A district's first budgetary responsibility is to be fiscally sound. District officials must ensure that the district is able to meet its financial commitments each year. Thus, they must temper the desire to innovate and invest in new priorities-or provide raises to employees-with a clear-sighted evaluation of the district's current and anticipated fiscal condition.
Certainly this requires that the adopted budget be fiscally sound. Beyond that, it demands that district officials, most notably the school board, also monitor district revenues and expenditures throughout the year to ensure fiscal solvency.
State reporting and oversight requirements
There is tremendous variation in the size, location, and student diversity in California's nearly 1,000 school districts and 58 county offices. While their budgets differ accordingly, every district must meet common state requirements, such as budget deadlines and the responsibility to invite public comment. In addition, districts are required to submit specific reports to the county superintendent and to commission a financial audit each year.
California has standardized many school district accounting and reporting forms in an effort to further increase accountability for the use of public funds. One strong motivation was to create an early warning system to help avert a financial crisis, such as bankruptcy and/or the need for an emergency loan from the state. Most of these apply to every local education agency (LEA). LEAs include county offices of education, school districts, joint powers authorities (JPAs), and charter schools that receive their funding directly from the state.
In 1991 Assembly Bill (AB) 1200 created a formal process of review and oversight that furthered these goals. The process requires the county superintendent to approve the budget and monitor the financial status of each school district and JPA in its jurisdiction. County offices of education today perform a similar function in regard to many charter schools.
The California Department of Education (CDE), in turn, reviews the finances of county offices. In 2004 lawmakers strengthened these fiscal accountability provisions with the passage of AB 2756. The law made immediate changes in the process county offices use to review district budgets and interim reports. It also called for the state to update the standards and criteria used for the fiscal oversight of LEAs, effective in 2006-07. For the most current criteria for reviewing school district budgets and interim reports as well as a summary of the changes to the criteria and standards, see the CDE website.
Reviews of district finances occur several times annually
Each year LEAs submit to the county superintendent at least five finance-related documents for review. These are then submitted to the state superintendent of public instruction. (County offices submit their own budgets and reports directly to the state superintendent for a similar review.) These documents include:
- the district's preliminary budget passed by July 1,
- the first and second interim reports by Dec. 15 and March 15 respectively,
- an unaudited financial report at the end of the budget year, and
- the district's annual audit a few months later.
The process begins with the budget adopted by July 1, at the official beginning of the school and fiscal year. Based on its review of this budget, the county superintendent approves the LEA's budget, approves it conditionally, or disapproves it. Districts with approved budgets proceed with the implementation of their programs as planned. A conditional approval or disapproval initiates a series of further oversight activities on the part of the county superintendent.
- Positive = the LEA will meet its obligations;
- Qualified = the LEA may not be able to meet its obligations; and
- Negative = the LEA will be unable to meet its obligations.
The same process and reporting accompanies the First and Second Interim reports, which are due by December 15 and March 15 respectively.
When a district receives a qualified or negative certification, it loses some of its financial autonomy. Its collective bargaining agreements are subject to county office scrutiny prior to board approval, and it is prohibited from incurring specific nonvoter-approved financial obligations (such as TRANs-Tax Revenue Anticipation Notes). It will also have additional reporting obligations, including a Third Interim Report due June 1. Often, the district will work with the Fiscal Crisis and Management Assistance Team (FCMAT) to evaluate its financial position and develop a plan for improvement.
After the end of the school and fiscal year on June 30, school districts close their books and prepare their budget-actual data. These unaudited data are submitted, through the county offices, to the CDE.
Finally, an audit provides one more check of district financial procedures. By law, every school district must hire an independent auditor who reviews its financial records once the books are closed for a given school year. Each district must submit its audit report to the county office of education, the CDE, and the state controller.
The audit is an after-the-fact look at how the district operated. It tells the governing board and the public about the integrity of the district's financial systems and practices. Formally presented at a public meeting, the report includes a management letter that highlights any concerns or problems the auditors found-including serious "audit exceptions"-plus recommendations for addressing them. Districts must then provide information on whether the findings have been addressed and the conditions corrected.
Understanding the audit report
An audit is an advisory document that helps a district improve its financial management. The absence of audit exceptions does not necessarily mean a district has no financial worries. Similarly, a long list of recommendations does not mean that district staff members are acting irresponsibly. The audit provides important information, but it is just one of many tools for evaluating a district's fiscal health and integrity.
County offices have long been
expected to review district audits and report to the state any audit
exceptions related to attendance, inventory of equipment, and internal
controls. Since 2004-05 they have also been required to inform the
state superintendent of public instruction and the state controller's
office if any audits include exceptions related to instructional
materials, teacher misassignments, and school accountability report
FCMAT provides financial support
Districts with financial problems often receive
help from the Fiscal Crisis and Management Assistance Team (FCMAT).
This state-funded organization is overseen by an advisory board made up
of county office and school district superintendents, plus an
administrator from the CDE. FCMAT provides assistance to districts with
financial problems or other management needs. It also has regional
teams of experts who can act as budget advisers when needed as part of
county office budget reviews.
Particularly during difficult economic times, some school districts have only avoided financial insolvency by receiving emergency financial support from the state. When the state provides such a loan, FCMAT has a more official role. It conducts an assessment of major operational areas in a district and then develops an improvement plan, providing progress reports to both local and state authorities. The state also appoints an administrator who, at a minimum, has veto power over district actions. When the amount of the loan exceeds a set threshold, the state appointed administrator takes control of the district. The board then loses its decision-making power, and the district superintendent must be dismissed.