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
D. FUND BALANCE
Governmental funds, such as KISD's general fund, report equity as a "fund balance." A fund balance is the difference between the asset and liabilities as reflected on the balance sheet. It is the measure of the district's financial resources available for future use after payment of all obligations.
Exhibit 6-17 displays KISD's general fund balance from 1997-98 to 2001-02.
Exhibit 6-17Source: KISD's Audited Financial Statements 1997-98 through 2000-01 and 2001-02 estimated using amended KISD 2001-02 budget dated January 31, 2002.
KISD General Fund Balance
1997-98 through 2001-02
Since 1997-98, KISD's general fund balance has varied from a high of $1.4 million in 1998-99 to a low of $133,825 in 2000-2001. The 2001-02 ending fund balance was estimated by adding budgeted revenues to and subtracting budgeted expenditures from the August 31, 2001 ending balance.
The district does not maintain an optimum fund balance as recommended by TEA. The district's fund balance lost 78 percent of its value between 1997-98 and 2000-01. The district anticipates that the fund balance will increase by the end of this fiscal year, based on the 2001-02 budgeted revenues and expenditures reported in the district's PEIMS submission.
Exhibit 6-18 summarizes the district's actual total revenues and expenditures from 1997-98 through 2000-01. Revenues and expenditures for 2001-02 are based on the district's amended budget as of January 31, 2002. Between 1997-98 and 2000-01, revenues increased 5.8 percent and expenditures increased 3.2 percent. The district's budgeted 2001-02 revenues are 8.6 percent higher than 1997-98, while budgeted expenditures for 2001-02 show a 4 percent increase during the five years.
Exhibit 6-18Source: KISD's Audited Financial Statements 1997-98 through 2000-01 and 2001-02 estimated using amended KISD 2001-02 budget dated January 31, 2002.
KISD General Fund Total Revenues and Expenditures
1997-98 through 2001-02
1997-98 1998-99 1999-2000 2000-01 2001-02 Revenues $22,709,204 $22,395,569 $24,491,513 $24,018,794 $24,670,177 Expenditures $23,622,685 $22,816,431 $24,595,088 $24,372,945 $24,557,325 Surplus (Deficit) (913,481) ($420,862) ($103,575) ($354,151) $112,852
Exhibit 6-19 summarizes the annual contribution to the general fund balance for every student dollar of revenue collected and expended from 1997-98 through 2001-02. During this period, the general fund lost 1.6 cents per student for every dollar collected.
Exhibit 6-19Source: KISD's Audited Financial Statements 1997-98 through 2000-01 and 2001-02 estimated using amended KISD 2001-02 budget dated January 31, 2002.
Per Student Dollar Contribution to Fund Balance
1997-98 through 2001-02
1997-98 1998-99 1999-2000 2000-01 2001-02 General Fund Revenues per Student $4,819 $4,661 $5,181 $5,152 $5,261 General Fund Expenditures per Student $5,013 $4,748 $5,203 $5,228 $5,237 General Fund Contribution per Student ($0.04) ($0.02) ($0.01) ($0.02) $0.01
TEA has developed a formula to estimate a school district's "optimum" general fund balance. It recommends that the optimum general fund balance be equal to the total reserved fund balance, total designated fund balance, an amount to cover fall cash flow deficits and one month of average cash disbursements during the regular (non-summer) school year. Reserved fund balances are those that are legally earmarked for a specific future use, such as a reserve for encumbrances. Designated fund balances are those that are identified by the school district management to reflect tentative plans or commitments, such as for a future construction project.
Exhibit 6-20 summarizes the KISD general fund balance at August 31 for years 1999, 2000 and 2001. The district has been unable to maintain an optimum fund balance throughout this three-year period. The district had approximately two days of expenditures in reserve at August 31, 2001. If the district under-budgeted by the same amount in 2001-02 as it did in 2000-01, $82,047 or less than 1 percent of the total budget, the general fund balance at August 31, 2002 would be $51,777.
Exhibit 6-20Source: KISD's Audited Financial Statements, 1998-99 through 2000-01.
Analysis of KISD General Fund Balance
1998-99 through 2000-01
8/31/1999 8/31/2000 8/31/2001 Ending Fund Balance $1,400,662 $487,976 $133,825 Total General Fund Expenditures $24,217,397 $24,435,110 $24,557,325 Number of Months Covered
(Fund Balance) / (Expenditures/12)
0.7 0.25 0.07 Total Reserved Fund Balance $748,230 $7,961 $19,925 Total Designated Fund Balance ($74,130) $65,885 $68,911 Estimated cash flow deficit $0 $0 $0 Estimated average monthly cash disbursements during school year $1,951,356 $1,931,907 $2,033,638 Optimal Fund Balance $2,605,436 $2,005,753 $2,122,474 Excess/(Deficit) ($1,204,774) (1,517,777) ($1,988,649)
There are several factors that led to the decline in the general fund balance, including:
- An inability to reconcile special revenue expenditures resulting in general funds being expended to cover the costs of the program that were not reimbursed;
- Lack of cost benefit analysis to evaluate the cost of the numerous education program initiatives and not prioritizing programs to best apply district dollars;
- Authorizing additional programs without determining if budget dollars are available;
- Failure to revise budgeted expenditures to reflect revenue shortfalls;
- Inability to control costs throughout the district; and
- Escalating health care costs associated with the self-funded health insurance plan.
Laredo ISD (LISD) established a general fund balance goal that exceeded the guidelines established by the TEA and is advancing toward that goal following the instructions established by the board.
LISD board policy CA (LOCAL), issued September 20, 1999, set a goal of attaining an unreserved, undesignated fund balance of at least two months' operating costs within five years. To meet that goal, the policy instructs the superintendent and business manager to implement the following steps:
- Develop and submit for board approval a balanced budget with input from site-based decision making (SBDM) committees and instructional programs.
- Develop staffing patterns and funding formulas based on a per pupil basis.
- Restrict any surplus funds for allocation to the unreserved, undesignated fund balance.
In the management letter for the district's 1998-99 external audit, the auditor commended LISD for adopting the policy requiring maintenance of at least two months of operating expenditures as unreserved, undesignated fund balance. The auditor further encouraged the board to support management in complying with the policy. The 2001 external audit commends the board and staff for increasing the district's unreserved, undesignated fund balance from $1.1 million in 1998 to $10.6 million in 2001.
Establish a general fund balance policy, develop administrative procedures to achieve and maintain the balance and require reports to the board.
The board should establish a fund balance policy that contains a target fund balance that will best meet the long-range district strategic plan. Difficult decisions must be made to prioritize the district's goals, and the board should direct the superintendent to develop a three-year plan with detailed strategies to meet the fund balance target while achieving district goals. The superintendent's plan should include a three-year forecast of the district's anticipated enrollment projections, revenue projections and expenditure projections. The forecast should use the 2000-01 audited financial statements as the baseline. The policy should also require that every agenda item contain a fiscal impact statement showing how the item will affect the fund balance.
Once the target has been established, the superintendent should develop procedures that help the district meet the set target. These administrative procedures should present clear direction on how the target will be met and how it will be maintained. For example, if district officials set a target to bring the fund balance up to the TEA-defined "optimum" level, they must determine what steps are required and establish a timeline for reaching the target. The board would then authorize the superintendent to reduce budgeted expenditures to the necessary level and establish annual procedures to ensure that the fund balance target is maintained.
IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent and assistant superintendent of Business and Finance draft a plan to maintain an optimum fund balance in line with TEA's recommendations. September 2002 2. The superintendent and assistant superintendent of Business and Finance present the three-year plan along with a proposed policy to the board. October 2002 3. The board reviews the plan and policy, and makes any necessary modifications. November 2002 4. The board approves the policy setting the target fund balance and directing it to be maintained. December 2002 5. The superintendent and assistant superintendent of Business and Finance include a line item for the internal budget that represents the budgeted contribution to the general fund balance beginning with the 2003-04 budget. January 2003 6. The assistant superintendent of Business and Finance prepares a report for the board packet each month detailing the change in fund balance, if any, over the prior month. September 2003 7. Before each budget cycle, the board, superintendent and assistant superintendent of Business and Finance review the target fund balance and make any required adjustments to best meet the district's needs. January 2004 and each January Thereafter
This recommendation can be implemented with existing resources.
KISD does not have a policy addressing the use of proceeds from one-time events such as land sales. The district is attempting to sell 21 acres of land to Home Depot for $3.5 million and, at the time of the review team's site visit, the district was pursuing a conditional use permit from the city of Kerrville. The assistant superintendent of Business and Finance stated that the impending sale looked good and would provide a viable means for the district to replenish its general fund balance. The net receipts to the district would be approximately $2.5 million after allocating $1 million to rebuild the football field at the high school.
Adopt a board resolution restricting the use of the net proceeds from the land sale without specific approval by the board and invest the net proceeds.
The resolution should contain specific limitations on how these funds will be used. It should contain language allowing for the release of these funds for general operating expenses if and only if the general fund balance exceeds the established target. Any exception to this policy must be presented in a board agenda item, provide the opportunity for public input and be approved by the board.
IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent and assistant superintendent of Business and Finance draft a board resolution restricting use of net proceeds from land sale until the general fund balance target is met. September 2002 2. The board approves the resolution. October 2002 3. The assistant superintendent of Business and Finance reports quarterly to the board about progress toward reaching the established target. November 2002 and Quarterly Thereafter
4. The board approves release of funds after general fund balance target has been achieved. When Achieved
By investing the net proceeds of the land sale with TexPool, the district could earn additional interest. Assuming an average interest rate of 4.4 percent on an average balance of $2.5 million, the district would earn $110,000 annually.
Recommendation 2002-03 2003-04 2004-05 2005-06 2006-07 Adopt a board resolution preventing the use of the proceeds from the land sale without specific approval by the board and invest the net proceeds $110,000 $110,000 $110,000 $110,000 $110,000