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Chapter 6
FINANCIAL MANAGEMENT

This chapter examines the Kerrville Independent School District's (KISD's) financial management in the following six sections:

A. Fiscal Operations
B. Payroll Processing
C. Budgeting
D. Fund Balance
E. Tax Collections
F. External and Internal Audit

Effective financial management in school districts involves planning, budgeting and overall management of the district's resources to maximize financial performance. A district must establish solid relationships with employees, vendors, funding agencies and the local community.

Financial management is most effective when the district directs its financial resources toward meeting its stated goals and objectives. Internal controls must be in place and operating as intended. Financial information should be provided in a timely manner and presented in a format that is easily understood by board members, community members and staff.

BACKGROUND

School districts must manage their finances in a highly regulated environment, which includes numerous requirements established by federal and state laws, rules and regulations. The Texas Education Agency's (TEA's) Financial Accountability System Resource Guide (FASRG) outlines the accounting and reporting requirements placed on Texas school districts. Internally developed policies and procedures, generally accepted accounting principles and guidelines set by the Governmental Accounting Standards Board (GASB) also affect school districts' financial management activities.

The state's funding contribution to public education is allocated through a system of statutory formulas known as the Foundation School Program (FSP). According to the Texas Education Code, the FSP is designed to "provide substantially equal access to similar revenue per student at a similar tax effort, considering all state and local tax revenues of districts after acknowledging all legitimate student and district cost differences." To compensate for wide variations in local property wealth among school districts, the state allocates funding to districts in inverse relation to their property wealth.

The FSP consists of three components or "tiers": Tier I, Tier II and Tier III. These three tiers provide state aid to supplement local property taxes and limit the total amount of local funding per student that some districts can spend on education.

Tier I "foundation" funding ensures that each district can provide its students with a basic instructional program. The state bases Tier I allotments on student attendance, as measured by weighted average daily attendance (WADA). WADA provides additional "weight" or funding for special-needs students participating in programs such as special education, compensatory education, bilingual education and gifted and talented programs. Tier I formula funding also provides some support for school transportation services. The state adjusts Tier I allotments for individual districts' property tax bases. Therefore, a district's property wealth factors significantly into the state funding formula. A district that cannot generate local revenue equivalent to the entire Tier I allotment receives state aid to make up the difference.

Tier II funding, also known as the "guaranteed yield" program, is designed to provide additional funding beyond the basic Tier I program. District property wealth determines the amount of state aid received in Tier II. For districts with property wealth of less than $258,100 per weighted student in 2001-02, the state will provide Tier II funding to bring them up to that level. Chapter 41 of the Texas Education Code requires districts with property wealth above $300,000 per weighted student to transfer any local revenue exceeding that amount to the state, for redistribution to "property-poor" districts. "Gap" districts, those with property wealth at or above $258,100 but below $300,000 per weighted student, will generate the Tier II funding level entirely with local funds and will receive no Tier II state funding, but can retain all of the local funds they collect. Tier II funds can be used for any legal purpose other than capital outlays for equipment, building or renovations or debt service interest payments.

The 76th Legislature added a new component, Tier III funding, to the education funding formula. Tier III funds provide partial state funding for debt service requirements on bonds previously issued by local school districts.

The Texas Constitution authorizes local governments, including school districts, to levy property taxes. School property taxes represent nearly 60 percent of all property taxes levied in the state. School districts levy two categories of property taxes: maintenance and operations (M&O) and interest and sinking (I&S). Districts use M&O taxes to cover routine operating costs and I&S taxes to pay debt service for financing building programs.

KISD receives revenue from local, state and federal sources. Exhibit 6-1 summarizes the district's budgeted revenue breakdown from 1997-98 through 2001-02. During this period, total revenues rose by 2.2 percent. Local revenues increased by 20.6 percent. Both state and federal revenues decreased during the period, by 18.9 percent and 93.6 percent, respectively. Federal funding made up less than 0.2 percent of the district's total revenue.

Exhibit 6-1
KISD Total Budgeted Revenue by Source
1997-98 through 2001-02
Revenue
Source
1997-98 1998-99 1999-2000 2000-01 2001-02 Percent Change
Local and Intermediate $14,440,871 $16,390,259 $15,221,517 $16,602,390 $17,409,436 20.6%
State 9,173,415 6,477,397 7,949,928 6,726,000 7,436,627 (18.9%)
Federal 748,928 694,150 715,491 0 48,155 (93.6%)
Total $24,363,214 $23,561,806 $23,886,936 $23,328,390 $24,894,218 2.2%
Source: Texas Education Agency (TEA), Academic Excellence Indicator System (AEIS), 1997-98 through 2000-01 and Public Education Information Management System (PEIMS), 2001-02.

Texas school districts receive an average of 53.1 percent of their revenues from local property taxes, 43.6 percent from the state and 3.4 percent from federal sources. KISD receives the majority of its revenue, 69.9 percent, from local sources. Exhibit 6-2 illustrates budgeted revenue by source for the district in 2001-02.

Exhibit 6-2
KISD Budgeted Revenue Sources
as a Percentage of Total Revenues
2001-02

 Budgeted Revenue Sources
Source: TEA, PEIMS, 2001-02.

Each of the peer districts mirrors KISD in that local sources provide the majority of their revenue. With the exception of Midlothian ISD, all of the peers are in line with the state average federal funding at between 2 to 3 percent of total revenues. KISD is significantly below the state average and is a full percentage point behind its closest peer, Midlothian, in the level of federal funding it receives. The federal revenues reported in PEIMS reflect the federal funds reported in the general operating fund. Exhibit 6-3 illustrates the breakdown of 2001-02 budgeted revenue sources for KISD and each peer district.

Exhibit 6-3
Budgeted Revenue Sources
KISD and Peer District Comparison
2001-02

 Budgeted Revenue Sources
Source: TEA, PEIMS, 2001-02.

Between 1997-98 and 2001-02, the peer group, with the exception of Levelland, has seen significantly higher revenue growth than KISD, as shown in Exhibit 6-4. The average peer district growth in budgeted revenues from 1997-98 through 2001-02 has been 29.6 percent. KISD, at 2.2 percent, falls substantially below the peer group's average.

Exhibit 6-4
Peer District Comparison of Budgeted Revenue Growth
1997-98 through 2001-02
District 1997-98 1998-99 1999-2000 2000-01 2001-02 Percent
Change
Kerrville $24,363,214 $23,561,806 $23,886,936 $23,328,390 $24,894,218 2.2%
Levelland $20,887,211 $17,790,311 $18,285,880 $19,448,067 $21,175,500 1.4%
Brenham $26,734,484 $27,212,522 $29,122,193 $30,601,760 $32,775,385 22.6%
Aransas County $19,312,716 $21,976,248 $23,382,259 $25,072,366 $24,974,395 29.3%
Marble Falls $20,343,856 $21,723,712 $24,215,581 $24,797,818 $27,830,895 36.8%
Midlothian $21,470,436 $24,029,901 $27,538,772 $30,583,346 $34,219,391 59.4%
Peer Average* $21,749,741 $22,546,539 $24,508,937 $26,100,671 $28,195,113 29.6%
Source: TEA, AEIS, 1997-98 through 2000-01 and PEIMS, 2001-02.
*The peer average does not include Kerrville.

The state sends a proportional amount of revenue to each district based on a district's property values. Districts with greater property wealth per pupil receive less from the state because they generate more property taxes, while districts with lower property value per pupil receive more from the state.

Exhibit 6-5 compares the property value per pupil for KISD and its peer districts from 1997-98 through 2000-01. The property value per student reported by KISD and its peer districts was higher than the state average for the entire five-year period, with the exception of Levelland in 1999-2000. KISD's property value per student was 9.1 percent higher than the state average in 2000-01.

Exhibit 6-5
Property Value per Pupil
KISD, Peer Districts and State
1997-98 through 2000-01
District 1997-98 1998-99 1999-2000 2000-01 Percent
Change
Levelland $243,497 $217,746 $183,715 $215,567 (11.5%)
Kerrville $216,292 $214,976 $238,190 $234,748 8.5%
Brenham $202,312 $212,917 $221,750 $243,676 20.4%
Marble Falls $227,828 $222,995 $251,694 $275,008 20.7%
Aransas County $214,820 $232,230 $245,696 $279,177 30.0%
Midlothian $215,674 $228,192 $239,528 $297,222 37.8%
State Average $182,154 $190,769 $198,090 $215,232 18.2%
Source: TEA, AEIS, 1997-98 through 2000-01.

Enrollment in KISD remained relatively flat between 1997-98 and 2001-02. Exhibit 6-6 presents the enrollment trends from 1997-98 through 2001-02 for KISD and its peer districts. KISD and three peer districts have experienced declining enrollment. Only Marble Falls and Midlothian had increased enrollment during the period.

Exhibit 6-6
Enrollment Trends
KISD and Peer Districts
1997-98 through 2001-02
District 1997-1998 1998-99 1999-2000 2000-01 2001-02 Percent
Change
Aransas County 3,530 3,438 3,480 3,360 3,337 (5.5%)
Brenham 4,954 4,778 4,697 4,703 4,713 (4.9%)
Kerrville 4,712 4,805 4,727 4,662 4,689 (0.1%)
Levelland 3,451 3,392 3,196 2,994 3,024 (12.3%)
Marble Falls 3,371 3,529 3,452 3,597 3,648 8.2%
Midlothian 3,822 4,061 3,590 3,705 3,987 4.3%
Source: TEA, AEIS, 1997-98 through 2000-01 and PEIMS, 2001-02.

As KISD's enrollment dropped, the number of staff increased. In 2001-02, the teacher-student ratio was 1:14.8, up slightly from 1:14 in 2000-01. The district's total staff-student ratio was 7.3:1 in
2001-02, up from 7.1:1 in 2000-01.

Exhibit 6-7 illustrates KISD's operating expenditures by activity. Instruction includes teacher salaries and all activities dealing directly with interaction between teachers and students, including computer-assisted instruction. The amount of funds devoted to instruction in KISD increased 13.9 percent during the five-year period from 1997-98 through 2001-02. Throughout this five-year period, at least 62.4 cents of every dollar budgeted for operating costs was allocated for instruction. The state average is about 52 cents of every dollar.

The largest increase in budgeted operating expenditures was in student transportation, which increased 46.1 percent. Food-service expenditures fell slightly by 0.2 percent. Co-curricular and extracurricular expenditures decreased by 11.9 percent. Plant maintenance and operating expenditures increased slightly during the period, by 3.8 percent. Security and monitoring expenditures have doubled but still remain low at approximately $5,000 for 2001-02. The district did not budget data processing expenditures in 1997-98 and 1998-99. In 2001-02, data processing comprised 1.4 percent of the total budgeted operating expenditures. Over the past five years the total budgeted operating expenditures increased by 15.2 percent. Per student operating expenditures increased by 15.8 percent, while enrollment decreased 0.5 percent.

Exhibit 6-7
KISD Budgeted Operating Expenditures by Function
1997-98 through 2001-02
Function 1997-98 1998-99 1999-2000 2000-01 2001-02 Percent Change
Over 5 Years
Instruction $13,805,451 $13,881,152 $15,396,936 $15,978,700 $15,725,210 13.9%
School Leadership $961,612 $953,116 $1,091,526 $1,223,865 $1,261,877 31.2%
Support Services Students $910,285 $1,038,962 $1,110,410 $1,150,000 $1,100,869 20.9%
Student Transportation $504,421 $522,929 $430,862 $635,325 $736,997 46.1%
Food Services $1,178,935 $1,654,405 $1,135,729 $1,152,591 $1,176,826 (0.2%)
Co-curricular/ Extracurricular $722,356 $442,956 $536,406 $445,946 $636,616 (11.9%)
Central Administration $1,233,853 $1,270,946 $1,013,476 $1,016,165 $1,549,316 25.6%
Plant Maintenance and Operations $2,494,387 $2,483,324 $2,283,850 $2,264,232 $2,588,485 3.8%
Security and Monitoring $2,725 $2,725 $5,050 $3,400 $5,500 101.8%
Data Processing Services $0 $0 $115,500 $78,525 $344,331 N/A
Total $21,814,025 $22,250,515 $23,119,745 $23,948,749 $25,126,027 15.2%
Student Enrollment 4,712 4,805 4,727 4,662 4,689 (0.5%)
Total Operating Expenditures Per Student $4,629 $4,631 $4,891 $5,137 $5,359 15.8%
Source: TEA, AEIS, 1997-98 through 2000-01 and PEIMS, 2001-02.

Exhibit 6-8 compares the district's total budgeted operating expenditures to those of its peer districts. KISD and Midlothian ISD lead the peer group in the percentage of operating dollars allocated to instruction, at 62.6 percent each. Instructional expenditures statewide represent approximately 52 percent of total expenditures. The district allocates the highest percentage of total operating expenditures to central administration when compared against its peers. KISD's student transportation and extracurricular expenditures are the lowest when compared against its peers. The district is comparable to its peer group in all other categories of operating expenditures.

Exhibit 6-8
Total Budgeted Operating Expenditures by Function
KISD and Peer Districts
2001-02
Function Kerrville Aransas
County
Brenham Levelland Marble
Falls
Midlothian
Instruction 62.6% 55.1% 61.4% 60.9% 58.3% 62.6%
School Leadership 5.0% 6.0% 5.3% 4.7% 5.3% 6.7%
Support Services - Students 4.4% 5.2% 4.3% 3.4% 5.0% 5.0%
Student Transportation 2.9% 4.5% 3.8% 4.1% 4.0% 2.7%
Food Services 4.7% 5.8% 6.5% 5.2% 5.5% 4.2%
Co-curricular/ Extracurricular Activities 2.5% 3.2% 3.2% 4.3% 3.6% 3.4%
Central Administration 6.2% 4.5% 3.8% 4.8% 5.0% 3.9%
Plant Maintenance and Operations 10.3% 14.2% 10.7% 10.2% 11.5% 9.5%
Security and Monitoring Services 0.0% 0.7% 0.2% 0.2% 0.0% 0.1%
Data Processing Services 1.4% 0.8% 0.7% 2.2% 1.6% 1.9%
Source: TEA, PEIMS, 2001-02.
Note: Totals may not add to 100 because of rounding.

Payroll costs comprise the largest percentage of expenditures for any school district, generally between 75 and 85 percent of a district's total expenditures each year. In 2001-02, KISD budgeted 82.5 percent of its total expenditures for payroll.

Exhibit 6-9 compares the district's total budgeted expenditures, by object for 1997-98 through 2001-02. The budgeted payroll increased substantially between 1998-99 and 1999-2000. These budgeted amounts continued to increase in 2000-01 and decreased slightly in the 2001-02 budget, although they remained above the 1999-2000 level. The district's budgeted payroll costs increased 12.3 percent during the five-year period of 1997-98 through 2001-02. Professional and contracted services increased 19.8 percent. Budgeted supplies and materials decreased 49.6 percent. Other operating costs, including travel and miscellaneous expenditures, increased 95.6 percent.

Non-operating expenditures include those expenditures dedicated to facilities acquisition and construction, capital outlay and debt service. According to PEIMS data, non-operating expenditures have decreased 84.1 percent from since 1997-98 to 2001-02. However, between 1997-98 and 1999-2000, the district's debt service averaged 2.6 percent of the district's total expenditures.

Total budgeted expenditures decreased by 2.8 percent between 1997-98 and 2001-02. This decrease is primarily the result of the decrease in non-operating expenditures. Operating expenditures continued to increase during the same period.

Exhibit 6-9
KISD Total Budgeted Expenditures by Object
1997-98 through 2001-02
  1997-98 1998-99 1999-2000 2000-01 2001-02
Payroll Costs $17,752,678 71.4% $18,198,735 71.4% $19,606,229 81.0% $20,903,549 85.5% $19,936,631 82.5%
Professional and Contracted Services $1,674,375 6.7% $1,983,666 7.8% $1,721,131 7.1% $1,731,395 7.1% $2,005,140 8.3%
Supplies & Materials $2,183,969 8.8% $1,865,240 7.3% $1,634,188 6.8% $1,263,396 5.2% $1,100,376 4.6%
Other Operating Costs $338,441 1.4% $363,552 1.4% $375,258 1.5% $261,770 1.1% $662,083 2.7%
Total Operating Expenditures $21,949,463 88.3% $22,411,193 87.9% $23,336,806 96.4% $24,160,110 98.9% $23,704,230 98.1%
Debt Service $2,326,000 9.4% $2,246,303 8.8% $355,000 1.4% $240,000 1.0% $232,000 1.0%
Capital Outlay $576,555 2.3% $830,357 3.3% $525,591 2.2% $36,000 0.1% $228,742 0.9%
Total Non-Operating Expenditures $2,902,555 11.7% $3,076,660 12.1% $880,591 3.6% $276,000 1.1% $460,742 1.9%
Total Expenditures $24,852,018 100% $25,487,853 100% $24,217,397 100% $24,436,110 100% $24,164,972 100%
Source: TEA, PEIMS, 1997-98 through 2001-02.

The actual expenditures reported for 2000-01 reflect different results than the budgeted numbers. Exhibit 6-10 compares actual KISD expenditures, by object, against the same expenditures of the peer districts. Operating expenditures comprised 67 percent of KISD's total annual expenditures, which was relatively low compared with its peers. Payroll costs comprised 56.2 percent of KISD's actual expenditures for the year. Only Midlothian ISD has lower payroll costs than KISD. Non-operating expenditures comprised 33 percent of the district's total expenditures for 2000-01. This level of spending for non-operating expenditures was the second highest of the peer group.

Exhibit 6-10
Comparison of Actual Expenditure by Object
KISD and Peer Districts
2001-02
  Kerrville Aransas County Brenham Levelland Marble Falls Midlothian
Payroll Costs $23,926,950 56.2% $19,969,885 71.1% $22,597,963 67.1% $17,703,452 66.4% $17,514,128 62.4% $20,146,341 41.9%
Professional and Contracted Services 1,818,521 4.3% 2,064,846 7.4% 4,317,236 12.8% 1,759,972 6.6% 4,657,921 16.6% $2,647,456 5.5%
Supplies and Materials 2,258,385 5.3% 1,789,570 6.4% 2,355,010 7.0% 1,715,368 6.4% 2,023,439 7.2% $2,538,148 5.3%
Other Operating Costs 490,295 1.2% $690,220 2.5% 646,272 1.9% 664,816 2.5% 336,864 1.2% $430,871 0.9%
Total Operating Expenditures $28,494,151 67.0% $24,514,521 87.4% $29,916,481 88.8% $21,843,608 81.9% $24,532,352 87.4% $25,762,816 53.6%
Debt Service $4,777,879 11.2% $1,370,052 4.9% $2,168,863 6.4% $70,000 0.3% $2,660,997 9.5% $5,137,533 10.7%
Capital Outlay 9,279,609 21.8% 2,206,900 7.9% $1,577,028 4.7% 4,750,469 17.8% 869,672 3.1% $17,137,519 35.7%
Total Non-Operating Expenditures $14,057,488 33.0% $3,576,952 12.8% $3,745,891 11.1% $4,820,469 18.1% $3,530,669 12.6% $22,275,052 46.4%
Total Expenditures $42,551,639 100% $28,091,473 100% $33,662,372 100% $24,217,397 100% $28,063,021 100% $48,037,868 100%
Source: TEA, PEIMS, 2001-02.