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(Editor's note: In accordance with Texas Government Code, §2002.014, which permits the omission of material which is "cumbersome, expensive, or otherwise inexpedient," the figures in 19 TAC §109.1001 are not included in the print version of the Texas Register. The figures are available in the on-line version of the July 27, 2018, issue of the Texas Register.)

The Texas Education Agency (TEA) adopts an amendment to §109.1001, concerning financial accountability ratings. The amendment is adopted with changes to the proposed text as published in the April 13, 2018 issue of the Texas Register (43 TexReg 2240). The adopted amendment adds definitions, updates financial accountability rating information for school districts and open-enrollment charter schools, and adds financial accountability rating information for charter schools operated by public institutions of higher education (IHEs) in accordance with Senate Bill (SB) 1837, 85th Texas Legislature, Regular Session, 2017.

REASONED JUSTIFICATION. Section 109.1001 includes 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 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.

SB 1837, 85th Texas Legislature, Regular Session, 2017, amended the Texas Education Code (TEC), §39.082, to require the financial performance of a charter school operated by a public IHE under TEC, Chapter 12, Subchapter D or E, to be evaluated using indicators adopted by the commissioner that are appropriate to accurately measure the financial performance of such charter schools.

The adopted amendment to §109.1001 implements SB 1837 and includes other updates, as follows.

In subsection (a), the adopted amendment adds definitions for the terms ceiling indicator, open-enrollment charter school, and public institution of higher education. Definitions for Financial Integrity Rating System of Texas (FIRST) and Public Education Information Management System (PEIMS) were modified.

In subsections (b) and (c), the adopted amendment includes charter schools operated by a public IHE to the provisions relating to the assignment of ratings and the evaluation and modification of the rating system.

In subsection (d), the adopted amendment updates the data sources the TEA uses in calculating the financial accountability indicators for school districts, open-enrollment charter schools, and charter schools operated by public IHEs. Specifically, PEIMS was changed to Texas Student Data System (TSDS) PEIMS.

In subsections (e)(3) and (f)(3), the adopted amendment clarifies that the financial accountability rating indicators used to determine each school district's and open-enrollment charter school's 2016-2017 rating would only be for the 2016-2017 rating year and not subsequent rating years. No changes were made to the indicator calculations for the 2016-2017 rating year, but the footers of the worksheets were amended to remove language indicating that the worksheets apply to rating years after 2016-2017.

New subsections (e)(4) and (f)(4) include new rating worksheets for rating years 2017-2018 through 2019-2020 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 worksheets clarify that financial accountability ratings for a rating year are based on the data from the prior fiscal year.

New subsections (e)(5) and (f)(5) include new rating worksheets for rating year 2020-2021 and subsequent ratings years 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 worksheets clarify that financial accountability ratings for a rating year are based on the data from the prior fiscal year.

In response to public comment, the worksheets in subsections (e)(5) and (f)(5) were modified at adoption as follows.

In Figure: 19 TAC §109.1001(e)(5) and Figure: 19 TAC §109.1001(f)(5), Indicators 6 and 7 were modified to specify the fund type(s) used in the calculation for school districts and open-enrollment charter schools. Part II (alternate calculation) of Indicator 6's calculation was modified for school districts and charter schools to show that the total current year fund balance (districts) and total current year net assets (charter schools) must be greater than 75 days of total operating expenditures. Indicator 8 was modified to specify the data source(s) and the fund(s) or fund type(s) used in the calculation for school districts and open-enrollment charter schools. Indicator 9 was modified to specify the fund type(s), function code(s), and object code(s) used in the calculation for school districts and open-enrollment charter schools.

Indicator 10 was modified in Figure: 19 TAC §109.1001(e)(5) to clarify the fund(s) or fund type(s) that are covered by all components of the indicator, including budgeted revenues and actual revenues, and specify the data sources that will be used to complete the calculation.

Indicator 10 was modified in Figure: 19 TAC §109.1001(f)(5) to clarify that for the 2020-2021 rating year, the calculation will include revenue reported in fund 420 (Foundation School Program and Other State Aid) from revenue object code series 5700 (Revenues from Local and Intermediate Sources) and 5800 (State Program Revenues). Indicator 10 was also modified in Figure: 19 TAC §109.1001(f)(5) to align the calculation definition with TSDS Texas Education Data Standards (TEDS); update the equation for Indicator 10 of Charter FIRST for the 2020-2021 rating year to include the average variance variable; specify the fund(s) or fund type(s) that are covered by the components of the indicator; and specify the data source.

Indicator 11 was modified in Figure: 19 TAC §109.1001(e)(5) and Figure: 19 TAC §109.1001(f)(5) to specify the categories covered by the components used in the calculation, including long-term liabilities and total assets, for school districts and open-enrollment charter schools. Figure: 19 TAC §109.1001(e)(5) was also modified to remove variable C and exclude Net Pension Liability from the calculation.

Indicator 12 was modified in Figure: 19 TAC §109.1001(e)(5) to specify the fund type(s) or fund type(s) and data source(s) used in the calculation and clarify the indicator definition to specific property value category. In addition, Figure: 19 TAC §109.1001(e)(5) was modified to accurately calculate the debt per property value ratio. The modified calculation is ((A/B)*(C))/(D/100). Figure: 19 TAC §109.1001(e)(5) was also modified to exclude Net Pension Liability from the calculation.

Indicator 16 was modified in Figure: 19 TAC §109.1001(f)(5) to identify that a charter school's average daily attendance (ADA) estimate is used in the calculation.

Indicator 20 was modified in Figure: 19 TAC §109.1001(e)(5) to clarify the calculation definition.

Indicator 20 was modified in Figure: 19 TAC §109.1001(f)(5) to include an effective date as a measure for the indicator.

Indicator 21 was excluded from the 2020-2021 FIRST indicators in Figure: 19 TAC §109.1001(e)(5).

Indicator 21 was modified in Figure: 19 TAC §109.1001(f)(5) to identify the source of the indicator as the Charter School Tracking System compared to the TSDS PEIMS summer submission.

The adopted amendment adds new subsection (g) to address provisions for charter schools operated by a public IHE. New subsection (g)(1) includes new rating worksheets for charter schools operated by a public IHE for rating years 2016-2017 through 2019-2020 that will be used to measure the overall performance on the financial measurements, ratios, and other indicators established by the commissioner. The adopted new worksheets clarify that financial accountability ratings for a rating year are based on the data from the prior fiscal year. The worksheet in subsection (g)(1) was modified at adoption to update the Determination of the IHE Charter School Rating chart by clarifying the indicators that would result in a pass or fail - substandard achievement rating.

New subsection (g)(2) includes new rating worksheets for charter schools operated by a public IHE for rating year 2020-2021 and subsequent years that will be used to measure the overall performance on the financial measurements, ratios, and other indicators established by the commissioner. The adopted new worksheets clarify that financial accountability ratings for a rating year are based on the data from the prior fiscal year. The worksheet in subsection (g)(2) was modified at adoption to update the Determination of the IHE Charter School Rating chart by clarifying the indicators that would result in a pass or fail - substandard achievement rating.

New subsection (j) was added to define the terminology for the types of financial accountability ratings charter schools operated by public IHEs may receive for the 2016-2017 and subsequent rating years. The ratings will be "P" for pass and "F" for substandard achievement.

In subsection (k), the adopted amendment adds language to allow the commissioner to change a financial accountability rating in cases of disaster, flood, extreme weather conditions, fuel curtailment, or another calamity.

In subsection (m)(2), the adopted amendment includes clarifying language for the issuance of final ratings.

In subsection (n)(3), the adopted amendment adds the word "other" to indicate that the preliminary rating may be appealed for adverse issues other than those already identified in the rule. Language that is contrary to the provisions of TEC, §39.082(g), were also deleted from the paragraph.

In subsection (q)(4)(A), the adopted amendment changes the requirement for posting the notice for public hearing from once a week for two weeks prior to holding the public hearing to posting the notice only one time prior to holding the public hearing. The notice is required to be posted no earlier than 30 days or later than 10 days before the date of the hearing.

SUMMARY OF COMMENTS AND AGENCY RESPONSES. The public comment period on the proposal began April 13, 2018, and ended May 14, 2018. Following is a summary of the public comments received and the corresponding agency responses.

INDICATOR 6

Comment. Concerning proposed Figure: 19 TAC §109.1001(e)(5) and Figure: 19 TAC §109.1001(f)(5), the Texas Association of School Business Officials (TASBO) commented that the wording and calculation definitions for school districts and open-enrollment charter schools do not specify the fund(s) or fund type(s) that are covered by this indicator. TASBO also commented that the description for the calculation in the proposed rule appears to be in error.

Agency Response. The agency agrees and has modified Indicator 6 in Figure: 19 TAC §109.1001(e)(5) and Figure: 19 TAC §109.1001(f)(5) to specify the fund type(s) used in the calculation for school districts and open-enrollment charter schools. Part II (alternate calculation) of Indicator 6's calculation has also been modified for districts and charter schools to show that the total current year fund balance (districts) and total current year net assets (charter schools) must be greater than 75 days of total operating expenditures.

INDICATOR 7

Comment. Concerning proposed Figure: 19 TAC §109.1001(e)(5) and Figure: 19 TAC §109.1001(f)(5), TASBO commented that the wording and calculation definitions do not specify the fund(s) or fund type(s) that are covered by this indicator.

Agency Response. The agency agrees and has modified Figure: 19 TAC §109.1001(e)(5) and Figure: 19 TAC §109.1001(f)(5) to specify the fund type(s) used in the calculation for Indicator 7 for school districts and open-enrollment charter schools.

Comment. Concerning proposed Figure: 19 TAC §109.1001(e)(5) and Figure: 19 TAC §109.1001(f)(5), a school district administrator commented that the calculation for Indicator 7 does not consider the timing of payment delays enacted by the Texas Legislature nor does it include underpayments owed from the TEA to local education agencies (LEAs).

Agency Response. The agency disagrees that pending receivables (i.e., payment delays and underpayments) owed from the state should be considered in the calculation of the Days Cash on Hand. The Charter FIRST and School FIRST ratings use audited data from the charter schools' annual financial and compliance reports (AFRs), the TSDS PEIMS, and other required TEA reports that the charter schools and school districts must submit to TEA. Including pending receivables in the calculation may not yield an accurate Charter FIRST or School FIRST rating because the pending receivable amounts may be increased, decreased, or not paid at all. To ensure that TEA is using reliable and audited data, TEA has determined that all types of pending receivables will not be included in the Days Cash on Hand calculation.

INDICATOR 8

Comment. Concerning proposed Figure: 19 TAC §109.1001(e)(5) and Figure: 19 TAC §109.1001(f)(5), TASBO commented that the wording for Indicator 8 and the calculation definition do not specify the fund(s) or fund type(s) that are covered by all the components of this indicator, including current assets, current liabilities, and short-term debt. TASBO also commented that the calculation definition does not specify the data source, such as PEIMS and/or the AFR.

Agency Response. The agency agrees and has modified Figure: 19 TAC §109.1001(e)(5) and Figure: 19 TAC §109.1001(f)(5) to specify the data source(s) and the fund(s) or fund type(s) used in the calculation for Indicator 8 for school districts and open-enrollment charter schools.

INDICATOR 9

Comment. Concerning proposed Figure: 19 TAC §109.1001(e)(5) and Figure: 19 TAC §109.1001(f)(5), TASBO commented that the wording for Indicator 9 and the calculation definition do not specify the fund(s) or fund type(s), function code(s), and object code(s) that are covered by all the components of the indicator, including cash on hand, revenues, expenditures, and facilities acquisition and construction. TASBO also asked if the calculation for Indicator 9--[A/(B-C)-1] > 0--can be simplified by removing the "-1" component.

Agency Response. The agency agrees in part and has modified Figure: 19 TAC §109.1001(e)(5) and Figure: 19 TAC §109.1001(f)(5) to specify the fund type(s), function code(s), and object code(s) used in the calculation for Indicator 9 for school districts and open-enrollment charter schools. The agency disagrees that "-1" should be removed from the proposed calculation and has maintained the calculation as proposed.

Comment. A school district administrator asked if overnight investment pools (e.g., TexPool, LOGIC, Lone Star) are considered cash for purposes of Indicator 9.

Agency Response. The agency provides the following clarification. The second part of Indicator 9 takes into consideration cash and cash equivalents from the district's balance sheet that can be readily converted to cash.

Comment. Concerning proposed Figure: 19 TAC §109.1001(e)(5) and Figure: 19 TAC §109.1001(f)(5), a school district administrator commented that the calculation for Indicator 9 does not consider the timing of payment delays enacted by the Texas Legislature nor does it include underpayments owed from TEA to LEAs.

Agency Response. The agency disagrees that pending receivables (i.e., payment delays and underpayments) owed from the state should be considered in the calculation of the Days Cash on Hand. The Charter FIRST and School FIRST ratings use audited data from AFRs, TSDS PEIMS, and other required TEA reports that the charter schools and school districts must submit to TEA. Including pending receivables in the calculation may not yield an accurate Charter FIRST or School FIRST rating because the pending receivable amounts may be increased, decreased, or not paid at all. To ensure that TEA is using reliable and audited data, TEA has determined that all types pending receivables will not be included in the Days Cash on Hand calculation.

INDICATOR 10 - SCHOOL DISTRICTS

Comment. Concerning proposed Figure: 19 TAC §109.1001(e)(5), TASBO commented that the wording for Indicator 10 and the calculation definition do not specify the fund(s) or fund type(s) that are covered by all components of this indicator, including budgeted revenues and actual revenues, and do not specify the data source. One school district administrator commented that Indicator 10 needs to be specific as to which funds are included for the indicator, and another school district administrator commented that the source of data used in the calculation should be clarified.

Agency Response. The agency agrees and has modified Figure: 19 TAC §109.1001(e)(5) to clarify the fund(s) or fund type(s) that are covered by all components of Indicator 10, including budgeted revenues and actual revenues, and specify the data sources that will be used to complete the calculation.

Comment. A school district administrator commented that Indicator 10 does not seem to be reasonable and requested that the indicator be eliminated.

Agency Response. The agency disagrees that Indicator 10 is unreasonable and should be eliminated. Budgeting is an essential and required function of each school district. Creating and maintaining an accurate budget is one of the most significant functions of a school district, and an accurate budget gives school districts the ability to make sound financial decisions concerning the allocation of financial resources received by the school district. Each school district must prepare a proposed budget of all estimated revenues and proposed expenditures; only expenditures that have been budgeted, whether in the original budget or amended budget, are allowed. In addition, proper budgeting creates transparency and discloses the quality of the school district's decision-making processes.

INDICATOR 10 - CHARTER SCHOOLS

Comment. Concerning proposed Figure: 19 TAC §109.1001(f)(5), the Texas Charter School Association (TCSA) asked that the commissioner provide additional clarity to Indicator 10 in the 2020-2021 Charter FIRST ratings. Specifically, TCSA asked that TEA state what specific revenue streams will be included in this indicator.

Cont'd...

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