The Texas Education Agency adopts an amendment to §109.1001, concerning the financial accountability rating system. The amendment is adopted with changes to the proposed text as published in the June 24, 2016 issue of the Texas Register (41 TexReg 4580). The section establishes provisions that detail the purpose, ratings, types of ratings, criteria, reporting, and sanctions for the financial accountability rating system. The adopted amendment clarifies the financial accountability rating indicators used to determine each school district's rating for the 2015-2016 rating year and subsequent years and describes a new "No Rating" category for certain school districts that receive territory from an annexation order under the Texas Education Code (TEC), §13.054, or consolidation under the TEC, Chapter 41, Subchapter H.

REASONED JUSTIFICATION. Chapter 109, Budgeting, Accounting, and Auditing, Subchapter AA, Commissioner's Rules Concerning Financial Accountability, establishes 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 (HB) 3, 81st Texas Legislature, 2009. 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.

Section 109.1001 includes the financial accountability rating system and rating worksheets that explain the indicators that the Texas Education Agency will analyze to assign financial accountability ratings for school districts and open-enrollment charter schools. The rule also specifies 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.

The adopted amendment clarifies the financial accountability rating indicators used to determine each school district's rating for the 2015-2016 rating year and subsequent years by revising the ratings worksheet calculations in Figure: 19 TAC §109.1001(e)(2) and Figure: 19 TAC §109.1001(e)(3). The adopted worksheets, dated August 2016, differ from the current worksheets, dated August 2015, as follows.

Indicator 5 was revised to show the operation of adding variable F for pension expense and net pension liability (NPL) instead of subtracting the variable from the calculation.

Indicators 6, 9, and 10 were revised to remove the pension expense and NPL variables from the calculation since the amounts for pension expense and NPL are not applicable to the indicator calculations.

Indicator 10 was revised to add variable E (function code 81 - capital outlay) in order to make the indicator more uniform for all districts.

Both figures, as well as subsection (h), were modified to include a new category for "No Rating" for the 2016-2017 rating year and subsequent years. The rating allows a school district that receives territory from an annexation or consolidation order by the commissioner due to closure or action under the TEC, Chapter 41, to not receive a financial accountability rating for two consecutive rating years after the annexation/consolidation with another school district.

The figures were modified at adoption to correct a typographical error in Indicator 5. The worksheets as proposed inadvertently showed variable F being subtracted rather than added.

SUMMARY OF COMMENTS AND AGENCY RESPONSES. The public comment period on the proposal began June 24, 2016, and ended July 25, 2016. Following is a summary of public comments received and corresponding agency responses regarding the proposed amendment to 19 TAC Chapter 109, Budgeting, Accounting, and Auditing, Subchapter AA, Commissioner's Rules Concerning Financial Accountability, §109.1001, Financial Accountability Ratings.

Comment. An administrator from Texas City Independent School District asked how long a district would receive "No Rating" under TEC, §13.054.

Agency Response. The agency provides the following clarification. A school district that is receiving territory due to an annexation order by the commissioner under the TEC, §13.054, or consolidation under the TEC, Chapter 41, Subchapter H, will not receive a rating for two consecutive years beginning with the rating year that is based on financial data from the fiscal year in which the order of annexation becomes effective.

STATUTORY AUTHORITY. The amendment is adopted under the Texas Education Code (TEC), §39.082, which requires the commissioner to develop and implement a financial accountability rating system for school districts and open-enrollment charter schools. The section establishes certain requirements, including procedures, to enable the commissioner and administrators to provide meaningful financial oversight and improvement along with transparency to the public. The section provides additional requirements and rulemaking authority for the commissioner. The amendment is also proposed under the TEC, §39.085, which provides the commissioner rulemaking authority for the implementation and administration of the financial accountability subchapter of the TEC, Chapter 39.

CROSS REFERENCE TO STATUTE. The amendment implements the Texas Education Code, §39.082 and §39.085.