11_09 Public Comments on Adopted Amendment to 19 TAC §109.1002

ATTACHMENT III

Summary of Public Comments and Agency Responses Related to Proposed Amendment to 19 TAC Chapter 109, Budgeting, Accounting, and Auditing, Subchapter AA, Commissioner's Rules Concerning Financial Accountability, Division 1, Financial Accountability Rating System, §109.1002, Financial Accountability Ratings

School Districts

Indicators 16 and 17

Comment: Concerning proposed Figure: 19 TAC §109.1002(f), the Texas Classroom Teachers Association (TCTA) commented that, for Indicator 16 (student-to-teacher ratio), the rule should clarify that the definition for the term "teacher" is the same as the Texas Education Code (TEC), §5.001, in order to provide true accuracy and transparency to this metric. The TCTA further commented that otherwise, as it has in the past, the calculation will include any professional employee who is required to hold a valid teacher certificate or permit in order to perform some type of instruction to students, which can include personnel who don't teach at least an average of four hours each day in an academic instructional setting or a career and technology instructional setting.

Agency Response: The agency disagrees. In the Financial Integrity Rating System of Texas (FIRST), the number of teachers is calculated from PEIMS Code Table C021 Role-ID as defined in the FIRST software application. More specifically, a teacher is defined as a professional employee who is required to hold a valid teacher certificate or permit in order to perform some type of instruction to students. Permanent substitute teachers are also included in this total. The agency has determined that, for the purposes of financial accountability, the teacher information reflected in PEIMS provides the most accurate reflection of a district's financial obligation. The agency considers the number of personnel who do not teach at least an average of four hours each day to not have a significant effect on the student-to-teacher ratio.

Comment: Concerning proposed Figure: 19 TAC §109.1002(f), the TCTA commented that, for Indicator 16 (student-to-teacher ratio), the metric requires districts' ratios of students to teachers to fall within prescribed ranges according to district size, meaning that if districts have small student-to-teacher ratios and fall outside the prescribed range, it counts against them in their FIRST rating. The TCTA stated that it does not see a good public policy reason for punishing districts for maintaining low student/teacher ratios given the vast amount of research supporting the benefits of individualized instruction for students.

Agency Response: The agency disagrees. The low threshold of the student-to-teacher ratio ranges from 7 to 13.5. While the agency acknowledges the benefits of individualized instruction, it is appropriate for districts with ratios beyond a certain level to examine whether they result in an effective use of taxpayer funds. The financial management report procedure under the TEC, §39.083, requires a district to hold a public meeting to discuss its School FIRST results compared to the state standard. The public hearing process offers an opportunity for the district to provide more detailed statistics and explanatory information. If a district chooses to set a lower student-to-teacher ratio than the state standard, it can do so and provide its rationale to local taxpayers. Furthermore, the agency notes that this is not a critical indicator that results in automatic failure of School FIRST. Therefore, a district could earn fewer than five points on this indicator and still receive an acceptable, or higher, School FIRST rating.

Comment: Concerning proposed Figure: 19 TAC §109.1002(f) and the indicators for teacher and staff ratios (Indicators 16 and 17), the TCTA noted that the indicators focus on comparisons of ratios of students to teachers and then overall staff. The TCTA stated that what appears to be missing is an indicator that compares ratios of classroom teachers, as defined by the TEC, §5.001, to total staff, as this has been a subject of increasing interest by legislators and other policymakers. The TCTA further commented that given the increased emphasis in these tight budgetary times on the efficiency of school district expenditures, coupled with the oft-stated goal of the need to preserve classroom instruction as a budgetary priority, it would be a serious oversight for a state financial accountability rating system not to include such an indicator. Accordingly, the TCTA recommended that such an indicator be added.

Agency Response: The agency disagrees. Currently, the TEC, §44.0071, requires each fiscal year that a school district compute and report to the commissioner: (1) the percentage of the district's total expenditures for the preceding fiscal year that were used to fund direct instructional activities; and (2) the percentage of the district's full-time equivalent employees during the preceding fiscal year whose job function was to directly provide classroom instruction to students, determined by dividing the number of hours spent by employees in providing direct classroom instruction by the total number of hours worked by all district employees. This information is available on the Academic Excellence Indicator System (AEIS) report. The TEC, §39.082(c), states that the financial accountability system may not include an indicator or any other performance measure that: (1) requires a school district to spend at least 65 percent or any other specified percentage of district operating funds for instructional purposes; or (2) lowers the financial management performance rating of a school district for failure to spend at least 65 percent or any other specified percentage of district operating funds for instructional purposes. If an indicator for the ratio of classroom teachers to total staff were added, a certain percentage would have to be specified as the optimum ratio, which could be construed as requiring a specified percentage of funds to be spent on instructional purposes.

Indicator 20

Comment: Concerning proposed Figure: 19 TAC §109.1002(f), the Texas Association of School Boards (TASB) proposed that Indicator 20, former Indicator 22, be changed to determine whether investment earnings in all funds (excluding debt service funds and capital projects) meet or exceed the investment earnings at the federal funds rate minus .25%. The TASB proposed an indicator that would reduce the benchmark by 25 basis points (.25%) to take into account the fact that the benchmark is merely a rate and does not include transaction and other costs related to investing in available securities. The TASB stated that this would be based on the average balance of cash and cash equivalents over the course of the year and the monthly average federal funds rate over the course of the fiscal year. The TASB stated that its proposed indicator would be an improvement over the indicator proposed by the agency for the following reasons.

The indicator proposed by the agency is a fixed standard that requires rule revisions to change. As interest rates rise, the rule will have to be constantly revised to be relevant to investment return potentials. The indicator proposed by the TASB uses a benchmark that changes with regard to the economic climate and that influences the range of investment returns that are available in the capital market. The indicator proposed by the TASB should limit the need for change in the future and will result in a benchmark by which schools might compare themselves across years as a result of having a constant standard.
The indicator proposed by the agency has the potential to incent poor financial practices. As written, the indicator proposed by the agency could provide districts with an incentive to take on more risk with their investments than they normally would in an effort to achieve partial or full points for this indicator. This would be counter to the Public Funds Investment Act, which places yield last in its lists of priorities regarding the investing of public funds and states that safety of principal and liquidity are to take priority over yield.

Agency Response: The agency agrees with the majority of the proposal for improvement in Indicator 20. The results of calculations based on the indicator proposed by the TASB were comparable to the average rate proposed by the agency; however, subtracting 25 basis points (.25%) resulted in many districts achieving a negative rate of return. In response to another comment, the agency has modified Indicator 20 to use a comparison to the 3-month Treasury bill rate since the investment pools used by many school districts also track the 3-month Treasury bill rate.

Comment: Concerning proposed Figure: 19 TAC §109.1002(f), an administrator from Garland Independent School District (ISD) stated that the rating worksheet for Indicator 20, former Indicator 22, needs to be amended to evaluate a district's financial management/condition for areas that the district can control. The administrator stated that 1-year Treasury bills are currently yielding approximately .14%, which makes it virtually impossible for a district of any size to earn all 5 points on this indicator. The administrator proposed revising the indicator by linking it to an index.

Comment: Concerning proposed Figure: 19 TAC §109.1002(f), an administrator from Jasper ISD stated that the rating worksheet for Indicator 20, former Indicator 22, needs to be amended since interest rates have been extremely low. The administrator also stated that, with the potential funding cuts, districts will most likely have to use fund balance to offset revenue losses and, depending on their available cash flow and fund balance, this indicator may be an issue.

Comment: Concerning proposed Figure: 19 TAC §109.1002(f), an administrator from Spring Branch ISD stated that the rating worksheet for Indicator 20, former Indicator 22, needs to be amended since the statewide results evidence the effect of the current economy and low interest rates on a district's ability to earn interest revenue. The administrator further stated that, while the standard of $17 to $20 interest earnings per student in funds other than the debt and capital projects funds was reflective of statewide earnings at the time it was established, the standard is not possible for most districts of size to meet given current circumstances. The administrator noted that in a steady or robust economy, earnings for districts with active portfolios may be two or three times this standard. The administrator also stated that lower district fund balances and later payments from the state leave fewer funds on hand to invest. The administrator recommended that the measure reflect the economic and interest environment of the time and suggested that a measure based on investment markets would be more logical instead of a fixed dollar measure per student.

Agency Response: The agency agrees and has modified Indicator 20 to use a calculation that compares the district's interest earned to an average interest rate to prevent continuous rule actions to estimate interest yields. In addition, the agency provides the following clarification. Comments regarding a target value of $20 in interest earnings per student are referring to Indicator 22 on the School FIRST rating worksheet dated March 2010, which was in effect for data from fiscal year 2009-2010. For data from fiscal year 2010-2011, the target value for interest earnings per student became Indicator 21, due to renumbering, and was set at $15 on the School FIRST rating worksheet dated December 2010. However, through the current rule action, which updates provisions to be implemented with data from fiscal year 2010-2011, Indicator 21 has been renumbered as Indicator 20 and the specific dollar amount was changed to an average interest rate at adoption.

Comment: Concerning proposed Figure: 19 TAC §109.1002(f), administrators from Houston ISD and Fort Bend ISD stated that the rating worksheet for Indicator 20, former Indicator 22, needs to be reformulated due to problems pertaining to the target value of $20 in interest earnings per student and commented that a fixed dollar target is not reflective of current financial market conditions existing during any fiscal period evaluated. The administrators further stated that this fixed target will result in the indicator being too easy to reach when short-term rates are high or too difficult to reach when interest rates are low. The administrators also stated that when market conditions exist whereby short-term rates are low for a long period of time (including fiscal year 2009-2010 through current), the indicator target pushes school districts to incur various risks, including interest rate risk, credit risk, and liquidity risk, in order to attain yields necessary to meet the earnings target. The administrators noted that the acceptance of these risks is in direct contradiction to prudent investment practices and the Public Funds Investment Act. The administrators recommended that an indexed target rate be established for this indicator test and provided an example of a target rate tied to the average monthly federal funds rate or 3-month Treasury rate as published by the Federal Reserve. The administrator from Fort Bend ISD also recommended that the calculation be modified to remove the negative impact on interest earnings that will materialize in the future due to the delay of the payment of state funding in August 2013 to a subsequent fiscal year and/or to reflect the impact of any potential proration of state funding.

Comment: Concerning proposed Figure: 19 TAC §109.1002(f), an administrator with Kirbyville Consolidated ISD stated that in regard to Indicator 20, former Indicator 22, it seems almost impossible to earn $20 per student in investment earnings in current economic times. The administrator further stated that in the past, the district received 4 points for this indicator, but, due to the market fluctuations in fiscal year 2009-2010, the district received 0 points, causing the district's overall rating to drop. The administrator noted that a district should not be held accountable for market conditions that were unpredictable and out of the district's control. The administrator asked that the TEA consider reviewing and revising the indicator to a lesser amount than $20 per student.

Charter Schools

Comment: Concerning proposed Figure: 19 TAC §109.1002(g), the Texas Charter Schools Association (TCSA) commented that it recognizes that the purpose of the proposed amendment is to provide relief from indicators related to recommended financial reserves given current economic conditions and changes in state funding for open-enrollment charter schools. The TCSA further noted that it appreciates and supports the TEA's proposed rule change that revises the rating worksheet by deleting the indicators that refer to the ability of a charter school's assets to cover two months without additional funds.

Agency Response: The agency agrees.

Indicator 17

Comment: Concerning proposed Figure: 19 TAC §109.1002(g), the TCSA commented that, to provide further financial relief from current economic conditions, it recommends deleting Indicator 17, which reviews whether a charter school has a decrease in total net assets of 20% or more over two fiscal years. According to the TCSA, the proposed reduction in state funding alone is 14.5% over the next two fiscal years, and this indicator permits only an additional reduction of 5.5% in order for a score of 5 to be achieved. The TCSA further commented that a 5.5% reduction may be necessary for a small charter school to meet current year operating obligations alone.

Agency Response: The agency disagrees. Good financial management of a nonprofit organization is similar to for-profit management. For successful financial management, the board should reevaluate budgeted expenses if actual revenue falls short of the budgeted amount. Since net assets represent the difference between a nonprofit organization's assets and liabilities, a decrease of 20% or greater indicates a deterioration in the financial stability of the organization.

Indicator 19

Agency Response: The agency agrees in part and disagrees in part. The agency will not delete the indicator but has modified Indicator 19, including the calculation, to use the same method adopted for school districts, which will focus on a comparison of the interest rate earned by the charter school to the average 3-month Treasury bill rate to allow for fluctuations with changes in interest rates.

For additional information, email rules@tea.state.tx.us.

Page last modified on 10/12/2011.