Embed Size (px)
Citation preview
Rules of Thumb For
School District Budgeting
1 Revenues must equal expenditures No deficit spending
2 Be conservative - underestimate revenues amp overestimate expenditures
3 Use non-reoccurring revenue ONLY on non-reoccurring expenditures
4 Maintain a fund balancebudgetary reserve for unexpected events or emergencies
5 Advise participants involved in the budget review and adoption procedures of any possible tax increase at the beginning of the process
6 Use actual historical data and statistics to validate estimated revenue and expenditure appropriations
7 Announce significant local events that impact the budget such as new housing developments plant shut-downs roadbridge closings etc
8 Determine the amount of fixed costs contained in the budget and the amount of discretionary appropriations available
9 Be prepared to identify and discuss options if necessary
10 Be prepared to explain to the public and other stakeholders the impact of the proposed budget in regards to the education program and the available financial resources to support it
90
IAcronym$1
Common Acronvms
ADA Average Daily Attendance
ADM Average Daily Membership
AFR Annual Financial Report
AG Auditor General
AICPA American Institute of Certified Public Accountants
AlE Actual Instructional Expense
AIEIWADM Actual Instructional Expense Per Weighted Average Daily Membership
APS Approved Private School
AUN Administrative Unit Number
A VTS Area Vocational Technical School
BANs Bond Anticipation Notes
BER Base Earned for Reimbursement
BFS Basic Financial Statements
CAFR Comprehensive Annual Financial Report
CATS Career and Technical Education Information System (formerly VEMIS)
CFDA Catalog of Federal Domestic Assistance
EAP Educational Assistance Program
EM Equalized Mills
FAI Financial Accounting Information
FASB Financial Accounting Standards Board
GAAFR Government Accounting Auditing and Financial Reporting
GAAP Generally Accepted Accounting Principles
GAAS Generally Accepted Auditing Standards
GAGAS Generally Accepted Government Auditing Standards
GAO US General Accounting Office
GASB Governmental Accounting Standards Board
GFOA Government Finance Officers Association
IEP Individualized Education Program
IU Intermediate Unit
LEA Local Educational Agency
LECS Labor Education and Community Services (Comptrollers Office)
PDE Manual of Accounting 3 January 2012
MDampA Management Discussion and Analysis
MFSA Measurement Focus and Basis of Accounting
MV Market Value
MVAR Market Value Aid Ratio
MVPI AR Market Value Personal Income Aid Ratio
NCGA National Council on Governmental Accounting
OMS US Office of Management and Budget
OPES Other Postemployment Benefits
PRRI Private Residential Rehabilitative Institution
PSERS Pennsylvania Public School Employees Retirement System
RANs Revenue Anticipation Notes
RIDC Restricted Indirect Cost
TANs Tax Anticipation Notes
TRANs Tax and Revenue Anticipation Bonds
VADM Vocational Average Daily Membership
WADM Weighted Average Daily Membership
POE Manual of Accountinpound 4 January 2012
Ready Set Govern - PSBA 2009
Basic Budget Terms
Act 1 of Sp ecial Session 2006 - Imposes referendum requirements on all school districts Repeals authority of Act 72 as welJ as Act 50 Limits tax increases along with limits on the implementation of new Act 511 taxes
Act 24 of 200 1 - Allows districts to repeal their occupation assessment tax and replace the lost revenue with an increase in the earned income tax
Act 511 Taxes - Revenue received from the flat and proportional assessments made in accordance with Act 511 of 1965 (Local Tax Enabling Act) School distrjcts of the first class or first-class A are not empowered to levy taxes under the provisions of Act 511
Actmll I ns truction al Expense (AfE) - The net cost of instruction in a school district
Aid Ra tio - The result oftbe formula that reflects a districts wealth in relation to aU other districts in the state
Appropria tioD - An authorization granted by the board of education or voters to make expenditures and to incur obligations for specific purposes An appropriation usually is limited in amount for the time covered by the approved budget
Assessed Valuation - The official valuation of property [or the purpose of taxation The val uation is determined by the assessors of the district (see School Code)
Aud it - An examination of records and documents to determine whether 1) transactions that are contemplated or were completed were appropriate or 2) all transactions were recorded properly completely and accurately
Average Daily Atten da nce (A DA) - The total days ofpupil attendance ofa given school district during a repOltrng period divided by the number of days scbool is in session dWjng this period
Average Daily M embership (ADM) - Aggregate number of school days represented by all pupils on the actjve ro]) divided by the number of days schoo) is in session
Basic Instructional Subsidy (BIS) - A payment that includes payment on account of instruction payment on account oflow-income families and payment on accowl1 of poverty
Basis Point - An investment term related to interest earnings equal to 001 The equivalent of $1 earned on an investment of $1000000 when it js invested for one year
5
Ready Set Govem - PSBA 2009
Budget - A complete financial forecast for a given time (usually one year) including bOtJl expenditures and receipt based on all educational plan
bull F inal Budget - Adopled pursuant to the provisions of Act 1 must be placed on public display and advertising notice Last day to adopt is June 30
bull Preliminary Budget - Adopted pursuant to the provisions ofAct 1 must be adopted at least 90 days prior to the pJimary election Subject to public display and advertising notice May be waived if the board chooses to keep tax increases under the index
Budget Calendar - A guide for indicating budget preparation responsibilities and the dates for their accomplishment by individuals or groups
Budgetary T ransfers - Transfer of unencwnbered funds or funds designated for one purpose to another part of the budget to be used for a different purpose requiring approval by two-thirds of board members and allowed only during the last nine months of the fiscal year
Capital Outlay - Expenditures for fixed assets or adclitions to fixed assets They are expenditwes for land improvements to the grounds construction of buildings additions to or remodeling of existing buildings and initial or additional equipment
Capital Resene Fund - A special fund created for the purpose of constructing a school building project or projects under a long-tenn project program approved by the Department ofEducation
CasJl Flow - Matching oftlle receipt and disbw-sement of district funds This is tlle basis of determining borrowing needs to meet operating expenditures Also is the basis of determining the length of investment of excess cash
Cbart of Accounts - A list of all accounts used in an individual accounting system An account is a descriptive heading under which are recorded similar financial transactions
Clean and Green Act - Legislative authorization to provide special real property tax treatment to properties of 1 0 acres or more with no improvements (Applies to farmland)
Curren t Expenditures (Current Expend) - Includes aJl general fund expenditures WitJl reference to the functional classifications of instruction (less tuition) support services and operation of nonshyinstructional services
Debt Sen ire - Expenditures for the retirement or paying off of the principal amount of a debt and the interest on tile amount
Employee Benefits - A form of compensation in addition to salary for an employee Such benefits include retirement benefits Social Security workers compensation sick leave life insurance accident insurance disability insurance etc
Employm ent Cost I ndex (Eel ) - A measure of the change in the total cost of labor calculated by the US Department of Labor Bureau of Labor Statistics
6
Ready Set Govern - PSBA 2009
Encumbrances - Purchase orders contracts and salary or other commitments that are chargeable to an appropriation and fo r which a part of the appropriation is reserved
Equalized Mi lls (EM) - A measure of the local tax effort calculated by dividing the local taxes by the market value multiplied by 1000
Eq ualized Subsidy for Basis Education (ESBE) - Eliminated in the early 1990s this fonnula was used for many years to detennine the basic instructional subsidy
Farmstead E xclusion - Originally defined in Act 50 of 1998 and incorporated into Act 72 of 2004 and by reference into Act 1 of2006 the exclusion applies to the value of farm buildings used in commercial agricultural production
Fiscal Year - School districts of the first class first-class A and second class may by majority vote establish a fiscal year to coincide with the calendar year all others shall begin July I
Fringe Benefits - See Employee Benefits
Full Valuation - The ClUTent market value appraisal or estimate of what a property would sell fOT in a transaction between a willing buyer and a willing seller
F unction - Budgetary tenll used to describe the major purpose and the end an appropriation is to accomplish
Functional Gudget - A budget that uses the format of the line item ur uaditional budget La group proposed expenditures first according to general activities or actions performed The major functional categories are administration instruction pupil personnel services pupil transportation services health services operation and maintenance of plant etc Within such functions there are additional line items for various expenditures
Fund - A fiscal and accounting entity for recording resources liabilities and equity
General Fund - 111e principal fund of a school district includes all operations Dot required to be recorded in other funds S11Ch as school lunch capital reserves activity funds etc
Genera lly Accepted Accounting Princip les - Accounting standards designed for use by local government units
Homestead Excl usion -- Originally defined in Act 50 of 1998 now incorporated into Act 1 of2006 by reference the value of owner occupied residential property to be excluded from real property taxation
Index - A calculation by PDE using the SA WW and Eel The calculation may be modified for poorer school districts This is the muximum increase permitted for school districts
Interest Earnings - The amount of money earned by investing excess cash
7
Ready Set Govern - PSBA 2009
I nvestment - The deposit of excess cash for tbe purpose of earning interesl Permitted types of investments are enumerated by the School Code
Line-Item or Traditional Budget - A budget that groups proposed expenditures according to certain categories known as the object of expenditure On each line of the budget the expenses are listed the way they are paid out salaries on one line supplies on another line utilities on another line Thus salaries are one object and supplies another
Local Economic Revita lization T ax Abatement Act (LERTA) - A program based on local choice intended to promote economic growth in real property by excluding improvements from taxation for a period of not more than 10 years
Market Value (MV) - The value of taxable real property within a school district as determined by the State Tax Equalization Board
Market Va lue Aid Ratio (MVAR) - A fraction used to calculate the states share of instrUctional costs
Mali(et Va lue-Person~lllncom e Aid Ratio (MV-PIAR) - A factor used to determine the states share of instructional costs
J1iUage- TIle fixed rate of real estate taxes on assessed property value
Object- The article to be pure based or the service 10 be obtained to carry out the function v1th which it is associated
Operation of Jlant - Expenditures necessary to keep the buildings and grounds and equipment open and ready for use - housekeeping costs
Per capita Ta x - A flat rate tax levied upon each adult resident of the taxing school district
Personal Income Aid R a tio - A fraction used to determine the market value personal income aid ratio
Program Budget - A program is a plan of activities or procedures designed to accomplish a set of related objectives A program budget groups all the proposed expenditures for each indiyjdual program then within each program expenditures are listed according to function and object A program budget includes the delineation or definition of the purpose or o~jectives of a particular program - that is what that program is expected 10 accomplish The dollar amowlts budgeted are considered in relation to achieving a desired and agreed-to pillmiddotpose
Program budgeting differs from line-item budgeting in that it focuses on the purposes of the district and the particular program and activity It is a variation from the concept offunctional budgeting because in the latter the budget anlounts requesled are merely an itemization of the dollars required to continue a gjven activity or to install a new one Moreover a functional budget does not link program costs to program results
8
Ready SCI Oavern - PSBA 2009
Proposed Budget - A tentative budget subject to public hearings examination or comment When tb district is fiscalJy dependent on another municipal body such as the town or city cOWlcil for its funds the proposed budget sometimes is called the budget request
Public Utility Realty Tax Act (fURTA) - Any property subject to regulation by the Public Utility Commission pays an equivalent tax to the Pennsylvania Department of Revenue which then is distributed to local taxing jurisdictions
Referendum - Vote taken by the electorate for approval or rejection of proposed or passed legislation
Reserve F und - An aJllount set aside to cover an obligation doly authorized and incurred
Statewide Aver age Weekly Wage (SA WW) - The average weekly wage established by the Pennsylvania Department of Labor and Industry for calculating workers compensation payments
Tax Increment Financing (TIF) - An economic development program designed to promote economic growth by using the increased tax value of property improvement Lo pay for infrastructure improvements
Tax Levv - The total dollar amount to be raised by tax
Tax RatelMiII -111e tax levy divided by the total taxable assessed value of the district usually stated as dollars per thousand or per hundred of assessed value
Tota l Expenditures (Total Expend) - LncJudes all general fund expenditures cited under current expenditures plus facilities acguisilion and other financing uses (less prior years receipts and fund transfers)
Weighted Average Da ily Membership (A DM) - The assignment of weight by grade level to the average daily membership The current weighting is half-lime kindergarten at 05 full-time kindergarten at 10 elementary grades (grades 1-6) at 10 and secondary grades (grades 7-12) at 136
Zero Base Budgeting - A method of budgeting that requires each perSOll requesting funds in a budget to develop decision packages and to rank them in priority order
9
Laws that Effect the Budget and Fiscal Administration
bull The School Code gives local boards the authority to conduct the financial affairs of the district It contains provisions that are manciatory pennissive and prohibite(i The district is also subject to commonwealth statues such as the Municipal Code (53 Purdons) the Fiscal Code (72 Purdons) and other laws that apply to governmental entities
Act 16-Mandate Waivers APR Standards GAOP Section 2218 ofSchool Code
Budget statutes
bull Must approve an annual budget prior to the Sart ofthe fiscal year
bull Section 687 ofthe School Code requires that a proposed budget be prepared at least 30 days prior to adoption of the budget for the following fiscal year in a formula stIpulated by the Department ofEducation
bull The Notice ofPropos~dBudget must be published at least once in a newspaper of general circulation within the community at least 10 days before the adoption of a final budget The notice must include the time and place of the meeting at which the final budget wiU be adopted ~d a statement that the proposed budget is available for public inspection
bull Section 508 ofthe School Code requires a majority vote of the board to adopt the annual budget and to levy and assess taxes The vote must be by a duly recorded (roll call) vote that records how each member voted Failure to have five affumative votes renders their action void and unenforceable
11
bull Failure to adopt a budget by July 1 causes the district to lose authority to expend funds for the new fiscal year
bull Section 687 of the School Code requires that a certified copy of the adopted budget must be provided to the PDE It also prohibits dencit financing in public schools The total amount of the adopted budget may not exceed the amount offunds including the proposed annual tax levy and state appropriations available to the district
bull The commonwealth has established a mandatory accounting system that must be used by every school entity based on GenergJJy Accepted Accounting Principles (GAAP) consistent with state and federal laws
bull Section 2932 of the Municipal Code allows for the operation of a Capital Reserve Fund Monies in this fund must be kept in a special account separate from any other fund The monies in the Capital Reserve Fund may be expended only for capital improvements and for replacement of andor additions to public works and improvements and for deferred maintenance thereof as approved by the board of school directors Specific projecrs must be identified together With the year ofproposed completion
bull Section 511 of the School Code allows for the establishment oftbe Athletic Fund to account for revenues generated through gate receipts incurred by the interscholastic athletic program
bull Section 609 of the School Code allows school districts to receive and expend state and federal revenues for the pwposes for which ~y are intended whether or nOl they were included in the adopted budget
12
Bidding and purcbasing statutes
bull Section 801 of the School Code requires boards to purcbase and provide all furniture equipment textbooks school supplies and other items for the use ofthe district to maintain the educational environment
bull Section 8071 (as amended by Act 30 of 1990) sets the requirement for competitive bidding at $10000 or more Purchases of $1 0000 or more require public notice by advertisement once a week for furee consecutive weeks in not less than two newspapers ofgeneral circulation Any purchase of $4000 but less than $10000 requires three price quotations The board must accept the lowest responsible bid (where kind quality and material are equal) Boards may reject any and all bids or select a single item from any bid
bull Section 521 ofthe School Code permits purchases to be made through intergovernmental cooperativcr agreements (joint purchase agreements) School entities may also piggyback on State or other government contracts following appropriate legal requirements
Cash Management and Investments Statutes
bull Section 4401 of the School Code pennits the investment of funds in specifically designated areas
13
BID THRESHOLDS INCREASING
Section 8071 (as amended by Act 30 of 1990 and Act 97 of 2011 )
The new limits which take effect January 2013 will be updated annudlly based
on changes in the Consumer Price Index up to a 3 percent cap No advertising
or competitive bidding or price quotations will be required for contracts below
$10000 allowing school maintenance staff to perform work that costs less than
$10000 Written or ielephonic price quotations will only be required for contracts
between $10000 and $18500 Advertising and competitive bidding will only be
required for contracts over $18500
14
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
IAcronym$1
Common Acronvms
ADA Average Daily Attendance
ADM Average Daily Membership
AFR Annual Financial Report
AG Auditor General
AICPA American Institute of Certified Public Accountants
AlE Actual Instructional Expense
AIEIWADM Actual Instructional Expense Per Weighted Average Daily Membership
APS Approved Private School
AUN Administrative Unit Number
A VTS Area Vocational Technical School
BANs Bond Anticipation Notes
BER Base Earned for Reimbursement
BFS Basic Financial Statements
CAFR Comprehensive Annual Financial Report
CATS Career and Technical Education Information System (formerly VEMIS)
CFDA Catalog of Federal Domestic Assistance
EAP Educational Assistance Program
EM Equalized Mills
FAI Financial Accounting Information
FASB Financial Accounting Standards Board
GAAFR Government Accounting Auditing and Financial Reporting
GAAP Generally Accepted Accounting Principles
GAAS Generally Accepted Auditing Standards
GAGAS Generally Accepted Government Auditing Standards
GAO US General Accounting Office
GASB Governmental Accounting Standards Board
GFOA Government Finance Officers Association
IEP Individualized Education Program
IU Intermediate Unit
LEA Local Educational Agency
LECS Labor Education and Community Services (Comptrollers Office)
PDE Manual of Accounting 3 January 2012
MDampA Management Discussion and Analysis
MFSA Measurement Focus and Basis of Accounting
MV Market Value
MVAR Market Value Aid Ratio
MVPI AR Market Value Personal Income Aid Ratio
NCGA National Council on Governmental Accounting
OMS US Office of Management and Budget
OPES Other Postemployment Benefits
PRRI Private Residential Rehabilitative Institution
PSERS Pennsylvania Public School Employees Retirement System
RANs Revenue Anticipation Notes
RIDC Restricted Indirect Cost
TANs Tax Anticipation Notes
TRANs Tax and Revenue Anticipation Bonds
VADM Vocational Average Daily Membership
WADM Weighted Average Daily Membership
POE Manual of Accountinpound 4 January 2012
Ready Set Govern - PSBA 2009
Basic Budget Terms
Act 1 of Sp ecial Session 2006 - Imposes referendum requirements on all school districts Repeals authority of Act 72 as welJ as Act 50 Limits tax increases along with limits on the implementation of new Act 511 taxes
Act 24 of 200 1 - Allows districts to repeal their occupation assessment tax and replace the lost revenue with an increase in the earned income tax
Act 511 Taxes - Revenue received from the flat and proportional assessments made in accordance with Act 511 of 1965 (Local Tax Enabling Act) School distrjcts of the first class or first-class A are not empowered to levy taxes under the provisions of Act 511
Actmll I ns truction al Expense (AfE) - The net cost of instruction in a school district
Aid Ra tio - The result oftbe formula that reflects a districts wealth in relation to aU other districts in the state
Appropria tioD - An authorization granted by the board of education or voters to make expenditures and to incur obligations for specific purposes An appropriation usually is limited in amount for the time covered by the approved budget
Assessed Valuation - The official valuation of property [or the purpose of taxation The val uation is determined by the assessors of the district (see School Code)
Aud it - An examination of records and documents to determine whether 1) transactions that are contemplated or were completed were appropriate or 2) all transactions were recorded properly completely and accurately
Average Daily Atten da nce (A DA) - The total days ofpupil attendance ofa given school district during a repOltrng period divided by the number of days scbool is in session dWjng this period
Average Daily M embership (ADM) - Aggregate number of school days represented by all pupils on the actjve ro]) divided by the number of days schoo) is in session
Basic Instructional Subsidy (BIS) - A payment that includes payment on account of instruction payment on account oflow-income families and payment on accowl1 of poverty
Basis Point - An investment term related to interest earnings equal to 001 The equivalent of $1 earned on an investment of $1000000 when it js invested for one year
5
Ready Set Govem - PSBA 2009
Budget - A complete financial forecast for a given time (usually one year) including bOtJl expenditures and receipt based on all educational plan
bull F inal Budget - Adopled pursuant to the provisions of Act 1 must be placed on public display and advertising notice Last day to adopt is June 30
bull Preliminary Budget - Adopted pursuant to the provisions ofAct 1 must be adopted at least 90 days prior to the pJimary election Subject to public display and advertising notice May be waived if the board chooses to keep tax increases under the index
Budget Calendar - A guide for indicating budget preparation responsibilities and the dates for their accomplishment by individuals or groups
Budgetary T ransfers - Transfer of unencwnbered funds or funds designated for one purpose to another part of the budget to be used for a different purpose requiring approval by two-thirds of board members and allowed only during the last nine months of the fiscal year
Capital Outlay - Expenditures for fixed assets or adclitions to fixed assets They are expenditwes for land improvements to the grounds construction of buildings additions to or remodeling of existing buildings and initial or additional equipment
Capital Resene Fund - A special fund created for the purpose of constructing a school building project or projects under a long-tenn project program approved by the Department ofEducation
CasJl Flow - Matching oftlle receipt and disbw-sement of district funds This is tlle basis of determining borrowing needs to meet operating expenditures Also is the basis of determining the length of investment of excess cash
Cbart of Accounts - A list of all accounts used in an individual accounting system An account is a descriptive heading under which are recorded similar financial transactions
Clean and Green Act - Legislative authorization to provide special real property tax treatment to properties of 1 0 acres or more with no improvements (Applies to farmland)
Curren t Expenditures (Current Expend) - Includes aJl general fund expenditures WitJl reference to the functional classifications of instruction (less tuition) support services and operation of nonshyinstructional services
Debt Sen ire - Expenditures for the retirement or paying off of the principal amount of a debt and the interest on tile amount
Employee Benefits - A form of compensation in addition to salary for an employee Such benefits include retirement benefits Social Security workers compensation sick leave life insurance accident insurance disability insurance etc
Employm ent Cost I ndex (Eel ) - A measure of the change in the total cost of labor calculated by the US Department of Labor Bureau of Labor Statistics
6
Ready Set Govern - PSBA 2009
Encumbrances - Purchase orders contracts and salary or other commitments that are chargeable to an appropriation and fo r which a part of the appropriation is reserved
Equalized Mi lls (EM) - A measure of the local tax effort calculated by dividing the local taxes by the market value multiplied by 1000
Eq ualized Subsidy for Basis Education (ESBE) - Eliminated in the early 1990s this fonnula was used for many years to detennine the basic instructional subsidy
Farmstead E xclusion - Originally defined in Act 50 of 1998 and incorporated into Act 72 of 2004 and by reference into Act 1 of2006 the exclusion applies to the value of farm buildings used in commercial agricultural production
Fiscal Year - School districts of the first class first-class A and second class may by majority vote establish a fiscal year to coincide with the calendar year all others shall begin July I
Fringe Benefits - See Employee Benefits
Full Valuation - The ClUTent market value appraisal or estimate of what a property would sell fOT in a transaction between a willing buyer and a willing seller
F unction - Budgetary tenll used to describe the major purpose and the end an appropriation is to accomplish
Functional Gudget - A budget that uses the format of the line item ur uaditional budget La group proposed expenditures first according to general activities or actions performed The major functional categories are administration instruction pupil personnel services pupil transportation services health services operation and maintenance of plant etc Within such functions there are additional line items for various expenditures
Fund - A fiscal and accounting entity for recording resources liabilities and equity
General Fund - 111e principal fund of a school district includes all operations Dot required to be recorded in other funds S11Ch as school lunch capital reserves activity funds etc
Genera lly Accepted Accounting Princip les - Accounting standards designed for use by local government units
Homestead Excl usion -- Originally defined in Act 50 of 1998 now incorporated into Act 1 of2006 by reference the value of owner occupied residential property to be excluded from real property taxation
Index - A calculation by PDE using the SA WW and Eel The calculation may be modified for poorer school districts This is the muximum increase permitted for school districts
Interest Earnings - The amount of money earned by investing excess cash
7
Ready Set Govern - PSBA 2009
I nvestment - The deposit of excess cash for tbe purpose of earning interesl Permitted types of investments are enumerated by the School Code
Line-Item or Traditional Budget - A budget that groups proposed expenditures according to certain categories known as the object of expenditure On each line of the budget the expenses are listed the way they are paid out salaries on one line supplies on another line utilities on another line Thus salaries are one object and supplies another
Local Economic Revita lization T ax Abatement Act (LERTA) - A program based on local choice intended to promote economic growth in real property by excluding improvements from taxation for a period of not more than 10 years
Market Value (MV) - The value of taxable real property within a school district as determined by the State Tax Equalization Board
Market Va lue Aid Ratio (MVAR) - A fraction used to calculate the states share of instrUctional costs
Mali(et Va lue-Person~lllncom e Aid Ratio (MV-PIAR) - A factor used to determine the states share of instructional costs
J1iUage- TIle fixed rate of real estate taxes on assessed property value
Object- The article to be pure based or the service 10 be obtained to carry out the function v1th which it is associated
Operation of Jlant - Expenditures necessary to keep the buildings and grounds and equipment open and ready for use - housekeeping costs
Per capita Ta x - A flat rate tax levied upon each adult resident of the taxing school district
Personal Income Aid R a tio - A fraction used to determine the market value personal income aid ratio
Program Budget - A program is a plan of activities or procedures designed to accomplish a set of related objectives A program budget groups all the proposed expenditures for each indiyjdual program then within each program expenditures are listed according to function and object A program budget includes the delineation or definition of the purpose or o~jectives of a particular program - that is what that program is expected 10 accomplish The dollar amowlts budgeted are considered in relation to achieving a desired and agreed-to pillmiddotpose
Program budgeting differs from line-item budgeting in that it focuses on the purposes of the district and the particular program and activity It is a variation from the concept offunctional budgeting because in the latter the budget anlounts requesled are merely an itemization of the dollars required to continue a gjven activity or to install a new one Moreover a functional budget does not link program costs to program results
8
Ready SCI Oavern - PSBA 2009
Proposed Budget - A tentative budget subject to public hearings examination or comment When tb district is fiscalJy dependent on another municipal body such as the town or city cOWlcil for its funds the proposed budget sometimes is called the budget request
Public Utility Realty Tax Act (fURTA) - Any property subject to regulation by the Public Utility Commission pays an equivalent tax to the Pennsylvania Department of Revenue which then is distributed to local taxing jurisdictions
Referendum - Vote taken by the electorate for approval or rejection of proposed or passed legislation
Reserve F und - An aJllount set aside to cover an obligation doly authorized and incurred
Statewide Aver age Weekly Wage (SA WW) - The average weekly wage established by the Pennsylvania Department of Labor and Industry for calculating workers compensation payments
Tax Increment Financing (TIF) - An economic development program designed to promote economic growth by using the increased tax value of property improvement Lo pay for infrastructure improvements
Tax Levv - The total dollar amount to be raised by tax
Tax RatelMiII -111e tax levy divided by the total taxable assessed value of the district usually stated as dollars per thousand or per hundred of assessed value
Tota l Expenditures (Total Expend) - LncJudes all general fund expenditures cited under current expenditures plus facilities acguisilion and other financing uses (less prior years receipts and fund transfers)
Weighted Average Da ily Membership (A DM) - The assignment of weight by grade level to the average daily membership The current weighting is half-lime kindergarten at 05 full-time kindergarten at 10 elementary grades (grades 1-6) at 10 and secondary grades (grades 7-12) at 136
Zero Base Budgeting - A method of budgeting that requires each perSOll requesting funds in a budget to develop decision packages and to rank them in priority order
9
Laws that Effect the Budget and Fiscal Administration
bull The School Code gives local boards the authority to conduct the financial affairs of the district It contains provisions that are manciatory pennissive and prohibite(i The district is also subject to commonwealth statues such as the Municipal Code (53 Purdons) the Fiscal Code (72 Purdons) and other laws that apply to governmental entities
Act 16-Mandate Waivers APR Standards GAOP Section 2218 ofSchool Code
Budget statutes
bull Must approve an annual budget prior to the Sart ofthe fiscal year
bull Section 687 ofthe School Code requires that a proposed budget be prepared at least 30 days prior to adoption of the budget for the following fiscal year in a formula stIpulated by the Department ofEducation
bull The Notice ofPropos~dBudget must be published at least once in a newspaper of general circulation within the community at least 10 days before the adoption of a final budget The notice must include the time and place of the meeting at which the final budget wiU be adopted ~d a statement that the proposed budget is available for public inspection
bull Section 508 ofthe School Code requires a majority vote of the board to adopt the annual budget and to levy and assess taxes The vote must be by a duly recorded (roll call) vote that records how each member voted Failure to have five affumative votes renders their action void and unenforceable
11
bull Failure to adopt a budget by July 1 causes the district to lose authority to expend funds for the new fiscal year
bull Section 687 of the School Code requires that a certified copy of the adopted budget must be provided to the PDE It also prohibits dencit financing in public schools The total amount of the adopted budget may not exceed the amount offunds including the proposed annual tax levy and state appropriations available to the district
bull The commonwealth has established a mandatory accounting system that must be used by every school entity based on GenergJJy Accepted Accounting Principles (GAAP) consistent with state and federal laws
bull Section 2932 of the Municipal Code allows for the operation of a Capital Reserve Fund Monies in this fund must be kept in a special account separate from any other fund The monies in the Capital Reserve Fund may be expended only for capital improvements and for replacement of andor additions to public works and improvements and for deferred maintenance thereof as approved by the board of school directors Specific projecrs must be identified together With the year ofproposed completion
bull Section 511 of the School Code allows for the establishment oftbe Athletic Fund to account for revenues generated through gate receipts incurred by the interscholastic athletic program
bull Section 609 of the School Code allows school districts to receive and expend state and federal revenues for the pwposes for which ~y are intended whether or nOl they were included in the adopted budget
12
Bidding and purcbasing statutes
bull Section 801 of the School Code requires boards to purcbase and provide all furniture equipment textbooks school supplies and other items for the use ofthe district to maintain the educational environment
bull Section 8071 (as amended by Act 30 of 1990) sets the requirement for competitive bidding at $10000 or more Purchases of $1 0000 or more require public notice by advertisement once a week for furee consecutive weeks in not less than two newspapers ofgeneral circulation Any purchase of $4000 but less than $10000 requires three price quotations The board must accept the lowest responsible bid (where kind quality and material are equal) Boards may reject any and all bids or select a single item from any bid
bull Section 521 ofthe School Code permits purchases to be made through intergovernmental cooperativcr agreements (joint purchase agreements) School entities may also piggyback on State or other government contracts following appropriate legal requirements
Cash Management and Investments Statutes
bull Section 4401 of the School Code pennits the investment of funds in specifically designated areas
13
BID THRESHOLDS INCREASING
Section 8071 (as amended by Act 30 of 1990 and Act 97 of 2011 )
The new limits which take effect January 2013 will be updated annudlly based
on changes in the Consumer Price Index up to a 3 percent cap No advertising
or competitive bidding or price quotations will be required for contracts below
$10000 allowing school maintenance staff to perform work that costs less than
$10000 Written or ielephonic price quotations will only be required for contracts
between $10000 and $18500 Advertising and competitive bidding will only be
required for contracts over $18500
14
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
MDampA Management Discussion and Analysis
MFSA Measurement Focus and Basis of Accounting
MV Market Value
MVAR Market Value Aid Ratio
MVPI AR Market Value Personal Income Aid Ratio
NCGA National Council on Governmental Accounting
OMS US Office of Management and Budget
OPES Other Postemployment Benefits
PRRI Private Residential Rehabilitative Institution
PSERS Pennsylvania Public School Employees Retirement System
RANs Revenue Anticipation Notes
RIDC Restricted Indirect Cost
TANs Tax Anticipation Notes
TRANs Tax and Revenue Anticipation Bonds
VADM Vocational Average Daily Membership
WADM Weighted Average Daily Membership
POE Manual of Accountinpound 4 January 2012
Ready Set Govern - PSBA 2009
Basic Budget Terms
Act 1 of Sp ecial Session 2006 - Imposes referendum requirements on all school districts Repeals authority of Act 72 as welJ as Act 50 Limits tax increases along with limits on the implementation of new Act 511 taxes
Act 24 of 200 1 - Allows districts to repeal their occupation assessment tax and replace the lost revenue with an increase in the earned income tax
Act 511 Taxes - Revenue received from the flat and proportional assessments made in accordance with Act 511 of 1965 (Local Tax Enabling Act) School distrjcts of the first class or first-class A are not empowered to levy taxes under the provisions of Act 511
Actmll I ns truction al Expense (AfE) - The net cost of instruction in a school district
Aid Ra tio - The result oftbe formula that reflects a districts wealth in relation to aU other districts in the state
Appropria tioD - An authorization granted by the board of education or voters to make expenditures and to incur obligations for specific purposes An appropriation usually is limited in amount for the time covered by the approved budget
Assessed Valuation - The official valuation of property [or the purpose of taxation The val uation is determined by the assessors of the district (see School Code)
Aud it - An examination of records and documents to determine whether 1) transactions that are contemplated or were completed were appropriate or 2) all transactions were recorded properly completely and accurately
Average Daily Atten da nce (A DA) - The total days ofpupil attendance ofa given school district during a repOltrng period divided by the number of days scbool is in session dWjng this period
Average Daily M embership (ADM) - Aggregate number of school days represented by all pupils on the actjve ro]) divided by the number of days schoo) is in session
Basic Instructional Subsidy (BIS) - A payment that includes payment on account of instruction payment on account oflow-income families and payment on accowl1 of poverty
Basis Point - An investment term related to interest earnings equal to 001 The equivalent of $1 earned on an investment of $1000000 when it js invested for one year
5
Ready Set Govem - PSBA 2009
Budget - A complete financial forecast for a given time (usually one year) including bOtJl expenditures and receipt based on all educational plan
bull F inal Budget - Adopled pursuant to the provisions of Act 1 must be placed on public display and advertising notice Last day to adopt is June 30
bull Preliminary Budget - Adopted pursuant to the provisions ofAct 1 must be adopted at least 90 days prior to the pJimary election Subject to public display and advertising notice May be waived if the board chooses to keep tax increases under the index
Budget Calendar - A guide for indicating budget preparation responsibilities and the dates for their accomplishment by individuals or groups
Budgetary T ransfers - Transfer of unencwnbered funds or funds designated for one purpose to another part of the budget to be used for a different purpose requiring approval by two-thirds of board members and allowed only during the last nine months of the fiscal year
Capital Outlay - Expenditures for fixed assets or adclitions to fixed assets They are expenditwes for land improvements to the grounds construction of buildings additions to or remodeling of existing buildings and initial or additional equipment
Capital Resene Fund - A special fund created for the purpose of constructing a school building project or projects under a long-tenn project program approved by the Department ofEducation
CasJl Flow - Matching oftlle receipt and disbw-sement of district funds This is tlle basis of determining borrowing needs to meet operating expenditures Also is the basis of determining the length of investment of excess cash
Cbart of Accounts - A list of all accounts used in an individual accounting system An account is a descriptive heading under which are recorded similar financial transactions
Clean and Green Act - Legislative authorization to provide special real property tax treatment to properties of 1 0 acres or more with no improvements (Applies to farmland)
Curren t Expenditures (Current Expend) - Includes aJl general fund expenditures WitJl reference to the functional classifications of instruction (less tuition) support services and operation of nonshyinstructional services
Debt Sen ire - Expenditures for the retirement or paying off of the principal amount of a debt and the interest on tile amount
Employee Benefits - A form of compensation in addition to salary for an employee Such benefits include retirement benefits Social Security workers compensation sick leave life insurance accident insurance disability insurance etc
Employm ent Cost I ndex (Eel ) - A measure of the change in the total cost of labor calculated by the US Department of Labor Bureau of Labor Statistics
6
Ready Set Govern - PSBA 2009
Encumbrances - Purchase orders contracts and salary or other commitments that are chargeable to an appropriation and fo r which a part of the appropriation is reserved
Equalized Mi lls (EM) - A measure of the local tax effort calculated by dividing the local taxes by the market value multiplied by 1000
Eq ualized Subsidy for Basis Education (ESBE) - Eliminated in the early 1990s this fonnula was used for many years to detennine the basic instructional subsidy
Farmstead E xclusion - Originally defined in Act 50 of 1998 and incorporated into Act 72 of 2004 and by reference into Act 1 of2006 the exclusion applies to the value of farm buildings used in commercial agricultural production
Fiscal Year - School districts of the first class first-class A and second class may by majority vote establish a fiscal year to coincide with the calendar year all others shall begin July I
Fringe Benefits - See Employee Benefits
Full Valuation - The ClUTent market value appraisal or estimate of what a property would sell fOT in a transaction between a willing buyer and a willing seller
F unction - Budgetary tenll used to describe the major purpose and the end an appropriation is to accomplish
Functional Gudget - A budget that uses the format of the line item ur uaditional budget La group proposed expenditures first according to general activities or actions performed The major functional categories are administration instruction pupil personnel services pupil transportation services health services operation and maintenance of plant etc Within such functions there are additional line items for various expenditures
Fund - A fiscal and accounting entity for recording resources liabilities and equity
General Fund - 111e principal fund of a school district includes all operations Dot required to be recorded in other funds S11Ch as school lunch capital reserves activity funds etc
Genera lly Accepted Accounting Princip les - Accounting standards designed for use by local government units
Homestead Excl usion -- Originally defined in Act 50 of 1998 now incorporated into Act 1 of2006 by reference the value of owner occupied residential property to be excluded from real property taxation
Index - A calculation by PDE using the SA WW and Eel The calculation may be modified for poorer school districts This is the muximum increase permitted for school districts
Interest Earnings - The amount of money earned by investing excess cash
7
Ready Set Govern - PSBA 2009
I nvestment - The deposit of excess cash for tbe purpose of earning interesl Permitted types of investments are enumerated by the School Code
Line-Item or Traditional Budget - A budget that groups proposed expenditures according to certain categories known as the object of expenditure On each line of the budget the expenses are listed the way they are paid out salaries on one line supplies on another line utilities on another line Thus salaries are one object and supplies another
Local Economic Revita lization T ax Abatement Act (LERTA) - A program based on local choice intended to promote economic growth in real property by excluding improvements from taxation for a period of not more than 10 years
Market Value (MV) - The value of taxable real property within a school district as determined by the State Tax Equalization Board
Market Va lue Aid Ratio (MVAR) - A fraction used to calculate the states share of instrUctional costs
Mali(et Va lue-Person~lllncom e Aid Ratio (MV-PIAR) - A factor used to determine the states share of instructional costs
J1iUage- TIle fixed rate of real estate taxes on assessed property value
Object- The article to be pure based or the service 10 be obtained to carry out the function v1th which it is associated
Operation of Jlant - Expenditures necessary to keep the buildings and grounds and equipment open and ready for use - housekeeping costs
Per capita Ta x - A flat rate tax levied upon each adult resident of the taxing school district
Personal Income Aid R a tio - A fraction used to determine the market value personal income aid ratio
Program Budget - A program is a plan of activities or procedures designed to accomplish a set of related objectives A program budget groups all the proposed expenditures for each indiyjdual program then within each program expenditures are listed according to function and object A program budget includes the delineation or definition of the purpose or o~jectives of a particular program - that is what that program is expected 10 accomplish The dollar amowlts budgeted are considered in relation to achieving a desired and agreed-to pillmiddotpose
Program budgeting differs from line-item budgeting in that it focuses on the purposes of the district and the particular program and activity It is a variation from the concept offunctional budgeting because in the latter the budget anlounts requesled are merely an itemization of the dollars required to continue a gjven activity or to install a new one Moreover a functional budget does not link program costs to program results
8
Ready SCI Oavern - PSBA 2009
Proposed Budget - A tentative budget subject to public hearings examination or comment When tb district is fiscalJy dependent on another municipal body such as the town or city cOWlcil for its funds the proposed budget sometimes is called the budget request
Public Utility Realty Tax Act (fURTA) - Any property subject to regulation by the Public Utility Commission pays an equivalent tax to the Pennsylvania Department of Revenue which then is distributed to local taxing jurisdictions
Referendum - Vote taken by the electorate for approval or rejection of proposed or passed legislation
Reserve F und - An aJllount set aside to cover an obligation doly authorized and incurred
Statewide Aver age Weekly Wage (SA WW) - The average weekly wage established by the Pennsylvania Department of Labor and Industry for calculating workers compensation payments
Tax Increment Financing (TIF) - An economic development program designed to promote economic growth by using the increased tax value of property improvement Lo pay for infrastructure improvements
Tax Levv - The total dollar amount to be raised by tax
Tax RatelMiII -111e tax levy divided by the total taxable assessed value of the district usually stated as dollars per thousand or per hundred of assessed value
Tota l Expenditures (Total Expend) - LncJudes all general fund expenditures cited under current expenditures plus facilities acguisilion and other financing uses (less prior years receipts and fund transfers)
Weighted Average Da ily Membership (A DM) - The assignment of weight by grade level to the average daily membership The current weighting is half-lime kindergarten at 05 full-time kindergarten at 10 elementary grades (grades 1-6) at 10 and secondary grades (grades 7-12) at 136
Zero Base Budgeting - A method of budgeting that requires each perSOll requesting funds in a budget to develop decision packages and to rank them in priority order
9
Laws that Effect the Budget and Fiscal Administration
bull The School Code gives local boards the authority to conduct the financial affairs of the district It contains provisions that are manciatory pennissive and prohibite(i The district is also subject to commonwealth statues such as the Municipal Code (53 Purdons) the Fiscal Code (72 Purdons) and other laws that apply to governmental entities
Act 16-Mandate Waivers APR Standards GAOP Section 2218 ofSchool Code
Budget statutes
bull Must approve an annual budget prior to the Sart ofthe fiscal year
bull Section 687 ofthe School Code requires that a proposed budget be prepared at least 30 days prior to adoption of the budget for the following fiscal year in a formula stIpulated by the Department ofEducation
bull The Notice ofPropos~dBudget must be published at least once in a newspaper of general circulation within the community at least 10 days before the adoption of a final budget The notice must include the time and place of the meeting at which the final budget wiU be adopted ~d a statement that the proposed budget is available for public inspection
bull Section 508 ofthe School Code requires a majority vote of the board to adopt the annual budget and to levy and assess taxes The vote must be by a duly recorded (roll call) vote that records how each member voted Failure to have five affumative votes renders their action void and unenforceable
11
bull Failure to adopt a budget by July 1 causes the district to lose authority to expend funds for the new fiscal year
bull Section 687 of the School Code requires that a certified copy of the adopted budget must be provided to the PDE It also prohibits dencit financing in public schools The total amount of the adopted budget may not exceed the amount offunds including the proposed annual tax levy and state appropriations available to the district
bull The commonwealth has established a mandatory accounting system that must be used by every school entity based on GenergJJy Accepted Accounting Principles (GAAP) consistent with state and federal laws
bull Section 2932 of the Municipal Code allows for the operation of a Capital Reserve Fund Monies in this fund must be kept in a special account separate from any other fund The monies in the Capital Reserve Fund may be expended only for capital improvements and for replacement of andor additions to public works and improvements and for deferred maintenance thereof as approved by the board of school directors Specific projecrs must be identified together With the year ofproposed completion
bull Section 511 of the School Code allows for the establishment oftbe Athletic Fund to account for revenues generated through gate receipts incurred by the interscholastic athletic program
bull Section 609 of the School Code allows school districts to receive and expend state and federal revenues for the pwposes for which ~y are intended whether or nOl they were included in the adopted budget
12
Bidding and purcbasing statutes
bull Section 801 of the School Code requires boards to purcbase and provide all furniture equipment textbooks school supplies and other items for the use ofthe district to maintain the educational environment
bull Section 8071 (as amended by Act 30 of 1990) sets the requirement for competitive bidding at $10000 or more Purchases of $1 0000 or more require public notice by advertisement once a week for furee consecutive weeks in not less than two newspapers ofgeneral circulation Any purchase of $4000 but less than $10000 requires three price quotations The board must accept the lowest responsible bid (where kind quality and material are equal) Boards may reject any and all bids or select a single item from any bid
bull Section 521 ofthe School Code permits purchases to be made through intergovernmental cooperativcr agreements (joint purchase agreements) School entities may also piggyback on State or other government contracts following appropriate legal requirements
Cash Management and Investments Statutes
bull Section 4401 of the School Code pennits the investment of funds in specifically designated areas
13
BID THRESHOLDS INCREASING
Section 8071 (as amended by Act 30 of 1990 and Act 97 of 2011 )
The new limits which take effect January 2013 will be updated annudlly based
on changes in the Consumer Price Index up to a 3 percent cap No advertising
or competitive bidding or price quotations will be required for contracts below
$10000 allowing school maintenance staff to perform work that costs less than
$10000 Written or ielephonic price quotations will only be required for contracts
between $10000 and $18500 Advertising and competitive bidding will only be
required for contracts over $18500
14
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
Ready Set Govern - PSBA 2009
Basic Budget Terms
Act 1 of Sp ecial Session 2006 - Imposes referendum requirements on all school districts Repeals authority of Act 72 as welJ as Act 50 Limits tax increases along with limits on the implementation of new Act 511 taxes
Act 24 of 200 1 - Allows districts to repeal their occupation assessment tax and replace the lost revenue with an increase in the earned income tax
Act 511 Taxes - Revenue received from the flat and proportional assessments made in accordance with Act 511 of 1965 (Local Tax Enabling Act) School distrjcts of the first class or first-class A are not empowered to levy taxes under the provisions of Act 511
Actmll I ns truction al Expense (AfE) - The net cost of instruction in a school district
Aid Ra tio - The result oftbe formula that reflects a districts wealth in relation to aU other districts in the state
Appropria tioD - An authorization granted by the board of education or voters to make expenditures and to incur obligations for specific purposes An appropriation usually is limited in amount for the time covered by the approved budget
Assessed Valuation - The official valuation of property [or the purpose of taxation The val uation is determined by the assessors of the district (see School Code)
Aud it - An examination of records and documents to determine whether 1) transactions that are contemplated or were completed were appropriate or 2) all transactions were recorded properly completely and accurately
Average Daily Atten da nce (A DA) - The total days ofpupil attendance ofa given school district during a repOltrng period divided by the number of days scbool is in session dWjng this period
Average Daily M embership (ADM) - Aggregate number of school days represented by all pupils on the actjve ro]) divided by the number of days schoo) is in session
Basic Instructional Subsidy (BIS) - A payment that includes payment on account of instruction payment on account oflow-income families and payment on accowl1 of poverty
Basis Point - An investment term related to interest earnings equal to 001 The equivalent of $1 earned on an investment of $1000000 when it js invested for one year
5
Ready Set Govem - PSBA 2009
Budget - A complete financial forecast for a given time (usually one year) including bOtJl expenditures and receipt based on all educational plan
bull F inal Budget - Adopled pursuant to the provisions of Act 1 must be placed on public display and advertising notice Last day to adopt is June 30
bull Preliminary Budget - Adopted pursuant to the provisions ofAct 1 must be adopted at least 90 days prior to the pJimary election Subject to public display and advertising notice May be waived if the board chooses to keep tax increases under the index
Budget Calendar - A guide for indicating budget preparation responsibilities and the dates for their accomplishment by individuals or groups
Budgetary T ransfers - Transfer of unencwnbered funds or funds designated for one purpose to another part of the budget to be used for a different purpose requiring approval by two-thirds of board members and allowed only during the last nine months of the fiscal year
Capital Outlay - Expenditures for fixed assets or adclitions to fixed assets They are expenditwes for land improvements to the grounds construction of buildings additions to or remodeling of existing buildings and initial or additional equipment
Capital Resene Fund - A special fund created for the purpose of constructing a school building project or projects under a long-tenn project program approved by the Department ofEducation
CasJl Flow - Matching oftlle receipt and disbw-sement of district funds This is tlle basis of determining borrowing needs to meet operating expenditures Also is the basis of determining the length of investment of excess cash
Cbart of Accounts - A list of all accounts used in an individual accounting system An account is a descriptive heading under which are recorded similar financial transactions
Clean and Green Act - Legislative authorization to provide special real property tax treatment to properties of 1 0 acres or more with no improvements (Applies to farmland)
Curren t Expenditures (Current Expend) - Includes aJl general fund expenditures WitJl reference to the functional classifications of instruction (less tuition) support services and operation of nonshyinstructional services
Debt Sen ire - Expenditures for the retirement or paying off of the principal amount of a debt and the interest on tile amount
Employee Benefits - A form of compensation in addition to salary for an employee Such benefits include retirement benefits Social Security workers compensation sick leave life insurance accident insurance disability insurance etc
Employm ent Cost I ndex (Eel ) - A measure of the change in the total cost of labor calculated by the US Department of Labor Bureau of Labor Statistics
6
Ready Set Govern - PSBA 2009
Encumbrances - Purchase orders contracts and salary or other commitments that are chargeable to an appropriation and fo r which a part of the appropriation is reserved
Equalized Mi lls (EM) - A measure of the local tax effort calculated by dividing the local taxes by the market value multiplied by 1000
Eq ualized Subsidy for Basis Education (ESBE) - Eliminated in the early 1990s this fonnula was used for many years to detennine the basic instructional subsidy
Farmstead E xclusion - Originally defined in Act 50 of 1998 and incorporated into Act 72 of 2004 and by reference into Act 1 of2006 the exclusion applies to the value of farm buildings used in commercial agricultural production
Fiscal Year - School districts of the first class first-class A and second class may by majority vote establish a fiscal year to coincide with the calendar year all others shall begin July I
Fringe Benefits - See Employee Benefits
Full Valuation - The ClUTent market value appraisal or estimate of what a property would sell fOT in a transaction between a willing buyer and a willing seller
F unction - Budgetary tenll used to describe the major purpose and the end an appropriation is to accomplish
Functional Gudget - A budget that uses the format of the line item ur uaditional budget La group proposed expenditures first according to general activities or actions performed The major functional categories are administration instruction pupil personnel services pupil transportation services health services operation and maintenance of plant etc Within such functions there are additional line items for various expenditures
Fund - A fiscal and accounting entity for recording resources liabilities and equity
General Fund - 111e principal fund of a school district includes all operations Dot required to be recorded in other funds S11Ch as school lunch capital reserves activity funds etc
Genera lly Accepted Accounting Princip les - Accounting standards designed for use by local government units
Homestead Excl usion -- Originally defined in Act 50 of 1998 now incorporated into Act 1 of2006 by reference the value of owner occupied residential property to be excluded from real property taxation
Index - A calculation by PDE using the SA WW and Eel The calculation may be modified for poorer school districts This is the muximum increase permitted for school districts
Interest Earnings - The amount of money earned by investing excess cash
7
Ready Set Govern - PSBA 2009
I nvestment - The deposit of excess cash for tbe purpose of earning interesl Permitted types of investments are enumerated by the School Code
Line-Item or Traditional Budget - A budget that groups proposed expenditures according to certain categories known as the object of expenditure On each line of the budget the expenses are listed the way they are paid out salaries on one line supplies on another line utilities on another line Thus salaries are one object and supplies another
Local Economic Revita lization T ax Abatement Act (LERTA) - A program based on local choice intended to promote economic growth in real property by excluding improvements from taxation for a period of not more than 10 years
Market Value (MV) - The value of taxable real property within a school district as determined by the State Tax Equalization Board
Market Va lue Aid Ratio (MVAR) - A fraction used to calculate the states share of instrUctional costs
Mali(et Va lue-Person~lllncom e Aid Ratio (MV-PIAR) - A factor used to determine the states share of instructional costs
J1iUage- TIle fixed rate of real estate taxes on assessed property value
Object- The article to be pure based or the service 10 be obtained to carry out the function v1th which it is associated
Operation of Jlant - Expenditures necessary to keep the buildings and grounds and equipment open and ready for use - housekeeping costs
Per capita Ta x - A flat rate tax levied upon each adult resident of the taxing school district
Personal Income Aid R a tio - A fraction used to determine the market value personal income aid ratio
Program Budget - A program is a plan of activities or procedures designed to accomplish a set of related objectives A program budget groups all the proposed expenditures for each indiyjdual program then within each program expenditures are listed according to function and object A program budget includes the delineation or definition of the purpose or o~jectives of a particular program - that is what that program is expected 10 accomplish The dollar amowlts budgeted are considered in relation to achieving a desired and agreed-to pillmiddotpose
Program budgeting differs from line-item budgeting in that it focuses on the purposes of the district and the particular program and activity It is a variation from the concept offunctional budgeting because in the latter the budget anlounts requesled are merely an itemization of the dollars required to continue a gjven activity or to install a new one Moreover a functional budget does not link program costs to program results
8
Ready SCI Oavern - PSBA 2009
Proposed Budget - A tentative budget subject to public hearings examination or comment When tb district is fiscalJy dependent on another municipal body such as the town or city cOWlcil for its funds the proposed budget sometimes is called the budget request
Public Utility Realty Tax Act (fURTA) - Any property subject to regulation by the Public Utility Commission pays an equivalent tax to the Pennsylvania Department of Revenue which then is distributed to local taxing jurisdictions
Referendum - Vote taken by the electorate for approval or rejection of proposed or passed legislation
Reserve F und - An aJllount set aside to cover an obligation doly authorized and incurred
Statewide Aver age Weekly Wage (SA WW) - The average weekly wage established by the Pennsylvania Department of Labor and Industry for calculating workers compensation payments
Tax Increment Financing (TIF) - An economic development program designed to promote economic growth by using the increased tax value of property improvement Lo pay for infrastructure improvements
Tax Levv - The total dollar amount to be raised by tax
Tax RatelMiII -111e tax levy divided by the total taxable assessed value of the district usually stated as dollars per thousand or per hundred of assessed value
Tota l Expenditures (Total Expend) - LncJudes all general fund expenditures cited under current expenditures plus facilities acguisilion and other financing uses (less prior years receipts and fund transfers)
Weighted Average Da ily Membership (A DM) - The assignment of weight by grade level to the average daily membership The current weighting is half-lime kindergarten at 05 full-time kindergarten at 10 elementary grades (grades 1-6) at 10 and secondary grades (grades 7-12) at 136
Zero Base Budgeting - A method of budgeting that requires each perSOll requesting funds in a budget to develop decision packages and to rank them in priority order
9
Laws that Effect the Budget and Fiscal Administration
bull The School Code gives local boards the authority to conduct the financial affairs of the district It contains provisions that are manciatory pennissive and prohibite(i The district is also subject to commonwealth statues such as the Municipal Code (53 Purdons) the Fiscal Code (72 Purdons) and other laws that apply to governmental entities
Act 16-Mandate Waivers APR Standards GAOP Section 2218 ofSchool Code
Budget statutes
bull Must approve an annual budget prior to the Sart ofthe fiscal year
bull Section 687 ofthe School Code requires that a proposed budget be prepared at least 30 days prior to adoption of the budget for the following fiscal year in a formula stIpulated by the Department ofEducation
bull The Notice ofPropos~dBudget must be published at least once in a newspaper of general circulation within the community at least 10 days before the adoption of a final budget The notice must include the time and place of the meeting at which the final budget wiU be adopted ~d a statement that the proposed budget is available for public inspection
bull Section 508 ofthe School Code requires a majority vote of the board to adopt the annual budget and to levy and assess taxes The vote must be by a duly recorded (roll call) vote that records how each member voted Failure to have five affumative votes renders their action void and unenforceable
11
bull Failure to adopt a budget by July 1 causes the district to lose authority to expend funds for the new fiscal year
bull Section 687 of the School Code requires that a certified copy of the adopted budget must be provided to the PDE It also prohibits dencit financing in public schools The total amount of the adopted budget may not exceed the amount offunds including the proposed annual tax levy and state appropriations available to the district
bull The commonwealth has established a mandatory accounting system that must be used by every school entity based on GenergJJy Accepted Accounting Principles (GAAP) consistent with state and federal laws
bull Section 2932 of the Municipal Code allows for the operation of a Capital Reserve Fund Monies in this fund must be kept in a special account separate from any other fund The monies in the Capital Reserve Fund may be expended only for capital improvements and for replacement of andor additions to public works and improvements and for deferred maintenance thereof as approved by the board of school directors Specific projecrs must be identified together With the year ofproposed completion
bull Section 511 of the School Code allows for the establishment oftbe Athletic Fund to account for revenues generated through gate receipts incurred by the interscholastic athletic program
bull Section 609 of the School Code allows school districts to receive and expend state and federal revenues for the pwposes for which ~y are intended whether or nOl they were included in the adopted budget
12
Bidding and purcbasing statutes
bull Section 801 of the School Code requires boards to purcbase and provide all furniture equipment textbooks school supplies and other items for the use ofthe district to maintain the educational environment
bull Section 8071 (as amended by Act 30 of 1990) sets the requirement for competitive bidding at $10000 or more Purchases of $1 0000 or more require public notice by advertisement once a week for furee consecutive weeks in not less than two newspapers ofgeneral circulation Any purchase of $4000 but less than $10000 requires three price quotations The board must accept the lowest responsible bid (where kind quality and material are equal) Boards may reject any and all bids or select a single item from any bid
bull Section 521 ofthe School Code permits purchases to be made through intergovernmental cooperativcr agreements (joint purchase agreements) School entities may also piggyback on State or other government contracts following appropriate legal requirements
Cash Management and Investments Statutes
bull Section 4401 of the School Code pennits the investment of funds in specifically designated areas
13
BID THRESHOLDS INCREASING
Section 8071 (as amended by Act 30 of 1990 and Act 97 of 2011 )
The new limits which take effect January 2013 will be updated annudlly based
on changes in the Consumer Price Index up to a 3 percent cap No advertising
or competitive bidding or price quotations will be required for contracts below
$10000 allowing school maintenance staff to perform work that costs less than
$10000 Written or ielephonic price quotations will only be required for contracts
between $10000 and $18500 Advertising and competitive bidding will only be
required for contracts over $18500
14
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
Ready Set Govem - PSBA 2009
Budget - A complete financial forecast for a given time (usually one year) including bOtJl expenditures and receipt based on all educational plan
bull F inal Budget - Adopled pursuant to the provisions of Act 1 must be placed on public display and advertising notice Last day to adopt is June 30
bull Preliminary Budget - Adopted pursuant to the provisions ofAct 1 must be adopted at least 90 days prior to the pJimary election Subject to public display and advertising notice May be waived if the board chooses to keep tax increases under the index
Budget Calendar - A guide for indicating budget preparation responsibilities and the dates for their accomplishment by individuals or groups
Budgetary T ransfers - Transfer of unencwnbered funds or funds designated for one purpose to another part of the budget to be used for a different purpose requiring approval by two-thirds of board members and allowed only during the last nine months of the fiscal year
Capital Outlay - Expenditures for fixed assets or adclitions to fixed assets They are expenditwes for land improvements to the grounds construction of buildings additions to or remodeling of existing buildings and initial or additional equipment
Capital Resene Fund - A special fund created for the purpose of constructing a school building project or projects under a long-tenn project program approved by the Department ofEducation
CasJl Flow - Matching oftlle receipt and disbw-sement of district funds This is tlle basis of determining borrowing needs to meet operating expenditures Also is the basis of determining the length of investment of excess cash
Cbart of Accounts - A list of all accounts used in an individual accounting system An account is a descriptive heading under which are recorded similar financial transactions
Clean and Green Act - Legislative authorization to provide special real property tax treatment to properties of 1 0 acres or more with no improvements (Applies to farmland)
Curren t Expenditures (Current Expend) - Includes aJl general fund expenditures WitJl reference to the functional classifications of instruction (less tuition) support services and operation of nonshyinstructional services
Debt Sen ire - Expenditures for the retirement or paying off of the principal amount of a debt and the interest on tile amount
Employee Benefits - A form of compensation in addition to salary for an employee Such benefits include retirement benefits Social Security workers compensation sick leave life insurance accident insurance disability insurance etc
Employm ent Cost I ndex (Eel ) - A measure of the change in the total cost of labor calculated by the US Department of Labor Bureau of Labor Statistics
6
Ready Set Govern - PSBA 2009
Encumbrances - Purchase orders contracts and salary or other commitments that are chargeable to an appropriation and fo r which a part of the appropriation is reserved
Equalized Mi lls (EM) - A measure of the local tax effort calculated by dividing the local taxes by the market value multiplied by 1000
Eq ualized Subsidy for Basis Education (ESBE) - Eliminated in the early 1990s this fonnula was used for many years to detennine the basic instructional subsidy
Farmstead E xclusion - Originally defined in Act 50 of 1998 and incorporated into Act 72 of 2004 and by reference into Act 1 of2006 the exclusion applies to the value of farm buildings used in commercial agricultural production
Fiscal Year - School districts of the first class first-class A and second class may by majority vote establish a fiscal year to coincide with the calendar year all others shall begin July I
Fringe Benefits - See Employee Benefits
Full Valuation - The ClUTent market value appraisal or estimate of what a property would sell fOT in a transaction between a willing buyer and a willing seller
F unction - Budgetary tenll used to describe the major purpose and the end an appropriation is to accomplish
Functional Gudget - A budget that uses the format of the line item ur uaditional budget La group proposed expenditures first according to general activities or actions performed The major functional categories are administration instruction pupil personnel services pupil transportation services health services operation and maintenance of plant etc Within such functions there are additional line items for various expenditures
Fund - A fiscal and accounting entity for recording resources liabilities and equity
General Fund - 111e principal fund of a school district includes all operations Dot required to be recorded in other funds S11Ch as school lunch capital reserves activity funds etc
Genera lly Accepted Accounting Princip les - Accounting standards designed for use by local government units
Homestead Excl usion -- Originally defined in Act 50 of 1998 now incorporated into Act 1 of2006 by reference the value of owner occupied residential property to be excluded from real property taxation
Index - A calculation by PDE using the SA WW and Eel The calculation may be modified for poorer school districts This is the muximum increase permitted for school districts
Interest Earnings - The amount of money earned by investing excess cash
7
Ready Set Govern - PSBA 2009
I nvestment - The deposit of excess cash for tbe purpose of earning interesl Permitted types of investments are enumerated by the School Code
Line-Item or Traditional Budget - A budget that groups proposed expenditures according to certain categories known as the object of expenditure On each line of the budget the expenses are listed the way they are paid out salaries on one line supplies on another line utilities on another line Thus salaries are one object and supplies another
Local Economic Revita lization T ax Abatement Act (LERTA) - A program based on local choice intended to promote economic growth in real property by excluding improvements from taxation for a period of not more than 10 years
Market Value (MV) - The value of taxable real property within a school district as determined by the State Tax Equalization Board
Market Va lue Aid Ratio (MVAR) - A fraction used to calculate the states share of instrUctional costs
Mali(et Va lue-Person~lllncom e Aid Ratio (MV-PIAR) - A factor used to determine the states share of instructional costs
J1iUage- TIle fixed rate of real estate taxes on assessed property value
Object- The article to be pure based or the service 10 be obtained to carry out the function v1th which it is associated
Operation of Jlant - Expenditures necessary to keep the buildings and grounds and equipment open and ready for use - housekeeping costs
Per capita Ta x - A flat rate tax levied upon each adult resident of the taxing school district
Personal Income Aid R a tio - A fraction used to determine the market value personal income aid ratio
Program Budget - A program is a plan of activities or procedures designed to accomplish a set of related objectives A program budget groups all the proposed expenditures for each indiyjdual program then within each program expenditures are listed according to function and object A program budget includes the delineation or definition of the purpose or o~jectives of a particular program - that is what that program is expected 10 accomplish The dollar amowlts budgeted are considered in relation to achieving a desired and agreed-to pillmiddotpose
Program budgeting differs from line-item budgeting in that it focuses on the purposes of the district and the particular program and activity It is a variation from the concept offunctional budgeting because in the latter the budget anlounts requesled are merely an itemization of the dollars required to continue a gjven activity or to install a new one Moreover a functional budget does not link program costs to program results
8
Ready SCI Oavern - PSBA 2009
Proposed Budget - A tentative budget subject to public hearings examination or comment When tb district is fiscalJy dependent on another municipal body such as the town or city cOWlcil for its funds the proposed budget sometimes is called the budget request
Public Utility Realty Tax Act (fURTA) - Any property subject to regulation by the Public Utility Commission pays an equivalent tax to the Pennsylvania Department of Revenue which then is distributed to local taxing jurisdictions
Referendum - Vote taken by the electorate for approval or rejection of proposed or passed legislation
Reserve F und - An aJllount set aside to cover an obligation doly authorized and incurred
Statewide Aver age Weekly Wage (SA WW) - The average weekly wage established by the Pennsylvania Department of Labor and Industry for calculating workers compensation payments
Tax Increment Financing (TIF) - An economic development program designed to promote economic growth by using the increased tax value of property improvement Lo pay for infrastructure improvements
Tax Levv - The total dollar amount to be raised by tax
Tax RatelMiII -111e tax levy divided by the total taxable assessed value of the district usually stated as dollars per thousand or per hundred of assessed value
Tota l Expenditures (Total Expend) - LncJudes all general fund expenditures cited under current expenditures plus facilities acguisilion and other financing uses (less prior years receipts and fund transfers)
Weighted Average Da ily Membership (A DM) - The assignment of weight by grade level to the average daily membership The current weighting is half-lime kindergarten at 05 full-time kindergarten at 10 elementary grades (grades 1-6) at 10 and secondary grades (grades 7-12) at 136
Zero Base Budgeting - A method of budgeting that requires each perSOll requesting funds in a budget to develop decision packages and to rank them in priority order
9
Laws that Effect the Budget and Fiscal Administration
bull The School Code gives local boards the authority to conduct the financial affairs of the district It contains provisions that are manciatory pennissive and prohibite(i The district is also subject to commonwealth statues such as the Municipal Code (53 Purdons) the Fiscal Code (72 Purdons) and other laws that apply to governmental entities
Act 16-Mandate Waivers APR Standards GAOP Section 2218 ofSchool Code
Budget statutes
bull Must approve an annual budget prior to the Sart ofthe fiscal year
bull Section 687 ofthe School Code requires that a proposed budget be prepared at least 30 days prior to adoption of the budget for the following fiscal year in a formula stIpulated by the Department ofEducation
bull The Notice ofPropos~dBudget must be published at least once in a newspaper of general circulation within the community at least 10 days before the adoption of a final budget The notice must include the time and place of the meeting at which the final budget wiU be adopted ~d a statement that the proposed budget is available for public inspection
bull Section 508 ofthe School Code requires a majority vote of the board to adopt the annual budget and to levy and assess taxes The vote must be by a duly recorded (roll call) vote that records how each member voted Failure to have five affumative votes renders their action void and unenforceable
11
bull Failure to adopt a budget by July 1 causes the district to lose authority to expend funds for the new fiscal year
bull Section 687 of the School Code requires that a certified copy of the adopted budget must be provided to the PDE It also prohibits dencit financing in public schools The total amount of the adopted budget may not exceed the amount offunds including the proposed annual tax levy and state appropriations available to the district
bull The commonwealth has established a mandatory accounting system that must be used by every school entity based on GenergJJy Accepted Accounting Principles (GAAP) consistent with state and federal laws
bull Section 2932 of the Municipal Code allows for the operation of a Capital Reserve Fund Monies in this fund must be kept in a special account separate from any other fund The monies in the Capital Reserve Fund may be expended only for capital improvements and for replacement of andor additions to public works and improvements and for deferred maintenance thereof as approved by the board of school directors Specific projecrs must be identified together With the year ofproposed completion
bull Section 511 of the School Code allows for the establishment oftbe Athletic Fund to account for revenues generated through gate receipts incurred by the interscholastic athletic program
bull Section 609 of the School Code allows school districts to receive and expend state and federal revenues for the pwposes for which ~y are intended whether or nOl they were included in the adopted budget
12
Bidding and purcbasing statutes
bull Section 801 of the School Code requires boards to purcbase and provide all furniture equipment textbooks school supplies and other items for the use ofthe district to maintain the educational environment
bull Section 8071 (as amended by Act 30 of 1990) sets the requirement for competitive bidding at $10000 or more Purchases of $1 0000 or more require public notice by advertisement once a week for furee consecutive weeks in not less than two newspapers ofgeneral circulation Any purchase of $4000 but less than $10000 requires three price quotations The board must accept the lowest responsible bid (where kind quality and material are equal) Boards may reject any and all bids or select a single item from any bid
bull Section 521 ofthe School Code permits purchases to be made through intergovernmental cooperativcr agreements (joint purchase agreements) School entities may also piggyback on State or other government contracts following appropriate legal requirements
Cash Management and Investments Statutes
bull Section 4401 of the School Code pennits the investment of funds in specifically designated areas
13
BID THRESHOLDS INCREASING
Section 8071 (as amended by Act 30 of 1990 and Act 97 of 2011 )
The new limits which take effect January 2013 will be updated annudlly based
on changes in the Consumer Price Index up to a 3 percent cap No advertising
or competitive bidding or price quotations will be required for contracts below
$10000 allowing school maintenance staff to perform work that costs less than
$10000 Written or ielephonic price quotations will only be required for contracts
between $10000 and $18500 Advertising and competitive bidding will only be
required for contracts over $18500
14
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
Ready Set Govern - PSBA 2009
Encumbrances - Purchase orders contracts and salary or other commitments that are chargeable to an appropriation and fo r which a part of the appropriation is reserved
Equalized Mi lls (EM) - A measure of the local tax effort calculated by dividing the local taxes by the market value multiplied by 1000
Eq ualized Subsidy for Basis Education (ESBE) - Eliminated in the early 1990s this fonnula was used for many years to detennine the basic instructional subsidy
Farmstead E xclusion - Originally defined in Act 50 of 1998 and incorporated into Act 72 of 2004 and by reference into Act 1 of2006 the exclusion applies to the value of farm buildings used in commercial agricultural production
Fiscal Year - School districts of the first class first-class A and second class may by majority vote establish a fiscal year to coincide with the calendar year all others shall begin July I
Fringe Benefits - See Employee Benefits
Full Valuation - The ClUTent market value appraisal or estimate of what a property would sell fOT in a transaction between a willing buyer and a willing seller
F unction - Budgetary tenll used to describe the major purpose and the end an appropriation is to accomplish
Functional Gudget - A budget that uses the format of the line item ur uaditional budget La group proposed expenditures first according to general activities or actions performed The major functional categories are administration instruction pupil personnel services pupil transportation services health services operation and maintenance of plant etc Within such functions there are additional line items for various expenditures
Fund - A fiscal and accounting entity for recording resources liabilities and equity
General Fund - 111e principal fund of a school district includes all operations Dot required to be recorded in other funds S11Ch as school lunch capital reserves activity funds etc
Genera lly Accepted Accounting Princip les - Accounting standards designed for use by local government units
Homestead Excl usion -- Originally defined in Act 50 of 1998 now incorporated into Act 1 of2006 by reference the value of owner occupied residential property to be excluded from real property taxation
Index - A calculation by PDE using the SA WW and Eel The calculation may be modified for poorer school districts This is the muximum increase permitted for school districts
Interest Earnings - The amount of money earned by investing excess cash
7
Ready Set Govern - PSBA 2009
I nvestment - The deposit of excess cash for tbe purpose of earning interesl Permitted types of investments are enumerated by the School Code
Line-Item or Traditional Budget - A budget that groups proposed expenditures according to certain categories known as the object of expenditure On each line of the budget the expenses are listed the way they are paid out salaries on one line supplies on another line utilities on another line Thus salaries are one object and supplies another
Local Economic Revita lization T ax Abatement Act (LERTA) - A program based on local choice intended to promote economic growth in real property by excluding improvements from taxation for a period of not more than 10 years
Market Value (MV) - The value of taxable real property within a school district as determined by the State Tax Equalization Board
Market Va lue Aid Ratio (MVAR) - A fraction used to calculate the states share of instrUctional costs
Mali(et Va lue-Person~lllncom e Aid Ratio (MV-PIAR) - A factor used to determine the states share of instructional costs
J1iUage- TIle fixed rate of real estate taxes on assessed property value
Object- The article to be pure based or the service 10 be obtained to carry out the function v1th which it is associated
Operation of Jlant - Expenditures necessary to keep the buildings and grounds and equipment open and ready for use - housekeeping costs
Per capita Ta x - A flat rate tax levied upon each adult resident of the taxing school district
Personal Income Aid R a tio - A fraction used to determine the market value personal income aid ratio
Program Budget - A program is a plan of activities or procedures designed to accomplish a set of related objectives A program budget groups all the proposed expenditures for each indiyjdual program then within each program expenditures are listed according to function and object A program budget includes the delineation or definition of the purpose or o~jectives of a particular program - that is what that program is expected 10 accomplish The dollar amowlts budgeted are considered in relation to achieving a desired and agreed-to pillmiddotpose
Program budgeting differs from line-item budgeting in that it focuses on the purposes of the district and the particular program and activity It is a variation from the concept offunctional budgeting because in the latter the budget anlounts requesled are merely an itemization of the dollars required to continue a gjven activity or to install a new one Moreover a functional budget does not link program costs to program results
8
Ready SCI Oavern - PSBA 2009
Proposed Budget - A tentative budget subject to public hearings examination or comment When tb district is fiscalJy dependent on another municipal body such as the town or city cOWlcil for its funds the proposed budget sometimes is called the budget request
Public Utility Realty Tax Act (fURTA) - Any property subject to regulation by the Public Utility Commission pays an equivalent tax to the Pennsylvania Department of Revenue which then is distributed to local taxing jurisdictions
Referendum - Vote taken by the electorate for approval or rejection of proposed or passed legislation
Reserve F und - An aJllount set aside to cover an obligation doly authorized and incurred
Statewide Aver age Weekly Wage (SA WW) - The average weekly wage established by the Pennsylvania Department of Labor and Industry for calculating workers compensation payments
Tax Increment Financing (TIF) - An economic development program designed to promote economic growth by using the increased tax value of property improvement Lo pay for infrastructure improvements
Tax Levv - The total dollar amount to be raised by tax
Tax RatelMiII -111e tax levy divided by the total taxable assessed value of the district usually stated as dollars per thousand or per hundred of assessed value
Tota l Expenditures (Total Expend) - LncJudes all general fund expenditures cited under current expenditures plus facilities acguisilion and other financing uses (less prior years receipts and fund transfers)
Weighted Average Da ily Membership (A DM) - The assignment of weight by grade level to the average daily membership The current weighting is half-lime kindergarten at 05 full-time kindergarten at 10 elementary grades (grades 1-6) at 10 and secondary grades (grades 7-12) at 136
Zero Base Budgeting - A method of budgeting that requires each perSOll requesting funds in a budget to develop decision packages and to rank them in priority order
9
Laws that Effect the Budget and Fiscal Administration
bull The School Code gives local boards the authority to conduct the financial affairs of the district It contains provisions that are manciatory pennissive and prohibite(i The district is also subject to commonwealth statues such as the Municipal Code (53 Purdons) the Fiscal Code (72 Purdons) and other laws that apply to governmental entities
Act 16-Mandate Waivers APR Standards GAOP Section 2218 ofSchool Code
Budget statutes
bull Must approve an annual budget prior to the Sart ofthe fiscal year
bull Section 687 ofthe School Code requires that a proposed budget be prepared at least 30 days prior to adoption of the budget for the following fiscal year in a formula stIpulated by the Department ofEducation
bull The Notice ofPropos~dBudget must be published at least once in a newspaper of general circulation within the community at least 10 days before the adoption of a final budget The notice must include the time and place of the meeting at which the final budget wiU be adopted ~d a statement that the proposed budget is available for public inspection
bull Section 508 ofthe School Code requires a majority vote of the board to adopt the annual budget and to levy and assess taxes The vote must be by a duly recorded (roll call) vote that records how each member voted Failure to have five affumative votes renders their action void and unenforceable
11
bull Failure to adopt a budget by July 1 causes the district to lose authority to expend funds for the new fiscal year
bull Section 687 of the School Code requires that a certified copy of the adopted budget must be provided to the PDE It also prohibits dencit financing in public schools The total amount of the adopted budget may not exceed the amount offunds including the proposed annual tax levy and state appropriations available to the district
bull The commonwealth has established a mandatory accounting system that must be used by every school entity based on GenergJJy Accepted Accounting Principles (GAAP) consistent with state and federal laws
bull Section 2932 of the Municipal Code allows for the operation of a Capital Reserve Fund Monies in this fund must be kept in a special account separate from any other fund The monies in the Capital Reserve Fund may be expended only for capital improvements and for replacement of andor additions to public works and improvements and for deferred maintenance thereof as approved by the board of school directors Specific projecrs must be identified together With the year ofproposed completion
bull Section 511 of the School Code allows for the establishment oftbe Athletic Fund to account for revenues generated through gate receipts incurred by the interscholastic athletic program
bull Section 609 of the School Code allows school districts to receive and expend state and federal revenues for the pwposes for which ~y are intended whether or nOl they were included in the adopted budget
12
Bidding and purcbasing statutes
bull Section 801 of the School Code requires boards to purcbase and provide all furniture equipment textbooks school supplies and other items for the use ofthe district to maintain the educational environment
bull Section 8071 (as amended by Act 30 of 1990) sets the requirement for competitive bidding at $10000 or more Purchases of $1 0000 or more require public notice by advertisement once a week for furee consecutive weeks in not less than two newspapers ofgeneral circulation Any purchase of $4000 but less than $10000 requires three price quotations The board must accept the lowest responsible bid (where kind quality and material are equal) Boards may reject any and all bids or select a single item from any bid
bull Section 521 ofthe School Code permits purchases to be made through intergovernmental cooperativcr agreements (joint purchase agreements) School entities may also piggyback on State or other government contracts following appropriate legal requirements
Cash Management and Investments Statutes
bull Section 4401 of the School Code pennits the investment of funds in specifically designated areas
13
BID THRESHOLDS INCREASING
Section 8071 (as amended by Act 30 of 1990 and Act 97 of 2011 )
The new limits which take effect January 2013 will be updated annudlly based
on changes in the Consumer Price Index up to a 3 percent cap No advertising
or competitive bidding or price quotations will be required for contracts below
$10000 allowing school maintenance staff to perform work that costs less than
$10000 Written or ielephonic price quotations will only be required for contracts
between $10000 and $18500 Advertising and competitive bidding will only be
required for contracts over $18500
14
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
Ready Set Govern - PSBA 2009
I nvestment - The deposit of excess cash for tbe purpose of earning interesl Permitted types of investments are enumerated by the School Code
Line-Item or Traditional Budget - A budget that groups proposed expenditures according to certain categories known as the object of expenditure On each line of the budget the expenses are listed the way they are paid out salaries on one line supplies on another line utilities on another line Thus salaries are one object and supplies another
Local Economic Revita lization T ax Abatement Act (LERTA) - A program based on local choice intended to promote economic growth in real property by excluding improvements from taxation for a period of not more than 10 years
Market Value (MV) - The value of taxable real property within a school district as determined by the State Tax Equalization Board
Market Va lue Aid Ratio (MVAR) - A fraction used to calculate the states share of instrUctional costs
Mali(et Va lue-Person~lllncom e Aid Ratio (MV-PIAR) - A factor used to determine the states share of instructional costs
J1iUage- TIle fixed rate of real estate taxes on assessed property value
Object- The article to be pure based or the service 10 be obtained to carry out the function v1th which it is associated
Operation of Jlant - Expenditures necessary to keep the buildings and grounds and equipment open and ready for use - housekeeping costs
Per capita Ta x - A flat rate tax levied upon each adult resident of the taxing school district
Personal Income Aid R a tio - A fraction used to determine the market value personal income aid ratio
Program Budget - A program is a plan of activities or procedures designed to accomplish a set of related objectives A program budget groups all the proposed expenditures for each indiyjdual program then within each program expenditures are listed according to function and object A program budget includes the delineation or definition of the purpose or o~jectives of a particular program - that is what that program is expected 10 accomplish The dollar amowlts budgeted are considered in relation to achieving a desired and agreed-to pillmiddotpose
Program budgeting differs from line-item budgeting in that it focuses on the purposes of the district and the particular program and activity It is a variation from the concept offunctional budgeting because in the latter the budget anlounts requesled are merely an itemization of the dollars required to continue a gjven activity or to install a new one Moreover a functional budget does not link program costs to program results
8
Ready SCI Oavern - PSBA 2009
Proposed Budget - A tentative budget subject to public hearings examination or comment When tb district is fiscalJy dependent on another municipal body such as the town or city cOWlcil for its funds the proposed budget sometimes is called the budget request
Public Utility Realty Tax Act (fURTA) - Any property subject to regulation by the Public Utility Commission pays an equivalent tax to the Pennsylvania Department of Revenue which then is distributed to local taxing jurisdictions
Referendum - Vote taken by the electorate for approval or rejection of proposed or passed legislation
Reserve F und - An aJllount set aside to cover an obligation doly authorized and incurred
Statewide Aver age Weekly Wage (SA WW) - The average weekly wage established by the Pennsylvania Department of Labor and Industry for calculating workers compensation payments
Tax Increment Financing (TIF) - An economic development program designed to promote economic growth by using the increased tax value of property improvement Lo pay for infrastructure improvements
Tax Levv - The total dollar amount to be raised by tax
Tax RatelMiII -111e tax levy divided by the total taxable assessed value of the district usually stated as dollars per thousand or per hundred of assessed value
Tota l Expenditures (Total Expend) - LncJudes all general fund expenditures cited under current expenditures plus facilities acguisilion and other financing uses (less prior years receipts and fund transfers)
Weighted Average Da ily Membership (A DM) - The assignment of weight by grade level to the average daily membership The current weighting is half-lime kindergarten at 05 full-time kindergarten at 10 elementary grades (grades 1-6) at 10 and secondary grades (grades 7-12) at 136
Zero Base Budgeting - A method of budgeting that requires each perSOll requesting funds in a budget to develop decision packages and to rank them in priority order
9
Laws that Effect the Budget and Fiscal Administration
bull The School Code gives local boards the authority to conduct the financial affairs of the district It contains provisions that are manciatory pennissive and prohibite(i The district is also subject to commonwealth statues such as the Municipal Code (53 Purdons) the Fiscal Code (72 Purdons) and other laws that apply to governmental entities
Act 16-Mandate Waivers APR Standards GAOP Section 2218 ofSchool Code
Budget statutes
bull Must approve an annual budget prior to the Sart ofthe fiscal year
bull Section 687 ofthe School Code requires that a proposed budget be prepared at least 30 days prior to adoption of the budget for the following fiscal year in a formula stIpulated by the Department ofEducation
bull The Notice ofPropos~dBudget must be published at least once in a newspaper of general circulation within the community at least 10 days before the adoption of a final budget The notice must include the time and place of the meeting at which the final budget wiU be adopted ~d a statement that the proposed budget is available for public inspection
bull Section 508 ofthe School Code requires a majority vote of the board to adopt the annual budget and to levy and assess taxes The vote must be by a duly recorded (roll call) vote that records how each member voted Failure to have five affumative votes renders their action void and unenforceable
11
bull Failure to adopt a budget by July 1 causes the district to lose authority to expend funds for the new fiscal year
bull Section 687 of the School Code requires that a certified copy of the adopted budget must be provided to the PDE It also prohibits dencit financing in public schools The total amount of the adopted budget may not exceed the amount offunds including the proposed annual tax levy and state appropriations available to the district
bull The commonwealth has established a mandatory accounting system that must be used by every school entity based on GenergJJy Accepted Accounting Principles (GAAP) consistent with state and federal laws
bull Section 2932 of the Municipal Code allows for the operation of a Capital Reserve Fund Monies in this fund must be kept in a special account separate from any other fund The monies in the Capital Reserve Fund may be expended only for capital improvements and for replacement of andor additions to public works and improvements and for deferred maintenance thereof as approved by the board of school directors Specific projecrs must be identified together With the year ofproposed completion
bull Section 511 of the School Code allows for the establishment oftbe Athletic Fund to account for revenues generated through gate receipts incurred by the interscholastic athletic program
bull Section 609 of the School Code allows school districts to receive and expend state and federal revenues for the pwposes for which ~y are intended whether or nOl they were included in the adopted budget
12
Bidding and purcbasing statutes
bull Section 801 of the School Code requires boards to purcbase and provide all furniture equipment textbooks school supplies and other items for the use ofthe district to maintain the educational environment
bull Section 8071 (as amended by Act 30 of 1990) sets the requirement for competitive bidding at $10000 or more Purchases of $1 0000 or more require public notice by advertisement once a week for furee consecutive weeks in not less than two newspapers ofgeneral circulation Any purchase of $4000 but less than $10000 requires three price quotations The board must accept the lowest responsible bid (where kind quality and material are equal) Boards may reject any and all bids or select a single item from any bid
bull Section 521 ofthe School Code permits purchases to be made through intergovernmental cooperativcr agreements (joint purchase agreements) School entities may also piggyback on State or other government contracts following appropriate legal requirements
Cash Management and Investments Statutes
bull Section 4401 of the School Code pennits the investment of funds in specifically designated areas
13
BID THRESHOLDS INCREASING
Section 8071 (as amended by Act 30 of 1990 and Act 97 of 2011 )
The new limits which take effect January 2013 will be updated annudlly based
on changes in the Consumer Price Index up to a 3 percent cap No advertising
or competitive bidding or price quotations will be required for contracts below
$10000 allowing school maintenance staff to perform work that costs less than
$10000 Written or ielephonic price quotations will only be required for contracts
between $10000 and $18500 Advertising and competitive bidding will only be
required for contracts over $18500
14
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
Ready SCI Oavern - PSBA 2009
Proposed Budget - A tentative budget subject to public hearings examination or comment When tb district is fiscalJy dependent on another municipal body such as the town or city cOWlcil for its funds the proposed budget sometimes is called the budget request
Public Utility Realty Tax Act (fURTA) - Any property subject to regulation by the Public Utility Commission pays an equivalent tax to the Pennsylvania Department of Revenue which then is distributed to local taxing jurisdictions
Referendum - Vote taken by the electorate for approval or rejection of proposed or passed legislation
Reserve F und - An aJllount set aside to cover an obligation doly authorized and incurred
Statewide Aver age Weekly Wage (SA WW) - The average weekly wage established by the Pennsylvania Department of Labor and Industry for calculating workers compensation payments
Tax Increment Financing (TIF) - An economic development program designed to promote economic growth by using the increased tax value of property improvement Lo pay for infrastructure improvements
Tax Levv - The total dollar amount to be raised by tax
Tax RatelMiII -111e tax levy divided by the total taxable assessed value of the district usually stated as dollars per thousand or per hundred of assessed value
Tota l Expenditures (Total Expend) - LncJudes all general fund expenditures cited under current expenditures plus facilities acguisilion and other financing uses (less prior years receipts and fund transfers)
Weighted Average Da ily Membership (A DM) - The assignment of weight by grade level to the average daily membership The current weighting is half-lime kindergarten at 05 full-time kindergarten at 10 elementary grades (grades 1-6) at 10 and secondary grades (grades 7-12) at 136
Zero Base Budgeting - A method of budgeting that requires each perSOll requesting funds in a budget to develop decision packages and to rank them in priority order
9
Laws that Effect the Budget and Fiscal Administration
bull The School Code gives local boards the authority to conduct the financial affairs of the district It contains provisions that are manciatory pennissive and prohibite(i The district is also subject to commonwealth statues such as the Municipal Code (53 Purdons) the Fiscal Code (72 Purdons) and other laws that apply to governmental entities
Act 16-Mandate Waivers APR Standards GAOP Section 2218 ofSchool Code
Budget statutes
bull Must approve an annual budget prior to the Sart ofthe fiscal year
bull Section 687 ofthe School Code requires that a proposed budget be prepared at least 30 days prior to adoption of the budget for the following fiscal year in a formula stIpulated by the Department ofEducation
bull The Notice ofPropos~dBudget must be published at least once in a newspaper of general circulation within the community at least 10 days before the adoption of a final budget The notice must include the time and place of the meeting at which the final budget wiU be adopted ~d a statement that the proposed budget is available for public inspection
bull Section 508 ofthe School Code requires a majority vote of the board to adopt the annual budget and to levy and assess taxes The vote must be by a duly recorded (roll call) vote that records how each member voted Failure to have five affumative votes renders their action void and unenforceable
11
bull Failure to adopt a budget by July 1 causes the district to lose authority to expend funds for the new fiscal year
bull Section 687 of the School Code requires that a certified copy of the adopted budget must be provided to the PDE It also prohibits dencit financing in public schools The total amount of the adopted budget may not exceed the amount offunds including the proposed annual tax levy and state appropriations available to the district
bull The commonwealth has established a mandatory accounting system that must be used by every school entity based on GenergJJy Accepted Accounting Principles (GAAP) consistent with state and federal laws
bull Section 2932 of the Municipal Code allows for the operation of a Capital Reserve Fund Monies in this fund must be kept in a special account separate from any other fund The monies in the Capital Reserve Fund may be expended only for capital improvements and for replacement of andor additions to public works and improvements and for deferred maintenance thereof as approved by the board of school directors Specific projecrs must be identified together With the year ofproposed completion
bull Section 511 of the School Code allows for the establishment oftbe Athletic Fund to account for revenues generated through gate receipts incurred by the interscholastic athletic program
bull Section 609 of the School Code allows school districts to receive and expend state and federal revenues for the pwposes for which ~y are intended whether or nOl they were included in the adopted budget
12
Bidding and purcbasing statutes
bull Section 801 of the School Code requires boards to purcbase and provide all furniture equipment textbooks school supplies and other items for the use ofthe district to maintain the educational environment
bull Section 8071 (as amended by Act 30 of 1990) sets the requirement for competitive bidding at $10000 or more Purchases of $1 0000 or more require public notice by advertisement once a week for furee consecutive weeks in not less than two newspapers ofgeneral circulation Any purchase of $4000 but less than $10000 requires three price quotations The board must accept the lowest responsible bid (where kind quality and material are equal) Boards may reject any and all bids or select a single item from any bid
bull Section 521 ofthe School Code permits purchases to be made through intergovernmental cooperativcr agreements (joint purchase agreements) School entities may also piggyback on State or other government contracts following appropriate legal requirements
Cash Management and Investments Statutes
bull Section 4401 of the School Code pennits the investment of funds in specifically designated areas
13
BID THRESHOLDS INCREASING
Section 8071 (as amended by Act 30 of 1990 and Act 97 of 2011 )
The new limits which take effect January 2013 will be updated annudlly based
on changes in the Consumer Price Index up to a 3 percent cap No advertising
or competitive bidding or price quotations will be required for contracts below
$10000 allowing school maintenance staff to perform work that costs less than
$10000 Written or ielephonic price quotations will only be required for contracts
between $10000 and $18500 Advertising and competitive bidding will only be
required for contracts over $18500
14
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
Laws that Effect the Budget and Fiscal Administration
bull The School Code gives local boards the authority to conduct the financial affairs of the district It contains provisions that are manciatory pennissive and prohibite(i The district is also subject to commonwealth statues such as the Municipal Code (53 Purdons) the Fiscal Code (72 Purdons) and other laws that apply to governmental entities
Act 16-Mandate Waivers APR Standards GAOP Section 2218 ofSchool Code
Budget statutes
bull Must approve an annual budget prior to the Sart ofthe fiscal year
bull Section 687 ofthe School Code requires that a proposed budget be prepared at least 30 days prior to adoption of the budget for the following fiscal year in a formula stIpulated by the Department ofEducation
bull The Notice ofPropos~dBudget must be published at least once in a newspaper of general circulation within the community at least 10 days before the adoption of a final budget The notice must include the time and place of the meeting at which the final budget wiU be adopted ~d a statement that the proposed budget is available for public inspection
bull Section 508 ofthe School Code requires a majority vote of the board to adopt the annual budget and to levy and assess taxes The vote must be by a duly recorded (roll call) vote that records how each member voted Failure to have five affumative votes renders their action void and unenforceable
11
bull Failure to adopt a budget by July 1 causes the district to lose authority to expend funds for the new fiscal year
bull Section 687 of the School Code requires that a certified copy of the adopted budget must be provided to the PDE It also prohibits dencit financing in public schools The total amount of the adopted budget may not exceed the amount offunds including the proposed annual tax levy and state appropriations available to the district
bull The commonwealth has established a mandatory accounting system that must be used by every school entity based on GenergJJy Accepted Accounting Principles (GAAP) consistent with state and federal laws
bull Section 2932 of the Municipal Code allows for the operation of a Capital Reserve Fund Monies in this fund must be kept in a special account separate from any other fund The monies in the Capital Reserve Fund may be expended only for capital improvements and for replacement of andor additions to public works and improvements and for deferred maintenance thereof as approved by the board of school directors Specific projecrs must be identified together With the year ofproposed completion
bull Section 511 of the School Code allows for the establishment oftbe Athletic Fund to account for revenues generated through gate receipts incurred by the interscholastic athletic program
bull Section 609 of the School Code allows school districts to receive and expend state and federal revenues for the pwposes for which ~y are intended whether or nOl they were included in the adopted budget
12
Bidding and purcbasing statutes
bull Section 801 of the School Code requires boards to purcbase and provide all furniture equipment textbooks school supplies and other items for the use ofthe district to maintain the educational environment
bull Section 8071 (as amended by Act 30 of 1990) sets the requirement for competitive bidding at $10000 or more Purchases of $1 0000 or more require public notice by advertisement once a week for furee consecutive weeks in not less than two newspapers ofgeneral circulation Any purchase of $4000 but less than $10000 requires three price quotations The board must accept the lowest responsible bid (where kind quality and material are equal) Boards may reject any and all bids or select a single item from any bid
bull Section 521 ofthe School Code permits purchases to be made through intergovernmental cooperativcr agreements (joint purchase agreements) School entities may also piggyback on State or other government contracts following appropriate legal requirements
Cash Management and Investments Statutes
bull Section 4401 of the School Code pennits the investment of funds in specifically designated areas
13
BID THRESHOLDS INCREASING
Section 8071 (as amended by Act 30 of 1990 and Act 97 of 2011 )
The new limits which take effect January 2013 will be updated annudlly based
on changes in the Consumer Price Index up to a 3 percent cap No advertising
or competitive bidding or price quotations will be required for contracts below
$10000 allowing school maintenance staff to perform work that costs less than
$10000 Written or ielephonic price quotations will only be required for contracts
between $10000 and $18500 Advertising and competitive bidding will only be
required for contracts over $18500
14
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
bull Failure to adopt a budget by July 1 causes the district to lose authority to expend funds for the new fiscal year
bull Section 687 of the School Code requires that a certified copy of the adopted budget must be provided to the PDE It also prohibits dencit financing in public schools The total amount of the adopted budget may not exceed the amount offunds including the proposed annual tax levy and state appropriations available to the district
bull The commonwealth has established a mandatory accounting system that must be used by every school entity based on GenergJJy Accepted Accounting Principles (GAAP) consistent with state and federal laws
bull Section 2932 of the Municipal Code allows for the operation of a Capital Reserve Fund Monies in this fund must be kept in a special account separate from any other fund The monies in the Capital Reserve Fund may be expended only for capital improvements and for replacement of andor additions to public works and improvements and for deferred maintenance thereof as approved by the board of school directors Specific projecrs must be identified together With the year ofproposed completion
bull Section 511 of the School Code allows for the establishment oftbe Athletic Fund to account for revenues generated through gate receipts incurred by the interscholastic athletic program
bull Section 609 of the School Code allows school districts to receive and expend state and federal revenues for the pwposes for which ~y are intended whether or nOl they were included in the adopted budget
12
Bidding and purcbasing statutes
bull Section 801 of the School Code requires boards to purcbase and provide all furniture equipment textbooks school supplies and other items for the use ofthe district to maintain the educational environment
bull Section 8071 (as amended by Act 30 of 1990) sets the requirement for competitive bidding at $10000 or more Purchases of $1 0000 or more require public notice by advertisement once a week for furee consecutive weeks in not less than two newspapers ofgeneral circulation Any purchase of $4000 but less than $10000 requires three price quotations The board must accept the lowest responsible bid (where kind quality and material are equal) Boards may reject any and all bids or select a single item from any bid
bull Section 521 ofthe School Code permits purchases to be made through intergovernmental cooperativcr agreements (joint purchase agreements) School entities may also piggyback on State or other government contracts following appropriate legal requirements
Cash Management and Investments Statutes
bull Section 4401 of the School Code pennits the investment of funds in specifically designated areas
13
BID THRESHOLDS INCREASING
Section 8071 (as amended by Act 30 of 1990 and Act 97 of 2011 )
The new limits which take effect January 2013 will be updated annudlly based
on changes in the Consumer Price Index up to a 3 percent cap No advertising
or competitive bidding or price quotations will be required for contracts below
$10000 allowing school maintenance staff to perform work that costs less than
$10000 Written or ielephonic price quotations will only be required for contracts
between $10000 and $18500 Advertising and competitive bidding will only be
required for contracts over $18500
14
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
Bidding and purcbasing statutes
bull Section 801 of the School Code requires boards to purcbase and provide all furniture equipment textbooks school supplies and other items for the use ofthe district to maintain the educational environment
bull Section 8071 (as amended by Act 30 of 1990) sets the requirement for competitive bidding at $10000 or more Purchases of $1 0000 or more require public notice by advertisement once a week for furee consecutive weeks in not less than two newspapers ofgeneral circulation Any purchase of $4000 but less than $10000 requires three price quotations The board must accept the lowest responsible bid (where kind quality and material are equal) Boards may reject any and all bids or select a single item from any bid
bull Section 521 ofthe School Code permits purchases to be made through intergovernmental cooperativcr agreements (joint purchase agreements) School entities may also piggyback on State or other government contracts following appropriate legal requirements
Cash Management and Investments Statutes
bull Section 4401 of the School Code pennits the investment of funds in specifically designated areas
13
BID THRESHOLDS INCREASING
Section 8071 (as amended by Act 30 of 1990 and Act 97 of 2011 )
The new limits which take effect January 2013 will be updated annudlly based
on changes in the Consumer Price Index up to a 3 percent cap No advertising
or competitive bidding or price quotations will be required for contracts below
$10000 allowing school maintenance staff to perform work that costs less than
$10000 Written or ielephonic price quotations will only be required for contracts
between $10000 and $18500 Advertising and competitive bidding will only be
required for contracts over $18500
14
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
BID THRESHOLDS INCREASING
Section 8071 (as amended by Act 30 of 1990 and Act 97 of 2011 )
The new limits which take effect January 2013 will be updated annudlly based
on changes in the Consumer Price Index up to a 3 percent cap No advertising
or competitive bidding or price quotations will be required for contracts below
$10000 allowing school maintenance staff to perform work that costs less than
$10000 Written or ielephonic price quotations will only be required for contracts
between $10000 and $18500 Advertising and competitive bidding will only be
required for contracts over $18500
14
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
Payment of Financial Obligations
bull Section 439 of the School Code requires that all payments be approved by the board of school directors An order to pay must be signed directly or through facsimile signature by the board president
bull Section 607 requires that proper school orders be drawn prior to payment that there be sufficient
funds in the treasury and that a separate order be drawn for each account or payment Boards are also peJJDitted to establish policy regarding process and procedures for the disbursements of school funds including such matters as payments prior to board approval
bull The Fiscal Code of the commonwealth (as amended by Act 138 of 1994) also requires political subdivisions including school entities to pay interest penalties to certain qualified small businesses for regular every day normal goods and services when payments are more than 15 days past due
bull The Public Works Contract Regulation Law (as amended by Act 142 of 1994) regulates the payment to contractors and subcontractors working on public construction projects Under the law school districts are required to make payment or incur interest penalties
Construction of Facilities
bull State Board of Education Regulations and PDE standards provide specific requirements for buildings and grounds
bull Act 34 of 1973 (the Taj Mahal Law) requires school boards to conduct public hearings regarding building projects A second hearing is required ifthe bids received for a construction project exceed the initial Department ofEducation approved estimates by 8 It requires voter approval of any building project that exceeds pre-pupil cost figures that 2Te revised annually to reflect changes in the cost of living Alterations to existing buildings middotare excluded from this requireI1ent
15
~
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
Audits of Financial Records
bull All school districts are required to have an annual audit of financial records completed by an independent certified public accountant The audit must be prepared in accordance with GAAP to insure consistency Completion of the audit and issuance ofthe audit report mark the end of the budget cycle for a single year
bull Section 2553 of the School Code requires the comptroller of the Department ofEducatioD to perform regular field and specific audits
The state Fiscal Code requires the auditor generals office to audit the accounts and records of all school districts The purpose is to verify that the monies received from the commonwealth were properly paid and that the district properly complied with all laws and regulations The Bureau ofSchool Audits of the auditor generals office bas also published specific guidelines for the audit of student activity funds (Agency Funds)
16
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
Sample School District Accounting Dictionary
CJ FUND INSTR GRADEl JOB OBJECT SOURCE UNIT BLDG DEPT CLASSFUNCTION
xx XXXX xxx xxx XX middot xx xx XXX
10 General Fund 20 Sepclal Revenue 30 Capital Projects Fund 50 Food Service Fund 70 Trust Funds 80 Student Activity Fund
FUND INSTR GRADEl JOB FUND SOURCE UNIT BLDG DEPT CLASSIFUNCTION IOBJECT
XX -xxxx XXX XXX XX vv XX XXX 1100 Regular Programs 21 10 Pupil Services Supv 2700 Tra nsportation SerJice~
1200 Special Programs 21 20 Guidance Services 2830 Human Resources ~
121 1 Life Skills 2130 HomeSchool Visitor 2B4o Admin Technology 1224 Vrslon Support 2140 Psychological Services 2900 Other Support Services 1225 SpeechLanguage 2160 SocialOcc Services 3100 Cafertena Services 1231 Emotional Support 2170 Child Accoun ting 3200 Student Activities Svcs 1233 Autistic Support 2190 OccPhysical Therapy 3250 School Athletics 1241 Leaming Support 2220 Audio Visual Services 3300 Community Services 1243 Gifted 2250 Library Services 400D Facilities AcqUisition i 260 Physical Support 2260 Curriculumllnstr Svcs Construction and Improver 1270 Multi-Handicapp Support 2270 Instructional Staff De 5100 Debt Services 1280 Early Intervention 2310 Soald Services 5220 Athletic Fund Contrib 1290 Special Services Other 2330 Tax Collection Services 523D Capital Projects Fund Trans 1390 Vocational TechnicaJ 2350 Legal Servicesmiddot 5240 Debt Service Fund Transfer 1410 Driver Education 2360 Office of the Supt 5251 Food Service Fund Transfel 1420 Summer Schoo 2370 Community Relations 5900 Budgetary Reserve 1430 Homebound Instruction 2380 Office of the Principal 6000 Local Revenue 1441 Detention Center 2430 Dental Services 7000 State Revenue 1442 Altematlve Education 2440 Nursing SerVices BODO Federal Revenue 1610 Adult EdUcation 2500 Business Support 9000 Other Revenue 1700 Community College 2600 Buildings and Grounds
INSTR GRADE JOBGJ FUNDFUND FUNCTION OBJECT SOURCE UNIT BLDG DEPT CLASS
vvXX XXXX XXX XXX xx XX XXX
100 Personnel -- Salaries 400 Purchased Property Services 700 EqUipment 200 Personnel -- Benefits SOD Other Purchased Services 800 Other Objects 300 Professional Services 600 Supplies and Books 900 Other Uses of Funds
61
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
Ready Set Govcrn - ISSA 2()09
Fund Balance
Fund balance is usually viewed as a savings account Fund balance is an accounting term that is the difference between assets (everything of value) and liabilities (everything owed) Because assets include cash not yet received not all of the reported fund balance is available for use or equivalent to cash A districts financial condition will change from year to year and the fund balance also will change (increase or decrease) School boards should establish local policy on the appropriate size of the fund balance An adequate fund balance is important to
bull Adjust to the loss of a major taxpayeremployer bull Finance needed facility improvements without borrowing bull Purchase needed equipment (such as textbooks) without borrowing bull Deal with the uneven pattern of cash flow bull Finance uninsured emergencies and un budgeted contingencies
The School Code (Section 6-688) establishes a maximum fund balance if the district is going to increase tax rates The maximum is based on a sliding scale between 8 and 12 percent of the districts budget based on the size of the budget The financial industry typically views a school district fund balance as being between 5 and 10 percent of CUITent expenditures The financial industry guidelines Ivhen merged with the School Code provides for a fund balance of between 5 and 8 percent of expenditures
Fund balance has three distinct parts One is the reserved fund balance the second part is the designated fund balance and the third part is undesignated-unreserved fund balance Reserves of fu nd balance are required as part oCthe accounting standards to offset prepaid expenses and other items on Ihe financial statement A reserved fund balance is the amount of money that the board has set aside for some future purpose Currently some districts are designating Cund balance for retirement rate inerease~
heal th care cost increases and constructionrenovation needs The fund balance limit in the School Code is based only on the third part or undesignated-unreserved fund balance
Fund balance management implies that fund balance should only be used 10 cover one-lime expenditures When a district uses fund balance to cover operating expenditures the district oft en loses interest income which is incorporated into the annual budget In 2007-08 on a state-wide basis interest income equaled 35 percent of real estate tax revenue This means that without interest earnings being returned to the budget real estate taxes would need to be about 35 percent higher
The follovving example shows the impact of consuming fund balance for operating expenditures The example makes the following assumptions
I mil == $ 100000 in revenue Fund balance == $25 00000 (undedicated and unreserved) Interest income on fund balance = $68750 (rate of275) The board uses $500000 of fund balance rather than increase taxes to pay for salary increase The board would like to pay the entire contract increase over the four years fro m fund balance
79
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
RC8dy Sel Govern - PSI3A 1009
The assumptions and anticipated spending are presented in Table 2
Table 2 Consumption of Fund Balance
Year Exp_enditure Lost Interest Total Mill Value 1 $ 500000 $13750 $ 513750 51375 2 $1 000000 $27500 $ 1027500 10275 3 $1500000 S41250 $ 1541250 15412 4 S2000000 S55000 $ 2055000 20550 Total $5000000 I S137500 $5137500 51375
In the first year the board spends $500000 and loses $13 750 in interest income Since a mill is equal to $] 00000 the lost income plus the expenditure the total is equal to 5] 375 mills In the second year the board will need to provide $] 000000 This is the total of the first year contract cost plus the second year contract cost The lost interest is now $27500 and the mill value is 10275
The district started the process with a fund balance of $2500000 By the end of the second year it spent $1 500000 plus a loss of interest of $41250 There is insufficient fund balance to cover the third year Avoiding a 5 mill tax increase to cover the increased expenditures will require a 51375 mill increase in the second year without considering the increase in expenditures in the second year
The board would need a fund balance in excess of$5 137500 to cover the increased expenditures long with the loss of revenue from interest income Thus a 5 mill per year increase for 4 years
mpounds to a 51375 mill increase at the hcginning of the fifth year without replacing fund halance
80
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
Ir middot~ICD
Governmental Accounting Standards Board of the Financial Accounting Foundat ion
March 2009
GASB Statement Brings Greater Clarity and Consistency to Fund Balance Reporting
Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet This information is one of the most widely used elements of state and local government financial statements
Of central importance to the credit reviews performed by municipal bond analysts fund balance information also is used by taxpayer associations research organizations oversight bodies state county and local legislators and their staffs and reporters Financial statement users examine fund balance information to identify the available liquid resources that can be used to repay long-term debt reduce property taxes add new governmental programs expand existing ones or enhance the financial position of the government
The Governmental Accounting Standards Board (GASB) has found that despite its popularity and usefulness the value of fund balance information is significantly diminished by misunderstandings regarding the messages it conveys and inconsistency in governments financial reporting practices
In order to enhance how fund balance information is reported and improve its decision-usefulness in March 2009 the GASB issued Statement No 54 Fund Balance Reporting and Governmental Fund Type Definitions
How Will Fund Balance Be Reported
This Statement is designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply In essence it establishes a hierarchy based largely on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet
Statement 54 establishes the following classifications depicting the relative strength of the constraints that control how specific amounts can be spent
81
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
bull Nonspendable fund balance includes amounts that are not in a spendable form (inventory for example) or are required to be maintained intact (the principal of an endowment fund for example)
bull Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (for example grant providers) constitutionally or through enabling legislation (that is legislation that creates a new revenue source and restricts its use) Effectively restrictions may be changed or lifted only with the consent of resource providers
bull Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the governments highest level of decision-making authority Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally
bull Assigned fund balance comprises amounts intended to be used by the government for specific purposes Intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority In governmental funds other than the general fund assigned fund balance represents the amount that is not restricted or committed This indicates that resources in other governmental funds are at a minimum intended to be used for the purpose of that fund
bull Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications Unassigned amounts are technically available for any purpose If another governmental fund has a fund balance deficit then it will be reported as a negative amount in the unassigned classification in that fund Positive unassigned amounts will be reported only in the general fund
How Have the Fund Type Definitions Been Clarified
The Statement also is designed to improve the usefulness of fund balance information by clarifying certain parts of the definitions of governmental fund types that have led to confusion and adversely affected the interpretation of fund balance information It makes clear for example that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose and that the revenue source should constitute a substantial portion of the resources reported in the fund
The basic definition of the debt service fund type remains essentially unchanged However the terminology in the definition of the capital project fund type has been clarified to focus on the broader more consistently understood notion of capital outlays and to better capture the breadth of capital activities in todays environment
82
