The agency agrees on the need to define the variable "E" and provides the following clarification and modification of the language of Indicator 6, Figure: 19 TAC §109.1001(f)(2) and §109.1001(f)(3). The equation for Indicator 6 for the 2015-2016 and 2016-2017 rating years has been modified at adoption to state: [(A+B)/(C-D-E)] * 365, where

A = Cash and Equivalents;

B = Current Investments;

C = Total Expenditures;

D = Depreciation Expense;

E = Pension Expense, OPEB, and NPL, as applicable

The agency agrees that the operating expenses of a charter school that acts as the fiscal agent for an SSA should be excluded from the total expenses of the charter school that acts as the fiscal agent. The agency will exclude the expenses of the SSA member schools from the fiscal agent's expenses.

MATERIAL WEAKNESSES

(INDICATOR 7 for 2014-2015 Rating Year)

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(1) and Figure: 19 TAC §109.1001(f)(1), the assistant superintendent for business and finance from Fredericksburg ISD and the TCSA commented that Indicator 7 should be reworded and restructured to state: "Did the external independent auditor report that the AFR was free of any instance(s) of material weaknesses in internal controls over financial reporting and compliance for local, state, or federal funds as defined by the AICPA?"

Agency Response: The agency agrees and has modified the language of Indicator 7 at adoption to state: "Did the external independent auditor report that the AFR was free of any instance(s) of material weaknesses in internal controls over financial reporting and compliance for local, state, or federal funds? (The AICPA defines material weakness.)" This modification was made to Figure: 19 TAC §109.1001(e)(1) and Figure: 19 TAC §109.1001(f)(1).

CURRENT ASSETS TO CURRENT LIABILITIES

(INDICATOR 7 for 2015-2016 and 2016-2017 Rating Years)

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(2), Figure: 19 TAC §109.1001(e)(3), Figure: 19 TAC §109.1001(f)(2), and Figure: 19 TAC §109.1001(f)(3), representatives with the TCSA and Texans for Quality Public Charter Schools commented that Indicator 7 should exclude balloon payments from the calculation, that the indicator should be reworded, and that the phrase "to cover short-term debt" seems superfluous.

Comment: A representative from KIPP Houston commented that, "Indicator 7 has a possible issue, especially for short term loans, like construction loans, and for balloon indebtedness coming due in a year which will be refinanced...the current 'asset' in this case would be an impending refinancing that wouldn't show up on this balance sheet calculation." The representative suggested that the calculation exclude loans that are to be refinanced in the current year from being counted as a current liability.

Agency Response: The agency disagrees that balloon notes should be excluded from the calculation of current assets to current liabilities in Indicator 7. The charter school has at its own discretion the right to make the decision to refinance any balloon notes that the charter school is responsible for payment of. In addition, the charter school is responsible for making sound fiscal decisions for the charter school and carrying numerous balloon notes may cause the charter school to become insolvent. Also, the agency disagrees that the language for Indicator 7 should be revised and that the phrase "to cover short-term debt" is superfluous. The language for Indicator 7 is clear and direct and the intent is to determine if the charter school or district has enough current assets to cover the charter school's or district's short-term debts. The agency has determined that balloon notes will not be excluded from the equation for Indicator 7 and will not make the suggested change.

LONG-TERM LIABILITIES TO LONG-TERM ASSETS

(INDICATOR 8 for 2015-2016 and 2016-2017 Rating Years)

Comment: A school official from McKinney ISD suggested that the ratio of interest to principal be used to identify a district's long-term solvency for Indicator 8 (Was the measure of long-term liabilities to long-term asset ratio for the district sufficient to support long-term solvency?) instead of the ratio of long-term liabilities to long-term assets. The commenter stated that fast-growth districts will all receive very low points for the ratio of long-term liabilities to long-term assets because relatively new assets will be offset with relatively new liabilities.

Comment: A school official from Plano ISD disagreed with using the proposed Indicator 8 for the 2015-2016 School FIRST Ratings based on FY 2015 data and the 2016-2017 School FIRST Ratings based on FY 2016 data. The school official suggested that the ratio of future payments to current principal outstanding is a better indicator to determine long-term solvency than the ratio of long-term liabilities to long-term assets.

Comment: A school official from Frisco ISD asked that the agency amend the language in Indicator 8 to include an exception for fast-growth districts.

Comment: A representative of Dallas ISD recommended that the agency add the following conditions to Indicator 8: "If the DCC 3200 (Net Investment in Capital Assets) is positive, then the LEA automatically passes. Or, if the I&S tax rate is below 50 cents, then the LEA automatically passes."

Comment: A representative of Austin ISD commented that it seems excessive that the only way a district can achieve the highest score on Indicator 8 is to have long-term assets nearly double its long-term liabilities and that many districts have to rely on local taxpayer-approved bond referendums to support capital improvements because the state has a propensity for underfunding both maintenance and operations (M&O) collections and facilities.

Comment: A representative of Keller ISD suggested that the relationship between bonded debt and taxable appraised value is a better comparison than long-term liabilities to long-term assets because the appraised values, not buildings, generate cash flow through the interest & sinking fund tax rate.

Comment: Representatives of Texans for Quality Public Charter Schools stated that the long-term liabilities to long-term assets metric, as proposed, ignores cash balances and other short-term assets, including state and federal receivables, as a resource to meet long-term requirements. The representatives recommended that the agency consider excluding Indicator 8 until a more suitable alternative considering loan funds (short-term assets) and loan balances (long-term liabilities) is produced, for instance, a formula that allows bond funds to be recognized as long-term assets.

Comment: A representative of the TCSA suggested that the agency adjust the point structure for Indicator 8 because it punishes reasonable growth and sacrifices instructional supports in the classroom and excludes OPEB and NPL from the calculation as they apply to government charter schools.

Comment: A representative of KIPP Houston commented that Indicator 8 is a redundant and unnecessary test because long-term viability is already measured by Indicators 5 and 10. The representative stated that the underlying assumption is that charters are going to extinguish debt with long-term assets, which is not the case.

Comment: A representative of the Excel Academy Charter School commented that the charter holder for Excel Academy is the Harris County Juvenile Board, which is a governmental entity. The commenter stated that as a governmental entity, the annual financial audit report for the Juvenile Board's Excel Academy uses the governmental reporting model of the Governmental Accounting Standards Board (GASB) statement 45 that requires the board to report an expense and a liability for Other Post-Employment Benefits (OPEB) in the government-wide financial statements. The commenter explained that to receive an unmodified opinion in the presentation of its financial statements, Excel Academy must report an OPEB liability and expense in the government-wide financial statements as the GASB requires. The commenter went on to state that, on the contrary, Texas independent school districts do not report an OPEB liability or OPEB expense. The commenter stated that since pension expense, net pension liability (NPL), OPEB expense, and OPEB liability are similarly prepared estimates and GASB mandated, the OPEB liability and NPL should both be excluded from a school's long-term liabilities in the government-wide financial statements with regard to Indicators 5 and 8. Additionally, the OPEB expense should be excluded from a school's expenses in the government-wide financial statements with regard to Indicators 6 and 9. The commenter recommended revising proposed Indicators 6 and 9 to exclude OPEB expense and revising proposed Indicators 5 and 8 to exclude any OPEB liability and NPL.

Agency Response: The agency appreciates the suggestions to amend the measure of long-term solvency from the long-term liabilities to long-term assets for Indicator 8. The agency agrees that some districts and charter schools may receive low points on this indicator, primarily during the earlier periods of the debt payment term. Therefore, the agency will use the ratio of long-term liabilities to total assets to measure a district or charter school's ability to meet its financial requirements and has modified the calculation for Indicator 8 in Figure: 19 TAC §109.1001(e)(2), Figure: 19 TAC §109.1001(e)(3), Figure: 19 TAC §109.1001(f)(2), and Figure: 19 TAC §109.1001(f)(3) to reflect long-term liabilities divided by total assets. Additionally, the agency also added language to the indicator that allows districts and charter schools that have experienced a 10% increase or more over the past five years to pass this indicator. The agency has also excluded NPL and OPEB for districts and governmental charter schools, as applicable. The ratio of long-term liabilities to total assets will measure the percentage of a district or charter school's assets that have been financed with debt and a decrease in this ratio over years should indicate that a district or charter school is becoming less dependent on debt for its operations.

EXPENDITURE ANALYSIS

(INDICATOR 9 for 2015-2016 and 2016-2017 Rating Years)

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(2), the assistant superintendent for business and finance from Fredericksburg ISD asked if Indicator 9 should be operating expenditures and if Indicator 9 is only operating expenditures, the parentheses that encloses facilities and construction should be removed from the equation and the Chapter 41 recapture payments should be excluded.

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(2) and Figure: 19 TAC §109.1001(e)(3), a representative from Keller ISD commented on Indicator 9 by stating "this indicator wants a district not to deficit spend--that is revenues should exceed expenses." The representative further stated that Keller ISD has accumulated excess reserves and is in a position to spend down those excess reserves in fund balance and that Keller ISD and like districts would be penalized for being prudent in the past.

Comment: Concerning proposed Figure: 19 TAC §109.1001(f)(2) and Figure: 19 TAC §109.1001(f)(3), a representative from the TCSA commented on Indicator 9 by stating that the equation should be revised to include annual philanthropic receivables, an exclusion otherwise prohibited by the Financial Accounting Standards Board (FASB) Statement No. 116, and that TEA should exclude any OPEB expenses.

Comment: A representative of the Excel Academy Charter School commented that the charter holder for Excel Academy is the Harris County Juvenile Board, which is a governmental entity. The commenter stated that as a governmental entity, the annual financial audit report for the Juvenile Board's Excel Academy uses the governmental reporting model of the Governmental Accounting Standards Board (GASB) statement 45 that requires the board to report an expense and a liability for Other Post-Employment Benefits (OPEB) in the government-wide financial statements. The commenter explained that to receive an unmodified opinion in the presentation of its financial statements, Excel Academy must report an OPEB liability and expense in the government-wide financial statements as the GASB requires. The commenter went on to state that, on the contrary, Texas independent school districts do not report an OPEB liability or OPEB expense. The commenter stated that since pension expense, net pension liability (NPL), OPEB expense, and OPEB liability are similarly prepared estimates and GASB mandated, the OPEB liability and NPL should both be excluded from a school's long-term liabilities in the government-wide financial statements with regard to Indicators 5 and 8. Additionally, the OPEB expense should be excluded from a school's expenses in the government-wide financial statements with regard to Indicators 6 and 9. The commenter recommended revising proposed Indicators 6 and 9 to exclude OPEB expense and revising proposed Indicators 5 and 8 to exclude any OPEB liability and NPL.

Agency Response: The agency disagrees that the parentheses should be removed from the equation. The formula for Indicator 9 uses expenditures in the general fund; function codes 11 through 99 and expenditure object code series 6100 through 6400. The parentheses that enclose the numbers in the denominator have been placed in the equation to show the order of operation. In addition, the agency has determined that the Chapter 41 recapture payments will not be excluded from the expenditure analysis calculation. The calculation for this indicator includes total revenues, which include the local tax collections. Therefore, expenditures for Chapter 41 recapture payments will remain in the calculation.

The agency provides the following clarification concerning FASB Statement No. 116. According to FASB Statement No. 116, "Contributions, including unconditional promise, should be recognized as revenues in the period received. For the purpose of the Statement of Financial Position, contributions should be recorded as increases in assets or decreases in liabilities and as either restricted support or unrestricted revenue." Therefore, if the philanthropic contribution is recognized as revenues in the period received, then the philanthropic donation will be counted in the total revenues of the charter school. The availability of philanthropic funds that have not been contributed to the charter school will not be considered in the evaluation of this indicator.

The agency agrees that OPEB expenses should be excluded from the calculation of Indicator 9; therefore, the agency has modified the language at adoption to exclude OPEB expense. The language has been modified at adoption for Indicator 9, as reflected in Figure: 19 TAC §109.1001(e)(2), Figure: 19 TAC §109.1001(e)(3), Figure: 19 TAC §109.1001(f)(2), and Figure: 19 TAC §109.1001(f)(3).

DEBT SERVICE COVERAGE RATIO

(INDICATOR 10 for 2015-2016 and 2016-2017 Rating Years)

Comment: A school official from Raymondville ISD recommended that the agency include fund 599 (Debt Service Funds) revenues and expenditures from non-major governmental funds to calculate the debt service coverage ratio for Indicator 10 (Was the debt service coverage ratio sufficient to meet the required debt service?).

Comment: A representative of Fredericksburg ISD stated that the formula for the debt service coverage ratio needs to add the debt service fund balance in the numerator because the districts sometimes intend to spend the fund balance.

Comment: A school official from McKinney ISD commented that the debt service coverage ratio used in Indicator 10 does not reflect the efficiency and long-term solvency of a district's long-term liabilities.

Comment: A representative of NTP Enterprises, LLC asked for clarification on whether the D variable for debt service in the calculation for Indicator 10 on the 2015-2016 Charter FIRST Ratings based on FY 2015 data and the 2016-2017 Charter FIRST Ratings based on FY 2016 data should be for principal payments and actual interest payments made or the interest expense amount (which includes adjustments for accrued interest).

Comment: A school official from Plano ISD disagreed with using the proposed Indicator 10 for the 2015-2016 School FIRST Ratings based on FY 2015 data and the 2016-2017 School FIRST Ratings based on FY 2016 data. The school official recommended that fund balance usage and recognition of the district's fiscal year versus tax year differences be taken into consideration to measure debt service coverage.

Comment: A school official from Frisco ISD asked that the agency amend the language in Indicator 10 to include an exception for fast-growth districts as in Indicator 5. The officials stated that, "Indicator 10 will require a district to have revenues that are 20 percent of the debt service payment greater than the expenditures in order to obtain maximum points." The official also stated that, "for fast growing school districts that are issuing bonds and increasing debt service requirements, this threshold would be difficult to obtain and even more difficult to sustain."

Comment: A representative of Austin ISD commented that there is no allowance for purposely drawing down the excess fund balance to pay current year debt service by lowering or keeping the tax rate constant. The representative also stated that it seems districts would need to overtax on the debt service tax rate to achieve a ratio of 1.2 for the highest rating of 10 points for this indicator.

Comment: A representative of Keller ISD suggested that consideration be given to revenue and expenditures in the debt service fund for the debt service coverage ratio calculation.

Comment: Representatives from Texans for Quality Public Charter Schools agreed with the importance of the metric, but believed the point scale should match a superior rating to the standard of the PSF bond guarantee program. The representatives stated that a superior score on this indicator is stricter that what is required of public charter operators eligible for the PSF bond guarantee program.

Agency Response: The agency disagrees that the determination of points issues only six points for Indicator 10, as proposed, if a district sets its I&S tax rate to ensure collections exactly match principal and interest payments. However, the agency agrees that the calculation for the debt service coverage ratio should be adjusted to reflect whether districts are able to meet their obligations. Consequently, the agency modified the calculation for the debt service coverage ratio in Indicator 10 in Figure: 19 TAC §109.1001(e)(2) and Figure: 19 TAC §109.1001(e)(3) for districts to include the debt service fund balance from fund 599 in governmental funds. Therefore, the calculation was modified to (general fund unless noted otherwise):

Total Revenues - Total Expenditures + [Functions 71, 72, & 73] + Fund 599 Debt Service Fund Balance/Functions 71, 72, & 73