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Texas Register Preamble


The Texas Education Agency (TEA) adopts the repeal of §§109.1001-109.1005 and new §109.1001, concerning the financial accountability rating system. The repeal is adopted without changes to the proposed text as published in the May 22, 2015 issue of the Texas Register (40 TexReg 2724) and will not be republished. New §109.1001 is adopted with changes to the proposed text as published in the May 22, 2015 issue of the Texas Register (40 TexReg 2724). The sections establish provisions that detail the purpose, ratings, types of ratings, criteria, reporting, and sanctions for the financial accountability rating system. The adopted repeals and new rule implement the requirements of the Texas Education Code (TEC), §§39.082, 39.083, and 39.085, as added by House Bill (HB) 3, 81st Texas Legislature, 2009, and amended by HB 5, 83rd Texas Legislature, Regular Session, 2013, that charge the Texas Education Agency (TEA) with implementing a financial accountability rating system that includes processes for anticipating the future financial solvency of each school district and open-enrollment charter school, including analysis of district and school revenues and expenditures for preceding school years. The financial accountability rating system also includes indicators that measure the financial management performance and future financial solvency of a district or an open-enrollment charter school. School district ratings are referred to as School FIRST, and open-enrollment charter school ratings are referred to as Charter FIRST. The adoption also implements the TEC, §39.151, which requires the commissioner to provide a process by which a district or charter school can challenge an agency decision related to academic or financial accountability under the TEC, Chapter 39, and implements the TEC, §12.104(b)(2)(L), which applies accountability provisions to charters.

REASONED JUSTIFICATION: Rules in 19 TAC Chapter 109, Budgeting, Accounting, and Auditing, Subchapter AA, Commissioner's Rules Concerning Financial Accountability, Division 1, Financial Accountability Rating System, establish provisions that detail the purpose, ratings, types of ratings, criteria, reporting, and sanctions for the financial accountability rating system, in accordance with Senate Bill 218, 77th Texas Legislature, 2001, and House Bill 3, 81st Texas Legislature, 2009. The rules, which were initially adopted effective October 20, 2002, and last amended effective October 3, 2013, include the financial accountability rating system and rating worksheets that explain the indicators that the TEA will analyze to assign financial accountability ratings for school districts and open-enrollment charter schools. The rules also specify the minimum financial accountability rating information that a school district and an open-enrollment charter school is to report to parents and taxpayers in the district.

HB 5, Section 49, 83rd Texas Legislature, Regular Session, 2013, amended the TEC, §39.082, requiring that the commissioner of education include in the financial accountability rating system processes for anticipating the future financial solvency of each school district and open-enrollment charter school, including analysis of district and school revenues and expenditures for preceding school years. The TEC, §39.082, also requires the commissioner to adopt rules by which to measure the financial management performance and future financial solvency of a district or an open-enrollment charter school and sets forth specific requirements relating to indicators adopted by the commissioner and the assignment of ratings.

Adopted Repeal of 19 TAC §§109.1001-109.1005

The adopted repeal of 19 TAC §§109.1001-109.1005 removes outdated provisions. Continuing provisions are adopted in new 19 TAC §109.1001 along with new provisions that align with the amended TEC, §39.082. Following is a description of the changes from repealed 19 TAC §§109.1001-109.1005 to the adopted new 19 TAC §109.1001.

The adopted repeal of 19 TAC §109.1001, Purpose of Financial Accountability Rating System, removed the provisions of this section in their entirety because the TEC, §39.082 and §39.085, contain the purpose and the requirements for implementation of the Financial Accountability Rating System.

The adopted repeal of 19 TAC §109.1002, Financial Accountability Ratings, resulted in the following.

Provisions in subsection (a), relating to assignment of ratings and the evaluation and modification of the rating system, were adopted in new 19 TAC §109.1001(b) and (c), respectively. Revisions were made to describe the requirements using plain language.

Provisions in subsections (b)-(g), relating to ratings and worksheets from previous fiscal years, were repealed in their entirety in order to remove outdated provisions. Similar, clarified provisions that apply to school districts and open-enrollment charter schools beginning with indicators for rating year 2014-2015 were adopted in new 19 TAC §109.1001(e) and (f), respectively.

Provisions in subsection (h), relating to a financial accountability rating by a voluntary association, were adopted in new 19 TAC §109.1001(n).

Provisions in subsection (i)(1), relating to the rating a school district or open-enrollment charter school receives for substandard data quality, were repealed in order to remove outdated provisions.

Provisions in subsection (i)(2), relating to the appeals process, were removed, revised, and relocated to adopted new 19 TAC §109.1001(k)-(m) to implement the appeals process that aligns with statute in TEC, §§39.082, 39.085, and 39.151.

The adopted repeal of 19 TAC §109.1003, Types of Financial Accountability Ratings, resulted in the following.

Provisions in subsection (a), relating to the types of financial accountability ratings a school district or an open-enrollment charter school may receive, were repealed in order to remove outdated provisions. Adopted new 19 TAC §109.1001(g) and (h) clarify, by rating years, the types of financial accountability ratings a school district and an open-enrollment charter school may now receive.

Provisions in subsection (b), relating to lowering a financial accountability rating based on findings of an action, were adopted in new 19 TAC §109.1001(i).

Provisions in subsection (c), relating to the length of the effectiveness of a financial accountability rating, were revised using plain language and adopted in new 19 TAC §109.1001(j).

The adopted repeal of 19 TAC §109.1004, Criteria for Financial Accountability Ratings, removed outdated provisions in subsection (b). Provisions in subsection (a), relating to evaluation and modification of the system and the communication of changes to school districts and open-enrollment charter schools, were adopted in new 19 TAC §109.1001(c).

The adopted repeal of 19 TAC §109.1005, Reporting, clarified, updated, and relocated provisions related to how school districts and open-enrollment charter schools report information and financial accountability ratings to parents, taxpayers, and other stakeholders to adopted new 19 TAC §109.1001(o).

Adopted New 19 TAC §109.1001

Adopted new 19 TAC §109.1001, Financial Accountability Ratings, implements the financial accountability rating system, including provisions that would continue or update established practice, as follows.

New subsection (a) includes definitions to describe terminology the TEA uses in the Financial Accountability Rating System rule and determinations. In response to public comment, the TEA added a definition for "debt" at adoption.

New subsections (b) and (c) address provisions relating to the assignment of ratings and the evaluation and modification of the rating system, respectively. No changes were made at adoption.

New subsection (d) includes the types of data sources the TEA uses in calculating the financial accountability indicators for school districts and open-enrollment charter schools. No changes were made at adoption.

New subsections (e) and (f) include uniform indicators that measure the financial management performance and financial solvency of a school district or an open-enrollment charter school. Adopted indicators are assigned a point value to each indicator that will be used in a scoring matrix. The adopted financial accountability rating system does not include an indicator or any other performance measure that requires a school district to spend at least 65 percent or any other specified percentage of district operating funds for instructional purposes or 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.

The adopted new financial accountability rating system for each school district or open-enrollment charter school, as applicable, will be assigned a financial accountability rating each rating year. The adopted indicators would be evaluated by the commissioner at least once every three years. Accordingly, the adopted new 19 TAC §109.1001 includes rating worksheets that will be used to measure each school district and open-enrollment charter school on its overall performance on the financial measurements, ratios, and other indicators established by the commissioner. The adopted new rule clarifies that financial accountability ratings for a rating year are based on the data for the prior fiscal year. The adopted new rule also establishes a phase-in of rating indicators by proposing separate worksheets for rating years 2014-2015, 2015-2016, and 2016-2017 and subsequent years.

In response to public comment, each rating worksheet adopted under new subsections (e) and (f) has been updated at adoption to modify and clarify indicators.

In adopted new 19 TAC §109.1001(e) and (f), the title for the rating worksheets and calculations for ratings years 2014-2015, 2015-2016, and 2016-2017 were modified to reflect the month that the rule takes effect. For each worksheet in §109.1001(e), the title was changed from "School FIRST- Rating Worksheet Dated April 2015" to "School FIRST- Rating Worksheet Dated August 2015" for each specific rating year and for each section in §109.1001(f), the title was changed from "Charter FIRST - Rating Worksheet Dated April 2015" to "Charter FIRST- Rating Worksheet Dated August 2015" for each specific rating year. Also, the term "district" was changed to "school district" and "charter" was changed to "charter school" in each indicator where the terms were referenced to be uniform.

In response to public comments, the financial accountability indicators for school districts and charter schools for rating year 2014-2015, which are based on fiscal year 2014 data, in 19 TAC §109.1001(e)(1) and (f)(1), have been modified as follows.

Defining information for an unmodified opinion in Indicator 2 has been placed in parenthesis. For Indicator 3, defining information for a debt default has been placed in parentheses as well as an addition of a definition for a debt agreement to the indicator. A modification was made to the calculation defined for Indicator 4 to exclude pension expense and net pension liability as applicable from a school district's total unrestricted net asset balance determination and to exclude pension expense, Other Post-Employment Benefits (OPEB), and net pension liability as applicable from the total net asset balance determination of a charter school. A notation, "(See ranges below.)," was added to Indicator 5 to reference the administrative cost ratio thresholds for the determination of points. The administrative cost ratio thresholds for Indicator 5 have been also revised. The calculation defined for a charter school's administrative cost ratio was clarified to include funds 199 and 420. Additionally, the wording in Indicator 6 was revised to clarify how the variance between a school district's annual financial report (AFR) and Public Education Information Management System (PEIMS) data is calculated. Also, the wording in Indicator 7 was revised to clarify that the external auditor indicates the instances of material weaknesses in internal controls and to place the defining information for a material weakness in parenthesis.

In response to public comments, the financial accountability indicators for school districts and charter schools for rating years 2015-2016 and 2016-2017, which are based on fiscal year 2015 and 2016 data, respectively, in 19 TAC §109.1001(e)(2), (e)(3), (f)(2), and (f)(3) have been modified as follows.

The wording of Indicator 1 was modified to restore the 30-day grace period for 2015-2016 and beyond. Indicator 2 was modified from its proposed form that allowed a school district or charter school to pass the indicator if it passed either 2.A (unmodified opinion) or 2.B (free of material weaknesses) to require a school district or charter school to pass 2.A to pass the indicator. The wording in Indicator 2 was also revised to clarify that the external auditor indicates the instances of material weaknesses in internal controls. Defining information for an unmodified opinion and a material weakness in Indicator 2 have been placed in parenthesis. For Indicator 3, defining information for a debt default has been placed in parentheses and a definition for a debt agreement was added to the indicator. Defining information for timely payments to various government agencies was added to the calculation definition for Indicator 4.

A modification was made to the calculation defined for Indicator 5 for a school district's total unrestricted net asset balance to exclude pension expense and net pension liability as applicable and to a charter school's net asset balance to exclude pension expense, OPEB, and net pension liability as applicable from the total net asset balance determination. Modifications were also made to Indicators 6, 9, and 10 for school districts to exclude pension expense and net pension liability as applicable from expenditures in the calculations for days of cash on hand, revenues over expenditures, and the debt service coverage ratio. Modifications were also made to Indicators 6, 9, and 10 for charter schools to exclude pension expense, OPEB, and net pension liability as applicable from expenditures in the calculations for days of cash on hand, revenues over expenditures, and the debt service coverage ratio. Additionally for Indicator 10, the calculation for the debt service coverage ratio for school districts was modified to include the debt service fund balance. The measure for a school district or charter school's long-term solvency in Indicator 8 was amended from the ratio of long-term liabilities to long-term assets to the ratio of long-term liabilities to total assets. The calculation for Indicator 8 was amended to exclude pension expense and net pension liability as applicable for school districts and to exclude pension expense, OPEB, and net pension liability as applicable for charter schools.

Wording was added to Indicators 5 and 8 for the 2015-2016 and 2016-2017 Charter FIRST ratings worksheet to state "New charter schools that have a negative net asset balance will pass this indicator if they have a 10 percent growth in students year over year until it completes its fifth year of operations. After the fifth year of operations, the calculation change to the 10 percent increase in 5 years." A notation, "(See ranges below.)," was added to Indicators 6, 7, 8, 10, and 11 to reference the thresholds for the determination of points for days of cash on hand, current assets to current liabilities ratio, long-term liabilities to total assets ratio, debt service coverage ratio, and the administrative cost ratio, respectively. The administrative cost ratio thresholds for Indicator 11 have been revised also. The calculation defined for a charter school's administrative cost ratio was clarified to include funds 199 and 420. For Indicator 12, the wording was revised to align with the agency's intent of the point scale for the change in the student to staff ratio. The wording in Indicator 13 was revised to clarify how the variance between a school district or charter school's AFR and their PEIMS data is calculated. Additionally, the wording in Indicator 14 was revised to clarify that the external auditor indicates the instances of material noncompliance and the defining information for a material noncompliance was placed in parenthesis.

The determination of a school district's 2015-2016 School FIRST ratings based on fiscal year 2015 data and a charter school's 2015-2016 Charter FIRST ratings based on fiscal year 2015 data were modified from the proposed scale to allow them to more easily transition to newly adopted financial accountability ratings. For school districts and charter schools, the ratings were modified from a proposed scale for a Superior rating with 90 through 100 points to 70 through 100, from an Above Standard rating with 75 through 89 points to 50 through 69 points, from Meets Standard rating with 50 through 74 points to 31 through 49 points, and from Substandard Achievement rating with 0 through 49 points to 0 through 30 points. Additionally, the criteria for a Substandard Achievement rating was adjusted to require a school district or charter school to pass Indicator 2.A, so a school district or charter school receives a Substandard Achievement rating if it scores below the minimum passing score, if it failed any critical indicator 1, 3, 4, 5, or 2.A, if the AFR or the data were not both complete, or if either the AFR or the data were not submitted on time for FIRST analysis.

New subsections (g) and (h) clarify, by rating years, the types of financial accountability ratings a school district and an open-enrollment charter school may receive. No changes were made at adoption.

New subsection (i) addresses the lowering of a financial accountability rating based on findings of an action. No changes were made at adoption.

New subsection (j) addresses the length of the effectiveness of a financial accountability rating. No changes were made at adoption.

Subsection (k) specifies that each district or open-enrollment charter school will receive a preliminary rating before receiving a final rating. In accordance with the TEC, §39.082(i), the financial accountability rating of each school district and open-enrollment charter school under the adopted new financial accountability rating system will be made publicly available by August 8 of each year. At adoption, the TEA added clarification in subsection (k)(1) that the F rating is substandard achievement for failing to meet the statutory deadline for submitting the AFR.

Cont'd...

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