Source:AUSD Website 2/9/2007 Superinendent's Recommendation

Background Material for Agenda Item 3

February 13, 2007 BOE Meeting

Background: On November 28,2006, the Board of Education approved $2,100,000 in budget revisions for the current fiscal year, using one time dollars to fund ongoing expenses, with the understanding that AUSD would need to make spending reductions to the ongoing costs in the 2007-2008 fiscal year.

Staff presented a timeline and process for identifying spending reductions for the 2007-2008 Fiscal Year. A task force of district office staff and site principals developed a preliminary list of spending reductions using AUSD Goals and Core Values as framework for assessing the impact of proposed spending reductions. A series of four community budget meetings provided additional input and guidance in establishing spending priorities.

The Recommendation for Spending Reduction and Resource Allocation Plan provides a budget overview and factors considered in making the recommendation, including AUSD Goals and Core Values, impact of the previous spending revisions, and reductions, potential for mandated cost reimbursement audit, potential for negotiated salary increases, and upcoming liability for post-employment benefits. The detailed list of all spending reduction items contains two alternative spending plans. Alternative #2 is the recommended spending reduction is the recommended spending reduction and resource allocation plan.

Recommendation

We recommend the Board of Education approve $1,500,0000 in spending reductions and enhancements as listed in Alternative #2 (Explanation of Budget Items), and set aside 75%, or $1,170,000, of the mandated cost reimbursement dollars. This recommendation involves some risk. First, this recommendation leaves no balance available for any unbudgeted spending increase we may incur (e.g. additional fall teaching positions once enrollment settles, negotiated salary increases, special education settlements). If we experience a need for any unbudgeted spending increase, we will need to draw down from the mandate reimbursement set aside in the budget year, and make the corresponding ongoing spending reductions in the subsequent year. In addition, we will be out of compliance with the County recommendation to aside 80% of the mandate costs reimbursement dollars. However, because of the energy and commitment the community has expressed recently, we are willing to take on some financial risk in order to allow time for community advocacy for revenue enhancements and to develop alternatives to meet our educational challenges.

Alternative #1 is a fiscally prudent option. It is based spending reductions totaling $2,000,000, and a set aside of 80%, or $1,250,000, of the mandate cost reimbursement dollars. This alternative allows for an available balance of $440,000 for unbudgeted spending increases e.g. additional fall teaching positions once enrollment settles, negotiated salary increases, spedial education settlements). In addition, it places the AUSD in compliance with the County recommendation to set aside 80% of the mandate costs reimbursement dollars. While Alternative #1 is a fiscally prudent option, it also has a more significant impact to our curent educational services and programs.

BUDGET OVERVIEW

Our budget is divided into two major components, unrestricted revenue and restricted revenue. Unrestricted revenue funds our day to day operations. Restricted revenue funds targeted services that supplement our day to day operations. The AUSD budget is in large part determined by a state process – 94% of our unrestricted revenue comes from the State.

State revenues are adjusted annually by an inflationary index call the statutory Cost of Living Adjustment (COLA). The COLA is intended to fund step and column for employees, inflationary increases in our operations (e.g., utilities, property and liability insurance), negotiated salary increases, and any other spending priorities designated by the District.

Our 2006-2007 revenues benefited significantly from a strong State budget. Specifically, we received a COLA of 5.92%, equalization aid at 78%, and the elimination of the deficit factor. The strong growth in state revenue Alameda Unified School District was appropriately applied to negotiated increases in employee compensation, increases in special education settlements, and increases in operating costs.

We must continue to acknowledge that our current and subsequent budgets may be impacted by factors beyond our immediate influence (such as declining enrollment and state actions) and factors within our immediate influence (such as the negotiated prior year salary formula, current negotiations with bargaining units, and spending reductions). The total impact of these factors is unknown, yet each one will likely have an effect on AUSD’s short-term solvency. As we look to developing our budget for the next year, we offer the following factors for your consideration.

RECOMMENDATION FACTORS

1. Narrow and close the achievement gap in English Language Arts and Mathematics between our lowest performing students and our highest performing students, while increasing or maintaining the performance of any group performing at the proficient or advanced level.
2. Align the spending plan with educational objectives while ensuring the highest and best use of limited resources and long-term solvency.
3. Ensure all students will be in educational environments that are safe and conducive to learning.
4. Recruit and retain highly qualified and diverse staff, and provide systems of support for and recognition of all employees.

AUSD Core Values

• Support student achievement by promoting efficiency, communication, and responsibility.
• Preserve fiscal integrity and responsibility.
• Recruit and retain highly qualified, competitively compensated employees.

2. Impact of Spending Revisions and Reductions

Despite the strong state budget described earlier, the AUSD implemented spending reductions totaling $800,000 for the current year in order to align its facilities and operations with current enrollment. The consolidation of three elementary schools into one new school generated $600,000 of the needed spending reductions.

In addition, the AUSD made budget revisions in November 2006 to fund several spending increases that impacted the budget after its adoption. The budget revisions consisted of a salary increase for the third year of the 2003-2006 employee contract, totaling $4,200,000 for all employees ($2,100,000 for FY05/06; $2,100,000 for FY06/07), $500,000 for additional fall teaching positions required to meet contractual staffing obligations, and $100,000 for various special education settlements. The net impact of these spending increases was a $2,100,000 shortfall in the District reserves for the 2006-2007. The $2,100,000 shortfall in our reserves was replenished in the current year with one-time sources: $1,600,000 in one-time mandate cost reimbursements; $400,000 in one-time transfers from other funds; and, $100,000 in on-going transfers within categorical funds. However, the $2,100,000 shortfall resulted from on-going costs, and must be funded with ongoing revenue sources.

In FY06/07 AUSD expects to receive $1,600,000 in mandate cost reimbursements deferred from prior years. This $1,600,000 has already been allocated to the $2,100,000 shortfall for the current year. However, the Office of the State Controller (OSC) is actively auditing reimbursement claims. A total of 55 audits have been complete, and the OSC has disallowed 80% of the total dollar amount claimed. For nearly half of the districts audited, the OSC disallowed 100% of the total dollar amount claimed. The primary reason cited for disallowance is the lack of adequate documentation.

A group of school districts led by the Clovis Unified School District filed a lawsuit against the OSC over the mandate audit process. The lawsuit charges that the OSC’s mandate audits are arbitrary and capricious and follow no clear standard. The lawsuit is currently in the discovery phase, and a trial date has not been set. A favorable ruling would presumably lead to a more reasonable documentation standard that Districts could actually meet.

Based on the 55 audits that have been completed, larger districts and larger claims seem more likely to be audited than smaller ones. Only 2 of the 55 districts have ADA less than 10,000. The AUSD has not undergone an audit by the OSC. We cannot surmise how well our records will hold up to an OSC audit since they follow no clear standard.

Therefore, given the high disallowance rate, the Alameda County Office of Education recommends that districts set aside 80% of the reimbursement dollars received until the audit period closes (i.e., three years from the date of disbursement). School Services of California also recommends districts reserve 80% of the reimbursement dollars received. We did not follow this recommendation in the current year because we needed the revenue to help fund the spending increases for FY05/06 negotiated salaries, and FY06/07 fall staffing, and special education settlements (as described in the section on the Impact of Spending Revisions and Reductions).

However, AUSD could consider setting aside less than the 80% recommended amount and reducing the total spending reductions accordingly. Not funding the county’s recommended set-aside would be risky, depending on whether or not AUSD’s documentation was audited, and would only provide fiscal relief for the 2007-2008 budget year since the Mandate Cost Reimbursement is one time revenue. AUSD’s audit period will close October/November 2009.

AUSD and our certificated bargaining unit Alameda Education Association (AEA) have been working diligently to finalize the FY05/06 salary formula calculations. The salary formula calculations used to prepare November 2006 paychecks were based on a preliminary agreement with AEA, with the understanding that the final formula would be based on the Unaudited Actuals report. Any additional salary increase determined by the final salary formula calculation will trigger the “me-too” clauses for other bargaining units, and will require us to dip into our reserves in the current year to provide for all employees. This dip into our current year reserves would result in a Qualified Certification for the Second Interim reporting period, March 15. In addition, the AUSD is currently in negotiation with the AEA for another three year contract, 2006-2009. We have received a proposal from the AEA for an increase to total compensation (article 12 and article 14) for the current year and two subsequent years. A negotiated increase with AEA will trigger the “me-too” clauses for other bargaining units. A 1% salary increase for all employees is an ongoing cost totaling $550,000 per year.

The Government Accounting Standard Board (GASB) issued Statement 45 in June 2004, known as GASB 45. GASB 45 requires districts to recognize the financial liability of providing health and welfare benefits to retired employees beginning in FY08/09. Specifically, districts are required to recognize the expense (i.e., out of pocket) and the obligation (i.e., future out of pocket) on our financial statements. Currently, we are a pay-as-you- go district, and only recognize the expense. GASB 45 does not require school districts to fund the liability.

However, not funding it would have adverse financial consequences such as impacting future borrowing costs, credit ratings, and the overall financial health of our District.

AUSD plans to conduct an actuarial study this spring to determine the amount of the liability. Once that is determined, we will develop a plan on how to fund the liability in the 2008-2009 fiscal year and beyond.

In 2006, a CTA presentation disclosed their position on acknowledging the liability associated with retiree health care benefits.

A Qualified district certifies that it may or may not meet its financial obligations in the current or two subsequent years. Accordingly, a Qualified district must prepare a Board-approved plan to replenish the reserve level to 3% by the adoption of the subsequent budget.

A Negative district certifies it will not be able to meet its financial obligations in the current or subsequent year. A Negative district must prepare a Board-approved plan to replenish the reserve level to 3% by the adoption of the subsequent budget. In addition, the County assigns an in-house Fiscal Adviser with stay and rescind power over the Board of Education. In other words, the County-assigned Fiscal Adviser can prevent the Board of Education from taking any action that s/he deems inconsistent with the fiscal recovery plan.

Qualified and Negative districts suffer other consequences. For example, they cannot issue non-voter approved debt, including Tax and Revenue Anticipation Notes (TRAN). A TRAN allows districts to finance cash flow deficits caused by irregular streams of revenue (e.g., property taxes are collected and disbursed only twice per year). In lieu of issuing a TRAN, the AUSD would borrow from Measure C bond proceeds to address the shortterm cash flow shortages. We would have to replace the amount borrowed plus interest within the same fiscal year.

ALTERNATIVE #1: Reduce spending in FY07/08 by $2.0M (Not Recommended)

Impacts

1. Implications for Goals and Core Values: This alternative consolidates middle schools into two, and makes greater reductions to the clerical staff and the athletics program.
2. Implications for Mandate Cost Reimbursement Set Aside: Set aside 80%, or $1,250,000, of the mandate cost reimbursement for the final two years of the open audit period (i.e., FY07/08 and FY08/09). If AUSD claims are audited, disallowed claims can be funded with the 80% set aside. Our reserve for economic uncertainties would not be impacted, unless disallowed claims exceed the 80% set aside.
3. Implications for Negotiated Salary Increases: If salary increases are negotiated for the current or subsequent year, our reserve for economic uncertainties would be impacted, and corresponding ongoing spending reductions would have to be implemented to replenish the reserve.
4. Implications for Funding the Liability for Post-Employment Benefits: If the mandate cost reimbursement set aside is available after the open audit period closes, it could be used to fund the liability for postemployment benefits beginning in FY08/09. If the mandate cost reimbursement set aside is unavailable in FY08/09, we would need to identify another funding source which may impact our reserve for economic uncertainties.
5. Implications for Bottom-Line Fund Balance: This alternative allows for an available undesignated balance at the beginning of next year totaling $440,000(or 0.5% of total spending) for other spending priorities (e.g., additional fall teaching positions to meet contractual obligations, negotiated salary increases).

AUSD Multi-Year Financial Projection (Alternative #1)

ALTERNATIVE #2: Reduce spending in FY07/08 by $1.5M (Recommended)

Impacts

1. Implications for Goals and Core Values: This alternative eliminates the middle school consolidation and spreads the impact across the district.
2. Implications for Mandate Cost Reimbursement Set Aside: Set aside 75%, or $1,170,000, of the mandate cost reimbursement for the final two years of the open audit period (i.e., FY 07/08 and FY 08/09). If AUSD claims are audited, disallowed claims can be funded with the 75% set aside. Our reserve for economic uncertainties would not be impacted, unless disallowed claims exceed the 75% set aside. We will be out of compliance with the County recommendation.
3. Implications for Negotiated Salary Increases: If salary increases are negotiated for the current or subsequent year, our reserve for economic uncertainties would be impacted, and corresponding ongoing spending reductions would have to be implemented to replenish the reserve.
4. Implications for Funding the Liability for Post-Employment Benefits: If the mandate cost reimbursement set aside is available after the open audit period closes, use it to begin to fund the liability for postemployment benefits beginning in FY08/09. If the mandate cost reimbursement set aside is unavailable in FY08/09, our reserve for economic uncertainties would be impacted.
5. Implications for Bottom-Line Fund Balance: This alternative leaves no balance available at the beginning of next year for other spending priorities (e.g., additional fall teaching positions to meet contractual obligations, negotiated salary increases). Unbudgeted spending increases will require us to draw down from the mandate costs reimbursement set aside in the budget year, and make the corresponding ongoing spending reductions in the subsequent year.

AUSD Multi-Year Financial Projection (Alternative #2)

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Last modified: February 10, 2007

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