The Texas Education Agency (TEA) adopts new §109.2001, concerning financial exigency. The new section is adopted with changes to the proposed text as published in the December 9, 2011, issue of the Texas Register (36 TexReg 8317). The new rule implements the requirements of the Texas Education Code (TEC), §44.011, as added by Senate Bill (SB) 8, 82nd Texas Legislature, First Called Session, 2011. The TEC, §44.011, requires that the commissioner of education adopt minimum standards concerning school district financial conditions that must exist for declaration of a financial exigency by the board of trustees of the district. In addition, the TEC, §44.011, authorizes the commissioner to take such action in the manner provided by law for emergency rules.

At the same time the proposed new permanent rule, §109.2001 was adopted on an emergency basis effective November 21, 2011, and published in the December 9, 2011, issue of the Texas Register (36 TexReg 8283). The TEA renewed the effectiveness of the emergency adoption of new §109.2001 for an additional 60 days. The renewal was published in the March 23, 2012, issue of the Texas Register (37 TexReg 1971). The emergency effectiveness of §109.2001 expires upon the effective date of the adoption of the new permanent rule.

Previously there were no rules or regulations as to when a school district may declare financial exigency for the school district. New TEC, §44.011, allows the board of trustees of a school district to adopt a resolution declaring financial exigency for the school district. Each time the board adopts a resolution under this section, the board must notify the commissioner of education.

Adopted new 19 TAC Chapter 109, Subchapter BB, §109.2001, defines financial exigency and establishes in rule procedures for consistent implementation of the statutorily required written notification. In accordance with the TEC, §44.011, adopted new 19 TAC §109.2001 sets minimum standards concerning school district financial conditions that must exist for declaration of financial exigency by the board of trustees of the school district. Also in accordance with statute, the adopted new rule prescribes the time and manner in which notice must be given to the commissioner of education.

In conjunction with the addition of minimum standards concerning the declaration of financial exigency, School Financial Integrity Rating System of Texas (FIRST) rules in 19 TAC Chapter 109, Subchapter AA, will be amended in 2012 for the fiscal year 2011-2012 data for financial accountability ratings to be published in summer 2013. A school district declaring financial exigency will not be able to obtain the highest School FIRST rating of Superior Achievement.

In response to public comments, the following changes were made to 19 TAC §109.2001 since the rule was published as proposed.

In subsection (a), the phrase "existing academic programs" was changed to "the district's instructional programs" to clarify that a school district may also take into consideration new programs when determining the district's financial resources.

In subsection (b)(3), the phrase "over one year" was added to define the time period involved.

The criterion described in subsection (b)(4) was broadened to include events other than unforeseen natural disasters.

Subsection (b)(5) was modified to allow for a combination of the conditions listed in the subsection in order to provide flexibility.

Subsection (d) was modified to clarify that an extension of a declaration of financial exigency is subject to the same criteria specified in subsection (b).

In addition, the following technical changes were made at adoption.

Subsection (b)(5) was modified to better phrase the original intent, clarifying that the 15% benchmark applies to all conditions listed in subsection (b)(5).

Subsection (d) was modified to require that the specified notice be signed by both the board president and the school district superintendent for shared responsibility and accountability. The subsection was also modified to remove reference to a specific agency division, as the division responsible for handling notices of exigency declarations may change.

The adopted new section requires school districts to provide notice to the commissioner when the district declares financial exigency. The notice must be provided within 20 calendar days of adoption by a school district's board of trustees. School districts are required to maintain documentation supporting the declaration of financial exigency.

The TEA determined that there is no direct adverse economic impact for small businesses and microbusinesses; therefore, no regulatory flexibility analysis, specified in Texas Government Code, §2006.002, is required.

The public comment period on the proposal began December 9, 2011, and ended January 9, 2012. Following is a summary of public comments received and the corresponding agency response regarding proposed new 19 TAC Chapter 109, Budgeting, Accounting, and Auditing, Subchapter BB, Commissioner's Rules Concerning Financial Exigency, §109.2001, Financial Exigency.

§109.2001(a)

Comment: The Texas Association of School Boards (TASB) commented that the language in 19 TAC §109.2001(a) does not specify that it is the responsibility of a local school board to make the determination of a district's financial position. The TASB also commented that "the wording of Subsection (a) could be construed to limit not only a school district's ability to cut positions in a reduction of force, but also to cut salaries." The TASB noted that Senate Bill 8, 82nd Texas Legislature, First Called Session, "created new flexibilities for reducing personnel, which are now found in Texas Education Code (TEC) §§21.4021-[21].4032." The TASB further commented that although these new processes do not require a declaration of financial exigency, subsection (a) could appear to imply that a school district exercising the abilities described under the TEC, §§21.4021-21.4032, must use the financial exigency process. The TASB also noted that subsection (a) "indicates that financial resources must be insufficient to support existing programs, without accounting for new programs, even when new programs would be mandated by law."

Agency Response: The agency agrees in part and disagrees in part. The agency agrees that the definition for exigency, as stated in the proposed rule, did not specifically encompass any new programs that a school district may have. The agency has modified subsection (a) to replace "existing academic programs" with "the district's instructional programs." The agency disagrees that subsection (a) would limit a school district's ability to cut positions in a reduction of force or to cut salaries. The TEC, §44.011(e), requires the commissioner of education to set minimum standards for school district financial conditions that must exist for declaration of financial exigency by the board of trustees of the school district. Unilateral and individual school district definitions of financial exigency are no longer allowable when declaring exigency. Additionally, as noted by the TASB, financial exigency is not required for action authorized under the TEC, §§21.4021-21.4032.

Comment: The Texas American Federation of Teachers (Texas AFT) commented that 19 TAC §109.2001(a) could result in confusion by "suggesting there are two alternative definitions of financial exigency, one based on insufficiency of resources to support existing academic programs, the other based on inability to finance full staff compensation." The Texas AFT provided an alternate suggested definition of "financial exigency" for use in the rule that referenced only inability to finance full staff compensation.

Agency Response: The agency disagrees with the suggested change to the definition of "financial exigency." The suggested definition is too narrow and does not reflect the intent of the legislation that created the authorizing statute.

§109.2001(b)

Comment: The Texas Association of School Administrators (TASA) recommended that the rule's criteria for declaration of financial exigency be made "less prescriptive and more flexible." The TASA further commented that while the rule includes a provision that allows the commissioner to approve other circumstances not listed in 19 TAC §109.2001(b)(1)-(5), "there is no guarantee of approval and no deadline for the commissioner to render a decision."

Agency Response: The agency disagrees that the minimum standards are overly prescriptive. If a school district identifies any other circumstance not listed under subsection (b)(1)-(5) that it considers a reason for declaration of financial exigency, a school district is given the opportunity under 19 TAC §109.2001(b)(6) to present it for consideration by the commissioner. In addition, the commissioner of education is aware of the need for timely review and approval of requests made for any other circumstances as allowed under subsection (b)(6).

§109.2001(b)(1)

Comment: A business official from Fredericksburg Independent School District (ISD) commented that while the district has no plans to declare financial exigency under 19 TAC §109.2001(b)(1), the official and her colleagues feel that "taking away" the option for a school district to meet the conditions described under subsection (b)(1) without declaring financial exigency is a very bad idea and limits the flexibility of school districts.

Agency Response: The agency provides the following clarification. A school district is not required to declare financial exigency if it meets any of the minimum standards in subsection (b). Including the condition under subsection (b)(1) as a minimum standard for declaration of financial exigency does not inhibit a school district from projecting and planning.

Comment: The TASB commented that its primary concern about the standard set in 19 TAC §109.2001(b)(1) is that "by focusing exclusively on the percentage of reduction in fund balance, the rule does not reflect long-standing TEA guidance establishing a target for healthy school district fund balances. For a district already at a healthy target, reductions less than 20 percent may signal significant fiscal distress. On the other hand, a district with a balance well above the target may actually reduce by 20 percent in order to achieve greater financial health."

Agency Response: The agency disagrees. The new rule does not require a school district to declare financial exigency. Reductions in fund balance that exceed the 20% calculations do not automatically trigger any requirement that financial exigency be declared regardless of the fund balance. If a school district identifies any other circumstance not listed under 19 TAC §109.2001(b)(1)-(5) that it considers a reason for declaration of financial exigency, a school district is given the opportunity under 19 TAC §109.2001(b)(6) to present it for consideration by the commissioner of education.

Comment: The Texas AFT commented that the percentage thresholds specified in proposed 19 TAC §109.2001(b)(1)-(5) should not be lowered in response to public comments and that, "if anything, the commissioner should consider raising these percentage thresholds."

Agency Response: The agency agrees in part and disagrees in part. While the rule does state five specific conditions with thresholds under which a school district may declare financial exigency, a sixth condition without a specified threshold is also available. A school district may seek approval from the commissioner of education in order to declare exigency under this sixth condition. If a school district identifies any other circumstance not listed under subsection (b)(1)-(5) that it considers a reason for declaration of financial exigency, a school district is given the opportunity under 19 TAC §109.2001(b)(6) to present it for consideration by the commissioner of education.

§109.2001(b)(2)

Comment: The TASB commented that 19 TAC §109.2001(b)(2) "adopts a new, and potentially arbitrary, standard of a 10% enrollment decline within a five-year period." The TASB proposed that the subsection "be modified to (a) give latitude and flexibility to the local boards to determine the impact of a decline in students, or (b) follow current law. As such, a reasonable justification behind a declaration of financial exigency might read: A current or projected decline in enrollment that results or will result in a significant decrease in district revenue." Or, alternatively: "A current or projected decline in ADA that is the result of the closing or reduction in personnel of a military base or a current or projected decline in ADA where the district has or will have 98% or less of the prior year's ADA."

Agency Response: The agency disagrees. If a school district identifies any other circumstance not listed under 19 TAC §109.2001(b)(1)-(5) that it considers a reason for declaration of financial exigency, a district is given the opportunity under 19 TAC §109.2001(b)(6) to present it for consideration by the commissioner of education.

§109.2001(b)(3)

Comment: The TASB commented that 19 TAC §109.2001(b)(3) "sets a high and potentially arbitrary benchmark for financial exigency based on loss of general funds per WADA [weighted average daily attendance]." The TASB stated, "A local school board grappling with a sudden loss of funds, even at rates below 10%, will have to make serious adjustments to its operating budget, including potentially the reduction of personnel positions."

The TASB proposed the following changes to the subsection: "The 'lookback' period should be defined as 'the prior two years.' The percentage benchmark should be changed from ten percent . . . to eight percent, which would capture some portion of school districts subject to deeper cuts next year and which no longer will have federal jobs funds to lessen the impact. Finally the projected reduction should be set to four percent, which is one-half of the reduction of looking back two years because the time period has been changed from two years to one year."

The TASB proposed that the subsection's language be changed to read, "A reduction of more than 8% in total General Fund total funding per student in weighted average daily attendance over the past two years or a projected reduction of 4% compared to the current year."

Agency Response: The agency disagrees. The agency has maintained the subsection as proposed for the 10% reduction criterion having determined it was an appropriate measure of financial exigency. The agency, however, has clarified the subsection to define the "lookback" period as one year instead of the two years suggested by the TASB. Subsection (b)(3) has been revised to read, "a reduction of more than 10% in total General Fund total funding per student in weighted average daily attendance over one year or a projected reduction of 10% compared to the current year."

§109.2001(b)(4)

Comment: The TASB commented that specifying "natural" disasters in 19 TAC §109.2001(b)(4) excludes man-made disasters and that the use of the word "unforeseen" is problematic as certain types of disasters such as hurricanes occur regularly and so could be judged to be foreseeable.

The TASB proposed the subsection be changed to read, "Any disaster requiring significant expenditures for repair or remediation."

Agency Response: The agency agrees that specifying "natural" disaster is too limiting and has expanded the criteria in subsection (b)(4) to read, "a natural disaster or casualty loss defined as damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual and that requires expenditures for repair or remediation in excess of 15% of the current year General Fund budget."

§109.2001(b)(5)

Comment: In commenting on 19 TAC §109.2001(b)(5), the TASB stated that litigation expenses and tax refunds should not be grouped with repair costs as "unanticipated" major expenses and that the subsection should be split into two separate subsections for this reason.

The TASB also commented that "the 15 percent benchmark for tax refunds sets a higher bar for circumstances that impact the expenditure side of a school budget than for those that impact the revenue side as is found in the standard set in subsection (b)(3)." The TASB proposed that the benchmark for tax refunds be dropped to 4 percent to align with the percentage it had proposed for use in 19 TAC §109.2001(b)(3).

Agency Response: The agency disagrees. If a school district identifies any other circumstance not listed under 19 TAC §109.2001(b)(1)-(5) that it considers a reason for declaration of financial exigency, a school district is given the opportunity under 19 TAC §109.2001(b)(6) to present it for consideration by the commissioner of education. To provide flexibility, however, the agency has modified subsection (b)(5) to allow a combination of the conditions listed in subsection (b)(5). In addition, to better phrase the original intent, the subsection was modified to clarify that the 15% benchmark applies to all conditions listed in subsection (b)(5).

§109.2001(b)(6)

Comment: In addressing 19 TAC §109.2001(b)(6), the TASB commented that determination of whether financial exigency is present should remain largely a local matter, as it has been in the past. The TASB stated that "the proper role for the commissioner in determining whether or not a financial exigency occurs outside of the minimum standards is to make such determinations, after a board has already made its own determination. In assessing their own financial conditions, school districts should be able to rely on previous written decisions from the commissioner on grievances regarding reductions in force."

The TASB proposed that subsection (b)(6) be changed to read, "Any other circumstances approved by the school district's board of trustees based on the current or projected financial condition of the school district."

Agency Response: The agency disagrees. The TEC, §44.011(e), requires the commissioner of education to set minimum standards for school district financial conditions that must exist for declaration of financial exigency by the board of trustees of the school district. If a proposed declaration does not meet the minimum standards as defined under 19 TAC §109.2001(b)(1)-(5), then the opportunity exists for a school district to describe another specific condition under subsection (b)(6).

Comment: The Texas AFT commented that 19 TAC §109.2001(b)(6) "sets no boundaries for the commissioner's own exercise of discretion to approve a declaration of financial exigency" and that "the five more specific provisions already provide broad enough latitude, particularly considering the inclusion of 'unanticipated major expense' as a sufficient basis for financial exigency." The Texas AFT asked that subsection (b)(6) be deleted for these reasons.