BILL ANALYSIS �
AB 751
Page 1
Date of Hearing: April 13, 2011
ASSEMBLY COMMITTEE ON EDUCATION
Julia Brownley, Chair
AB 751 (Furutani) - As Introduced: February 17, 2011
SUBJECT : Education finance
SUMMARY : Shortens, from two to three years, the time horizon
over which school district and county office of education (COE)
interim financial reports are produced and judged, and over
which external financial oversight is provided. Specifically,
this bill :
1)Deletes the requirement that a county superintendent, as part
of each of two required interim financial reports, certifies
whether the COE is able to meet its financial obligations for
the current and two subsequent fiscal years, and instead
requires the certification to be made with respect to the
current and one subsequent fiscal year.
2)Redefines the classifications that may be assigned to the two
interim financial reports required for COEs and school
districts to be:
a) Negative certification is assigned to any local
educational agency (LEA) that will be unable to meet its
financial obligations for the remainder of the current
fiscal year, rather than the current plus one subsequent
year.
b) Qualified certification is assigned to any local
educational agency (LEA) that may not meet its financial
obligations for the current and one subsequent fiscal year,
rather than the current plus two subsequent years.
c) Positive certification is assigned to any local
educational agency (LEA) that will meet its financial
obligations for the current and one subsequent fiscal year,
rather than the current plus two subsequent years.
3)Requires a county superintendent to investigate the financial
condition of a school district for the current and one
subsequent fiscal year, rather than the current plus two
subsequent fiscal years, in the event that any study, report,
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evaluation, or audit shows the district to be in fiscal
distress.
4)Requires a county superintendent who determines that a school
district may not meet its financial obligations for the
current and one subsequent fiscal, rather than the current
plus two subsequent fiscal years, to report this determination
to the district governing board and to the Superintendent of
Public Instruction (SPI).
EXISTING LAW :
1)Provides for external financial oversight of COEs by the SPI,
and of school districts by county superintendents.
2)Requires the California Department of Education (CDE) to
develop and the State Board of Education (SBE) to adopt fiscal
criteria and standards to guide LEA budget development and
interim reporting, and to be sued by the SPI and county
superintendents in providing fiscal oversight.
3)Requires 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.
4)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
LEA may not meet or will be unable to meet its financial
obligations.
5)Requires a county superintendent to investigate the financial
condition of a school district for the current and two
subsequent fiscal years, in the event that any study, report,
evaluation, or audit shows the district to be in fiscal
distress; also requires a county superintendent who, through
that investigation, determines that a school district may not
meet its financial obligations for the current and two
subsequent fiscal years, to report this determination to the
district governing board and to the Superintendent of Public
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Instruction (SPI).
FISCAL EFFECT : Unknown
COMMENTS : Background on financial oversight of LEAs: As a
result of court decisions (see Butt v. State of California,
1992), giving the state the ultimate responsibility for ensuring
the equitable provision of public education to all pupils,
including those in financially failing LEAs, and the resulting
early experiences with school districts on the verge of
insolvency, the state developed a process for providing
financial oversight, financial assistance and financial recovery
to LEAs in financial trouble. This process is commonly referred
to as the AB 1200 process - a reference to the initial
authorizing legislation, AB 1200 (Eastin), Chapter 1213,
Statutes of 1991. The potential last stage of this process, the
granting of an emergency loan to the LEA and the requirement
that the LEA accept accompanying conditions, including
assumption of control of the district by the SPI and the
completion of a SCO conducted audit, has been reached in eight
school districts; six of those loans are still outstanding. In
many other cases the oversight, advice and assistance provided
by the SPI, county superintendents and other fiscal advisors
under the AB 1200 process has been sufficient to pull the LEA
out of immediate financial trouble and to provide time for the
governing board of the district, county superintendent or county
board of education to take those actions necessary to begin a
return to a more stable fiscal condition without the need for an
emergency loan.
In accordance with AB 1200 (Chapter 1213, Statutes of 1991), the
county superintendent of schools has fiscal oversight
responsibility over school districts in his or her county, and
has authority to disapprove a school district's budget or to
declare a district in jeopardy of meeting its financial
obligations through a qualified or negative certification, as a
result of interim financial reports or at any time. The SPI has
the same fiscal oversight responsibility and similar authorities
with respect to COEs.
Many of the oversight components of the AB 1200 process,
including the development, review and assessment of LEA budget
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and interim financial reports, are guided by the fiscal criteria
and standards developed, as statutorily required, by the CDE and
adopted by the SBE. Refinements to the fiscal criteria and
standards, particularly over the last six years, have reduced
the number of false positives from indicators suggesting that
fiscal distress existed when it may not have, and have improved
the ability of the AB 1200 process to function as an early
fiscal warning system. The fiscal criteria and standards are
enacted in Title 5 of the California Code of Regulations. Many
of the criteria and standards are built in to CDE-developed
financial reporting software that LEAs are required to use to
satisfy financial reporting requirements; this built-in feature
automatically provides LEAs with guidance as they enter data to
comply with those requirements.
LEAs are 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 is the approver) for compliance with the
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 horizon. The first interim report is due
December 15 for the period ending October 31, while the second
interim report is due March 17 for the period ending January 31.
This self-assessment results in a certification of whether or
not the LEA is able to meet its financial obligations. Each LEA
is assigned a certification that is classified as positive,
qualified, or negative. A positive certification is assigned to
an 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
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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. County superintendents are required to report to the
SPI and the State Controller on the interim certification for
all districts in their county within 75 days after the close of
the reporting period.
This bill proposes to roll back the time horizon over which
LEAs, within the structure of the interim financial reports, are
required to self-assess their financial health. In addition to
changing the focus of the interim reports to the current and one
subsequent fiscal year, from the current and two subsequent
fiscal years in existing law, the bill also proposes to change
the definition of positive, qualified, and negative
certification by reducing the time horizon in each definition by
one year. The bill also then changes the circumstances under
which additional county superintendent or SPI oversight is put
into place, as well as under which various interventions are
triggered. In other words, LEAs would not self-certify fiscal
status, county superintendents would not investigate fiscal
distress, and neither county superintendents nor the SPI would
intervene (or have reason to know) in the face of fiscal
distress projected for the LEA in the second fiscal year
subsequent to the current year. The time horizon for much of
the AB 1200 process would be reduced from three years to two.
This bill raises three questions:
Question #1: Is the inclusion of the third year of the required
multi-year budget projections necessary?
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. A reduction in this early
warning capability by shortening the time horizon for interim
budget reports would likely result in an increase in the number
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of requests for emergency appropriations, and would also reduce
the level of oversight and interventions provided by the county
superintendents and the SPI.
The eight school districts that have requested an emergency loan
from the state in the past have had two elements in common: 1)
at the point that the request was made, projections of the
school district's budget showed that the district would no
longer be able to meet payroll or other financial obligations,
and 2) either for external or for internal reasons, the school
district had waited too long to respond to the fiscal crisis
that it faced. In fact, early cases provided the impetus for
enactment of AB 1200; in later cases, the districts could not
recover even with AB 1200 assistance and interventions. In the
current fiscal circumstances, a number of districts in the state
would likely have already been receiving or requesting emergency
loans if the third year in the multi-year projections required
under AB 1200 had not informed governing boards of their fiscal
problems, and increased the level of oversight and transparency
on those problems.
Supporters of the bill argue that the uncertainty of the current
budget situation make the third year of multi-year projections
even more uncertain. In recent years it is likely that few
third-year revenue projections that LEAs have made have been
perfectly accurate, but this does not mean that the three-year
projection is without benefit. In recent years the uncertainty
that LEAs have faced (i.e., the difference between districts'
revenue projections and the actual revenue that materialized
when that third year arrived) has all been in one direction. In
other words, LEAs have budgeted and provided multi-year
projections; however, to the extent that those projections have
not fully reflected the fiscal situation that the LEA eventually
faces in the third year, it is because the situation has become
worse by the time the LEA actually gets to that third year. Not
producing interim budget reports that include the second
subsequent year would mean that a LEA would not be in a position
to react to fiscal problems that are brought to light for that
future year, would lose the opportunity to begin a process to
reconcile future budget problems, and in this environment would
likely face even greater problems when that third year arrives.
The current system provides the early warning that allows LEAs
to move early to correct a situation that is most likely to
deteriorate even further, and provides the oversight (and if
necessary interventions) to ensure that those LEAs heed the
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early warning.
Supporters have also stated that, in the absence of a
requirement to provide interim multi-year projections with a
three-year horizon, LEAs would continue to make such projections
for internal planning and budgeting purposes; that may very well
be the case, as it was in the years preceding the enactment of
AB 1200. For example, Compton Unified School District, which
received an emergency apportionment in 1993 and was one of the
first districts to do so, had an internal budgeting process
prior to their fiscal crisis that included multi-year
projections; however, that process lacked the oversight of the
current process. There is no guarantee of fiscal solvency
inherent in multi-year projections based on a three-year
horizon, rather it is the process of county superintendent (or
SPI) oversight and intervention, based on independent and
thorough analyses of the district's (county office's) perceived
fiscal health across that time horizon that makes the
difference. The proposal made in this bill eliminates the
reports that allow that oversight and, if the LEA's fiscal
health is at risk, trigger those interventions.
For the period ending October 31, 2010, the CDE reported that 97
LEAs in the state received a qualified certification of its
financial status at the 2010-11 First Interim Report; a negative
certification was assigned to 13 LEAs. The table below shows
the dramatic growth, at both the first and second interim
report, in recent years of LEAs certified as qualified;
increases in negative certification are also apparent. With
such increases in the number of LEAs at fiscal risk, it is
unclear that this is the time to reduce the level of fiscal
oversight for LEAs.
Question #2: Is there a difference between a district or COE
assigned a qualified certification 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 of the multi-year projections?
If a LEA is assigned a qualified certification as a result of
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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. However, a 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. This does not mean that LEAs
qualified as a result of that third year have the luxury of
ignoring the early warning provided by those projections or that
the early warning provided is unimportant, but more that LEAs
qualified as a result of the situation that they face in the
current or subsequent year face a more urgent situation.
Under the current AB 1200 process, however, there is no
distinction made between an 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. This may present some problems.
For example, a LEA certified as qualified or negative may face
external consequences, such as a loss of credit extended by
vendors, a decrease in its bond rating or even more difficulty
in accessing the capital market; a LEA in that situation may
also face a perception problem within its community. These
impacts might be less severe if it was clear that a LEA was
assigned qualified status as a result of the third year
projections only, since that LEA may have a longer period of
time over which to improve its fiscal health.
Question #3: In a situation where a district or COE is assigned
a qualified certification solely as a result of its fiscal
situation in the third year, would it be possible for the LEA to
allow for greater transparency and public discourse when
considering budget reductions as a result of that third year
financial status?
Some supporters of this bill have argued that the third-year
projections create a climate where a LEA assigned qualified
certification solely as a result of that third year, since there
is no distinction between these two situations, may rush to make
reductions without taking advantage of the of the opportunity to
be slightly more deliberative in its approach to resolving its
problems. Clearly this is unwise practice, to the extent it
occurs; it would be possible, though, to address this problem
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without abandoning the early warning benefits of the three-year
interim reports.
This Committee has historically shown a commitment to
transparency, openness, and public discourse during the
consideration of difficult decisions with which local governing
boards are faced. Examples of this commitment can be found in
legislation enacted in the 5th Extraordinary Session of 2009-10,
and in legislation addressing issues that have arisen as a
result of the current expenditure flexibility applied to
categorical programs - in both cases, this Committee made
amendments to legislation that provided for and ensured
opportunities for parents, LEA staff, and other community
members to enter into a public discourse over issues faced by
the local governing board. The same type of assurance of
transparency and public discussion could be provided in the case
of reductions that a LEA might consider as a result of that LEA
being assigned a qualified certification solely as a result of
its fiscal situation in the third year.
The author argues that, "Due to the state's current uncertain
fiscal climate, AB 1200 needs to be modified for the following
reasons:
School districts are funded by the state on a year-to-year
basis, and approximately 90 percent of school districts'
revenues are determined at the state level.
The present economic recession has created a volatile state
budget situation, whereby revenues are not predictable and
estimates are unreliable. Revenues consistently have come in
lower than estimates, causing the state to impose additional
cuts to school districts mid-year.
Mid-year cuts to school districts create chaos because fiscal
planning assumptions are invalidated by the drop in revenues,
much of which is ongoing into subsequent budget years.
County superintendents would maintain the assigned authority to
approve or reject school districts' budgets, thereby assuring
due diligence while avoiding insolvency by respective
districts."
However, it is also the uncertainty of the current economic and
state budget climate that puts school districts at the most
risk, and necessitates the kind of fiscal oversight that the AB
1200 process brings to bear. It is interesting to note that
both supporters and opponents of this bill make much the same
argument, when they cite the fiscal uncertainty in which local
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educational agencies are currently operating. Both sides of the
discussion also agree that accurate budget planning and analysis
is necessary in a fiscally responsible district or county
office. 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 three-year
budget projections and interim reports.
Committee amendments: Committee staff recommends the following
amendments:
1)Remove this bill's proposed deletion of the requirements that
school districts and county offices of education provide
budget projections for the second subsequent year following
the current year, as well as the bill's deletion of resulting
elements of financial oversight; instead, require the SPI,
county superintendents and school districts to distinguish
between school districts and county offices of education 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)Remove the bill's proposed deletion of the first subsequent
fiscal year from the definition of negative certification, so
that negative certification remains assigned to any school
district or county office of education that will be unable to
meet its financial obligations for the remainder of the fiscal
year or the subsequent fiscal year. The author's staff has
indicated that this proposal was inadvertently included in the
bill and should be removed.
3)In the interests of public discussion and transparent budget
decisions, require 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.
4)Authorize the SPI to waive the requirements on any school
district or county office of education to provide and report
budget projections and interim projections for the second
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subsequent year following the current year, as well as the
requirement that the LEA self-certify interim status on the
basis of that third year, if all of the following hold:
a) The school district or county office of education
requests that such a waiver be approved and provides any
information requested that is needed by the CDE to analyze
that request.
b) In the case of a school district, the county
superintendent of the county within which that district is
located recommends that the SPI approves the requested
waiver.
c) The SPI determines with reasonable certainty, from 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.
Previous legislation: AB 1200 (Eastin), Chapter 1213, Statutes
of 1991, established the AB 1200 process for fiscal oversight of
school districts. AB 1708, Chapter 924, Statutes of 1993,
appropriates $9.4 million to Compton Unified School District;
also adds to the AB 1200 process, the requirement that county
superintendents of schools undertake specific actions if, at any
time during the fiscal year, a school district may be unable to
meet its financial obligations for the current or two subsequent
fiscal years. SB 39 (Perata), Chapter 14, Statutes of 2003,
provides Oakland Unified School district with a $100 million
loan and requires the appointment of a state administrator. SB
1190 (Chesbro), Chapter 53, Statutes of 2004, appropriates $60
million for an emergency loan to the Vallejo City Unified School
District, requires the SPI to assume all the rights, duties, and
powers of the governing board of the VCUSD and to appoint an
administrator to serve during the term of the loan. SB 130
(Denham), Chapter 20, Statutes of 2009, appropriates five
million dollars and authorizes lease financing up to thirteen
million dollars as an emergency loan for the King City Joint
Unified High School District.
REGISTERED SUPPORT / OPPOSITION :
Support
California Federation of Teachers
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California School Employees Association
California Teachers Association
Los Angeles Unified School District (Sponsor)
Small School Districts' Association (with amendment)
United Teachers of Los Angeles
Opposition
California Association of School Business Officials
California County Superintendents Educational Services
Association
California School Boards Association (unless amended)
Kern County Superintendent of Schools
Los Angeles County Office of Education
Analysis Prepared by : Gerald Shelton / ED. / (916) 319-2087