BILL ANALYSIS �
SENATE COMMITTEE ON EDUCATION
Carol Liu, Chair
2013-2014 Regular Session
BILL NO: SB 1047
AUTHOR: Walters
INTRODUCED: February 18, 2014
FISCAL COMM: Yes HEARING DATE: April 9, 2014
URGENCY: No CONSULTANT:Daniel Alvarez
SUBJECT : Education finance: budgets: long-term obligations.
SUMMARY
This bill permits the Superintendent of Public Instruction
(SPI) or county office of education, as specified, to
disapprove an adopted local educational agency (LEA) budget if
the LEA does not disclose long-term actuarial obligations,
including, but not limited to, the debts and retiree
obligations of the COE or school district, as applicable.
BACKGROUND
Fiscal Oversight
Current law requires external financial oversight of county
offices of education (COEs) by the SPI, and of school
districts by county superintendents. Requires the California
Department of Education (CDE) to develop and the State Board
of Education (SBE) to adopt fiscal criteria and standards to
guide local educational agencies (LEAs) budget development and
interim reporting, and to be used by the SPI and county
superintendents in providing fiscal oversight. 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.
(Education Code � 42100 et. seq.)
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.
The county superintendent of schools has fiscal oversight
responsibility over school districts in his or her county, and
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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
and interim financial reports, are guided by the fiscal
criteria and standards developed, as statutorily required, by
the CDE and adopted by the SBE. 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 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
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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.
California State Teachers' Retirement System
Current law, establishes the California State Teachers'
Retirement System (CalSTRS), which provides retirement and
related benefits for the teachers and school administrators in
K-12 and community colleges, and has over 850,000 members and
retirees. In addition, current law requires the CalSTRS Board
to administer the retirement plan and to conform to specified
standards and practices, including actuarial oversight of the
system and annual financial reporting of the system's assets
and liabilities. Contributions to CalSTRS are set in statute:
currently 8% for members, 8.25% for school districts, and
3.046% for the State. Unlike the California Public Employees'
Retirement System (CalPERS), which can raise employer rates
when investment returns and contributions are insufficient to
properly fund the system; CalSTRS has no means of increasing
employer contributions absent a change to statute.
Accounting requirements for LEAs
Education Code section 41010 requires local educational
agencies (LEAs) to follow the definitions, instructions, and
procedures in the California School Accounting Manual (CSAM).
The manual provides accounting policies and procedures, as
well as guidance in implementing those policies and
procedures.
The CSAM states the term, "generally accepted accounting
principles" refers to the standards, rules, and procedures
that serve as the norm for the fair presentation of financial
statements. Conformity with generally accepted accounting
principles (GAAP) is essential for consistency and
comparability in financial reporting. The Governmental
Accounting Standards Board (GASB) is the standard-setting body
for accounting and financial reporting by state and local
governments, including local educational agencies (LEAs). The
GASB establishes GAAP for governments in its authoritative
statements, interpretations, and technical bulletins.
Generally accepted accounting principles evolve continually in
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response to changes in the operating and reporting
environments.
ANALYSIS
This bill permits the Superintendent of Public Instruction
(SPI) or county office of education, as specified, to
disapprove an adopted local educational agency (LEA) budget if
the LEA does not disclose long-term actuarial obligations,
including, but not limited to, the debts and retiree
obligations of the COE or school district, as applicable.
More specifically, this bill:
1) Authorizes the Superintendent of Public Instruction (SPI)
to disapprove an adopted budget of a county board of
education if it does not disclose the long-term actuarial
obligations of the county office of education, including,
but not limited to, the debts and retiree obligations of
the county office of education.
2) Authorizes a county superintendent of schools to
disapprove the adopted budget of a school district if it
does not disclose the long-term actuarial obligations of
the school district, including, but not limited to, the
debt and retiree obligations of the school district.
STAFF COMMENTS
1) Need for the bill . According to the author's office,
meaningful and timely transparency is needed at every
level of state and local government particularly
information regarding an entities debt is critical to
enable our elected representatives to make responsible
and informed decisions in resolving their city's or
district's unfunded liabilities. The current lack of
transparency hinders the ability of parents and other
members of the public from holding their public officials
accountable when it comes to fiscal responsibility.
2) Disclosure in accounting for pensions becomes effective
June 2014 . Arguably the most significant component of
this measure - recognition of long-term pension liability
- are required to be disclosed in financial statements
beginning in June 2014; the GASB issued Statement No. 68
- requiring all public employers that employ individuals
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covered by defined benefit pensions to recognize their
share of long-term pension liability on their financial
statements. Financial statements are used by rating
agencies; in effect the recognition of a LEAs portion of
unfunded pension liabilities could impact the cost and /
or liability to borrow. However, all public employers
participating in defined benefit programs are going to be
similarly impacted.
The State Department of Education will need to provide
informed direction to LEAs for purpose of integrating
GASB 68 requirements in accounting, auditing, and then
budget. The size of an LEA's liability will depend on
factors including the type of benefits promised, the ages
of active employees and retirees, and how long the
unfunded obligation has been accumulating.
3) Requirements of this measure are ill-defined for annual
budget requirements and could be less informative and
more confusing . First, this measure does not clearly
delineate or define how long is long-term? The lack of
clear direction may lead to numerous county
interpretations when reviewing school district budgets.
Typical bond debt, depending on the type of local
projects and investment tool selected, can be anywhere
from 20-30 years. In addition, voter approved bond debt
is generally paid by property taxes levied by the county
and is not really a district "budget" issue because the
amount needed for payment is automatically levied "off
the top" of a district's share of local property taxes -
however it is not clear in this measure how issues such
as this would be handled.
Second, other debt that is not secured could be in a
budget but that debt is usually shorter in term. Because
the bill does not define its terms, it makes it difficult
to know how long is long-term debt and therefore the
treatment of such debt in the construction of an annual
budget.
Finally, this measure appears to mix debt that is
reported, but not obligated to be paid in its entirety,
with debt that that has annual budget appropriations
requirements. For example, LEAs as a matter of budgeting
are required to acknowledge "other post-employment
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benefits (OPEB)" but are not required to make a specific
appropriation to retire the entire debt.
4) Local educational agencies budget tools for addressing
long-term retiree obligations are not under their
control . Under current law, control over a critical
funding tool to address unfunded retiree liabilities -
state, LEA, and employee retirement contributions - is
controlled by the State. Would disclosure of an LEA's
share of retiree obligations give an accurate picture of
an LEAs fiscal health in an annual budget, or rather
distort its budgetary picture? LEAs do not have the
authority to set benefit levels, determine contribution
levels, or make investment decisions.
5) Given the many unanswered questions and possible
unintended consequences that the language of this measure
may have on LEA budgeting processes, if it is the desire
of the committee to move this measure, staff recommends
amendments that replace the current contents of the
measure, and instead amend statute that as part of the
annual audit requirements specifically require the
auditor to include in the independent audit whether the
school district, charter school, or county office of
education has complied with GASB 68 requirements.
SUPPORT
None on file.
OPPOSITION
AFSCME
California School Employees Association
California Teachers Association
Glendale City Employees Association
Organization of SMUD Employees
San Bernardino Public Employees Association
San Luis Obispo County Employees Association