides for a modified fiscal oversight process 
          for school districts and county offices of education where 
          a "qualified" certification status is assigned based on the 
          review of the second fiscal year following the current 
          fiscal year, and provides for additional information on and 
          a potential waiver of related actions.  Specifically, this 
          bill:

          1)   Requires the Superintendent of Public Introduction 
               (SPI), county superintendents and school districts to 
               distinguish between school districts and COE that 
               receive qualified certification only on the basis of 
               the second subsequent year following the current year 
               from those that are qualified on the basis of the 
               current year or first subsequent year.

          2)   Requires any school district, choosing to make budget 
               reductions as a result of it being assigned a 
               qualified certification solely on the basis of the 
               second subsequent year following the current year, to 
               hear those cuts as an information item and allow 
               public comment on that item at an open meeting held 
               prior to the meeting at which the board takes action 
               on the proposed cuts. 

          3)   Authorizes the SPI to waive the requirements on any 
               school district or COE to provide and report budget 
               projections and interim projections for the second 
               subsequent year following the current year, as well as 
               the requirement that the local educational agency 
               (LEA) self-certify interim status on the basis of that 
               third year, if all of the following are met:

               a)        The school district or COE requests that 
                    such a waiver be approved and provides any 
                    information requested that is needed by the 
                    California Department of Education (CDE) to 
                    analyze that request;

               b)        In the case of a school district, the county 




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                    superintendent of the county within which that 
                    district is located recommends that the SPI 
                    approves the requested waiver; and, 

               c)        The SPI determines with reasonable 
                    certainty, based on the requestor's fiscal 
                    history, current financial status and budget 
                    projections, and from the SPI's expectations 
                    concerning future funding levels, that the 
                    requestor would meet its financial obligations 
                    for the second subsequent year following the 
                    current year.

           STAFF COMMENTS  

           1)   Need for the bill  .  According to the author, due to 
               the uncertainty of the state's current fiscal climate, 
               the third year of multi-year projections (as required 
               under the AB 1200 process) are made even more 
               uncertain.  In recent years it is unlikely that 
               third-year revenue projections that LEAs have made 
               have been accurate - having nothing to do with the 
               school district, but rather with the imperfection of 
               the state budget process.  And current law does not 
               distinguish when a school district is given a 
               "qualified" certification as a result of possible 
               issues in the third year of a multi-year projection or 
               rather in the immediate upcoming fiscal year. This 
               measure would provide a more reasonable approach to 
               dealing with "qualified' certifications in the second 
               fiscal year following the current fiscal year.

           2)   State's financial oversight of LEAs.   The AB 1200 
               process establishes an "early warning" system with 
               respect to LEAs that are in financial distress; this 
               early warning capability is important in terms of both 
               protecting the state's interests (i.e., minimizing the 
               number of emergency apportionments that are requested 
               from the state) and protecting the fiscal health of 
               districts.

               Under the AB 1200 process, each school district and 
               COE is required to adopt a budget by July 1 of each 
               year.  County superintendents are required to review 
               and approve (or disapprove) each school district's 
               adopted budget - in the case of COE budgets, the SPI 




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               is the approver - for compliance with fiscal criteria 
               and standards, and to determine whether the budget 
               will allow the LEA to meet current and subsequent year 
               financial obligations.  If an LEA's budget remains 
               disapproved by October 8, then the county 
               superintendent or SPI, as appropriate, is required to 
               make specified interventions with respect to financial 
               actions of the LEA, including developing a budget plan 
               that will guide the LEA through the fiscal year.


               LEAs are also required to file two interim financial 
               reports during each fiscal year; these reports provide 
               for a self-assessment of the status of the LEA's 
               financial health over a three-year time period.  This 
               self-assessment results in a certification of whether 
               or not the LEA is able to meet its financial 
               obligations; each LEA's certification is classified as 
               positive, qualified, or negative.  


                           A positive certification is assigned to a 
                    LEA that will meet its financial obligations for 
                    the current and two subsequent fiscal years; 

                           A qualified certification is assigned 
                    when the LEA may not meet its financial 
                    obligations for the current or two subsequent 
                    fiscal years; and

                            A negative certification is assigned 
                    when a LEA will be unable to meet its financial 
                    obligations for the remainder of the current year 
                    or for the subsequent fiscal year.  



               Qualified or negative certification results in various 
               forms of additional oversight or interventions on the 
               part of the county superintendent or SPI, including 
               assigning external consultants, requiring a district 
               fiscal recovery plan, or even disallowing certain 
               expenditures through a stay and rescind of governing 
               board actions.  For the period ending January 31, 
               2011, the CDE reported that 113 LEAs in the state 
               received a qualified certification of its financial 




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               status at the 2010-11 Second Interim Report and 13 
               LEAs received a negative certification.  

               If a LEA is assigned a qualified certification as a 
               result of its fiscal status in the current or 
               subsequent year, then that district may be facing an 
               immediate threat to its fiscal health in that changes 
               within this fiscal year or within the budget that will 
               have to be adopted by the end of this fiscal year may 
               be necessary.  

          3)    Supporters and opponents  of this bill make much the 
               same argument, when they cite the fiscal uncertainty 
               in which local educational agencies are currently 
               operating, yet results in two different approaches - 
               the need to provide either a reasonable accommodation 
               in light of the continued fiscal uncertainty that 
               allows local deliberation with additional information 
               or to maintain the current system which requires 
               immediate and expeditious action to budget pressures.  
               Despite this agreement on the conditions that 
               districts and county offices face, and the activities 
               that are necessary in those conditions, supporters and 
               opponents disagree fundamentally on how they judge the 
               usefulness of the third-year budget projections and 
               interim reports.

               Under the current AB 1200 process, however, there is 
               no distinction made between a LEA qualified as a 
               result of its fiscal situation in the current or 
               second year, and one assigned a qualified 
               certification solely as a result of its fiscal 
               situation in the third year. While an LEA that is 
               assigned a qualified certification solely as a result 
               of its fiscal situation in the third year of the 
               multi-year projections likely has the ability to be 
               slightly more deliberative in its approach to 
               resolving the problems that it faces.  But the 
               consequences of a "qualified" certification can make 
               it harder for a school district to establish and 
               maintain credit with vendors or go to outside markets 
               for cash borrowing purposes.  This does not mean that 
               LEAs with a "qualified" certification, as a result of 
               that third year have the security of ignoring the 
               early warning provided by those projections or that 
               the early warning provided is unimportant, but more 




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               that LEAs qualified as a result of the situation that 
               they face in the current or subsequent year face a 
               more urgent situation.  

               This measure attempts to strike a balance of continued 
               immediate oversight without ignoring the early warning 
               system benefits of the current process, with a modicum 
               of reasonability under prescribed conditions and 
               review of a COEs or school district financial 
               condition.  Because of the possible implications of 
               trying to achieve a balance on fiscal responsibility, 
               at a minimum staff recommends that the provisions of 
               this measure sunset as of June 30, 2015. 

           SUPPORT 

          California Federation of Teachers
          Los Angeles Unified School District
          San Francisco Unified School District


           OPPOSITION

           California County Superintendents Educational Services 
          Association
          Kern County Superintendent of Schools
          Riverside County Superintendent of Schools
          San Diego County Office of Education
          Santa Clara County Office of Education