The First Interim report is a snapshot in time of the local educational agency’s (LEA’s) revenue and expenditure forecasts for the current fiscal year as well as a projection of the two subsequent fiscal years. It is a time to adjust the budget based upon the Enacted Budget and subsequent trailer bills, the closing of the prior fiscal year, and other factors that impact revenue and expenditures. The First Interim report covers the period of time from July 1 through October 31 each fiscal year and must be submitted to the county office of education (COE) no later than December 15.
The School Services of California Inc. (SSC) Financial Projection Dartboard (Dartboard) is updated with the Enacted Budget to include the financial factors needed for your budget and can be found by clicking here. Revisions to the Dartboard will be made with the release of the Governor’s Budget proposal for 2022-23 in January.
Below are legal considerations and “best practices” to help with the First Interim report.
COVID-19 Resources
Nearly $25 billion in one-time funds have been allocated to LEAs in response to the COVID-19 pandemic. This tremendous influx of money to open schools and address learning loss, compounded by the labor shortage of qualified people to meet the needs of students, is causing consternation as LEAs try to spent emergency funds by their published deadline. LEAs should have a plan in place to spend all the funds by the established deadline and endeavor to ensure these plans are communicated to all stakeholder groups. All expenditures must be allowable based on the Enacted Budget and subsequent trailer bills (Senate Bills 98 and 820, respectively), and must also meet federal requirements.
For more information, including deadlines and allowable uses, on the all the COVID-19 resources, please see the California Department of Education’s (CDE’s) COVID-19 Funding Summary Sheet.
Accounts Receivable/Accounts Payable
The California School Accounting Manual (CSAM) defines “accounts receivable” as amounts due from private persons, firms, and corporations. LEAs typically err on the side of overstating the balance of their accounts receivable.
Many LEAs had a larger than usual accounts receivable balance because of the deferral of state aid payments. However, those balances were paid off as part of the July and August principal apportionment payments. To enhance the accuracy of your agency’s accounts receivable, review the remaining entries recorded in the accounts receivable ledger to ensure they are accurate and meet the CSAM’s criteria for an accrual. Any unresolved accounts receivable from the prior year should be investigated to determine whether they are still valid and collectible according to the CSAM. An accounts receivable reconciliation report will assist in fully understanding amounts due that are still outstanding and allow you to clear any recorded receivables that will not materialize this fiscal year.
The CSAM defines “accounts payable” as amounts due to private persons, firms, or corporations for services rendered and goods received on or before the close of the year. In contrast to the accounts receivable, LEAs often inadvertently understate the balance of their accounts payable by failing to accrue an amount due to an outside vendor.
As with accounts receivable, any accounts payable items remaining that were accrued the prior year should be investigated to ensure that they are still outstanding. If they are not, then an adjusting entry should be made to clear that item from the accounts payable balance.
Attendance
The October 6 census collection is complete, so your LEA should have preliminary information regarding enrollment to compare to the same time the prior year. First day/week/month head count data is helpful in analyzing the average daily attendance (ADA) to enrollment ratio trends each year.
Consider performing an internal audit of attendance programs (i.e., classroom attendance, independent study) to ensure the proper paperwork is on file and available for audit. The First Principal Apportionment report accounts for attendance through the last school month that ends on or before December 31. Although funding is not finalized based on this data, it is important to report accurate information, as it will impact the cash flow for principal apportionment payments.
Adjust staffing based on actual enrollment, as appropriate. Also, recalculate the estimate of ADA for the current year and determine whether revenue adjustments will be necessary (see the Local Control Funding Formula [LCFF] section below).
Consider community outreach to improve your LEA's attendance rate to increase revenue and promote student learning. The CDE has a webpage dedicated to attendance improvement strategies here.
Attendance was held harmless for the 2020-21 fiscal year, and for declining enrollment districts, the 2021-22 attendance figure will be based on 2019-20 Second Principal Apportionment and Annual Principal Apportionment figures. Growing enrollment districts may use the greater of current-year attendance or the funded ADA in 2020-21. Unfortunately, charter schools and COEs are funded on current-year attendance as their hold harmless was only valid for 2020-21.
Attendance for independent study has proved to be a learning curve as many LEAs had not provided independent study to this scale. Additional changes in independent study law have increased the compliance requirements.In addition to traditional independent study rules, LEAs must also document participation for “long-term” students. Student participation, or lack thereof, in live interaction or synchronous instruction does not impact attendance, but a lack of compliance by the LEA could result in an audit, and fiscal penalty. As a reminder, attendance in independent study is determined and generated by the following elements:
- Traditional Independent Study: The time value of student work
- Course-Based Independent Study: Student enrollment in a course(s) certified by a local governing board to be of equivalent rigor to classroom-based courses and making satisfactory educational progress in that course(s)
California State Teachers’ Retirement System On-Behalf Payments
Review the CDE guidance here. In the Standardized Account Code Structure (SACS), the journal entry to recognize the state’s on-behalf pension contribution to the California State Teachers’ Retirement System (CalSTRS) is to debit pension contribution expenditures by fund, goal, and function in proportion to the LEA’s own pension contributions to CalSTRS by fund, goal, and function with a corresponding credit to state revenue.
The amount for 2021-22 must be calculated for each entity using guidance provided on the CalSTRS website, which can be found by clicking here. This activity should occur in Resource Code 7690, and revenues will equal expenditures. The link for the spreadsheet to allocate the amount across the funds, goals, and functions is provided by the CDE and can be found by clicking here.
It is important to explain to all stakeholders that this is a “paper only” entry and does not impact the bottom line. However, the required Reserve for Economic Uncertainties will need to be increased because a “phantom” expense is recorded for the CalSTRS on-behalf payment.
Carryover Balances
Now that the books are closed for 2020-21, it is time to add carryover balances for categorical programs, school sites, and departments to their expenditure budgets. When expenditures include carryover balances from categorical funds or site/department budgets from the prior year, there will likely be deficit spending. For most categorical funds, LEAs will recognize the expenditure, not the revenue, and include narrative in the assumptions made to address the increased spending. However, some of the one-time COVID-19 resources did not reside in ending fund balance and thus the revenue and expenditures will be recognized in 2021-22. Ensure that carryover expenditures and revenues are removed, as appropriate, when preparing the multiyear projection for 2022-23 and 2023-24.
Cash Flow
The year 2020-21 reintroduced cash deferrals to the tune of more than $12 billion. Completion of the Form CASH in SACS became as important as the multiyear projection. For LEAs that follow the traditional 5-5-9 schedule for state aid, your cash flow projections incorporated significant deferrals of cash beginning in February 2021, and now you must be feeling the windfall resulting from repayment of said deferrals. For more information on booking state apportionments that include deferral payments, please see our article, “Ask SSC . . . Recording Deferral Repayments in Cash Flow” in the October 2021 Fiscal Report.
Those LEAs that are community-funded, with reserve balances at or near the legal minimum, in declining enrollment, or in a growing environment should conduct an additional cash flow projection for the year following the budget year to ensure adequate reserve balances are available. Cash flow projections should also be prepared for two years following any bargaining unit agreement settlements to ensure the LEA can afford the terms of the agreement. LEAs should know and be able to communicate the number of months in each fiscal year that expenditures exceed revenues and how reserves are used to manage operations during these periods.
Download the estimated cash flow schedule from the CDE, which can be found by clicking here.
Charter Schools
Supplemental and concentration (S/C) grants for charter schools are limited to no more than the S/C grant increase of the school district where the charter is physically located. Education Code Section (EC §) 42238.02(f)(2) allows a charter school to include its authorizing school district when determining its physical location.
Payments for in-lieu property taxes are required to be received and recorded monthly. If you are a chartering authority, ensure that the in-lieu property taxes between your financial statements and your authorized charter schools net to zero.
Clearing Funds
As stated in its title, clearing funds are cash conduits used by the LEA to account for receipts due to agencies such as the Internal Revenue Service, CalSTRS, and the California Public Employees’ Retirement System (CalPERS). The clearing funds should have a zero balance after the payment has been sent to the agency. Over the course of the year, the clearing funds should be reconciled and cleared monthly.
Collective Bargaining Agreements
If your collective bargaining agreements have been settled for the current and subsequent years, ensure that your budget includes any adjustments to salary as well as professional development costs, substitute costs, or other changes to the agreements that need to be budgeted.
Local Control Funding Formula/Local Control and Accountability Plan
LEAs must ensure compliance with the transitional kindergarten (TK) to grade 3 grade span adjustment requirement. The First Interim reporting period is a good time to monitor class loads and calculate compliance with the average class size of 24 at each school site. If your entity does not have a collectively bargained alternative, it is critically important to ensure you are not in jeopardy of losing this funding. The penalty of noncompliance is $842 per ADA for all ADA generated in grades TK-3. Charter schools automatically receive this grade span adjustment funding but are not required to meet the enrollment average.
In addition to reviewing the TK-3 grade span compliance, LEAs should review the following areas:
- Verify unduplicated pupil counts
- Begin scheduling stakeholder meetings for input for the subsequent Local Control and Accountability Plan (LCAP)—a new template will be available by November 30 and should be adopted locally by June 30, 2022
- Verify LCFF funding and prior-year receivables and payables if any adjustments were made during an audit
- Update ADA estimates based upon enrollment projections for future years and make adjustments as applicable to LCFF revenues
Lottery
The most recent projections from the CDE estimate unrestricted Lottery funding at $163 per ADA and restricted Lottery funding at $65 per ADA per annual ADA, multiplied by an enrollment factor of 1.04446. SSC will provide updated figures in our Dartboard with the release of the Governor’s Budget in January 2022.
Multiyear Projections
Fiscal year 2021-22 marks the first year of economic recovery from the pandemic-induced recession. While the economic recovery is not uniform and many people remain unemployed, the economy is back to pre-pandemic levels. The state funded cost-of-living adjustments (COLA) after failing to do so the prior year. Positive economic news has been tempered by concerns regarding inflation. With the federal government announcing that social security will increase 5.9% in 2022, all eyes are on the implicit price deflator and the January State Budget proposal, where LEAs will be given their first glimpse at the Governor’s projections for the rest of 2021-22 and 2022-23.
LEAs with low reserves, declining enrollment, or changes in demographics affecting revenue should prepare an additional year in the multiyear projections to determine adequacy of funding for current decisions, including the programs within the LCAP. Future funding increases should not be dedicated to ongoing current expenses. Ensure that any anticipated ongoing expenses in the revised budget are also being included in the multiyear projections.
Adequate reserves are critically important, but the existence of adequate reserves does not mean that there is sufficient cash on hand. Reserves are an accumulation of resources, including accounts receivable. Cash is king, so make sure that the cash flow is updated and don’t rely on just the fund balance number.
Reserves
All four criteria to require a deposit into the Public School System Stabilization Account were met in 2020-21 and 2021-22. The sum of these two deposits—approximately 8.1% of the K-12 portion of the minimum guarantee—are sufficient to trigger the reserve cap for school districts in 2022-23. The result is that non-exempt LEAs must limit their unassigned and assigned reserves in Funds 01 and 17 to a limit of no more than 10%. SSC has always encouraged LEAs to maintain sufficient reserves to meet their LEA-specific needs, which is invariably higher than the state-required minimum. Given the triggering of the reserve cap, school districts might consider taking board action to commit funds for specific costs such as special education cost increases, increasing CalSTRS/CalPERS contributions, or other LEA priorities.
New challenges arose with the COVID-19 pandemic, such as addressing learning loss and the need for additional health and safety protocols. Although record federal funds were distributed through the Coronavirus Aid, Relief, and Economic Security; Coronavirus Response and Relief Supplemental Appropriations; and American Rescue Plan Acts, those funds should be considered one-time in nature and should not be used for ongoing purposes. LEAs should monitor expenditures of these one-time funds to ensure that any ongoing costs are properly subsumed into the unrestricted General Fund, or develop a plan for eliminating the ongoing costs.
As a reminder, the reserve cap law has excluded charter schools, small school districts, and community-funded districts from the reserve cap.
Routine Restricted Maintenance Account
The contribution to the Routine Restricted Maintenance Account (RRMA) is in full effect for the 2021-22 year and beyond. Any LEA which qualifies based on EC § 17070.75(b)(2) must contribute no less than 3% of total General Fund expenditures to Resource Code 8150.
Various bills from 2019-20 through 2021-22 amended the definition of total General Fund expenditures for the purpose of calculating the RRMA contribution by excluding the following:
- Expenses coded to Resource Code 7690
- Expenses of one-time pandemic funding sources in Resource Codes 3210, 3212, 3213, 3214, 3215, 3216, 3218, 3219, 3220, 5316, 7027 and 7420
Compliance with this law is monitored through the Criteria and Standards, but ultimate compliance is measured against total General Fund expenditures as of Unaudited Actuals, adjusted for the exceptions above. Note that the law does not contemplate how much is spent in the RRMA, but only that the contribution is no less than 3%.
SACS Software
The SACS software is the same software that was used for reporting the 2021-22 Unaudited Actuals. A link to the software is located on the CDE website and can be accessed by clicking here.
Special Education Maintenance of Effort and Excess Costs
Now that the books are closed for the prior year, evaluate the cost factors that may have increased your LEA’s maintenance of effort (MOE) level. Ensure that your agency is properly recording expenditures and that the time charged for special education staff represents time working with students on an Individualized Education Program (IEP). Many LEAs allow 100% of staff members’ time to be charged to special education when they may actually be working with students prior to eligibility for services having been or being determined during the IEP. Review the factors from your Program Cost Report Allocations Form to ensure that centralized costs are distributed accurately as well.
Utilize the SACS Forms for the MOE during the interim periods. These are voluntary, but will assist in getting an up-to-date peek at where you stand. The FORM SEMAI can be accessed in the Reports section of SACS.
Once you review your agency’s special education costs as they are budgeted, you can then project whether your agency will meet the MOE requirement by year’s end. You may also want to review the excess cost data to ensure that your agency has met those requirements prior to using funds. If your agency is not projected to meet the MOE, contact your Special Education Local Plan Area for assistance in reviewing your agency’s costs to ensure you have captured all appropriate expenditures.
Current law allows four exceptions to reduce the current-year MOE:
- Voluntary or just cause departure of special education or related personnel
- A decrease in special education enrollment
- The termination of the LEA’s obligation to provide services because a high-cost student has either left the agency, reached the age at which the agency is no longer required to provide free and appropriate public education, or no longer needs special education
- Costly expenditures such as equipment or facilities are terminated
The CDE has developed an LEA MOE exemption worksheet that must be completed and included with the submission of the LEA’s MOE report. The LEA MOE exemption worksheet is available here.
Transportation
Expenditures recorded against the transportation programs (Resource Code 0000 and Function 3600) should be reviewed to ensure that they are all appropriate and the MOE requirement is met.
As a reminder, the MOE is measured by the lesser of the following:
- Expenditures for transportation in 2012-13
- State revenues received for home-to-school transportation and small school bus replacement in 2012-13
For most LEAs, number two will be the operative test. The penalty for noncompliance with this MOE is a finding in the annual audit report, but there is no fiscal penalty. For more information on the topic, please see our article, “Ask SSC . . . What Are the Requirements for the Transportation MOE?” in the August 2020 Fiscal Report.