March 3, 2011

Dear Superintendents, Chief Business Officials, and Directors of Administrative Units for Special Education Local Plan Areas:

NEW FUND FOR SPECIAL EDUCATION LOCAL PLAN AREA PASS-THROUGH REVENUES

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.

BACKGROUND

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.

ACCOUNTING FOR SPECIAL EDUCATION PASS-THROUGH REVENUES

Applicability of the New Fund

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.[1] 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.

Accounting Procedures for the New Special Revenue 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.

1. Establishing beginning balances in the new fund. The establishment of the new special revenue fund to account for special education pass-through revenues is a change in application of an accounting principle. GAAP directs that for governments, the cumulative effect of an accounting change should be reported as a direct adjustment to beginning fund equity.[2] The usual accounting entry is to debit Object 9795, Other Restatements, in the general
   fund and to credit Object 9795, Other Restatements, in Fund 10, with offsetting entries to cash or to other assets or liabilities as appropriate. This entry is done for each resource for which a beginning balance is established.[3]
   
   
2. Receipt and pass-through of special education revenues for other member LEAs. The portion of special education revenues received by the AU for pass-through to other member LEAs in accordance with the local plan are accounted for as credits to the applicable revenue accounts in Fund 10, with offsetting entries to cash or to other asset accounts as appropriate. The eventual pass-through of these revenues to other member LEAs is accounted for as debits to inter-agency transfer accounts, with offsetting entries to cash or to other asset or liability accounts as appropriate. These entries are illustrated in detail in Attachment A.
   
   
3. Balances retained in the new fund. The amount of pass-through revenues received in a given period and the amount of revenues passed through to other member LEAs might not match exactly within that period due to various local factors such as agreements for balances or reserves to be maintained by the SELPA AU, timing differences relating to when amounts are passed through, and subsequent settle-up of amounts previously passed through. Ending fund balances are allowable in Fund 10.
   
   
4. Receipt of special education revenues by the AU when the exact amount to be passed through is not yet known. The AU can use either of the following accounting treatments:
   
   
   • Post the entire amount in Object 9910, Suspense Clearing. Once the distribution between the AU and other member LEAs is determined, reclassify the amount between the AU’s general fund and Fund 10.
     
     
   • Post amounts between the AU’s general fund and Fund 10 based on an estimate. Once the distribution between the AU and other member LEAs is determined, reclassify the amounts between the AU’s general fund and Fund 10 as necessary.
   
   
5. Interfund borrowing. Where an AU utilizes temporary interfund borrowing for purposes of cash management in Fund 10, the accounting entry is to debit Object 9310, Due From Other Funds with a credit to cash in the lending fund, and to credit Object 9610, Due To Other Funds with a debit to cash in Fund 10. These amounts are then carried on the balance sheet until the entry is reversed when the funds are repaid. Temporary interfund borrowings are not accounted for as interfund transfers and do not affect the fund balance for either the borrowing or lending fund. The interfund borrowing is not available for appropriation and is not considered income to the borrowing fund or account.[4]
   
   
6. Reallocation of revenues or balances from prior years. In some instances it may be necessary to reallocate prior year balances. For example, a SELPA may determine that a portion of a prior year balance originally allocated to the AU and remaining in the AU’s general fund should now be redistributed to Fund 10 for pass-through to member LEAs. The AU can use either of the following accounting treatments:
   
   
   • Adjust the current year revenue transactions between the AU’s general fund and Fund 10, for example by reducing the amount of current year revenue credited to the AU’s general fund and increasing the amount of current year revenue credited to Fund 10.
     
     
   • If the amount is not material compared to the revenues or fund balances of the AU’s general fund or of Fund 10, account for the reallocation as an interagency transfer from the AU’s general fund to the other member LEAs.
     
     Note that this treatment would be advisable only where due to its immateriality it would not defeat the purpose of achieving comparability among LEAs by accounting for pass-through transactions in Fund 10 rather than in the AU’s general fund.
     
     
7. Interest earned on balances in the new fund. Local agreements may vary as to the disposition of interest earned on SELPA balances. SACS revenue accounts for interest and investment earnings are open in combination with Fund 10, but there is no requirement that interest be posted to Fund 10 if the interest will not be passed through to member LEAs. Interest earned by the AU that will not be passed through to member LEAs may be posted to the AU’s general fund. These entries are illustrated in detail in Attachment A.
   
   
8. Interfund transfers. Following extensive consideration of whether there would be a need for interfund transfers to or from the new fund, it was concluded that there would not be. Interfund transfer accounts are therefore not open in combination with Fund 10.
   
   Prompting this extensive consideration was that many assumed from the beginning that the entire allocation of special education revenues should be posted first to Fund 10 and the AU’s portion would then be transferred to the AU’s general fund. Since this seemed so intuitive to so many, it seemed likely that some AUs, at least, would follow this practice and that a new basis for incomparability of LEA financial data would inadvertently result.
   
   The CDE working group examined every transaction that might involve the use of an interfund transfer. In each case, the group concluded that there existed an acceptable alternative accounting treatment for the transaction that did not involve the use of an interfund transfer. Most of these transactions are illustrated in this letter.
   
   
9. Balancing revenues to apportionment exhibits. During consideration of the new fund and associated accounting procedures, it was recognized that because pass-through revenues are posted to the new fund and the AU’s portion is posted to the AU’s general fund, LEAs’ reconciliation processes to balance special education revenues to apportionment exhibits or other source documents will now involve two funds instead of one.
   
   
10. Modifying the accounting for the state special education apportionment. While exploring accounting issues relating to the new fund, the CDE also considered whether to modify the “transfer of apportionment” accounting treatment for passing through the state special education apportionment to align it with the accounting treatment for passing through the federal special education apportionment, from which it differs slightly due to a provision in California statute. Although feedback from some LEAs showed support for this change, the CDE concluded that in keeping with its identified priority of minimizing the impact on LEAs from the changes relating to the new fund, it would be preferable not to introduce this additional change at this time.

Accounting for Special Education Pass-Through Revenues in an Agency Fund

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.

FUTURE CDE EFFORTS ON THIS TOPIC

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 sacsinfo@cde.ca.gov.

Sincerely,



Scott Hannan, Director
School Fiscal Services Division

Attachment [http://www.cde.ca.gov/fg/ac/co/selpaaufundltra.asp]

[1] "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.

[2] GASB Statement 34, Paragraph 309.

[3] 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.

[4] California Education Code Section 42603.