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SACS Forum Meeting Minutes, May 2011

Meeting Agenda

Announcements

• 2011–12 indirect cost rates

Accounting Issues

• Use of Function 7190 and Function 7191
  
  
• Flexed funding resources – clearing remaining balances by 2010–11
  year-end
  
  
• Fund 10 - Special Education Pass-Through Revenue
  Fund – participant implementation questions
  
  
• Governmental Accounting Standards Board (GASB) Statement 54
  
  
  • Restating balances between unrestricted and restricted resources
    
    
  • Accounting for restricted or committed funding sources reported in a special revenue fund
    
    
  • Fund 17 and Fund 20 – use of Resource 9010
    
    
  • Other issues or questions?

SACS Software Issues

• May validation table updates
  
  
• SACS2011 software status
  
  
  • Budget release
    
    
  • Proposed SACS2011ALL changes – (Attachment A)
    
    
  • Windows 7 Issues
    
    
• Future Software Proposals
  
  
  • SACS Funds Forms – follow-up from previous meeting

Other Issues

• Education Jobs Fund (Ed Jobs) early Retirement incentive approvals – update
  
  
• California School Accounting Manual (CSAM) – review process
  
  
• Next Meeting

Meeting Minutes

Announcements

• 2011–12 indirect cost rates
  
  The 2011–12 approved indirect cost rates are available on the California Department of Education (CDE) Web site. ICRs for charter schools and for a few districts for which rates are still pending, as well as the CDE 2011–12 ICR letter, will soon be finalized and posted as well.  

Accounting Issues

• Use of Function 7190 and Function 7191
  
  As briefly discussed at the March 8 meeting, one of the common reporting errors noted during the 2009–10 unaudited actuals data review was the inappropriate function code used when reporting audit costs and the effect on the local educational agencies’ (LEAs’) indirect cost rates. Audit costs should be charged to either Function 7190, External Financial Audits – Single Audit, or Function 7191, External Financial Audit – Other, depending on whether the LEA is subject to federal Single Audit Act provisions. See the California School Accounting Manual (CSAM), Procedure 325, for detailed definitions. These required function codes were established for use beginning 2007–08.
  
  
  Currently more than half of the LEAs are not recording audit costs in the appropriate function, which may result in an inaccurate indirect cost rate. The CDE discussed the possibility of creating a technical review check (TRC) in the SACS software that would monitor the appropriate reporting of audit costs, at least temporarily. Participants responded that a warning TRC would be preferable and suggested that it could be permanent for the benefit of new staff entering the industry. The CDE will consider initiating a warning TRC for the unaudited actuals data.
  
  
• Flexed funding resources – clearing remaining balances by 2010–11 year-end
  
  The CDE provided a reminder that by 2010–11 year-end all flexed restricted resources should have a zero ending balance.
  
  An unintended consequence of LEAs’ continued use of these restricted resource codes in 2009–10 to clean up remaining balances associated with flexed funding was that the published financial data gave the impression that LEAs were in fact continuing to report the use of unrestricted moneys in restricted resource codes, suggesting that those programs are still in effect. This is misleading to the users of the data and could result in incorrect assumptions regarding flexed programs.
  
  Some participants indicated that the LEAs feel that they are being prudent in continuing to report unrestricted flexed funding, for example the former deferred maintenance moneys, in restricted resource codes. The CDE reminded participants that although some LEAs did not change their accounting for flexed balances, the manner in which the LEA has accounted for the flexed balances does not change their unrestricted character. The CDE’s April 17, 2009 letter [http://www.cde.ca.gov/fg/ac/co/documents/sbx34budgetflex.doc] (DOC; 188 KB; 16pp.) provides guidance on accounting for the flexed balances that were transformed from restricted to unrestricted as a result of the new laws.
  
  
• Fund 10, Special Education Pass-Through Revenue
  Fund – participant implementation questions
  
  The CDE continued the discussion of the implementation of Fund 10, the new pass-through revenue fund, and the CDE’s guidance letter released on March 3, 2011. [http://www.cde.ca.gov/fg/ac/co/selpaaufudnltr.asp]
  
  Participants asked the following questions regarding the implementation of the new fund:
  
  
  • What if a SELPA AU does not want to use Fund 10?
    
    The CDE responded that there is a technical check relating to the appropriate use of Fund 10 by the SELPA AUs. Since the new Fund 10 will be in the California School Accounting Manual (CSAM), and since Education Code Section 41010 requires that LEAs follow CSAM, CDE imagines that the auditors would issue a management finding for the non-use of Fund 10. The CDE mentioned that the auditors will need to understand how reconciliation of revenues to apportionment exhibits now involves two funds rather than one.
    
    
  • What if we have 2010–11 deferrals and receivables reported in Fund 06 that will clear in 2011–12?
    
    The CDE responded that in 2011–12 the LEA could continue to use Fund 06 (a locally-defined fund that rolls to Fund 01) to clear its 2010–11 accruals, and then transition to Fund 10 in 2011–12.
    
    
• GASB 54
  
  
  • Restating balances between unrestricted and restricted resources
    
    For funds other than the general fund, pre-GASB 54 fund balance classification principles required that in order to be reported as reserved fund balance, external restrictions placed on the use of a particular revenue source should be narrower than the purposes of the fund in which the revenue source was reported. Consistent with those principles, LEAs may have reported some externally restricted funding in unrestricted resource codes in funds other than the general fund.
    
    The new fund balance classification principles require that fund balances be reported in the applicable classification, regardless of the fund in which they are reported. Consequently, it may be necessary for LEAs to reclassify revenue sources and balances that have historically been reported in an unrestricted resource code to a restricted resource code.
    
    In addition, there may be other circumstances in which revenue sources have been reported in an erroneous resource code (either unrestricted or restricted) and should be corrected.
    
    LEAs should use the following guidance for reclassifying revenue sources to the correct resource code:
    
    
    • Reclassify in 2011–12 – if an LEA has been reporting revenue sources consistently with previous fund balance principles, but now needs to change in order to implement GASB 54 (a new accounting principle), close 2010–11 with balances in the current resource code and reclassify to the appropriate resource code in 2011–12, either by restating beginning balances using Object 9795, Restatements, or (for deferred revenue resource codes) reclassifying the appropriate asset, liability, revenue and/or expenditure accounts. (In governmental GAAP, the effect of a change in accounting principle is reported as an adjustment to equity rather than a current period transaction.)
      
      
    • Reclassify in 2010–11 – if an LEA has been reporting a revenue source erroneously, reclassify any balances to the appropriate resource code in 2010–11 using the procedure described above.
      
      Some participants noted that they preferred to get everything reclassified by the end of 2010–11. The CDE acknowledged that there would be no harm in their doing so since the standard takes effect for 2010–11.
      
      
  • Accounting for restricted or committed funding sources reported in a special revenue fund
    
    The CDE reported the outcome of its research on special revenue funds and the resulting final guidance for Fund 11, Adult Education Fund, and Fund 14, Deferred Maintenance Fund.
    
    Background: Funds 11 and 14 were originally established pursuant to statute to allow LEAs to separately account for state funding restricted for Adult Education and Deferred Maintenance program purposes. Prior to categorical flexibility implemented by SBX3 4, Fund 11 and Fund 14 met the definition of special revenue funds as they were substantially composed of restricted or committed revenue sources. However, categorical flexibility removed program restrictions associated with Adult Education and Deferred Maintenance funding, making it available for any educational purpose for the five-year period 2008–09 through 2012–13. Consequently, Fund 11 and Fund 14 currently do not meet the definition of special revenue funds as the primary sources of funding associated with them are no longer restricted to the purposes of those funds.
    
    Nonetheless, the CDE elected not to close Fund 11 and Fund 14 because the associated programs may be reinstated at the end of the flexibility period. The CDE’s April 17, 2009 letter [http://www.cde.ca.gov/fg/ac/co/documents/sbx34budgetflex.doc] (DOC; 188 KB; 16pp.) regarding categorical flexibility indicated that the CDE was researching statutory and accounting requirements relating to the continued use of the Deferred Maintenance Fund and the Adult Education Fund, and would issue further guidance when that research was complete. That research depended in part on the then-upcoming issuance of GASB 54, which specifically addresses special revenue funds. The CDE has now completed its research on how Fund 11 and Fund 14 might still be used in accordance with GAAP.
    
    Outcome: In order to be in compliance with GAAP, LEAs may continue to use Fund 11 or Fund 14 only if a substantial portion of these funds’ inflows are restricted or committed revenue sources. For the majority of LEAs this will require taking formal action to commit flexed revenues to the purposes for which these funds were originally intended.
    
    In addition, GAAP requires that the committed revenue must then be recorded as revenue of the special revenue fund, not an interfund transfer. This will require a change in the accounting treatment for any flexed revenue that is to be expended in a special revenue fund rather than the general fund. Currently, LEAs initially report all flexed revenue, including amounts formerly restricted to Adult Education and Deferred Maintenance, in the general fund using Resource 0000, Object 8590. Flexed amounts to be expended in any other funds are then moved to those funds via an interfund transfer. Flexed revenue committed by an LEA to the purposes of Fund 11 or Fund 14 should now be reported directly in those funds as revenue using Resource 0000, Object 8590. Note that an LEA’s action to commit these revenues in order to justify the use of a special revenue fund does not make the revenues restricted; they remain unrestricted.
    
    Theoretically, where an LEA receives federal adult education revenue, the federal revenue might be great enough to compose a substantial portion of the revenues of Fund 11, thereby justifying the use of the special revenue fund. The LEA could then use an interfund transfer for the flexed state revenues it assigns to the purposes of that fund. However, the CDE advises that for consistency, the LEA should commit the flexed revenues to adult education and report them as revenues of Fund 11.
    
    Note that this guidance applies to special revenue funds only. GAAP does not require that other governmental funds, such as capital project funds or debt service funds, be composed substantially of a restricted or committed revenue source. It remains appropriate for an LEA to use an interfund transfer for moneys it assigns to those funds.
    
    Also note that this is a rare exception to the general observation that for LEAs, the difference between the committed and assigned classifications is minimal, and that when in doubt an LEA should use the lower classification.
    
    
    • A participant commented that one district put federal dollars in Fund 11 and state flexed dollars in Fund 01. However, their auditors instructed the LEA that all adult education activities should be recorded in Fund 11.
      
      The CDE concurred that an LEA that has federal Adult Ed revenues and that continues to operate an Adult Ed program using both federal funds and flexed state funds should use Fund 11 to report all its adult education activities.
      
      
    • A participant mentioned that her LEA was leaving the now-flexed former Deferred Maintenance funding in the general fund, but was continuing to transfer their former 50% match to Fund 14 for deferred maintenance.
      
      The CDE noted that strictly in accordance with GAAP, in order to justify the use of a special revenue fund, an LEA needs a specific revenue source. Technically, this LEA should therefore commit an amount of flexed revenue (an amount equal to its 50% match, in this case) to the purposes of deferred maintenance and should record that amount as revenue in Fund 14. The CDE acknowledged that the LEA ends up at the same place either way, but noted that GAAP requires that a specific restricted or committed revenue source must be the foundation of a special revenue fund. The CDE noted that other inflows can be reported in a special revenue fund, too, as long as a specific revenue source makes up a substantial portion of the inflows of the fund.
      
      
  • Fund 17 and Fund 20 – use of Resource 9010
    
    At the March 8, 2011 SACS Forum meeting the CDE discussed closing Resource 9010, Other Restricted Local, to Fund 17 and Fund 20.
    
    Subsequent to that meeting the CDE surveyed a few of the LEAs reporting large balances in Resource 9010 in Fund 17 and Fund 20 to determine whether that resource is being used appropriately. Although those LEAs surveyed appeared to be using Resource 9010 incorrectly, the CDE nevertheless wants to be sure that there is no legitimate reason to reported restricted amounts in these funds.
    
    In order to transition the closure of Resource 9010 to Fund 17 and Fund 20, the CDE is closing Resource 9010 and opening Object 9740, Restricted Balance, to Fund 17 and Fund 20 effective 2011–12. This will allow LEAs that may have restricted amounts appropriately reported in these funds to use Resource 9010, but they will receive a warning technical review exception that must be explained. The explanation should provide enough detail to describe why the funds are reported as restricted and allow the CDE to assess whether Resource 9010 should remain open in the two funds permanently. LEAs that are incorrectly reporting unrestricted amounts as restricted should reclassify those amounts to Resource 0000.  
    
    The code combination changes are reflected in the May 2, 2011 validation table update, discussed in more detail under SACS Software Issues.
    
    
  • Other issues or questions?
    
    
    • A participant asked whether all amounts in Fund 67, Self-Insurance Fund, should be reported as restricted. Per statute, amounts contributed to a self-insurance fund are restricted for that purpose. Although the CDE expects that a majority of amounts reported in this fund are restricted, more research will be done to ensure that it would not be appropriate to report any unrestricted amounts.
      
      Although GASB 54 does not apply to non-governmental fund types, the CDE expects that in order to achieve consistency in reporting across all funds, restricted amounts reported in these fund types should be reported in a restricted resource code.
      
      The CDE also clarified the use of the new object codes established for use in proprietary and fiduciary fund types, Object 9796, Invested in Capital Assets, Net of Related Debt, and Object 9797, Restricted Net Assets. Unlike the automatic calculation of restricted ending balances to Object 9740 in the SACS software for governmental fund types, there will be no automatic calculation of restricted ending balances to Object 9797 for non-governmental fund types. This is because balances of restricted resource codes may include both the value of capital assets as well as restricted amounts, thus there is no way for the software to determine the breakdown. LEAs will either include the appropriate net asset amounts SACS data import file, or manually input the amounts in the components of ending balance/net assets screen in the SACS financial reporting software.

SACS Software Issues

• May validation table updates
  
  The CDE announced new validation tables were released on May 2, 2011. The validation table updates [http://www.cde.ca.gov/fg/ac/ac/validcodes.asp]are available on the CDE Web site.
  
  
• SACS2011 software status
  
  
  • SACS2011 Budget release
    
    The CDE released the SACS2011 budget software on May 3, 2011.
    
    
  • Proposed SACS2011ALL changes – (Attachment A) [http://www.cde.ca.gov/fg/ac/ac/sacsminutes052011a.asp]
    
    The CDE reviewed the accompanying summary of changes to the SACS2011ALL software. The CDE asked participants if there were any concerns regarding the Proposed SACS2011ALL changes. No concerns were voiced.
    
    
  • Windows 7 issues
    
    The CDE mentioned some SACS software users have reported problems running the software on Windows 7 64-bit PCs. Although we are researching possible workarounds, these problems are currently unresolved. If and when a workaround is identified, it will be posted to the SACS Software Known Problems/Fixes Web page. [http://www.cde.ca.gov/fg/sf/fr/sacs2011probfix.asp]
    
    
• Future software proposals
  
  
  • SACS fund forms – follow-up from previous meeting
    
    At the March 8, 2011 meeting, participants were asked for feedback regarding the future appearance of the SACS fund forms. Participants did not bring any feedback to this meeting, and were asked to continue to keep this request for feedback in mind for future meetings or for submission directly to the CDE at any time.

Other Issues

• Education Jobs Fund (Ed Jobs) early retirement incentives approvals – update
  
  The CDE issued guidance to LEAs for the approval process of Ed Jobs early retirement incentives on March 5, 2011 and a number of LEAs have submitted requests for approval. In some cases, CDE has been able to review and approve the retirement incentive within a couple of hours. The CDE mentioned that a few LEAs requested approval for retirement incentives granted before August 10, 2010 (the date of the Act). The CDE confirmed that even where the LEA might demonstrate that such an incentive will save jobs in 2010–11, expenditures for obligations incurred prior to that date are not allowable.
  
  
• CSAM 2011 – review process
  
  The CDE asked the participants to contact the CDE Financial Accountability Information Services staff (sacsinfo@cde.ca.gov) if there were any LEA staff interested in reviewing the new GASB 54 accounting guidance that will be included in the next release of CSAM.
  
  
• Next meeting
  
  The next meeting has been scheduled for October 4, 2011. Please see the SACS Forum meeting Web page [http://www.cde.ca.gov/fg/ac/ac/sacsforum.asp] for additional information.