Re: 2015-16 First Interim Report

Date

Superintendent

Page 1 of 6

January x, 2016

Dear x:

Re: 2015-16 First Interim Report

Our office has completed its review of your First Interim Report (SACS Form 01I) in compliance with the provisions of Education Code Section 42130 et seq. The district has submitted a [positive, qualified, negative] certification, which means that the district [will meet its financial obligations for the current fiscal year and subsequent two years OR may not meet its financial obligations for the current fiscal year or two subsequent years OR will be unable to meet its financial obligations for the remainder of the fiscal year or for the subsequent fiscal year].

The district’s First Interim Report has been analyzed in the context of the 2015-16State Budget Act. All of the data submitted by the district has been analyzed and appears to adequately reflect the financial status of your district as of October 31, 2015.

Option 1

In accordance with the provisions of Education Code Section 42131, the County Superintendent of Schools will inform the California Department of Education that your district submitted a positive certification and we concur with this certification at this time.

Option 2

In accordance with the provisions of Education Code Section 42131, the County Superintendent of Schools will inform the California Department of Education that your district submitted a [qualified, negative] certification and we concur with this certification at this time.

The First Interim Report data as submitted shows that the district will be unable to meet its multi-year financial commitments in subsequent fiscal years without additional budget solutions. The Second Interim Report should include a multi-year projection that incorporates the 2016-17Governor’s Proposed State Budget. The district should also provide a letter with the Second Interim Report detailing the status of board-level discussions on budget reduction efforts through February 29, 2016.

The district’s budget will be reevaluated at the time of the Second Interim Report to determine if the budget should be certified as positive, qualified, or negative. The county superintendent also has the authority to determine that a school district is not a going concern at any time during the fiscal year if the district may not meet its financial obligations [Education Code Section 42127.6(a)(1)]. Our office can take this action at any time if substantial progress is not made towards budget reductions.

Financial Status in 2015-16

Reserve for Economic Uncertainties

The state requires the district to maintain a Reserve for Economic Uncertainties equal to x% of expenditures. The district projects that it will/will not meet this requirement in 2015-16.

Deficit Spending

The district is projecting deficit spending in the Unrestricted General Fund of $_____ in 2015-16. Be sure to note if deficit spending has been lowered due to an Interfund Transfer. Deficit spending permanently reduces the fund balance and can create future financial difficulties.

No Deficit Spending

We note that the district projects that it will be able to meet 2015-16 operating expenses with current year revenue.

Deficit Spending for Several Years

The district is projecting deficit spending in the Unrestricted General Fund of $_____ in 2015-16. The district also had deficit spending in the Unrestricted General Fund of $____in 2014-15, $______in 2013-14, and $______in 2012-13. Continued deficit spending will erode the district’s ending fund balance and will minimize the district’s ability to address unforeseen circumstances. We encourage the district to make ongoing expenditure reductions to minimize deficit spending in future years.

Basic Aid Districts

As a Basic Aid district, the ______School District is dependent on property taxes as its main source of revenue. The district has updated its property tax projection to match the P-1 Estimate provided by County Property Tax services. (If district is not using the P-1 estimate, comment on the reasonableness of the estimate.) The current property tax estimate represents a ____% increase/decrease compared to the prior year. We recommend that the district monitor tax collections monthly to ensure that revenues are on track with the district’s estimate.

STRS On-Behalf Pension Contributions

With the implementation of Statement No. 68 of the Governmental Accounting Standards Board (GASB 68), Accounting and Financial Reporting for Pensions, came the necessity to record the STRS On-Behalf pension contributions in the financial reports. We recommend that the district incorporate the required entries in the Second Interim Report using Resource 7690. Please note that the STRS On-Behalf entries will impact the district’s minimum reserve calculation, as well as the special education maintenance of effort and the routine restricted maintenance contribution.

Cash Flow

The cash flow submitted with the 2015-16 First Interim Report projects a negative cash balance in the months of ______. The district has issued Tax and Revenue Anticipation Notes (TRANS) of _____ in July 2015to help address anticipated cash shortfalls. Other options to help with cash flow include borrowing from other funds, spending freezes, working with vendors on the timing of revenues and payments, and a Temporary Transfer of Funds (TTF) from the County Treasury. We recommend that the district continue to closely monitor its cash situation.

Salary and Expenditure Increases- Not Yet Settled

Before considering salary, benefit, or other expenditure increases for 2015-16, the district should ensure that the costs will be supported by ongoing revenue to avoid creating or exacerbating structural deficits. The district should also take into account projected deficit spending and unrestricted reserve levels. We also recommend that the district protect its future financial integrity by assuring a minimum of reserves (including adequate reserves for contingencies) for at least the following two years of operation.

Salary and Expenditure Increases- Already Settled

We note that the district has settled with its collective bargaining units for 2015-16.Before considering any new expenditure increases, the district should ensure that the costs will be supported by ongoing revenue to avoid creating or exacerbating structural deficits. The district should also take into account projected deficit spending and unrestricted reserve levels. We also recommend that the district protect its future financial integrity by assuring a minimum of reserves (including adequate reserves for contingencies) for at least the following two years of operation.

Fiscal Status in Future Years

Declining Enrollment

The district has faced declining enrollment since _____. In 2015-16, the district projects an ADA loss of ____. ADA losses for the next two years are projected at ____ for 2016-17 and ______for 2017-18. These ADA reductions will lead to lower revenues from sources such as LCFFand Lottery. As a declining enrollment district, revenues will fall more quickly than expenditures and long-term structural solutions are necessary to bring expenditures in alignment with revenues.

Multi-Year Projection

The district’s multi-year projection incorporates the following key assumptions:

• LCFF Gap funding rate estimated at 35.55% for 2016-17 and 35.11%for 2017-18;
• LCFF ADA of _____ for 2016-17 and _____ for 2017-18;
• Unduplicated pupil count percentage of enrollment at ______% for 2016-17 and at ______% for 2017-18;
• Property taxes will increase/decrease by x% in 2015-16 and y% in 2016-17;
• STRS contribution will increase to 12.58% in 2016-17 and 14.43% in 2017-18; and
• PERS contribution will increase to 13.05% in 2016-17 and 16.60% in 2017-18.

Option 1 (ok all years)

We have reviewed the district’s assumptions for the multi-year projection and they appear to be reasonable. Based upon these assumptions, the District will meet the required reserve percentage.

Option 2 (deficit spending)

The district’s multi-year projection shows deficit spending in the Unrestricted General Fund of $_____ in 2016.17 and $_____ in 2017-18. The district has adequate reserves to fund the deficits and estimates that it will be able to meet the __% reserve requirement over the projection period. However, the district should monitor deficit spending for any future impact on the district’s financial solvency.

Option 3 (reductions assumed and not board approved)

In our analysis, we removed the district’s placeholders for reductions in 2016-17 and 2017-18 and took into account ______. Based on this analysis, cuts of approximately $____ will be needed in 2016-17 and $____ in 2017-18 to maintain a positive fund balance and meet the ___% reserve requirement. The cuts needed in 2016-17 represent ___% of the district's unrestricted General Fund expenditure budget, which is a substantial amount to reduce in one-year.

Other Issues

Charter Schools

As required by Education Code 47604.33, our office has/has not received a First Interim Report(s) from _____ charter school.

As a charter school sponsor, the district maintains fiscal oversight responsibilities, particularly in the key areas of accounting, attendance accounting, budgeting, and payroll. As part of this oversight, sponsoring school districts are also responsible for reviewing charter financial reports, including interim reports. Should any adverse circumstances arise related to the district’s charter school responsibilities that would negatively impact the financial condition of the district, please notify this office as soon as possible.

Monthly Financial Reports

As a district utilizing an off-line financial system, you are required to provide our office with a monthly report by the middle of each month with the following information:

• General Ledger for each fund
• Budgeted and actual revenues by major object for each fund
• Budgeted and actual expenditures by major object for each fund

Implications of a Qualified Certification

By submitting a qualified First Interim Report for the period ending October 31, 2015, the district becomes subject to the following requirements in the Education Code:

1.Copies of the interim report and this letter will be forwarded to the Superintendent of Public Instruction and the State Controller. [Education Code Section 42131(a)(2)]

2.During fiscal years 2015-16 and 2016-17, the district must obtain approval from SDCOE prior to the issuance of all nonvoter approved debt, including Tax and Revenue Anticipation Notes (TRANS) and Certificates of Participation (COPs). [Education Code Section 42133(a)]

4.The district is required to provide a written proposal that addresses the fiscal conditions that resulted in the determination that thedistrict may not be able to meet its financial obligations by ______date. [Education Code Section 42127.6(a)(1)(E)]

5.The County Superintendent is required to present an annual report to a school district’s governing board and the Superintendent of Public Instruction regarding the fiscal solvency of any school district with a qualified certification. This annual report will be issued by June 2016.[Education Code Section 1240(e)]

Conclusion

We appreciate the District’s efforts to ensure fiscal solvency. Should any adverse circumstances arise which would negatively impact the financial condition of the district, please notify this office as soon as possible.

If you have any questions concerning this review, please feel free to call me at (858) 292-3537 or ______, Consultant, Business Advisory Services at (858) 292-____.

Sincerely,

Brent Watson

Executive Director

District Financial Services

BW:XX:SR

cc:Board President

Chief Financial Official