Arkansas Department of Education Fiscal Distress Program

1. Arkansas Department of EducationFiscal Distress Program Presented to Joint Adequacy Evaluation Oversight Subcommittee of the House and Senate Interim Committees on Education March 13, 2008

2. Purpose The purpose of Fiscal Distress is to provide early interventions to school districts to improve their financial status before a crisis exists

3. History • Act 915 of 1995 A.C.A. 6-20-1601-1610, Repealed by Act 1467 of 2003 • Act 1467 of 2003 A.C.A. 6-20-1901 • Act 741 of 2007 A.C.A. 6-20-1904

4. Indicators of Fiscal Distress (A.C.A. 6-20-1904) Any indicator which could jeopardize the fiscal integrity of a school district may be used to identify a district as being in Fiscal Distress • Declining Balance determined to jeopardize the fiscal integrity of the district • Material failure to properly maintain facilities • Material violation of local, state, or federal fire, health, or safety codes • Material violation of local, state, or federal construction codes • Material state or federal audit exceptions • Material failure to provide timely and accurate, legally-required financial reports to ADE, Audit, Legislature, or IRS

5. Indicators of Fiscal Distress(Continued) (A.C.A. 6-20-1904) • Insufficient funds to cover payroll, benefits, and/or tax obligations • Failure to meet minimum teacher salary schedule • Failure to comply with purchasing or bid requirements • Default on a district debt obligation • Material discrepancies between budgeted and actual school district expenditures • Failure to comply with audit requirements • Failure to comply with provisions of the law that specifically place a district in fiscal distress • Any other fiscal condition deemed to have a detrimental negative impact on the continuation of educational services ******

6. Specific Reasons for Being in Fiscal Distress • Overage and cost overruns on construction projects • Placing bond proceeds or partnership money in operating fund • Excessive debt • Loss of students without making appropriate adjustments in staffing and facilities usage • Inaccurate and/or inconsistent financial record keeping • Operating programs beyond what is required • Fixed costs exceed revenues available • Operating day care programs in the red • Operating Child Nutrition programs in the red • Excessive increases in salaries beyond funds available

7. Specific Reasons for Being in Fiscal Distress(Continued) • Not being current on health insurance or teacher retirement benefits • Use of cash flow loans to cover lack of operating funds • Loss of state revenues and no adjustments in expenditures • Audit findings dealing with not following bid laws and not complying with ethics laws on disclosure • Illegal uses of categorical or federal funds • Not utilizing federal funds/or categorical funds to provide supplemental programs • Not reconciling the bank statements • Failing to use standardized accounting procedures and/or not filing accurate, required financial reports

8. Specific Reasons for Being in Fiscal Distress(Continued) • Transfers within funds that are excessive • Inability to say “No.” ******

9. Process of Identification • Perform an annual financial review of all school districts to determine those with declining balances and/or other financial indicators which indicate financial concerns • Districts with a three year declining balance are identified. • District is sent a letter and asked to respond to a financial questionnaire to provide additional financial information. • A conference is held with the district to gain further insight into their financial status • The district is requested to provide any additional, relevant information to explain its deteriorating financial status • ADE conducts a thorough financial analysis of the current status of the district and projects balances based on available facts

10. Process of Identification(Continued) • Report of findings is provided to the Commissioner of Education • Decision is made on what districts will be recommended to the State Board of Education to be identified as being in Fiscal Distress • District is notified by certified mail that the district will be recommended to be classified in Fiscal Distress by the State Board. • District is given thirty days to appeal the recommendation • State Board of Education makes the final determination to classify a district as being in Fiscal Distress ******

11. Fiscal Distress Timeline November - - - - Begin process of analyzing financial data and gathering reports December - - - - Annual review of financial information for all school districts (AFR’s, Audits, Balances, etc.) January - - - - - - Contact districts with declining balances and other Fiscal Distress indicators Mail first letter to districts with Fiscal Distress indicators with financial questionnaire

12. Fiscal Distress Timeline (Continued) February - - - - Questionnaires due back to ADE Conferences held with districts being screened to review financial information Districts present additional information regarding financial status March - - - - - - Mail identification letters by certified mail April - - - - - - - Deadline for district appeals of Fiscal Distress identification State Board hears appeals filed by districts State Board classifies Fiscal Distress districts

13. Fiscal Distress Timeline (Continued) May - - - - - - Fiscal Distress Plans due to ADE ******

15. Classification in Fiscal Distress(A.C.A. 6-20-1906) • State Board of Education classifies district as being in Fiscal Distress • District has to publish one time for two consecutive weeks in a newspaper with general circulation that the district has been classified as being in Fiscal Distress and give reasons why • No district classified as being in Fiscal Distress may incur any additional debt without prior written approval of ADE • Within ten days of being classified, a written Fiscal Distress Improvement Plan must be filed with ADE • The Plan outlines how the district will remedy the problems which resulted in the district being classified in Fiscal Distress

16. Classification in Fiscal Distress(Continued) • The district has two years to improve its financial status sufficient to be removed from Fiscal Distress status • ADE must provide on-site technical assistance • ADE makes recommendations which are binding on the district • ADE makes a progress report to the State Board every six months on the status of each district in fiscal Distress • ADE may recommend at any time the consolidation, annexation, or reconstruction of a fiscal Distress or may take other appropriate actions to secure the educational resources of the state or to act in the best interests of the students in the Fiscal Distress district

17. Classification in Fiscal Distress(Continued) • Any district that fails to make adequate improvements to be removed from Fiscal Distress status within the two year time frame shall be consolidated, annexed, or reconstituted by the State Board • When ADE certifies to the State Board that the district has met the objectives in its Fiscal Improvement Plan, the district then petitions the State Board for removal from Fiscal Distress status ******

18. Legal ADE Actions(A.C.A. 6-20-1909) In addressing needs of Fiscal Distress districts, ADE may: • Replace the superintendent • Appoint a new superintendent • Suspend the local board • May require a newly-elected board • May impose reporting requirements • Monitors fiscal operations and accounts of the Fiscal Distress district • May require fiscal training for the district staff and board • May take any action deemed necessary to assist in removing a district from Fiscal Distress ******

19. Legal State Board Actions (A.C.A. 6-20-1910) • May consolidate, annex, or reconstitute to another district or districts • Board may determine boundary lines of the receiving or resulting districts • Board may allocate assets and liabilities of the Fiscal Distress district ******

20. Fiscal Distress Districts2007-2008 • Bald Knob • Bismarck • Clinton • Helena/West Helena • Hughes • Midland • Omaha • Turrell