Subsection (l) addresses the process for a school district or an open-enrollment charter school to appeal a preliminary rating. Errors by a district or an open-enrollment charter school in recording data or submitting data through the TEA data collection and reporting system will be reviewed, but are disfavored due to the need to have the accountability system applied uniformly. Consideration will be given only to appeals that would result in a change of the preliminary rating. The appeal and additional information to support the appeal must be submitted by a district or open-enrollment charter school to the TEA no later than 30 days after the release of the preliminary ratings. The TEA will issue the final rating no later than 60 days after receiving the appeal. Appeals received 31 days or more after TEA issues a preliminary rating will not be considered. If TEA does not receive an appeal of a preliminary rating, the preliminary rating automatically becomes a final rating 31 days after issuance of the preliminary rating. An external review panel will independently review and submit his or her recommendation to the TEA division responsible for financial accountability after reviewing the appeal and additional supporting information. The commissioner will make the final financial accountability ratings decision.

The following changes were made to subsection (l) at adoption in response to comment.

Subsection (l)(1) was modified to clarify that an appeal must include "adequate evidence and additional information" supporting a school district or an open-enrollment charter school's appeal. This amendment was made to eliminate confusion as to whether the rule was implementing a legal standard.

Subsections (l)(2) and (3) were modified to permit a school district to submit an appeal of any issue that results in a failing preliminary FIRST rating. Subsection (l)(3) specifies, however, that the system must be uniformly implemented so an appeal based upon evidence of a data submission error by a district or charter school is unlikely to negate concerns raised by an indicator. Subsection (l)(3) was also modified to include language asserting that the appeals process is not for correcting data that has been incorrectly submitted to the TEA by a district or charter school and to clarify that a request for exception to application of an accountability rule made during the appeals process is disfavored and likely to be denied.

Subsection (m) establishes that a final rating issued by the TEA may not be appealed. No changes were made at adoption.

Subsection (n) addresses the local option of a financial accountability rating by a voluntary association. No changes were made at adoption.

Subsection (o) establishes provisions related to how school districts and open-enrollment charter schools report information and financial accountability ratings to parents, taxpayers, and other stakeholders. No changes were made at adoption.

SUMMARY OF COMMENTS AND AGENCY RESPONSES. The public comment period on the proposal began May 22, 2015, and ended June 22, 2015, and included a public hearing that was held on June 17, 2015. Following is a summary of public comments received, including those received at the public hearing, and corresponding agency responses regarding the proposed repeal of and new 19 TAC Chapter 109, Budgeting, Accounting, and Auditing, Subchapter AA, Commissioner's Rules Concerning Financial Accountability, Division 1, Financial Accountability Rating System.

A number of individuals, including school officials, a member of the State Board of Education, and representatives of regional education service centers and other interested organizations, submitted comments and inquiries regarding the Financial Accountability Rating System known as the Financial Integrity Rating System of Texas (FIRST) for school districts and open-enrollment charter schools.

ANNUAL FINANCIAL REPORT SUBMISSION

(INDICATOR 1 for 2014-2015, 2015-2016, and 2016-2017 Rating Years)

Comment: A school official from Clear Creek Independent School District (ISD) asked if the financial accountability rating system could remain unchanged for 2014-2015 and if there could be a 10-day grace period added for the submission of the annual financial and compliance report (AFR) to allow for signatures and uploading the document.

Comment: A representative of Fredericksburg ISD commented that the note for the no 30-day grace period should be in quotes since it is not part of the indicator question and that the proposed indicators should not be effective until the 2016-2017 rating year due to the timing of the release of the proposed indicators for rating years 2014-2015 and 2015-2016.

Comment: A representative from Texans for Quality Public Charter Schools expressed support for the decision to maintain a grace period for submission of the AFR.

Comment: A representative from the Texas Charter Schools Association (TCSA) requested that TEA clarify whether the 30-day grace period remains and provide guidance relating to untimely audits caused by TEA's directive to the school to change its audit firm.

Comment: The law firm of Schulman, Lopez, Hoffer & Adelstein commented that the proposed Indicator 1 does not consider the possibility that a school may, through no fault of its own, fail to file its AFR timely. The law firm suggested adding a clause to Indicator 1 that allows a charter school to not be penalized for this indicator if the independent auditor failed to timely complete the annual audit and the charter school provides documentary evidence of the independent auditor's failure to complete the audit and related AFR.

Agency Response: The agency agrees and has modified the indicator to maintain the 30-day grace period.

DEFAULT ON DEBT

(INDICATOR 3 for 2014-2015, 2015-2016, and 2016-2017 Rating Years)

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(1), Figure: 19 TAC §109.1001(e)(2), and Figure: 19 TAC §109.1001(e)(3), the assistant superintendent for business and finance from Fredericksburg ISD commented that, for Indicator 3, only the first sentence is the indicator and the rest is an explanation that should be in parenthesis or the language should be revised.

Comment: Concerning proposed Figure: 19 TAC §109.1001(f)(1), Figure: 19 TAC §109.1001(f)(2), and Figure: 19 TAC §109.1001(f)(3), a representative of Aristoi Classical Academy commented that Aristoi Classical Academy approves of the proposed language for Indicator 3.

Comment: Concerning proposed Figure: 19 TAC §109.1001(f)(1), Figure: 19 TAC §109.1001(f)(2), and Figure: 19 TAC §109.1001(f)(3), a representative of TCSA proposed exemption of payment plans and technical defaults and subsequently commented that its proposal provides needed clarity for Indicator 3. The TCSA, however, recommended that the Texas Education Agency (TEA) consider adding a definition for debt agreement(s) to the language of Indicator 3.

Comment: The law firm of Schulman, Lopez, Hoffer & Adelstein commented that the TEA would conclude that a charter school failed the proposed Indicator 3 if, subsequent to a default but prior to the conclusion of the fiscal year, a charter school negotiated a forbearance or payment plan with a lender and made timely payments to the lender pursuant to the agreed-upon payment schedule. The law firm also suggested adding wording to this indicator to emphasize the year being rated and the following wording regarding debt agreements: "For purposes of determining a charter school's financial performance under this indicator, debt agreements do not include amounts owed to the U.S. Internal Revenue Service, U.S. Social Security Administration, Teacher Retirement System of Texas, Texas Workforce Commission, or any other state or federal government agency."

Agency Response: The agency agrees with the suggestions to add parenthesis to explanatory sentences and to add clarity and has modified Indicator 3 by adding parenthesis to the explanatory sentences and adding a definition of debt agreement to the language of Indicator 3. Indicator 3 has been modified to read: "Was the school district in compliance with the payment terms of all debt agreements at fiscal year end? (If the school district was in default in a prior fiscal year, an exemption applies in following years if the school district is current on its forbearance or payment plan with the lender and the payments are made on schedule for the fiscal year being rated. Also exempted are technical defaults that are not related to monetary defaults. A technical default is a failure to uphold the terms of a debt covenant, contract, or master promissory note even though payments to the lender, trust, or sinking fund are current. A debt agreement is a legal agreement between a debtor (person, company, etc. that owes money) and their creditors, which includes a new plan for paying back the debt.)" This modification was made to Figure: 19 TAC §109.1001(e)(1), Figure: 19 TAC §109.1001(e)(2), Figure: 19 TAC §109.1001(e)(3), 19 TAC §109.1001(f)(1), Figure: 19 TAC §109.1001(f)(2), and Figure: 19 TAC §109.1001(f)(3).

The agency disagrees with the statement on how the agency would conclude a charter school's outcome for this debt default measure. The proposed indicator asks if the charter school was in compliance with the payment terms of all debt agreements at fiscal year end. Therefore, the agency concludes that a charter school with a debt default in a given fiscal year that negotiates a payment agreement in that same fiscal year and is current on the payment terms of that agreement at the end of that same fiscal year does not fail the proposed Indicator 3 for ratings based on data for that fiscal year. The agency appreciates the suggested wording for this indicator. However, the agency has determined that the failure of a charter school to make timely payments on agreements related to debts owed to the U.S. Internal Revenue Service, U.S. Social Security Administration, Teacher Retirement System of Texas, Texas Workforce Commission, or any other state or federal agency for delinquent payments is an indicator of financial instability, and the agency will not exclude amounts owed to such entities when evaluating this indicator.

TIMELY PAYMENTS TO TRS, TWC, AND IRS

(INDICATOR 4 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 Austin ISD, Texans for Quality Public Charter Schools, and TCSA commented that the language for Indicator 4 should be more specific as to the reason why a school district or charter school may be unable to make timely payments, because Indicator 4 appears to be extremely stringent and there are no allowances for occasional human or technological errors. The commenters also stated that the TEA should consider revising the language of Indicator 4 by replacing "timely payments" with "current payments" and adding a definition for "timely" in the language of Indicator 4.

Comment: The law firm of Schulman, Lopez, Hoffer & Adelstein commented that the agency's use of the term "timely" raises questions as to the source of the data to be used to calculate Indicator 4 (under 19 TAC §109.1001(f)(2) and (f)(3)). The law firm also suggested adding the following wording to this indicator: "For purposes of calculating this indicator, 'timely' shall be construed to mean the satisfactory resolution of a warrant hold, levy or lien or other similar administrative or judicial garnishment within 30 calendar days."

Agency Response: The agency disagrees that the words "timely payments" should be replaced with "current payments." A district or charter school is current on payments if the payments that are due are paid on time and in accordance with the applicable laws, rules, and regulations set forth by the aforementioned entities. The agency will use warrant holds as reported to the TEA by the Texas Comptroller of Public Accounts in its determination of whether districts and charter schools made timely payments to TRS and TWC. For this indicator, a district or charter school will be considered to have timely payments to TRS and TWC if it had no holds on payments that were not cleared within 30 days as a result of untimely payments to TRS or TWC. In regard to the IRS, the agency will use the AFR, warrant holds, and any notifications from the IRS as a basis for information related to timely payments to the IRS. The agency will not make the suggested change to Indicator 4; however, the agency will add clarification on the determination of timely payments to 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).

NET ASSET BALANCE

(INDICATOR 4 for 2014-2015 Rating Year and INDICATOR 5 for 2015-2016 and 2016-2017 Rating Years)

Comment: Concerning proposed Figure: 19 TAC §109.1001(f)(1), Figure: 19 TAC §109.1001(f)(2), and Figure: 19 TAC §109.1001(f)(3), a representative with NTP Enterprises, LLC commented that the equation for Indicator 4, for the 2014-2015 rating year, and Indicator 5, for the 2015-2016 and 2016-2017 rating years, discloses a variable of "E"; however, there is no description for the variable "E" disclosed in the language for the aforementioned indicator.

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(1), Figure: 19 TAC §109.1001(e)(2), and Figure: 19 TAC §109.1001(e)(3), representatives from Keller ISD and the TCSA commented that Indicator 4 for the 2014-2015 rating year and Indicator 5 for the 2015-2016 and 2016-2017 rating years require the total unrestricted net asset balance to be greater than zero ($0) and this may indicate that there is equity on the balance sheet. In addition, the commenter stated that many fast-growth districts will have a negative total net asset balance, because "...the debt is still cash and has not been expended on buildings - long-term assets." In addition, TCSA stated, "this indicator allows charter schools that grow by more than 10 percent (10%) over a 5-year period to pass and this is a good change. However, this indicator should acknowledge the reality that new charter schools must take on debt as part of the start-up process; and a new charter school should receive an exemption from this indicator. Or, TEA should allow any charter school that has an increase in students in membership by more than 10 percent (10%) over any span of years to pass this indicator."

Comment: The law firm of Schulman, Lopez, Hoffer & Adelstein commented that the proposed total net asset indicator (Was the total net asset balance in the Statement of Financial Position for the charter school greater than zero? (If the charter school's 5 year percent change in students in membership was a 10 percent increase or more, then the charter school passes this indicator)) does not take into consideration the conflicting financial and economic practicality of starting a charter school, particularly the acquisition of a school facility through debt financing that is an integral component of a multi-year strategic plan. The law firm suggested a charter school automatically pass this indicator if it is within the first three years of opening, does not experience a decline in student enrollment, and discloses a decline in any deficit in net assets.

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 provides the following clarification and modification of the language for Indicator 4 for the 2014-2015 rating year and Indicator 5 for the 2015-2016 and 2016-2017 rating years for Charter FIRST. The equations in Figure: 19 TAC §109.1001(f)(1), Figure: 19 TAC §109.1001(f)(2), and Figure: 19 TAC §109.1001(f)(3) for Indicator 4 for the 2014-2015 rating year and Indicator 5 for the 2015-2016 and 2016-2017 rating years have been modified to: A +B>C or (((D-E)/E) * 100) > F, where

A = Total net asset balance in the statement of financial position in the annual financial report;

B = Pension Expense, Other Post-Employment Benefits (OPEB) and Net Pension Liability (NPL), as applicable;

C = Net assets threshold, which = 0;

D = Number of students in membership in year 5 from base year;

E = Number of students in membership in base year;

F = Threshold for percent change in students in membership, which = 10%

The agency agrees on the need for addressing concerns of fast-growth school districts and start-up charter school operations. The agency has revised the indicator so that a district or charter school must either have a total unrestricted net asset or total net asset balance greater than zero or an increase of 10% or more in students in membership over the past 5 years in order to pass this indicator. New charters that have a negative net asset balance will pass this indicator if they have a 10% growth in students year over year until it completes its fifth year of operations. After the fifth year of operations, the growth computation for charter schools will be based on enrollment growth over the previous five years.

ADMINISTRATIVE COST RATIO

(INDICATOR 5 for 2014-2015 Rating Year and INDICATOR 11 for 2015-2016 and 2016-2017 Rating Years)