March 3, 2011
Dear Superintendents, Chief Business Officials, and Directors of Administrative Units for Special Education Local Plan Areas:
The California Department of Education (CDE) has established a special revenue fund for use by the Administrative Unit (AU) of a Special Education Local Plan Area (SELPA) to account for special education pass-through revenues outside the general fund.
Generally, the new fund is required for AUs that receive pass-through revenue for special education from federal, state, or local sources and that have administrative involvement in allocating and distributing the revenues to other member agencies. The few AUs for which the new fund is not required are identified in the section titled “Applicability of the New Fund” later in this letter.
The new fund is effective beginning in 2011–12. This letter describes the background leading to the establishment of the new fund and provides guidance to AUs on accounting for special education pass-through revenues.
On multiple occasions over the last several years, it was brought to the CDE’s attention that reporting special education pass-through revenues in the general fund of a SELPA AU impairs meaningful comparison of the AU with otherwise-similar local educational agencies (LEAs). This has been primarily problematic where the AU is a school district, rather than a county office of education (COE), particularly where a district that is a SELPA AU has attempted to pass a parcel tax, because inclusion of the pass-through revenues makes the district’s per-pupil revenues appear higher than those of other districts.
More recently, there was also brought to the CDE’s attention an occurrence in which SELPA pass-through balances in the AU’s general fund masked an unrelated fiscal solvency issue that would otherwise have been apparent.
Although these problems have not been widespread among all LEAs or even among all SELPA AUs, the problems have been significant enough for those LEAs affected by them that finding a solution was imperative. In exploring possible solutions, the CDE established as its priorities to improve comparability among LEAs; to conform to generally accepted accounting principles (GAAP); and to minimize, to the extent possible, the impact for those AUs for which the problems and current procedures were not a concern but that would nonetheless be affected by the solution.
The CDE conducted extensive research and solicited a great deal of feedback from LEAs. The CDE extends its appreciation to the many individuals who attended the meetings convened to explore this topic, embraced the need for a solution, provided helpful perspectives, and accepted the need for compromise in order to achieve that solution. CDE further extends its appreciation to the smaller group of individuals that then served as an informal working group to advise the CDE on resolution of the many inevitable details.
The new fund is required for all SELPA AUs that receive special education pass-through revenues and that have administrative involvement in allocating and distributing those revenues to other member LEAs. By definition, most AUs do have administrative involvement in the pass-through of special education revenues. A rare exception is an AU that serves purely as a cash conduit in receiving special education revenues and relaying them directly to a joint powers agency (JPA), where the JPA then performs all other AU services including allocation of the funds to member LEAs. AUs that serve purely as cash conduits, and AUs of single-district SELPAs that receive no pass-through revenues for any other LEAs, will not use the new fund. The JPA described in this paragraph that receives and passes through revenues to other member LEAs will use the new fund.
The new fund is used only for pass-through revenues. Special education pass-through revenues are those revenues received by the AU on behalf of the SELPA for distribution to other member LEAs in accordance with the local plan. While the disposition of revenues might vary somewhat among SELPAs according to each SELPA’s local plan, such revenues typically include state special education apportionments, federal local assistance under the Individuals with Disabilities Education Act, the portion of a COE’s local property taxes restricted to special education, federal preschool funding, and state mental health funding.
Special Education revenues that are not passed through to other member LEAs, but rather are retained for use by the AU in accordance with the local plan, are not accounted for in the new fund. These revenues and the related expenditures are operational in nature and are properly accounted for in the AU’s own general fund.
The new fund is defined in the standardized account code structure (SACS) as Fund 10, Special Education Pass-Through Fund. The following paragraphs describe the accounting entries necessary to establish the new fund and to account for the transactions likely to be encountered in the new fund, with additional discussion of issues about which individuals from LEAs expressed particular concern.
A very few LEAs are AUs for SELPAs organized as legally separate JPAs. Because current law does not allow the CDE to apportion funds to a JPA, the AU receives the revenue on behalf of the JPA and transfers it intact to the JPA, which then allocates it to the other member LEAs in accordance with the local plan.
Where an AU serves purely as a cash conduit for pass-through revenues, with no administrative or fiscal involvement in allocating the revenues, the use of an agency fund for the pass-through revenues is appropriate. In SACS, Fund 76, Warrant/Pass-Through Fund, is defined to account for those receipts for transfer to agencies for which the LEA is acting simply as a cash conduit. The accounting entry is to debit cash and credit Object 9620, Due to Student Groups/Other Agencies, upon receipt of the revenues and to debit Object 9620 and credit cash when the revenues are passed through to the JPA.
The JPA that receives and passes through the SELPA revenues to other member LEAs will use the new fund and the procedures in this letter.
The guidance and illustrations in this letter are being incorporated into the upcoming edition of the California School Accounting Manual. The new fund will be included in the 2011–12 budget release of the SACS financial reporting software, and the tables of valid SACS account combinations have been updated.
If you have questions or need assistance with the guidance in this letter, please contact the Office of Financial Accountability and Information Services at 916-322-1770 or by e-mail at firstname.lastname@example.org.
Scott Hannan, Director
School Fiscal Services Division
 "Administrative involvement” is defined in Governmental Accounting Standards Board (GASB) Statement 24 and in the California School Accounting Manual, Procedure 750. GAAP requires that when a recipient agency has either administrative or direct financial involvement in a pass-through grant, the pass-through transactions must be recorded in a governmental fund.
 In a resource subject to deferred revenue rather than fund balance, an entry to the Restatements account would not be appropriate, but an entry might be needed for Deferred Revenue or Accounts Receivable.