November 12, 2003
To: County and District Superintendents
County and District Chief Business Officials
Charter School Administrators
Via: Susan Lange, Deputy Superintendent
Finance, Technology, and Administration Branch
From: Scott Hannan, Director
School Fiscal Services Division
Subject: 2003–2004 Budget: Flexibility Provisions
The 2003–04 budget, Assembly Bill 1754 (Chapter 227, Statutes of 2003), made a variety of cuts to K–12 programs, the largest of which hit school district revenue limits. In an effort to mitigate the effects of the budget reductions, AB 1754 also provided increased budget flexibility for local educational agencies (LEAs). The purpose of this letter is to describe and give guidance on the fiscal consequences of that budget flexibility.
In summary, sections 9, 39 and 40 of AB 1754 provide budget flexibility, with certain exceptions, by allowing all LEAs to maintain one-half of their recommended reserve for economic uncertainties, and allowing school districts and county offices of education to use as general purpose monies 100 percent of their June 30, 2003 restricted General Fund and Cafeteria Fund balances. The bill also allows school districts and county offices of education to reduce their 2003–04 contribution to the ongoing and major maintenance account from 3 percent to 2 percent of General Fund expenditures. (Note that the Office of Public School Construction is currently reviewing whether this percentage should be applied to total General Fund expenditures or only unrestricted General Fund expenditures.) All of these "freed-up" funds may then be used to provide budgeting flexibility to mitigate the impact of the 2003–04 budget reductions. Note that LEAs' budget flexibility is not limited to the amount of revenue limit reductions that were incurred for 2003–04.
AB 1754 provides, with the following specific exceptions, that 100 percent of General Fund and Cafeteria Fund restricted account balances as of June 30, 2003 may be used as unrestricted general purpose monies. The exceptions are restricted reserves committed for capital outlay, bond or sinking funds, federal funds, and balances in the restricted accounts of the following programs:
Immediate Intervention / Underperforming
Schools Program (II/USP)*
High Priority Schools (HPS)*
Targeted Instructional Improvement Grant (TIIG)
Economic Impact Aid (EIA)
Instructional Materials Special Education
*Programs under the Public Schools Accountability Act
Available balances of restricted accounts specifically do not include appropriations deferred from the 2001–02 fiscal year to the 2002–03 fiscal year, appropriations deferred from the 2002–03 fiscal year to the 2003–04 fiscal year, or amounts where the redirection would cause the LEA to violate federal maintenance of effort requirements. Attachment 1 includes a listing of the appropriation deferrals excluded from the provisions of AB 1754.
It is the intent of the Legislature to allow LEAs to access surplus balances in the Cafeteria Fund. However, for districts participating in federal food programs, flexibility may be limited. Federal law requires school food authorities to establish a nonprofit school food service, and further requires that federal, state and local revenues received by the school food service be used only for the operation or improvement of such service. Therefore, you should exercise caution if your district receives federal funds and has established a school food service in accordance with federal guidelines, so as to ensure program compliance and avoid a federal audit exception.
As previously stated, balances in restricted accounts should not be used for budgeting flexibility if that use violates federal maintenance of effort (MOE) requirements. Therefore, if you receive federal funds, you should ensure that you are adhering to the MOE requirements of your federal programs.
You should also be aware of any waiver provisions if MOE requirements are not met. For example, No Child Left Behind (NCLB) regulations provide that if there is an unprecedented decline in state revenues, individual LEAs may apply directly to the federal government for a waiver of the MOE requirements. If you are unsure whether a specific federal program has a required MOE or whether those MOE requirements can be waived, you should contact the appropriate program office at the California Department of Education (CDE).
Because the Legislature generally has no authority to amend a voter-approved initiative unless the measure itself so provides, we recommend that you avoid using any available balances generated as a result of a voter-approved initiative for flexibility purposes. Examples of such programs include:
Tobacco Use & Prevention Education (TUPE) -
Community Based English Tutoring (CBET) - Proposition 227
Lottery Instructional Materials - Proposition 20
We also recommend that you use caution when utilizing AB 1754 flexibility so that you do not violate contractual obligations with external parties. The Legislature's authority to abrogate contractual obligations is limited, and legal issues may arise if you unilaterally cancel contracts with external (i.e., non-governmental) parties. The Legislature's authority does extend, however, to contracts and grants between state and local governmental agencies, where state funds are involved.
For purposes of calculating the restricted account balances available for transfer, start with the June 30, 2003 ending balance in your General Fund restricted accounts, and subtract any restricted balances that should be excluded (e.g., those specifically excluded by the bill; those whose redirection would create a violation of maintenance of effort requirements; those from deferrals between fiscal years; or those whose balances you've determined would be better spent in the original program, based on your local priorities). This is the amount that you may redirect pursuant to the provisions of AB 1754. Available restricted account balances may be transferred at any time prior to closing the books for the 2003–04 fiscal year.
Because AB 1754 requires the Superintendent of Public Instruction (SPI) to report all flexibility transfers to the Legislature, a new object code has been created to track these transactions. When a transfer is made from a restricted account, you should record a contribution from the resource of the restricted program from which the balance is being used to the resource benefiting from its use, using Object 8997, Transfers of Restricted Balances.
Transfers made pursuant to AB 1754 should be tracked separately from the transfers authorized annually by Section 12.40 of the Budget Act. The Budget Act transfers should continue to be tracked using Object Code 8998, Flexibility Transfer. To avoid confusion, we will be changing the title of object code 8998 from "Flexibility Transfer" to "Section 12.40 Transfer."
Attachment 2 includes a listing of those resource codes that are not valid in the state software in combination with Object 8997, Transfers of Restricted Balances. This table has been prepared based on our analysis of the provisions of Section 39 of AB 1754. If you believe the restricted balance of one of these resource codes should be available for transfer, use Object 8997 with an excluded resource. However, you will have to explain the validity of the transaction in the Technical Review Checklist (TRC) in the state financial reporting software.
Education Code Section 33128.3, as added by Section 9 of AB 1754, provides that for fiscal years 2003–04 and 2004–05, a school district or county office of education may reduce their recommended minimum reserve for economic uncertainties to one-half of the amount adopted by the State Board of Education (SBE) as of May 1, 2003. It is CDE's opinion that this applies to both the percentages and the dollar amounts specified in the criteria and standards.
Be aware that Education Code Section 33128.3 specifies that for the 2005–06 fiscal year, the minimum reserve requirement will be restored back to the original percentages and amounts adopted by the SBE. This means, for LEAs that implement the provisions of Section 9 of AB 1754, their multi-year projections must include assumptions for adequate expenditure cuts and/or revenue increases to achieve a full reserve by 2005–06. Reviewing agencies should ensure that multi-year projections include these assumptions, and follow up with LEAs as necessary in order to determine how the LEAs plan to comply.
Note that the criteria and standards calculations in the state software, which are used by LEAs to prepare interim reports, have not been modified to incorporate this change. However, you should explain your reduced reserve for economic uncertainties in the explanation section provided in the criteria and standards section in the software.
If you have questions regarding the applicability of AB 1754 to a specific program, we recommend you contact that program office directly. For program contact information, you can refer to the SACS Query page on our website at www.cde.ca.gov/fg/ac/ac/. If you have accounting questions regarding the flexibility provisions of AB 1754 or questions regarding General Fund reserves, please contact the Office of Financial Accountability and Information Services at 916-322-1770 or firstname.lastname@example.org. All other questions may be directed to Scott Hannan, Director of the School Fiscal Services Division, at 916-322-3024.