Encourage School Districts to Form Financial Management Services Cooperatives
School districts that manage their finances poorly or report or file erroneous information with state and federal agencies face serious consequences. Some states and some Texas school districts have established school business service cooperatives to handle their finances. Information sharing among districts, necessary for successful cooperative services, is hampered because school districts use a variety of computer software and hardware. A pilot program that provides grants from the state for uniform technology and associated startup costs would allow districts to share and exchange data and work together to ensure better business management, thus benefiting Texas’ school districts, taxpayers and, most importantly, schoolchildren.
More than half of Texas’ school districts serve 1,000 or fewer students. In smaller districts, financial management duties often are divided among employees who lack financial skills and a thorough familiarity with state and federal reporting requirements. Such districts generally cannot offer competitive salaries to attract full-time accountants to manage their financial affairs, nor do they need enough financial services to achieve any economies of scale in acquiring them. According to one Texas Education Agency (TEA) estimate, about 10 percent of all districts need help to face serious challenges in financial management.
Examples of routine school business services are provided in Exhibit 1.
Common School District Business Services
- Bank Reconciliation
- Board Reporting
- Cash Flow Analysis
- Fixed Asset Management
- Food Service Accounting
- Grant Reporting
- Investment of School District Funds
- Invoice Processing
- Long Range Budgeting
- Managing and Supervision
- Payroll Processing and Benefits Reporting
- Public Education Information Management System (PEIMS) Reporting
- Personnel Reporting
- Preparation of Financial Reports
- State Aid Calculations
- Student Activity Fund Accounting
- Student Enrollment Projections
- Tax Assessing/Collecting
Source: Kenedy ISD Texas School Performance Review, Texas Comptroller of Public Accounts.
All of these services are critical, but some are more complex than others, and districts often need professional help to learn how to perform them properly.
While some school districts may fear that forming cooperatives will be the first step toward consolidation, the success of any school district depends upon strong financial management. Moreover, many districts already use cooperatives for such things as purchasing, special education or transportation.
In 2000-01, Texas school districts managed more than $26.9 billion in total budgeted expenditures, and were required to do so in conformity with regulations and requirements established by state and federal laws, rules and regulations. Reporting requirements for school districts, moreover, have become more stringent in recent years, requiring adoption of new Government Accounting Standards Board standards and more complex data submissions to TEA.
Imprecise revenue estimating, poor financial planning, inaccurate reporting of financial data and faulty financial and personnel management practices can lead to staff reductions, accreditation sanctions, lawsuits over alleged wrongful terminations or reduction in force policy conflicts, rollback elections, inappropriate expenditures, higher interest rates on debt and an inability to detect malfeasance on the part of district staff.
The Lipan Independent School District (LISD), with a student population of 316, provides an example of the consequences of poor financial planning. LISD failed to project its revenues adequately and was forced to halt construction on a half-finished $2.7 million gymnasium when funding fell short by $700,000. The building now sits half-finished in a former cow pasture. Compounding the problem is the district’s obligation to repay TEA $489,000 in state payments based on incorrect enrollment estimates. In addition to the construction halt, LISD’s financial difficulties led to termination of a principal, a counselor, a teacher and eight support workers.
Benavides ISD, facing a deficit of nearly $1.3 million, was forced to lay off 44 of its 125 employees in a town of fewer than 2,000 people. According to the district, in March 2002 its board of trustees declared the district was in a financial emergency that resulted in the non-renewal of 22 teachers’ contracts for 2002-03 and the termination of 22 support workers. The district also was forced to seek a $100,000 loan to pay its employees after it missed a payday. The causes for this fiscal crisis included the district’s failure to collect $1.5 million in delinquent taxes—a sizeable amount, given the district budget of just $3.6 million. Also contributing to the shortfall was a poorly anticipated decline in the student population that resulted in a corresponding drop in state funding.
Regional education service centers
Most of the state’s 20 regional education service centers (RESCs) offer business service assistance to school districts in their respective regions.
In spring 2002, TEA began a two-year pilot program to be administered by the RESCs and designed to improve school business management in school districts and charter schools. This program, created by H.B. 2879 passed by the 2001 Texas Legislature, authorized the hiring of financial specialists at the RESCs. The main task of these financial specialists will be identifying financially troubled school districts and offering them assistance with their business affairs. In addition, the specialists will provide training in school finance, analyze district business systems and offer other financial services to districts. Financially troubled districts also may obtain help from TEA or independent auditors.
As of November 2002, 19 of the state’s 20 RESCs had filled either full- or part-time financial specialist positions. TEA plans to seek continued authority from the 2003 Texas legislative session for the finance specialists as part of the RESCs’ base funding.
For more than 20 years, the Region XX Educational Service Center has been developing business service software for use by school districts throughout the state. As of September 2002, two primary systems had evolved. The first is a mainframe application, the South Texas Multi-Regional Processing Center (STMRPC), currently used by 47 school districts of varying sizes. The second system is a server-based, Windows-compatible PC application called the Regional Service Center Computer Cooperative (RSCCC). RSCCC is used by more than 700 Texas school districts.
These two systems offer not only typical school business software categories, such as budget management, check reconciliations, finance, purchasing, PEIMS reporting to TEA, fixed-asset monitoring, human resources and payroll software, but also include records management for student attendance, grade reporting, health records, scheduling and other tools that assist teachers in managing information. Although many Texas districts use one of these two systems, information sharing between districts still is hampered by the diverse hardware they use.
Financial services cooperatives
The financial services offered by RESCs also could be provided by cooperatives of school districts.
Texas already has several models for these cooperatives. Brown County ISD, for instance, has developed the Brown County Schools Business Cooperative to serve six area districts with an aggregate student population of just over 1,200. The co-op employs a business manager and assistant manager and uses a mainframe computer application to provide various services to its member districts, including budget input, input of accounts payable data, the production of printed reports, check writing, bank reconciliation, TEA data editing and reporting, financial summaries and economic planning for future needs. 
Some administrators have expressed concerns that financial service cooperatives could be perceived as a first step toward the consolidation of smaller districts. Many small communities identify strongly with their local schools and fear that sharing financial services would automatically start them on the road to consolidation and could contribute to the demise of their communities. On the other hand, the survival of any school district depends on sound financial management, which many districts presently lack. Furthermore, many smaller districts already have benefited from cooperatives for special education or transportation without any loss of independence.
Business service cooperatives in New York
Since the late 1940s, other states have adopted cooperative financial management among smaller school districts to reduce costs and improve services. New York provides a particularly strong example.
In 1948, New York created the first statewide system of education service centers or agencies, the Board of Cooperative Educational Services (BOCES). Its mission was to provide shared business services to school districts within common geographical areas. BOCES offices also aid small districts in remaining current and complying with legislative mandates. One BOCES unit, for example, consists of 18 school districts, of which seven share business services through a cooperative.
According to BOCES, one district has realized average savings of $280,000 through the elimination of two business manager positions made redundant by membership in a cooperative. New York’s Department of Education also provides incentives to districts that join cooperatives through reimbursement grants for a portion of the costs incurred. One district paid $70,000 to the cooperative to assist it with its business services and expected to receive $35,000 the following year in state reimbursements. Participation in BOCES is optional.
State law should establish a pilot program to encourage public school districts to form shared financial management services cooperatives.
By providing up to $100,000 per grant to groups of districts or districts and regional education service centers for initial startup costs, the state could encourage districts to cooperate for improved financial management. TEA should administer these grants. Applicants would have to demonstrate that the proposed project would involve two or more school districts and would significantly improve member districts’ financial services.
The enabling legislation should define minimum size requirements for the cooperatives, based either on the total number of students served by districts within the cooperative or a minimum number of cooperating school districts. In addition, the legislation should give rulemaking authority to TEA regarding whether grants are to be awarded competitively or according to need, and establish other criteria for evaluating the quality of applicants’ proposed programs.
Participating districts may use the grant money for one-time personnel expenses, computer software or hardware or other equipment that would help them initiate a partnership. Grant applicants, however, should be required to demonstrate how their cooperatives would remain financially viable over time.
School districts, charter schools and RESCs should be eligible to apply for these grants. RESCs should use their newly established infrastructure of financial specialists to help establish and support the new cooperatives. At the end of the two-year pilot program, TEA should review its progress and make recommendations regarding the continuation of the program.
The fiscal impact for this recommendation assumes that $1 million would be drawn from funds appropriated by the Legislature for RESC operations over the two years of the biennium; therefore, there would be no impact on the state’s general revenues.
Each of 10 one-time grants for startup expenses would be for no more than $100,000 ($100,000 x five grants x two years). Grants not awarded in the first year of the program would become available in the second year of the program. The estimate assumes that five grants would be awarded in each year of the biennium.
Because existing staff in TEA’s Division of Financial Audits and the RESCs could be used to evaluate and monitor grant applications, TEA should not need additional employees to administer these grants.
Districts should be able to realize additional revenues and savings as a result of the better financial expertise available to them under a cooperative arrangement. More accurate reporting could result in increased federal and state funding through state funding formulas. Improved management oversight could allow boards to adjust staffing based upon budgetary and enrollment trends and thereby save money. Adherence to sound purchasing and personnel policies and procedures could reduce costs and help the district avoid costly lawsuits. The nature and amount of these benefits, however, would depend upon future events and cannot be estimated at this time.
Texas Education Agency, Academic Excellence Indicator System (AEIS), 2000-01.
Interview with Omar Garcia, coordinator of the financial specialists’ initiative, Region 13 Education Service Center, Austin, Texas, March 6, 2002.
Texas Education Agency, Academic Excellence Indicator System (AEIS), 2000-01.
E-mail from Tom Canby, managing director, School Financial Audits, Texas Education Agency, Austin, Texas, February 14, 2002.
Howard Swindle, “Big Hoop Dreams and a Deep Debt: In Lipan, Funds Run Out Before $2.7 Million Gym is Finished for Powerhouse Team,” Dallas Morning News (March 17, 2002).
Interview with Greg Perez, business manager, Benavides ISD, Benavides, Texas, September 23, 2002.
Jeremy Brown, “Benavides May Lay Off 25% of Staff: District is the Largest Employer in this Tiny Town,” Corpus Christi Caller-Times (March 21, 2002).
E-mail from Philip M. Cochran, director, ESC/Higher Education Financial Support, Texas Education Agency, Austin, Texas, November 8, 2002.
E-mail from Philip M. Cochran, director, ESC/Higher Education Financial Support, Texas Education Agency, Austin, Texas, September 25, 2002.
 Region XX Education Service Center, Texas Computer Cooperative: a Tradition of Performance, A Vision for the Future, STMRPC (Austin, Texas, 2002).
E-mail from Judith Castleberry, executive director, Region XX Education Service Center, San Antonio, Texas, September 26, 2002.
Region XX Education Service Center, Texas Computer Cooperative: a Tradition of Performance, A Vision for the Future, STMRPC (Austin, Texas, 2002).
 Region XI Education Service Center, Region XI Business Support Services Initiative: Improving Texas School District Fiscal Administration—Review of School Business Services & Cooperatives (Fort Worth, Texas, January 2001), pp. 27, 30-31.
Region XI Education Service Center, Region XI Business Support Services Initiative: Improving Texas School District Fiscal Administration—Review of School Business Services & Cooperatives (Fort Worth, Texas, January 2001), p. 3.
Region XI Education Service Center, Region XI Business Support Services Initiative: Improving Texas School District Fiscal Administration—Review of School Business Services & Cooperatives, p. 15.
Telephone interview with James Chadwick, New York Board of Cooperative Educational Services, Canton, New York, April 1, 2002.
Telephone interview with Pamela Whittet, assistant superintendent, St. Lawrence-Lewis BOCES cooperative, Canton, New York, February 25, 2002.