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 AB 751 Page 2 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 AB 751 Page 3 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 AB 751 Page 4 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 AB 751 Page 5 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 AB 751 Page 6 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