The State Board of Education (SBOE) adopts an amendment to §109.41, concerning budgeting, accounting, and auditing. The amendment is adopted without changes to the proposed text as published in the March 5, 2021 issue of the Texas Register (46 TexReg 1449) and will not be republished. The amendment adopts by reference the updated Financial Accountability System Resource Guide (FASRG). Although changes were not made to the text of §109.41, the FASRG adopted by reference in the rule includes changes to Modules 1-6 at adoption.

REASONED JUSTIFICATION: The FASRG describes the rules of financial accounting for school districts, charter schools, and education service centers and is adopted by reference under §109.41. Revisions to the FASRG would align the content with current governmental accounting and auditing standards, remove obsolete requirements, and remove descriptions and discussions of best practices and other non-mandatory elements.

Requirements for financial accounting and reporting are derived from generally accepted accounting principles (GAAP). School districts and charter schools are required to adhere to GAAP. Legal and contractual considerations typical of the government environment are reflected in the fund structure basis of accounting.

An important function of governmental accounting systems is to enable administrators to assure and report on compliance with finance-related legal provisions. This assurance and reporting means that the accounting system and its terminology, fund structure, and procedures must be adapted to satisfy finance-related legal requirements. However, the basic financial statements of school districts and charter schools should be prepared in conformity with GAAP.

School district and charter school accounting systems shall use the accounting code structure presented in the Account Code section of the FASRG (Module 1). Funds shall be classified and identified on required financial statements by the same code number and terminology provided in the Account Code section of the FASRG (Module 1).

The following changes were made to Modules 1-6 of the FASRG.

Module 1, Financial Accounting and Reporting (FAR) and FAR Appendices

Module 1 aligns with current governmental accounting standards. Module 1 as adopted includes the following significant changes. School districts and charter schools are required to maintain proper budgeting and financial accounting and reporting systems. In addition, school districts are required to establish principles and policies to ensure uniformity in accounting in conformity with GAAP established by the Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB).

Since published as proposed, changes were made to Module 1 to implement recent changes to federal statutes and rules, accounting and auditing standards, fund codes, and authoritative guidance and add clarity through grammatical edits.

Module 2, Special Supplement - Charter Schools

Module 2 aligns with current financial and accounting reporting standards. Module 2 as adopted includes the following significant changes. The module establishes financial and accounting requirements for Texas public charter schools to ensure uniformity in accounting in conformity with GAAP. The module also includes current guidance that complements the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide, State and Local Governments and supplements the Government Auditing Standards of the United States Government Accountability Office (GAO). These requirements facilitate preparation of financial statements that conform to GAAP established by the FASB.

Since published as proposed, changes were made to Module 2 to implement recent changes to federal statutes and rules, accounting and auditing standards, and authoritative guidance and add clarity through grammatical edits.

Module 3, Special Supplement - Non-profit Charter Schools Chart of Accounts

Module 3 aligns with current governmental accounting standards. Module 3 as adopted includes the following significant changes. Charter schools are required to maintain proper budgeting and financial accounting and reporting systems that are in conformity with Texas Education Data Standards (TEDS) in the Texas Student Data System Public Education Information Management System (TSDS PEIMS). In addition, charter schools are required to establish principles and policies to ensure uniformity in accounting in conformity with GAAP established by the FASB. The module also includes current auditing guidance that complements the AICPA Audit and Accounting Guide, State and Local Governments and supplements the Government Auditing Standards of the United States GAO. These requirements facilitate preparation of financial statements that conform to GAAP established by the FASB.

Since published as proposed, changes were made to Module 3 to implement recent changes to federal statutes and rules, accounting and auditing standards, fund codes, and authoritative guidance and add clarity through grammatical edits.

Module 4, Auditing

Module 4 aligns with current governmental auditing standards. Module 4 as adopted includes the following significant changes. The module establishes auditing requirements for Texas public school districts and charter schools and includes current requirements from Texas Education Code (TEC), §44.008, as well as Code of Federal Regulations, Title 2, Part 200, Subpart F, Audit Requirements, that implement the federal Single Audit Act. The module also includes current auditing guidance that complements the AICPA Audit and Accounting Guide, State and Local Governments and supplements the Government Auditing Standards of the United States GAO. These requirements facilitate preparation of financial statements that conform to GAAP established by the GASB.

Since published as proposed, changes were made to Module 4 to implement recent changes to federal statutes and rules, accounting and auditing standards, and authoritative guidance; remove outdated references; and add clarity through grammatical edits.

Module 5, Purchasing

Module 5 aligns with current purchasing laws and standards. Module 5 as adopted includes the following significant changes. School districts and charter schools are required to establish procurement policies and procedures that align with their unique operating environment and ensure compliance with relevant statutes and policies.

Since published as proposed, changes were made to Module 5 to implement recent legislative changes and changes to authoritative guidance, remove outdated references, provide clearer guidance, and add clarity through grammatical edits.

Module 6, Compensatory Education, Guidelines, Financial Treatment, and an Auditing and Reporting System

Module 6 aligns with current governmental accounting standards. Module 6 as adopted includes the following significant changes. School districts and charter schools are required to maintain proper budgeting and financial accounting and reporting systems. The module provides current information to assist local school officials' understanding of the numerous options for use of the state compensatory education allotment and provides current guidance for compliance.

Since published as proposed, changes were made to Module 6 to implement recent changes to state statutes and rules, remove outdated references, provide guidance for compliance, and add clarity through grammatical edits.

The SBOE approved the proposed amendment for first reading and filing authorization at its January 29, 2021 meeting and for second reading and final adoption at its April 16, 2021 meeting.

In accordance with TEC, §7.102(f), the SBOE approved the amendment for adoption by a vote of two-thirds of its members to specify an effective date earlier than the beginning of the 2021-2022 school year. The earlier effective date will ensure the provisions of the FASRG align with current governmental accounting and auditing standards for school districts and charter schools as soon as possible. The effective date is 20 days after filing as adopted with the Texas Register.

SUMMARY OF COMMENTS AND RESPONSES: The public comment period on the proposal began March 5, 2021, and ended at 5:00 p.m. on April 9, 2021. The SBOE also provided an opportunity for registered oral and written comments at its April 2021 meeting in accordance with the SBOE board operating policies and procedures. Following is a summary of the public comments received and corresponding responses.

Comment. An external independent auditor for Texas school districts commented that neither the FASRG Module 1 nor FASRG FAR Appendices contain the updated wording to replace the term "agency funds" with "custodial funds" pursuant to guidance that was issued by the GASB in GASB Statement 84. The commenter also stated the modules do not include any additional guidance on how to implement the changes required by GASB Statement 84, which is effective beginning with fiscal year 2021.

Response. The SBOE agrees. The term "agency funds" has been updated at adoption with the term "custodial funds" in accordance with GASB Statement 84 in all modules of the FASRG. Specific guidance for governmental entities, including school districts, is disclosed in GASB Statement 84. School districts are required to adhere to GASB Statement 84 guidance and the guidance disclosed in all applicable GASB statements. If a school district or other local educational agency (LEA) has questions about GASB statements and/or the guidance contained in the statements, it may contact the Texas Education Agency Financial Compliance Division.

Comment. Concerning proposed FAR Appendix H, Activity Funds, a school district employee and an employee from an education service center commented that the reference to fund code 491, the required fund code for Campus Activity Funds, should be fund code 461.

Response. The SBOE agrees. The fund code for Campus Activity Funds was modified in FAR Appendix H, Section H.2.2, at adoption to reflect the correct fund code and description.

Comment. Concerning proposed FAR Appendix A.4.6, Expenditure and Expense Object Codes, a school district employee commented that object code 6239 should be used instead of object code 6411 to code conference registration fees. The commenter stated that object code 6411 can only be used if obligated the day of a conference and is seldom allowed because vendors expect conference registration payments in advance. The commenter also stated that allowing LEAs to code conference registration fees to object code 6239 would allow for greater flexibility and accuracy when coding funds.

Response. The SBOE disagrees that object code 6239 should be used to code conference registration payments made in advance. However, to allow LEAs greater flexibility and accuracy when coding funds, the language of object code 6411 was updated at adoption to include conference registration fees paid in advance.

Comment. Concerning proposed FAR Appendix A.8, Program Intent Codes, the Texas Association of School Business Officials (TASBO) requested the addition of two new fund codes for the federal Rural Education Achievement Program to allow for accuracy when accounting for the funds. TASBO also requested that the definition of program intent code (PIC) 25 be modified to allow the coding of teacher salaries as an allowable expense when smaller class sizes are created for bilingual education. TASBO recommended that, at a minimum, school districts be allowed to code the salaries of the additional elementary grade teachers needed to create class sizes below the requirement of 22 students to 1 teacher to PIC 25. TASBO made a similar request for secondary schools, for which there is not a legal standard for class size, by requesting that school districts be allowed to code salaries of additional secondary education teachers needed to create class sizes below the size of similar non-bilingual classes to PIC 25.

Response. The SBOE agrees that two additional fund codes are needed for the Rural Education Achievement Program. These codes are included in FAR Appendix A at adoption. The SBOE has determined that the salaries of additional elementary grade teachers needed to create class sizes below the required ratio of 22 students to 1 teacher do not need to be coded to PIC 25. In addition, the SBOE has determined that the salaries of additional secondary education teachers needed to create class sizes below the size of similar non-bilingual classes do not need to be coded to PIC 25.

Comment. The Texas Association of School Boards (TASB) requested technical revisions to proposed FASRG FAR Appendix A and Modules 4 and 5. TASB recommended updating references to the Code of Federal Regulations, Title 2, Part 200, due to the August 2020 amendments made to the code; removing cross-references to sections that no longer exist in FASRG modules; updating cross-references to sections that have been renumbered or moved to other sections of the FASRG; and incorporating recent changes to statutes, laws, and rules that are applicable to purchasing and recycled products.

Response. The SBOE agrees. The technical revisions requested by TASB were incorporated into the applicable FASRG modules at adoption.

STATUTORY AUTHORITY. The amendment is adopted under Texas Education Code (TEC), §7.055(b)(32), which requires the commissioner to perform duties in connection with the public school accountability system as prescribed by TEC, Chapters 39 and 39A; TEC, §7.102(c)(32), which requires the State Board of Education (SBOE) to adopt rules concerning school district budgets and audits of school district fiscal accounts as required under TEC, Chapter 44, Subchapter A; TEC, §44.001(a), which requires the commissioner to establish advisory guidelines relating to the fiscal management of a school district; TEC, §44.001(b), which requires the commissioner to report annually to the SBOE the status of school district fiscal management as reflected by the advisory guidelines and by statutory requirements; TEC, §44.007(a), which requires the board of trustees of each school district to adopt and install a standard school fiscal accounting system that conforms with generally accepted accounting principles; TEC, §44.007(b), which requires the accounting system to meet at least the minimum requirements prescribed by the commissioner, subject to review and comment by the state auditor; TEC, §44.007(c), which requires a record to be kept of all revenues realized and of all expenditures made during the fiscal year for which a budget is adopted. A report of the revenues and expenditures for the preceding fiscal year is required to be filed with the agency on or before the date set by the SBOE; TEC, §44.007(d), which requires each district, as part of the report required by TEC, §44.007, to include management, cost accounting, and financial information in a format prescribed by the SBOE in a manner sufficient to enable the board to monitor the funding process and determine educational system costs by district, campus, and program; and TEC, §44.008(b), which requires the independent audit to meet at least the minimum requirements and be in the format prescribed by the SBOE, subject to review and comment by the state auditor. The audit must include an audit of the accuracy of the fiscal information provided by the district through the Public Education Information Management System.

CROSS REFERENCE TO STATUTE. The amendment implements Texas Education Code, §§7.055(b)(32), 7.102(c)(32), 44.001(a) and (b), 44.007(a)-(d), and 44.008(b).