Proprietary Funds for School Districts

Discussion Document

10/7/2018

Page 1 of 4

Proprietary Funds forSchool Districts

~ Discussion Document ~

Proposal Summary:

The SDAAC committee on chart of accounts is advancing to the full SDAAC committee a recommendation that OSPI move forward to open up proprietary funds for school district accounting.

Background:

The state accounting structure for School Districts currently categorizes accounting operations into several funds as authorized by statute:

  • General Fund–accounts for the operations of the school districts not required to be accounted for in other funds.
  • Associated Student Body Fund – accounts for the extracurricular activities of the student body.
  • Capital Projects Fund – accounts for financial resources to be used for the acquisition or construction of major capital facilities.
  • Transportation Vehicle Fund – accounts for the state bus depreciation funding and the purchase of school buses and vehicles.
  • Debt Service Fund – accounts for the accumulation of resources for the payment of long term debt.
  • Trust and Agency Funds – accounts for monies or other assets donated to the school district with specifications as to how the principal and/or earnings may be spent. Agency funds are considered to be custodial in nature.
  • Permanent Funds – accounts for donated resources which are legally restricted such that only the earning and not the principle may be expended.

Under the current accounting structure both the transportation and food service operations are accounted for within the general fund. Internal service operations are typically accounted for within Program 97 with debit/credit transfers to programs utilizing their services.

Proposal - Detail

The proposal for consideration is to recommend that OSPI open up proprietary funds in the accounting structure for school district.

Proprietary Funds - consist of two distinct groups of funds:

1)Enterprise Funds- which are used to account for operations that are financed and operated in a manner similar to private business enterprises – where the intent of the governing body is that costs (expenses, including depreciation) of providing the services are recovered primarily through user charges or where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income or loss is appropriate. Food Service activities would be appropriate to be accounted for in an enterprise fund.

2)Internal Service Funds – Account for the financing of goods or services provided by one department to other department on a costs reimbursement basis. Districts have a variety of operations such as printing and motor pools that would be appropriate to an internal service fund. An internal service fund allows district to recognize the annual depreciation cost of their equipment in determining the appropriate internal charge rates for services.

Benefits:

Food Service Operations – An enterprise fund

Currently school district food service operations are accounted for within the general fund. As these operations are largely funded from state and federal revenues and student charges, this may mislead the user in determining the true educational and instructional support costs of the district. Additionally, federal food service program requirements require that any profit earned on the food service program be used in the food service program. Current accounting does not provide a structure conducive to ensuring that this occurs.

In general fund accounting, transactions are accounted for as committed. An equipment purchase that provides benefit over a period greater than one year is recognized as a cost only in the year purchased. No depreciation, cost recognition over the useful life of the asset purchased, is allowed.

Creation of a separate fund would resolve a number of current deficiencies in reporting food service in the general fund:

1)It would allow for capitalization and depreciation of assets over their useful life which would more properly show the annual costs of providing a food program.

2)It would capture any earnings as an ongoing fund balance which could easily be used to ensure that the federal requirements are met.

3)Transparent accounting to the legislature and public as to the districts’ ability to operate food service programs within the revenue streams generated.

4)It would remove an educational support program from the general fund “melting pot”. The remaining expenditures within the general fund would represent more clearly the instructional operating expenditures of the district.

Internal Service Funds

Internal service funds allow for school districts to separately account for discrete operations that are performed for internal usage only, that are intended to be financed through internal fees. Typical examples are district central print shops and motor pools. As equipment is capitalized and depreciated, districts may establish a more consistent model for charging costs and monitoring the efficacy of the service model with the use of an internal service fund.

If OSPI adopts this proposal internal service funds would be considered an optional fund for the school districts.

Legal Framework

OSPI does not have the legal authority to add additional accounting funds for school district accounting. Statutory changes must be sought to gain this authority.

SDAAC - September 15, 2006

Questions About Proprietary Fund Proposal

  1. What would be the implementation school year for this proposal?
  2. The earliest implementation date for this proposal is considered to be the 2008-09 school year.
  1. Would all districts have to adopt a proprietary fund for School Food Services? Would there be any required adoption of other proprietary funds?
  2. As proposed all districts operating a food service program would be required to adopt a proprietary fund for these operations. Use of other proprietary funds for other purposes such as an internal service fund would be at the local district’s option. SDAAC has raised concerns about the complexities of proprietary fund accounting for smaller, cash basis districts.
  1. Has any consideration been made about a two tiered implementation?
  2. Some discussion has been held around implementation being performed on a two tiered basis where first class or accrual basis district would implement first with the second class or cash basis districts required to implement a year later. Other discussions emphasized not requiring proprietary funds for cash basis districts. This decision would be made at a later date.
  1. How would the funds be initially established?
  2. The actual mechanisms would be developed by the OSPI and the SDAAC to ensure consistent application.
  1. Can CountyTreasurers establish these additional funds?
  2. Currently CountyTreasurers work with established proprietary funds for many of the counties, cities and towns.
  1. Would school districts’ be able to assess a facility charge against Food Service and other operations accounted for in a proprietary fund?
  2. Facility costs are incorporated into the districts’ indirect rate. It is anticipated the operations in these funds would continue to be assessed an indirect rate to cover the district indirect support costs.
  1. Would a separate warrant stock be required for additional funds?
  2. This is not a requirement of separate fund accounting however, could be a local district option.
  1. Proprietary funds are focused on business-like activities. Concerns were expressed about districts that routinely subsidize their food service program.
  2. The intent of a proprietary fund is not solely on whether a particular business function earns money but, on whether the operations would be primarily funded by user charges or where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate.
  3. To summarize current reporting: A superficial analysis shows at least 178 districts for whom their food service expenditures exceed their food service revenues by an aggregate $7M. 109 experience a surplus of $10M. With a consideration of indirect expenditures the number of districts subsidizing their food service programs would increase.
  4. In Washington State overall, over 100% of food service costs are recovered through student fees and dedicated revenue streams. The results by district vary widely.
  5. The proposed proprietary fund accounting would clearly present the revenues and full expenses related to the food service operations as well as the subsidy costs of these programs,if any.
  1. Would all districts have to adopt an accrual basis of accounting for proprietary funds?
  2. A robust discussion was held around this issue. This would be an issue to be determined at a later date. As a point of fact - cash basis districts constitute 3% of the student population in the state.
  1. Concern was expressed that all districts, but particularly smaller districts, would require training focused on establishing and maintaining proprietary fund accounting.
  2. OPSI would develop and provide training statewide for all districts in adopting proprietary fund accounting.

Consideration was made that many of the implementation questions will take considerable amount of work and training to develop and that members of the committee are reluctant to devote that level of commitment until we have the legal authority to move forward. Conversely to gain support of the SDAAC for this proposal the more questions we can answer up front the better for the SDAAC to make a decision.